Date: 19971128
Docket: 96-4689-IT-I
BETWEEN:
CLAUDIO POSOCCO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] The Appellant is appealing, by way of the informal
procedure, an assessment bearing number 06439 and dated
October 27, 1995. The assessment was made pursuant to
section 227.1 of the Income Tax Act (the
“Act”) which provides that where a corporation
has failed, with respect to the salary of its employees, to
deduct and remit the amount of tax as required by
section 153 of the Act, the directors of that
corporation are jointly and severally liable to pay these
amounts.
[2] To counter this liability, subsection 227.1(3) of the
Act provides for a defence of due diligence for a director
who has taken reasonable care to prevent the failure. This
paragraph reads as follows:
A director is not liable for a failure under subsection (1)
where the director exercised the degree of care, diligence and
skill to prevent the failure that a reasonably prudent person
would have exercised in comparable circumstances.
[3] At the onset of the hearing, there was a preliminary
motion made by counsel for the Appellant to adjourn the hearing
because in counsel’s view, one of the issues was the
alleged fraud of the Appellant’s partner and it would be
prejudicial to the Appellant to proceed without the required
documentation. The Appellant thought that he had these documents
at his home but after a search the day before the hearing, he was
unable to find the documents and believed that these documents
were with another lawyer engaged in a civil suit on his behalf.
Counsel for the Respondent opposed the motion on the basis that
the Appellant had sufficient time to gather the proper evidence,
if he had acted with the diligence of a reasonable person between
the date of the notice of hearing on July 31, 1997, and the
date set for hearing.
[4] The motion was denied on the ground that it was tardy,
being made on the morning of the hearing and that there was no
indication that the Appellant had acted with diligence in
searching for this documentation.
[5] The Reply to the Notice of Appeal states that Cambryan
Homes Ltd. (the “Corporation”) had not remitted
source deductions comprising of federal income taxes, in the
following amounts: $8,597.34 as of March 24, 1992; $406.42
as of July 21, 1992; $1,333.35 as of March 9, 1994; and
$44.89 as of May 25, 1994.
[6] There was some dispute concerning the amount of the source
deductions that have not been remitted. After having reviewed the
evidence, counsel for both parties agreed that the amount of
unremitted source deductions should be reduced by $1,133.35, the
amount mentioned for March 9, 1994. Consequently, the appeal
is allowed for that part.
[7] In his testimony, the Appellant explained that he and a
Mr. Franco Simone were the only two shareholders and
directors of the Corporation in the years 1989 to 1991. The
Corporation was involved in construction activities. The
Appellant was its president and Mr. Simone, its
secretary-treasurer. The Appellant testified that he was involved
in the operational aspect of the Corporation while his partner
was involved in the office management. However, the signature of
the two directors was needed for the issuance of cheques. The
Appellant’s testimony is that his partner withdrew from the
Corporation’s activities at the end of 1991, except for the
signature of cheques. As shown previously, it is for the year
1991 that the amount of unpaid source deductions is the
highest.
[8] The Appellant produced Exhibit A-1, a summary
of loans receivable and payable prepared from the books and
records of the Corporation and of Cambryan Construction on
August 12, 1993 by a firm of accountants. The summary has
lumped the two corporations together and in this regard, it is
difficult to understand its usefulness in this instant case. The
summary of loans receivable shows that loans in very high amounts
had been made to the Appellant’s partner personally and to
some of the latter’s corporations. As well, it shows that
one loan was made to Mr. Loris Posocco, about whom we will
hear later. The summary of loans payable shows that the Appellant
made loans to the Corporation and to Cambryan Construction. The
purpose of the Appellant producing this document was to sustain
his allegation that his partner had acted fraudulently and
misappropriated corporate funds.
[9] The Appellant testified that he had done what was
necessary to prevent the failure to remit the source deductions
by hiring a bookkeeper, whom he would have kept until 1994. On
the other hand, the Appellant also testified that he did not know
about the failure to remit the deductions until 1994. He
testified that he was not aware of an audit conducted by Revenue
Canada in August 1992. The notice of this audit is evidenced by
Exhibit R-2. He said that he only became aware of the
problem in January 1994, when another notice of audit was given
(Exhibit R-3). There was a further notice given for
February 7,1994 (Exhibit R-4).
[10] On August 2, 1995, a letter was sent to the
Appellant by Revenue Canada informing him that the Corporation
owed source deductions and that, as a director of this
Corporation, he may be held liable to pay these amounts
(Exhibit R-6). A similar letter would have been sent
to another person, Mr. Loris Posocco, whose lawyer,
Robert R. Jason (the same lawyer representing the
Appellant in the instant case) responded by letter dated
September 7, 1995 (Exhibit R-7). The relevant
portions read as follows:
...
Re: Cambryan Homes Ltd., Account No. AXC216862, Mr.
