Date: 19990615
Docket: 97-3164(IT)G
BETWEEN:
G. ROYAL MacDONALD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hamlyn, J.T.C.C.
[1] By Notice of Assessment
no. 09581 dated July 19, 1995, the Minister of National
Revenue (the "Minister") assessed the Appellant for
federal income tax deducted at source but not remitted by
Multi-Ventures Ltd. ("Multi").
[2] In so assessing the Appellant, the
Minister relied on the following assumptions:
7. ...
(a) the Appellant
was, at all material times, a director of the Corporation;
(b) the Corporation
failed to remit to the Receiver General Federal income tax
withheld from the wages paid to its employees as follows:
Date
Assessed
Unremitted Federal
to
Corporation
Tax
Mar.
26/93
$37,971.61
May
20/93
3,144.60
May
20/93
5,739.50
May
27/93
10,176.61
June
8/93
8,062.88
July
16/93
13,227.01
July
20/93
12,761.83
July
30/93
13,625.07
Aug.
17/93
16,652.79
(c) the Corporation
failed to pay penalties and interest relating to the unremitted
Federal tax;
(d) on August 23,
1993 a receiving order was made against the Corporation under the
Bankruptcy Act and a claim for the amount of the
corporation's liability for Federal income tax, penalties and
interest was proved within six months after the date of the
receiving order; and
(e) the Appellant
did not exercise the degree of care, diligence and skill to
prevent the failure to remit the said amount by the Corporation
that a reasonably prudent person would have exercised in
comparable circumstances.
[3] A Partial Statement of Agreed
Facts was filed. It reads:
The Appellant, G. Royal MacDonald, and the Respondent, Her
Majesty the Queen, by their solicitors, agree to the following
facts provided that: 1) such admissions are made for the purpose
of these proceedings only; and 2) the parties are permitted to
adduce additional evidence which is not contrary to these agreed
facts.
(a) The Appellant is
G. Royal MacDonald of 214 Willingdon Street, Fredericton, New
Brunswick, E3B 3A5.
(b) The subjection
Corporation, Multi-Ventures Limited (the "Corporation")
was incorporated in 1969 and began operating in 1974.
(c) During the
relevant period of time (i.e. 1992 and 1993), the directors of
the Corporation were the Appellant, Royal MacDonald and Kevin
Phillips who each held 50% of the Corporation's shares.
(d) The Appellant
was, at all material times, an active director of the
Corporation, holding the position of president.
(e) The Appellant
was, at all material times, actively involved in managing the
Corporation.
(f) The
Minister of National Revenue issued the Notice of Assessment
#09581 dated July 19, 1995 under the Income Tax Act for
assessments to the Corporation dated March 26, 1993 to August 17,
1993.
(g) The assessment
referenced in paragraph (f) above, included amounts relating to
wages paid to employees in both 1992 and 1993.
(h) In early 1993 a
restructuring plan had been worked out with the Royal Bank of
Canada. Revenue Canada was aware of the plan and had agreed to
participate under certain terms and conditions.
(i) The
Corporation had agreed to a payment schedule to extinguish the
arrears owed to Revenue Canada and had agreed to keep remittances
to Revenue Canada current.
(j) Agreed
payments to Revenue Canada were not made by the Corporation and
current remittances were not all made. The Corporation did not
maintain its end of the agreement.
(k) The plan
referenced in paragraph (h) was rejected in August 1993 when
Revenue Canada made a request that certain real property be
pledged as security for the Revenue Canada debt, to which the
Royal Bank would not agree.
(l) At this
point the Royal Bank forced Multi-Ventures Limited into
bankruptcy.
(m) On August
23rd, 1993 a receiving order was made against the
Corporation under the Bankruptcy Act and on September
28th, 1993 a Proof of Claim in respect of Revenue
Canada's Unsecured Claim and Property Claim were filed.
(n) Revenue Canada
received the following payments on account of unpaid
withholdings:
September 28,
1993
$317,836.66
October 7,
1993
2,174.51
November 2,
1993
102,918.03
The amount of $2,174.51 was a garnishee payment from Warren
Maritime Limited and the balance was a garnishee payment from
Fundy Contractors Limited, all received pursuant to requirements
to pay.
(o) Except for the
payments noted above in paragraph (n), all payments applied
against the corporation's account with Revenue Canada were
done so at the direction of the Corporation, or with the
agreement of the Corporation.
(p) The Corporation
experienced some financial difficulties beginning in 1991. In
1992 and 1993 the financial difficulties continued and its
financial position became more critical.
