Date: 19981218

Docket: 96-4594-IT-G

BETWEEN:

LORNE DALKE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for judgment

Mogan J.T.C.C.

[1] The Appellant was assessed under section 227.1 of the Income Tax Act in his capacity as a former director of Seven S Structures Inc. (hereafter referred to as the "Corporation"). By notice of assessment dated April 25, 1996, the Appellant was assessed the aggregate amount of $27,833.34 under section 227.1 of the Income Tax Act (Federal) and corresponding provisions of the Alberta Income Tax Act, Canada Pension Plan and Unemployment Insurance Act. In a schedule attached to the notice of assessment (Exhibit A-17) the aggregate amount of $27,833.34 is allocated among the following headings:

Federal Tax $8,964.60

Federal Penalty    2,981.94

Provincial Tax    1,768.68

Provincial Penalty     426.51

CPP     1,564.57

CPP Penalty      253.27

UIC     4,472.00

UIC Penalty      447.20

Accrued Interest    6,740.07

Other       214.50

Total       $27,833.34

[2] Although there were a number of issues raised in the Notice of Appeal, the Appellant's counsel stated at the commencement of the hearing that there were only two issues to be decided by the Court: whether the Appellant had satisfied the due diligence test in subsection 227.1(3); and when should a director take positive steps in order to discharge his responsibility with respect to due diligence. Neither counsel referred to the conditions in subsection 227.1(2). I therefore conclude from other statements by counsel and from the manner in which this appeal was presented that those conditions have been satisfied.

[3] The Corporation was incorporated under the laws of the Province of Alberta sometime in the mid-1980s. Its purpose was to manufacture and sell a product used in the building industry. The Appellant described the product in layman's language as two slabs of chipboard approximately 4' x 8' which were like the bread of a sandwich. Between the two slabs a special machine pumped a special foam insulation product which was like the meat of the sandwich. The result of this process was a prefabricated insulated panel covering about 32 square feet. These panels were manufactured in standard widths of 3", 4", 6" and 8". The panels were designed to be used in the construction of houses and buildings as part of the outside wall in the sense that they would provide a better insulation than the normal insulation packed between studs.

[4] A man named Sidney Tissington held the original patent for the design of these panels comprising the two slabs of chipboard with the foam content pumped in between. Immediately after incorporation, the Tissington family held enough shares to control the Corporation but, at a later time, certain members of the public were invited to become shareholders in order to put more capital into the Corporation. It appears that Mr. Tissington transferred his patent to the Corporation.

[5] At all relevant times, the Appellant was an entrepreneur owning many businesses and residing in Chetwynd, British Columbia, a small community approximately 200 miles northeast of Prince George. The Appellant has been in business for more than 45 years. In 1952, he purchased his first truck. Later, he developed a trucking business and then expanded into other activities. He said that at one time he had 17 companies whose businesses included oil delivery, a helicopter service, construction, and financial services. The Appellant is a hands-on businessman who ran most of these companies on a day-to-day basis. He is hard-working. According to his own evidence which is all credible without qualification, he is up about 5:00 every morning and he gets home around 8:00 in the evening putting in a 13-hour day with time out for lunch and supper. The Appellant freely acknowledged in his examination-in-chief that, as the owner of many businesses, he knows about source deductions from wages and salaries; and he knows about a director's potential liability if a Corporation fails to remit such source deductions.

[6] The Appellant first saw the prefabricated insulated panels in Grand Prairie, Alberta around 1988. He was very impressed with the product and concluded that it would have great value in the construction industry. In 1989, when Mr. Tissington was raising additional capital for the Corporation by inviting persons outside the family to subscribe for shares, the Appellant purchased his first shares in the Corporation for $37,500. It never did come out in evidence how many shares the Appellant acquired for $37,500 but the Appellant's copy of a bank draft for that amount dated January 23, 1989 is Exhibit A-1. The Appellant cannot recall when he first became a director of the Corporation but the earliest minutes of any directors' meeting in evidence is Exhibit A-3 showing that the Appellant was a director when they met on December 7, 1990. A man named Vern Estabrook had loaned some money to the Corporation and introduced the Appellant to a number of the directors. It is the Appellant's recollection that it was through Vern Estabrook that he was invited to become a director.

