Date:
20080213
Docket:
A-437-06
Citation: 2008
FCA 59
CORAM: NADON
J.A.
SEXTON
J.A.
RYER
J.A.
BETWEEN:
BRUNO HARTRELL
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT OF THE
COURT
(Delivered
from the Bench at Toronto, Ontario, on February 13,
2008)
RYER J.A.
[1]
This is an
appeal from a decision of Paris J. of the Tax Court of Canada (the “TCC”) (2006
TCC 480) dismissing the appeal of Mr. Bruno Hartrell against an income tax
assessment, pursuant to subsection 227.1(1) of the Income Tax Act,
R.S.C. 1985, c. 1 (5th Supp.) (the “ITA”), in relation to his 1998
taxation year. The assessment arose out of the failure of Toronto Lynx Soccer
Club Inc. (“Lynx”) to remit
source deductions, in the amount of $47,434.46, to the Canada Revenue Agency
(the “CRA”) in 1998, as required by section 153 of the ITA.
[2]
The
appellant argues that the TCC erred in upholding the assessment against him on
the basis that subsection 227.1(1) of the ITA was not applicable to him because
he was never formally appointed, and did not, in fact, function as a director
of Lynx in 1998. In the
alternative, the appellant argues that if he did function as a director in
1998, he was entitled to rely on the due diligence defence under subsection
227.1(3) of the ITA.
[3]
The
determinations of the TCC as to whether Mr. Hartrell was liable, pursuant to
subsection 227.1(1) of the ITA, for the 1998 source deductions that lynx failed
to remit, on the basis that he, in fact, functioned as a director of Lynx and whether the due diligence
defence that is contained in subsection 227.1(3) of the ITA, has been
established require the application of a legal standard to a set of facts.
Accordingly, these determinations constitute questions of mixed fact and law
that are reviewable on a standard of palpable and overriding error, unless it
is clear that there has been an extricable error of law, in which event a standard
of correctness will apply. (See Housen v. Nikolaisen, [2002] 2 S.C.R.
235.)
[4]
The TCC
determined that in accordance with the decision in this Court in Wheeliker
v. R., [1999] 2 C.T.C. 395 (F.C.A.), a person who was not formally
appointed as a director can nonetheless have liability pursuant to subsection
227.1(1) of the ITA if that person has, in fact, functioned as a director of
the corporation in question.
[5]
We are of
the view that in making this determination on the basis of Wheeliker,
the TCC correctly apprehended the proper legal standard with respect to the
issue of whether liability under subsection 227.1(1) of the ITA can be assessed
against a person who has not formally been appointed as a director.
[6]
The TCC
reviewed the evidence of several witnesses, including Mr. Hartrell, and
numerous documents. Based upon that review, the TCC concluded that Mr. Hartrell
had played a significant role in the affairs of Lynx and that the Minister’s assumption that Mr. Hartrell
performed the function of a director of Lynx
had not been shown to be incorrect. In so finding, the TCC declined to accept
Mr. Hartrell’s assertion that he was no more than a passive investor in Lynx.
[7]
We are of
the view that the evidence before the TCC was sufficient to enable the TCC to
conclude that Mr. Hartrell had, in fact, functioned as a director of Lynx in 1998. Moreover, it was open to
the TCC to decline to accept Mr. Hartrell’s testimony to the effect that he was
a mere passive investor in Lynx.
Accordingly, we are unpersuaded that the TCC committed any palpable and
overriding error in reaching its conclusion that Mr. Hartrell was subject to
liability under subsection 227.1(1) of the ITA on the basis that he, in fact,
functioned as a director of Lynx
in 1998.
[8]
Pursuant
to subsection 227.1(3) of the ITA, liability in respect of a failure to remit
source deductions will not be imposed on a person who has, in fact, functioned
as a director, if that person has exercised the degree of care, diligence and
skill to prevent the failure that a reasonably prudent person would have
exercised in comparable circumstances.