(q) The Corporation
was assessed for failure to remit source deductions for certain
pay periods, beginning at least in 1991 and continuing in 1992
and 1993.
(r) Throughout the
relevant period, the Appellant was aware of both the
Corporation's financial difficulties and the failure to
remit.
(s) All accounts
receivable or cheques received and made payable to the
Corporation were deposited with the Royal Bank of Canada and
deposited to the general account.
(t) The
Corporation did not remit the federal income tax with respect to
wages paid to its employees as assessed to the Corporation on the
following dates: March 26th, 1993 - May
20th, 1993; May 20th, 1993, May
27th, 1993, June 8th, 1993, July
16th, 1993, July 20th, 1993, July
30th, 1993, and August 17th, 1993.
(u) The Corporation
did not pay the penalties and interest related to the unremitted
federal tax.
THE EVIDENCE
[4] The Appellant, G. Royal MacDonald,
is a civil engineer and for the period in question was a director
of Multi. He was also the President of Multi. Multi was, prior to
its bankruptcy, in the road construction and heavy equipment
business. Multi was incorporated in 1969 and commenced business
in 1974. For 17 years the business was successful and was
one of the larger companies in that business. The industry
suffered a downturn in 1989 and Multi was directly affected by a
highly competitive market, low prices and dropping volumes.
Withholding remittance problems for Multi began in 1991.
[5] In 1992, the Appellant, facing
remittance arrears, caused cheques to be issued to the Receiver
General. Several of those cheques were returned by the bank with
the notation "non sufficient funds". In part, to
rectify the remittance problem, the Appellant on behalf of Multi
caused Mr. John Feeney to be hired as Chief Financial
Officer. Mr. Feeney was a chartered accountant who had an
extensive employment history with KPMG, a public accounting firm.
His first role with Multi was as Vice-President in charge of
Finance and that was followed by the office of Controller. The
term of his retention was from March 1992 to August 1993.
[6] Mr. Feeney's role (April
1992) was to restructure or refinance Multi by securing an
enhanced line of credit with the Royal Bank of Canada (the
"Royal Bank"). The increased security to be given to
the bank was to be on Multi's equipment. The restructuring
was done on notice to Revenue Canada.
[7] Early in 1992, Mr. Alfred
Lacey was retained by Multi as a project manager to attempt to
settle accounts receivable. His prior work history was extensive,
including a period of time as a district sales manager for
General Motors, an elected official and former Cabinet Minister
of the province of New Brunswick and a term as Chairman of New
Brunswick Power.
[8] Between his retention in early
1992 and September 1992, the financial situation of Multi further
deteriorated. At that point, at the insistence of the Royal Bank,
Mr. Lacey assumed the new role of General Manager of Multi.
Mr. Lacey, amongst other things, sought to negotiate with
the Royal Bank further new funding for Multi on the basis of
collateral security to be given to the bank in relation to other
real property owned by Multi.
[9] This restructuring also was on
notice to Revenue Canada.
[10] The view of Messrs. MacDonald,
Feeney and Lacey was their expectation with the restructuring and
with the assistance of the bank that the current remittances and
the arrears would be addressed.
[11] In the Spring of 1992 the over-draft
position with the bank was approximately $800,000 whereas at the
point of bankruptcy (August 1993) the over-draft was
$1,800,000.
[12] No witness was called from the Royal
Bank. However, the evidence of Messrs. MacDonald, Feeney and
Lacey was to the effect for the remittance payment failures the
bank would only allow certain cheques of Multi to be negotiated
and the bank controlled all receipts. The bank returned certain
arrears cheques for non sufficient funds and would not authorize
the payment of gross payrolls including withholdings. The bank
would only allow cheques to be issued to employees for net
wages.
[13] The problems that arose late in 1992
and 1993 included Multi's failure to collect all receivables,
the bank's refusal to allow monies to be paid to the Receiver
General and latterly, the inability of Multi to secure the
transfer of property to the bank as collateral security.
[14] For the period of March 1992 to August
1993, while Messrs. MacDonald, Lacey and Feeney were
apparently concerned about source deductions, it was obvious the
bank was not concerned and refused to authorize the payment of
remittances from the over-draft borrowings or from the receipts
of Multi.
ANALYSIS
[15] The decision of the Federal Court of
Appeal in Soper v. The Queen, 97 DTC 5407[1], as has been
stated in many recent decisions, is the leading case on
directors' tax liability for both the Act and the
Excise Tax Act.[2] The Court in Soper (supra) set out the
following general principles:
- it is the
corporation and not the director who is the trustee of the
government's money;
- the standard of
care for a director's tax liability is partly objective and
partly subjective;
- the director does
not have to give constant attention to corporate affairs,
although there is an obligation to be informed about the
financial statements and records of the company;
- a director can
delegate responsibility for ensuring that source remittances are
made, provided that no suspicious circumstances exist;
- once a director is
aware or should be aware that there are problems with
remittances, he or she has a positive duty to act; and
- an inside director
will be held to a higher standard of care than an outside
director.