[7] The Appellant and Harvey Jager became directors at the same time. The Appellant had met the other members of the board before becoming a director but he did not know them well. Specifically, he was not related in any way to any other director nor did he have any prior business dealings with them. According to Exhibit A-3, the following persons were directors of the Corporation on December 7, 1990:

Harvey Jager

Sid Tissington

Jerry Wright

Norman Husband

Lorne Dalke

[8] The minutes of the directors' meeting on December 7, 1990 show that the directors accepted the resignation of Harvey Jager as president of the Corporation but Mr. Jager did not resign as a director. Curiously, the minutes do not indicate that the directors appointed any other person as president to replace Mr. Jager. The Appellant's oral testimony indicates that the Tissingtons took over management of the Corporation effective on or prior to December 7, 1990. Sid Tissington was of course the original inventor of the prefabricated insulated panel and he became the effective manager of the Corporation's operation. His wife Evelyn was the bookkeeper and his son Keith was a foreman or manager of the production plant at Innisfail, Alberta.

[9] Soon after the Appellant became involved in the Corporation, he realized that it was in serious financial difficulty. From time to time over the next two or three years, the Appellant provided financial assistance to the Corporation in a truly significant way. By 1994, he had invested approximately $1,000,000 directly or indirectly in the Corporation's business. The last page of Exhibit A-7 is a schedule prepared by the Appellant showing the amounts which he advanced to the Corporation at various times up to and including June 30, 1994. The schedule does not show the date when each advance was made but the Appellant described almost all of the amounts and the circumstances in which the advances were made. Set out below is the schedule from Exhibit A-7 as prepared by the Appellant:

Advanced by way of bank draft to cover payroll (1990)	$20,000.00
Paid to Louisiana Pacific for 5 Truckloads of O.S.B.	$42,023.00
Paid to Seven 'S' re: Cranes	$30,000.00
Paid to Northern Metallic re: Judgment	$27,000.00
Paid to Phil Swagg (re: business plan)	$1,000.00
Paid to Kaverit Crane re: insurance deductible	$708.47
Expenses owing since 1989	$23,993.64
Advanced to Seven (S') loan $50,000.00 plus interest	$116,662.00
Share Subscription 490,000 shares @ .25	$122,500.00
Investment in mortgage at Innisfail	$352,000.00
Investment in Cement Plant at Innisfail	$176,000.00
Total Investment in Seven 'S' Since March of 1989	$969,387.11

[10] The schedule has some inaccuracies as will appear in the comments below but it is a useful summary of the circumstances and certain times when the Appellant came to the rescue of the Corporation. I shall review most of the amounts in the same order in which they appear in the schedule with the Appellant's description of the amount.

$20,000 An amount advanced by the Appellant sometime in 1990 to cover the payroll.

$42,023 By April 1991, the Corporation had exhausted its credit with most suppliers who would not deliver any further product except on a cash basis. One of the biggest suppliers was Louisiana Pacific Panel Products Ltd. In April 1991, the Corporation needed product from Louisiana Pacific but had no cash. The Appellant advanced $42,023 to pay those invoices from Louisiana Pacific which are Exhibit A-9.

$30,000 When the Corporation purchased the plant and land at Innisfail, Alberta in 1988, it acquired four Gantry cranes in new condition. Sometime in 1992 when the Corporation was desperate for money, the Appellant loaned $30,000 on condition that one of the Appellant's operating companies in Chetwynd, British Columbia, be granted a chattel mortgage on two of the cranes. This transaction was effected and the Appellant ended up with a chattel mortgage for $30,000.

$27,000 In April, 1991, Northern Metallic Inc. had a law suit against the Corporation for $27,000. The directors were concerned that if Northern Metallic were to pursue its law suit, other creditors might become nervous and commence legal proceedings which could put the Corporation into receivership. To avoid this, the Appellant paid $27,000 to Northern Metallic to settle the law suit. As security for the $27,000, one of the Appellant's companies took a chattel mortgage on the other two cranes.