Loris Posocco
Your letter of August 2, 1995 has been referred to me. I
wish to confirm to you that Mr. Posocco has not been a
director of Cambryan Homes since October, 1989. I enclose a
copy of the Special Notice filed on February 10, 1993. This
discloses that the sole director of the corporation was
Mr. Claudio Posocco. There are no other directors shown as
there were no other directors. As Mr. Loris Posocco
was not a director of the corporation, he has not taken in any
actions and, therefore, is not liable for any alleged unremitted
source deductions of Cambrian Homes Ltd.
If you have other information to the contrary, I would be
pleased to discuss this with you further that no arbitrary action
is taken. (Emphasis added)
...
The special notices referred to in this letter, show indeed
that, in 1993, the only director was the Appellant.
[11] Counsel for the Appellant submitted that the Appellant
had fulfilled his obligation of due diligence in relying on his
co-director in 1991 and on a competent bookkeeper. It is
the fraudulent conduct of the Appellant’s partner that had
misled the Appellant who had no reason not to trust him.
[12] Counsel for the Appellant referred to a decision of the
Federal Court of Appeal in Soper v. The Queen, 97 DTC
5407, and more particularly to the words of Robertson, J.A. at
pages 5416, 5417 and 5419, the following portions of which I
quote:
... 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.”
...
Of course, not all inside directors have been held liable. The
Tax Court has refused to impose liability on an inside director
in cases where he or she is an innocent party who has been misled
or deceived by co-directors: see Bianco v. M.N.R., 91 DTC
1370 (T.C.C.); Edmondson v. M.N.R., 88 DTC 1542 (T.C.C.);
Shindle v. M.N.R., 95 DTC 5502 (F.C.T.D.); and Snow v.
M.N.R., 91 DTC 832 (T.C.C.). There are also other
examples of an inside director being exonerated: see
Fitzgerald et al. v. M.N.R., 92 DTC 1019 (T.C.C.).
...
... In each case it will be for the Tax Court Judge to
determine whether, based on the financial information or
documentation available to the director, the latter ought to have
known that there was a problem or potential problem with
remittances. Whether the standard of care has been met, now that
it has been defined, is thus predominantly a question of fact to
be resolved in light of the personal knowledge and experience of
the director at issue.
[13] Counsel for the Appellant also referred to
Edmondson and Snow (supra) in which there
was evidence of a director deceiving the respective Appellants in
that the source deductions had been remitted. These appeals were
allowed by reason of the fraudulent behaviour.
[14] Counsel for the Respondent referred to two decisions of
this Court, Youngman v. M.N.R., 87 DTC 250 and
Quantz v. M.N.R., 88 DTC 1201. She submitted that the
Appellant provided no evidence of any measures taken by him as
president of the Corporation to ensure that the source deductions
be properly remitted. She also submitted that a negative
inference should be drawn from the fact that neither the
bookkeeper, nor the partner were subpoenaed to testify.
[15] My analysis of the evidence is that it is clearly lacking
in all respect. Throughout the hearing, the Appellant’s
testimony was evasive and imprecise. There was no documentary
evidence except to the tendering of one exhibit that was scarcely
relevant and there were no witnesses other than the Appellant.
The Appellant’s testimony concerning his role as a director
was to say that he was primarily involved in the
Corporation’s operations, that the co-director of the time
was the one in charge of the office management and that he had no
reason not to trust this person.
[16] A statement such as this does not suffice. It has to be
proven and even at a higher degree in circumstances, where a
director is the corporation’s president, where he owns 50%
of the corporation’s share and where each cheque issued by
the corporation has to be bear his signature.
[17] In response to the care, a director needs to take to
ensure that source deductions are remitted, the Appellant simply
stated that he had hired a competent bookkeeper. The bookkeeper
did not testify to say from whom he or she was getting his or her
instructions and how it happened that the source deductions were
not remitted. Bookkeeping may be properly done and still source
deductions not remitted if instructions are given to pay those
last or hold their payment.
[18] It is impossible to believe that the Appellant would not
have been aware before 1994 that the payment of the source
deductions was not made, when he and the other director had to
sign the cheques. There were no allegations and no evidence that
the appropriate cheques were signed and after,
misappropriated.
[19] Counsel for the Appellant wanted to rely primarily on the
ground that the Appelant had been misled. The nature of the
alleged fraudulent acts has not been explained nor how these
fraudulent acts had misled the Appellant. As the Appellant
remained the only director since 1991, there is no reason why he
would not have had in his possession all the Corporation’s
papers needed to prove his allegations of fraudulent acts and how
they have misled him.
[20] In conclusion, there is no evidence before me that the
Appellant has exercised the degree of care, diligence and skill
to prevent the failure to remit the source deductions
contemplated by paragraph 227.1(3) of the Act nor
that he has been misled. The appeal is allowed in part with
respect to the amount mentioned at paragraph 6 of these
reasons. In all other aspects, it fails.
Signed at Ottawa, Canada this 28th day of November 1997.
"Louise Lamarre Proulx"
J.T.C.C.
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