[16] In Soper (supra),
Robertson J.A. wrote at page 5416:
This is a convenient place to summarize my findings in respect of
subsection 227.1(3) of the Income Tax Act. The standard of
care laid down in subsection 227.1(3) of the Act is inherently
flexible. Rather than treating directors as a homogeneous group
of professionals whose conduct is governed by a single,
unchanging standard, that provision embraces a subjective element
which takes into account the personal knowledge and background of
the director, as well as his or her corporate circumstances in
the form of, inter alia, the company's
organization, resources, customs and conduct. Thus, for example,
more is expected of individuals with superior qualifications
(e.g. experienced business-persons).
The standard of care set out in subsection 227.1(3) of the Act
is, therefore, not purely objective. Nor is it purely subjective.
It is not enough for a director to say he or she did his or her
best, for that is an invocation of the purely subjective
standard. Equally clear is that honesty is not enough. However,
the standard is not a professional one. Nor is it the negligence
law standard that governs these cases. Rather, the Act contains
both objective elements - embodied in the reasonable person
language - and subjective elements - inherent in individual
considerations like "skill" and the idea of
"comparable circumstances". Accordingly, the standard
can be properly described as "objective
subjective".
[17] The standard combines the traditional
objective, reasonable test with subjective elements such as the
individual's intelligence, experience and sophistication.
[18] The obligation of a director has been
further explored in Wheeliker v. Canada, [1999] F.C.J. No.
401 (Q.L) (F.C.A.), where Létourneau J. at
paragraph 49, has stated:
[A]s of their [the directors] learning of the financial
difficulties of the Corporation or its failure to remit, all the
respondents were under a positive duty to act to prevent failure
to make current and future remittances and not simply to cure
default after the fact.
[19] And further, at paragraph 57:
The obligation on the directors is to prevent a failure, not
to condone it systematically, as the respondents did, in the hope
of eventually correcting it because there would be enough money
in the end to pay all the creditors.
[20] Some other jurisprudence indicates that
directors should not be held liable for remittances in cases
where they do not have control over the financial affairs of the
corporation.
[21] In Fancy v. M.N.R.,
88 DTC 1641 (T.C.C.), per Couture C.J., the bank
of the company in question had begun monitoring all cheques
issued by it and only authorizing certain payments. The bank
refused to approve remittance payments to Revenue Canada and the
Appellant-directors informed the latter of this fact. It was held
that the directors were victims of circumstances over which they
had no effective control and therefore they were exempt from
liability under the due diligence provisions.
[22] In Champeval et al. v. M.N.R.,
90 DTC 1291 (T.C.C.), per Couture C.J., and
Worrell et al. v. The Queen, 98 DTC 1783
(T.C.C.), per McArthur J., the Courts held that in certain
specific fact situations where the bank, and not the directors,
had the ultimate authority to decide which cheques to pay, the
Appellants had no freedom of choice in the matter and could not
be held liable for the company's failure to remit.
[23] In terms of options available to
directors of corporations involved in the construction industry
faced with remittance problems, Dussault J. of this Court
has said in Bazinet et al. v. The Queen,
97 DTC 364, at page 373:
I recognize that the construction industry is an extremely
difficult sector: however, that does not mean that persons
working in it are exempt from the application of the law.
[24] Dussault J. also said, at
page 373:
If an individual cannot himself or herself terminate the
operations of a business in such circumstances, he or she should
at least completely dissociate themselves from it by leaving and
handing in a resignation.
[25] And Mogan J. of this Court has
commented on the issue of involuntary financing by way of
unremitted source deductions in Charkowy et al. v. M.N.R.,
91 DTC 284, at page 287:
When a corporation reaches the point where it does not even issue
the remittance cheque on June 15 for fear that it will not be
honoured, it is time to lock the door and go out of business.
Otherwise, the Receiver General becomes the involuntary banker of
the corporation's failing business. Part of the
directors' care, diligence and skill is the prudence of
knowing when to close down a business rather than prolong the
agony with the unlawful use of funds which are impressed with a
trust under subsection 227(4) of the Income Tax Act.
...
Continuing to operate with involuntary financing by the
Receiver General with respect to unremitted source deductions was
neglectful and not a demonstration of care or diligence.