$1,000 The Appellant and one or two other directors retained Phil Swagg personally to prepare a business plan for the Corporation and they paid Mr. Swagg out of their own pockets.

$23,933.64 This amount represents an accumulation of casual disbursements incurred from time to time by the Appellant for the benefit of the Corporation. He said that the total amount would include his transportation costs of going to and returning from directors' meetings (those costs were apparently never reimbursed), fees for directors' meetings which were not paid, and other incidental expenses which the Appellant incurred from time to time.

$116,662 On March 30, 1992, the Appellant loaned $50,000 to the Corporation. Exhibit A-6 is a record of the wire payment from the Toronto-Dominion Bank. Exhibit A-7 is the loan agreement between the Appellant and the Corporation and Exhibit A-8 is an acknowledgement of the loan signed by Jerauld G. Wright as chairman of the board. The acknowledgement in Exhibit A-8 shows that the interest is at the rate of 2.5% per month and Exhibit A-7, the loan agreement, states that the rate of interest is 30% per annum. To the best of the Appellant's recollection, the amount of $116,662 is the basic loan of $50,000 plus accrued interest at 30% per annum from March 30, 1992 to June 30, 1994. According to my calculations, the basic loan amount plus accrued interest even at 30% per annum would not make up a total of $116,662 by June 30, 1994 but that is the Appellant's best recollection given in Court in December 1998.

$122,500 The Appellant's first purchase of shares in the Corporation on January 23, 1989 cost $37,500. Exhibit A-1 is a bank draft in that amount payable to the Corporation and the Appellant identified that as his first payment for shares. At some later time, when the Corporation needed money, the Appellant agreed to take up an additional 490,000 shares at $.25 a share resulting in a total cost of $122,500. This is the amount recorded in Exhibit A-7 but it does not include the Appellant's initial investment of $37,500. The Appellant could not explain how the directors set a value of $.25 on the shares which he later purchased.

$352,000 The Corporation had purchased the land and plant around 1988 at a total cost of approximately $700,000. The Corporation failed to pay its municipal taxes in subsequent years until some time around 1992 when the Town of Innisfail needed $800,000 for arrears of municipal taxes on the property. The Corporation did not have the funds to pay these taxes. Three of the directors put up the $800,000 and collectively took back a mortgage on the property as security for their loan. The three directors and the amounts they respectively advanced are:

Jerauld Wright $500,000

The Appellant $200,000

Harvey Jager $100,000

The amount of $352,000 in Exhibit A-7 is the Appellant's share ($200,000) of the $800,000 advanced to pay the municipal taxes to Innisfail, plus accrued interest on the Appellant's share.

$176,000.00 When the Corporation bought its plant in 1988, it acquired not only the land and the building but all of the equipment in the building. Apparently, the plant had been intended to be used as a cement manufacturing facility because most of the equipment related to cement-making. That equipment was redundant to the Corporation's operation. Therefore, it was decided to sell the equipment by auction. The auction was held in Edmonton but, because the equipment was heavy and could not easily be moved, it was left in the plant at Innisfail and only pictures of the equipment were on display at the auction. The Appellant and Jerry Wright attended the auction sale. When the bidding stalled at $55,000, the Appellant intervened and started bidding on the equipment for his own personal use. As a result, the Appellant was the buyer at some price in the range of $180,000. There is no precise reconciliation between the amount of $186,000 which the Appellant claims in Exhibit A-11 to be the actual auction price; the amount of $171,000 which was the net proceeds to the Corporation according to Exhibit A-3, the minutes of the directors' meeting on December 7, 1990; and the amount of $176,000 appearing in Exhibit A-7. In the Appellant's mind, the $176,000 in Exhibit A-7 is higher than the net amount ($171,000) received by the Corporation because of some prior charge on the equipment.