[9]
The TCC
determined that the legal test with respect to the defence of due diligence
under subsection 227.1(3) of the ITA was to be interpreted in accordance with
paragraph 30 of the decision of this Court in Soper v. R., [1997] 3
C.T.C. 242 (F.C.A.) which the TCC reproduced in paragraph 37 of its reasons.
That paragraph reads as follows:
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”.
[10]
The
principles with respect to the test for the due diligence defence in subsection
227.1(3) of the ITA that were laid down in Soper have been affirmed by
this Court in Worrell v. R., [2000] 1 C.T.C. 79 (F.C.A.).
[11]
The
appellant submits that the TCC erred by not adopting the test in Worrell.
We are of the view that this argument must fail. By adopting the test in Soper,
which was approved in Worrell, the TCC has adopted the test that the
appellant advocates. We agree with the respondent that the TCC did not adopt
the decision in Thibeault v. The Queen, 2005 TCC 393, [2006] G.S.T.C.
165, with respect to the test for the due diligence defence, and that by its
reliance on Soper, the TCC adopted the proper legal test with respect to
the due diligence defence under subsection 227.1(3) of the ITA.
[12]
The
appellant argued that the decision of the Supreme Court of Canada in Peoples
Department Stores Inc. (Trustees of) v. Wise 2004 SCC 68 changed the
test with respect to the due diligence defence from the “objective subjective”
test, in Soper, to simply an “objective” test. Whether Peoples
Department Stores can be said to have eliminated the subjective aspects of
the due diligence defence in subsection 227.1(3) of the ITA is not entirely
clear since that the decision dealt with a provision of the Canada Business
Corporation Act R.S.C. 1985, c. B-3. In that regard, the Supreme Court of
Canada, in paragraph 63 of the decision, stated that:
With respect,
we feel that Robertson J.A.’s characterization of the standard as an “objective
subjective” one could lead to confusion. We prefer to describe it as an
objective standard. To say that the standard is objective makes it clear that
the factual aspects of the circumstances surrounding the actions of the
director or of the officer are important in the case of the s.122(1)(b) duty of
care, as opposed to the subjective motivation of the director or officer, which
is the central focus of the statutory fiduciary duty of s.122(1)(a) of the
CBCA.
If Peoples Department Stores did change the test to
be applied under subsection 227.1(3) of the ITA to one that requires due
diligence to be demonstrated on a purely objective standard, such a new test
would be more difficult to meet than a test that contains some elements of subjectivity.
As such, we are unable to see how the potential application of Peoples
Department Stores could be helpful to the appellant.
[13]
The TCC
found that Mr. Hartrell, an experienced chartered accountant, was aware that lynx had
failed to remit the correct amount of source deductions in a number of months
in 1998 and that he did nothing to prevent those failures. The TCC based this
finding on the evidence before it, in particular Mr. Hartrell’s testimony, as
well as correspondence between Mr. Hartrell and Mr. Iantorno, the president of Lynx. The TCC rejected Mr. Hartrell’s
argument that because he caused lynx to provide post-dated cheques
to the CRA in 1999, after the deficiencies had arisen, he had taken reasonable
efforts to prevent the deficient remittances that arose in 1998. The TCC held
that these cheques were provided long after the deficient remittances had
occurred and that the due diligence defence requires steps to be taken to
prevent such occurrences. Moreover, the TCC found that Mr. Hartrell could have
caused Lynx to pay the arrears
out of the funding that was provided to Lynx
between January and August of 1999.
[14]
Based upon
the evidence before the TCC, we are of the view that it was open to the TCC to
make these factual findings. Accordingly, we are not persuaded that the TCC
made any palpable and overriding error in applying due diligence defence in Soper
to these factual findings and in reaching the conclusion that Mr. Hartrell had
failed to exercise the degree of care, diligence and skill that a reasonably
prudent person would have exercised in comparable circumstances to prevent the
source deduction remittance shortfalls that occurred in 1998.
[15]
For these
reasons, the appeal will be dismissed with costs.
“C. Michael Ryer”
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