THE FAILURE TO REMIT AND
THE ACTIONS OF THE APPELLANT
[26] In 1991, the corporation failed to make
regular payroll remittances. By the end of 1991 the corporation,
at the direction of the Appellant, substantially addressed the
remittance problem and reduced the arrears to under $13,000.
[27] In the Spring of 1992, financial
problems continued and once again remittances were not made.
[28] In the Fall, at the insistence of the
bank, Mr. Lacey was appointed as General Manager and he had
the direct responsibility of dealing with the bank in all matters
and with Revenue Canada in terms of remittances and arrears. A
plan was structured to allow for the payment of arrears and the
payment of current remittances. As the plan was never followed,
the plan failed.
[29] In January 1993, further attempts were
developed involving the proposed co-operation of a major
supplier, the Royal Bank and Revenue Canada. Ultimately, this
proposal was not followed and therefore failed; eventually the
corporation fell into bankruptcy.
[30] Throughout the whole process, Revenue
Canada was informed, advised and consulted. The major problem was
the corporation did not have full access to its receivables and
had no control over its line of credit. It operated throughout
beyond its line of credit and the continued operation was at the
sufferance of the Royal Bank.
[31] The operating cash flow life line of
the corporation was at the discretion of the Royal Bank. The bank
held a registered assignment of book debts of the corporation.
The monies from accounts receivable such as contract payments
could only be obtained with difficulty and only with the
co-operation of the Royal Bank.
[32] Early on the Royal Bank while it paid
net payrolls made it clear it had no intention of honouring any
current remittance payments out of the line of credit. The Royal
Bank made all the day-to-day decisions as to what cheques could
be issued and honoured and what accounts could be addressed.
[33] In the face of this position
Mr. MacDonald through Messrs. Feeney and Lacey still
attempted to formulate plans to pay arrears and to pay current
remittances.
CONCLUSION
[34] The bank financed the operation of the
corporation for the period in question to the point of
bankruptcy.
[35] The Appellant caused an experienced
chartered accountant to be retained and the Appellant followed
the bank's direction to engage a General Manager that the
bank had confidence in.
[36] Revenue Canada co-operated throughout
the various attempts but did insist that current remittances be
paid and payments made on arrears.
[37] While plans were structured to pay
arrears and commitments were made to honour current remittances,
eventually all plans failed. The corporation did not maintain its
end of the agreements.
[38] I conclude from the evidence that the
Appellant, the Controller and the General Manager tried to
appease Revenue Canada by undertaking to address arrears and pay
present remittances. The Royal Bank of Canada obviously, from its
decisions and actions, would not cooperate. During this time of
continuing economic crisis, the on-site consensus of
Messrs. MacDonald, Feeney and Lacey was to carry on business
and not pay remittances and hope the future receivables and
future business would eventually solve Multi's economic
woes.
[39] The failure to remit was not a short
run event. It was long term and on-going. To carry on in this
mode took a specific decision of the directors and was taken
knowing notwithstanding their plans to the contrary they would
not be able to make payments to extinguish arrears and pay
current remittances.
[40] The Appellant, as a director of Multi,
was a highly educated civil engineer with an extensive business
and management history in the construction industry. When
remittance problems arose the second time in 1992 and 1993, he
did not seek independent opinion or analysis to determine if
Multi was a viable continuing business. He relied on the efforts
of Messrs. Feeney and Lacey to solve the problem and their
solution was to not positively address the arrears and current
remittances with payments but rather keep negotiating with
Revenue Canada. This negotiation was done in the face of the
Appellant's knowledge that the Royal Bank would not pay the
remittances from the line of credit. Further, because of his
knowledge, the Appellant did not, in any way, direct the bank or
specifically cause the Controller of Multi to attempt to pay
remittances. Thus, the Appellant's carry on course of action
was a decision that consciously placed remittances continually
and systematically in default.
[41] The Appellant, by allowing Multi to
continue on this long term basis, did nothing tangible to prevent
the failure to remit. The negotiating with Revenue Canada with
accompanying unproductive proposals when the director had full
knowledge the bank would not pay payroll remittances under
Multi's strained line of credit did not alleviate the
positive duty on a director to prevent failure to remit current
and future remittances.
[42] In conclusion, the Appellant did not
exercise the degree of care, diligence and skill to prevent the
failure to remit that a reasonably prudent director of his
capabilities would have exercised in comparable
circumstances.
DECISION
[43] The appeal is dismissed.
[44] The Respondent is awarded her
costs.
Signed at Ottawa, Canada, this 15th day of June 1999.
J.T.C.C.
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