[11] The Appellant's schedule in Exhibit A-7 is not 100% accurate but I am satisfied that in substance it is true. Specifically, there are two significant omissions. The $37,500 for the Appellant's first purchase of shares in 1989 is missing. Also, there is a further amount of $93,416 which the Appellant advanced to the Town of Innisfail on March 25, 1993 in order to pay the municipal taxes on the plant. See Exhibit A-12. The Appellant's explanation is that, as one of the three mortgagees holding a mortgage on the plant (the Appellant's share of $200,000 being part of the $800,000 mortgage described above), he decided to pay the municipal taxes of $93,416 without any immediate contribution at that time from Jerry Wright or Harvey Jager because it was the only way of protecting their collective mortgage on the property if they wanted to foreclose at some future time. He was confident that on a foreclosure and sale, he would recover from Wright and Jager their proportionate share of the $93,416.

[12] The number of times when and the circumstances in which the Appellant provided financial assistance to the Corporation is truly impressive. He said that he advanced the money from time to time because he really believed in the product. Unfortunately, the Corporation went out of business in March 1994. The Appellant thinks the Corporation failed because of poor management, lack of orders and lack of capital. Although the Corporation survived as a business operation until March 1994, there were a number of events along the way which sent out a constant signal that the Corporation was in financial difficulty. I will first comment on the minutes of three directors' meetings.

[13] Exhibit A-3 is minutes of the directors' meeting held on December 7, 1990. It is apparent from these minutes that the auction sale in which the Appellant had stepped in to rescue the bidding at the $55,000 level (described above) had occurred some time prior to this meeting. The first item in the minutes is a review of the results of the auction.

Mr. Wright advised that the auction of excess equipment of Seven S took in a gross amount of $190,000 which, after a 10% fee to the auctioneers left $171,000. Of the $171,000, 17% belongs to Vern Estabrook as the holder of an undivided interest in the excess equipment equalling $29,070.00. This left a balance of $141,930 to be paid by the auctioneers to Seven S. Of this amount, Revenue Canada Taxation and Revenue Canada Excise are to receive $71,398.92 and $45,001.38 respectively. This left a balance of $25,530. After a discussion of the outstanding accounts owed by Seven S to Howard, Mackie on motion by Mr. Dalke, seconded by Mr. Tissington and carried unanimously it was

RESOLVED THAT the balance of the proceeds of the concrete plant auction being $25,530 be paid to Howard, Mackie towards settlement of the outstanding accounts of Seven S with such law firm.

The above passage speaks for itself as to the Corporation's debts to Revenue Canada. Also, I infer from the wording of the resolution that the Corporation owed a larger amount to the Howard, Mackie law firm because the resolution states that the amount of $25,530 is paid "towards settlement of the outstanding accounts".

[14] Exhibit A-5 is minutes of the directors' meeting held on April 17, 1991. There had been no meeting since December 7, 1990 because the first item of business was to adopt the minutes of the meeting on that date. The next item was a review of the Corporation's financial status.

The Directors reviewed the financial status of Seven S and discussed the approximate $500,000 in trade creditor debt. The Board also discussed the current outstanding amounts owing to income tax in the amount of approximately $26,000 and Workers' Compensation of approximately $20,000. Mr. Husband suggested that unaudited financials be provided to the Directors on a monthly basis. On motion by Mr. Husband, seconded by Mr. Tissington and carried unanimously,

RESOLVED THAT the Directors receive financial statements including trial balance and complete breakdown of payables and receivables within 15 days of the end of each and every month.

Again, the above passage speaks for itself. The Corporation had trade creditor debts of $500,000; it owed income tax of $26,000 and Workers' Compensation levies of $20,000. These obligations are not the sign of a healthy Corporation.

[15] Exhibit A-10 is minutes of the directors' meeting held on August 19, 1992. This was an important meeting because it marked the departure of the Tissingtons (Sid, Evelyn and Keith) from the management of the Corporation. On page 2 of the minutes, the Appellant made a motion to offer a certain proposal to the Tissingtons but his motion died because it was not seconded. A different motion was then put forward by Norman Husband and adopted by the directors with the Appellant dissenting. These minutes show the Appellant's willingness to stand apart from his fellow directors. According to the Appellant, after this meeting the management of the Corporation was left in the hands of Jerry Wright who was the chairman of the board and de facto president of the Corporation whether he was appointed to that office or not. Because Mr. Wright was an Ontario businessman living in Ottawa, it was decided to move the head office of the Corporation from Innisfail to Ottawa but the banking was left at Innisfail. From and after August 1992, all of the Corporation's cheques were sent by Judy (the bookkeeper in Innisfail) to Mr. Wright in Ottawa for signature. This procedure persisted from August 1992 until the Corporation went out of business in March 1994.

[16] The Appellant said that it was appropriate to transfer the head office to Ottawa because Mr. Wright was the largest shareholder in the Corporation and had also invested the most money. The Appellant had obtained a list of the shareholders (Exhibit A-13) and, according to his own calculations, the five biggest shareholders of the Corporation with their respective percentage of the issued shares were as follows:

Jerry Wright 20.5%

Tissington Family 17.2%

Harvey Jager 19.0%

Norman Husband 7.7%

Lorne Dalke    7.4%

[17] Another reason for the Appellant placing importance on the directors' meeting of August 1992 is the fact that, prior to that meeting, he was often asked to advance money directly to the Corporation or to its suppliers as indicated in Exhibit A-7. After that meeting, however, the Appellant said that he was not asked to advance money directly to the Corporation. I do not in any way doubt the Appellant's sincerity or credibility but that statement must be qualified by the fact that in March 1993, when the Corporation had failed to pay the municipal taxes on its plant in Innisfail, the Appellant himself had to pay $93,416 to the Town of Innisfail to pay the back taxes and prevent the loss of the plant. That amount is described in paragraph 11 above as an addendum to the schedule which is the last page of Exhibit A-7.

[18] The Appellant stated that, after August 1992, he thought that the Corporation was doing okay. He said that he had no cause to check on tax remittances because every time he called Judy (the bookkeeper in Innisfail) she always told him that the cheques had been sent to Ottawa. Judy would assure the Appellant that among the cheques she sent to Ottawa were the remittance cheques to Revenue Canada for source deductions but the Appellant did not ask Jerry Wright if he actually signed and mailed those cheques. When he asked Mr. Wright about the Corporation's debts, he was told that there were lots of receivables.

[19] Sometime in 1993, Harvey Jager and Norman Husband resigned as directors of the Corporation because they could not get any financial information. The Appellant stated that he knew that Jager and Husband had resigned but that he could not resign because he had too much invested in the Corporation and he needed to stay on the scene to protect his investment.

[20] After August 1992, Judy (the bookkeeper) may very well have assured the Appellant from time to time that she had sent to Jerry Wright in Ottawa the cheques necessary to pay current debts including remittances to Revenue Canada. The schedule to the Appellant's notice of assessment (Exhibit A-17) shows that the total liability of $27,833.34 assessed against the Appellant was accumulated against the Corporation from April 5, 1993 through to March 22, 1994. In other words, it was over this 12-month period that the Corporation accumulated its liability through failure to remit amounts to Revenue Canada; and that liability has descended upon the Appellant as a director of the Corporation during that period. Exhibit A-16 is the Appellant's resignation as a director on February 8, 1996. According to Exhibit A-18, Jerry Wright and Sid Tissington were the only directors of the Corporation on June 17, 1996.

[21] Counsel for the Appellant made the following argument. The Appellant was an outside director; not a part of any controlling group; and not an officer of the Corporation. At all relevant times, the Appellant lived in Chetwynd, British Columbia approximately four hours by air (no direct flights) from Innisfail, Alberta and 10 hours by highway. Although the Corporation was in constant financial difficulties up to and including August 1992 when the Tissington family was removed from any further management, the Appellant had no reason to believe that there was any problem with remittances to Revenue Canada after August 1992 when Jerry Wright took over the management of the Corporation. The Appellant's position is that he did all that was required by enquiring of Judy if she had sent the cheques to Jerry Wright and by asking Mr. Wright from time to time if the debts were being paid.

[22] Section 227.1 of the Income Tax Act imposes a liability on the directors of a corporation who meet the conditions in subsection (1) and grants relief to a director who can satisfy the so-called due diligence test in subsection (3).

227.1(1) Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or section 153 or 215, has failed to remit such an amount or has failed to pay an amount of tax for a taxation year as required under Part VII or VIII, the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest or penalties relating thereto.

...

    (3) 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.

[23] There are many cases which have interpreted and applied section 227.1 of the Act and it would not be possible to reconcile those cases. A recent decision of the Federal Court of Appeal in Soper v. The Queen, 97 DTC 5407 provides a very helpful analysis of the duty of care, diligence and skill imposed by subsection 227.1(3). Neil Soper was an outside director of Ramona Beauchamp International (1976) Inc. ("RBI") and assessed under section 227.1. This Court had previously allowed an appeal by Lorraine Sanford (96 DTC 1912) who was an inside director of RBI. The decision in Soper has special interest because the Federal Court of Appeal upheld the assessment against Mr. Soper as an outside director. At page 5416, Robertson J.A. (Linden J.A. concurring) summarized the standard of care as follows:

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".

At page 5417, there is a description of an "inside director"

... it is difficult to deny that inside directors, meaning those involved in the day-to-day management of the company and who influence the conduct of its business affairs, will have the most difficulty in establishing the due diligence defence. ...

And finally, at page 5418, there is a useful comment on when the positive duty to act arises:

... I would not expect an outside director, upon appointment to the board of one of Canada's leading companies, to go directly to the comptroller's office to inquire about withholdings and remittances. Obviously, if I would not expect such steps to be taken by the most sophisticated of business-persons, then I would certainly not expect such measures to be adopted by those with limited business acumen. This is not to suggest that a director can adopt an entirely passive approach but only that, unless there is reason for suspicion, it is permissible to rely on the day-to-day corporate managers to be responsible for the payment of debt obligations such as those owing to Her Majesty. ...

In my view, the positive duty to act arises where a director obtains information, or becomes aware of facts, which might lead one to conclude that there is, or could reasonably be, a potential problem with remittances. Put differently, it is indeed incumbent upon an outside director to take positive steps if he or she knew, or ought to have known, that the corporation could be experiencing a remittance problem. ...

[24] I accept the fact that the Appellant was an outside director but I do not accept the Appellant's argument that there was no cause for him to be concerned after August 1992 about the financial difficulties of the Corporation. In my opinion, there are four independent reasons why the Appellant should have been concerned, after August 1992, as to whether the Corporation's debts were being paid including the necessary remittances to Revenue Canada. The first reason is the track record of the Corporation. It had never been out of financial difficulty since the Appellant became involved. He had intense personal knowledge of the Corporation's obligations to him because of the many times he had advanced money either directly to the Corporation or to its creditors. There was no indication to the Appellant that the Corporation was able either to redeem his chattel mortgage on the cranes or otherwise to repay amounts owing to him. The Appellant was himself a significant creditor of the Corporation only because of its bad financial track record.

[25] The second reason is the remarkable payment of $93,416 which the Appellant made on March 25, 1993 to the Town of Innisfail to protect his personal interest in the three-party mortgage on the Corporation's plant. This payment was required because the Corporation did not pay all or any part of the $93,416 owing to the Town with respect to municipal taxes. According to Exhibit A-17, the Corporation's failed remittances to Revenue Canada commenced on April 5, 1993 just 11 days after the Appellant paid $93,416 to the Town. This huge payment was, or should have been, a signal to the Appellant that the Corporation was in serious financial difficulties when it could not even protect its manufacturing plant from municipal taxes. As a man with long and varied experience in business, the Appellant knew about cash flow problems and the temptation to hold insolvency at bay by deferring payment to parties like Revenue Canada who were not providing essential goods or services to the Corporation.

[26] At the very least, the Appellant should have required an accounting each month of all outstanding debts of the Corporation including a precise statement from the bookkeeper as to when those debts were paid. The loans from the Appellant and Jerry Wright would have been included among those debts. There was no evidence that the Appellant made any separate journey to Innisfail after August 1992 to demand personal access to the records of the Corporation to determine whether its debts were being paid. I believe the Appellant when he stated that he was concerned and that he did phone Judy from time to time particularly on pay-day to ask if the required cheques were being sent; and I believe the Appellant when he said he phoned Jerry Wright from time to time to see if the debts were being paid. In all of the circumstances, those were not adequate steps to take given the track record of the Corporation and the Appellant's required payment of $93,416 to the Town in March 1993. It is particularly significant that the payment to the Town was a tax payment. Why did the Appellant not ask himself in and after March 1993 if payment to some other taxing authority might be deferred?

[27] The third reason is the Appellant's knowledge that Jerry Wright was not only the largest shareholder of the Corporation but also had advanced to the Corporation more money than the Appellant. No matter how much the Appellant trusted and relied on Jerry Wright, he should have wanted to know whether Mr. Wright as a creditor/director of the Corporation was attempting to recover any of his (Mr. Wright's) advances to the Corporation in priority to the Appellant's advances and before the necessary remittances to Revenue Canada. Common business prudence should have impelled the Appellant as a director and significant creditor of the Corporation to monitor more closely the cheques being issued and the identity of certain creditors (i.e. Revenue Canada) who were being paid. Having regard to the Appellant's big investment in the Corporation which caused him to stay on as a director in 1993 when Harvey Jager and Norman Husband resigned, it was not too much of a burden to expect the Appellant to travel from time to time from Chetwynd to Innisfail to meet with Judy and review not just the cheques she was sending to Jerry Wright but also the cheques which were being cashed and returned with monthly bank statements. The Appellant would then have known what cheques were in fact being signed and mailed by Jerry Wright and cashed by various creditors of the Corporation including Revenue Canada.

[28] The fourth reason is the resignation in 1993 of two directors. According to the Appellant, Harvey Jager and Norman Husband resigned because they could not get adequate financial information about the Corporation. Although they did not appear as witnesses in this case, I assume that Messrs. Jager and Husband are reasonable businessmen. As a benchmark for reasonable conduct, what did the resignations of Jager and Husband say to the Appellant? They were not replaced as directors. After their departure, the Appellant was left with only two other directors: Sid Tissington and Jerry Wright. In August 1992, the directors had removed Sid Tissington and his family from any further role in the management of the Corporation. On March 12, 1993, the Appellant was writing a nasty letter to Jerry Wright (Exhibit A-11) accusing him of trying to take over as "abandoned" certain assets which the Appellant had purchased at the auction sale. Toward the end of that letter, the Appellant stated:

Jerry I have always believed in the old saying that a man is as good as his word and if his word is no good then neither is the man. Jerry you also told us that you would send us a audited statement of your accounts with Seven S that was over two years ago, I sent you mine but you never sent me yours.

[29] In my opinion, March 1993 is a really important month in this case. On March 25 (Exhibit A-12), the Appellant was required to pay $93,416 to the Town of Innisfail to protect the Corporation's plant. On March 12, the Appellant wrote to Jerry Wright (Exhibit A-11) challenging his good faith when Mr. Wright was the de facto president and manager of the Corporation with sole cheque-signing authority. And, according to the Appellant's notice of assessment (Exhibit A-17), March was the last month when all required source deductions were remitted to Revenue Canada.

[30] Applying the objective standard, by the end of March 1993, there were many signals warning the Appellant that he should question the competency of Mr. Wright's management and should question the Corporation's ability to survive. Applying the subjective standard, the Appellant was an experienced businessman and knew from prior directors' meetings (Exhibits A-3 and A-5) that the Corporation had previously failed to remit to Revenue Canada. He knew about the temptation to defer such remittances when there was a shortage of cash. He knew that the Corporation was in fact short of cash. History has proved that remittances to Revenue Canada were deferred from April 1993 to March 1994 (see Exhibit A-17).

[31] By the end of March 1993, the Appellant had a duty to take positive steps to ensure that future source deductions would be remitted to Revenue Canada. The Appellant took no such steps. On the basis of the "objective subjective" standard of care as described in Soper, I find that the Appellant did not exercise the degree of care, diligence and skill to prevent the failed remittances that a reasonably prudent person would have exercised in comparable circumstances. The appeal is dismissed with costs.

Signed at Ottawa, Canada, this 18th day of December, 1998.

"M.A. Mogan"

J.T.C.C.