Donald Nice v. Minister of National Revenue, [1991] 1 CTC 2537, 91 DTC 628

Sobier, T.C.J.:—The appellant appeals from the confirmation of the respondent of an assessment whereby the respondent assessed the appellant for federal income tax deducted at source but not remitted by Custom Machine & Welding Ltd. (the"company"). At the hearing of the appeal, the appellant gave evidence by reading from a letter originally addressed to counsel for the respondent.

The appellant admitted that he was a director and there was evidence by way of an incumbency certificate given to the company's bankers which the appellant signed certifying the names of the officers and directors of the company. This certificate included his own name as a director and as secretarytreasurer of the company.

The appellant described his position as operations manager. He was elected a director and appointed as secretary-treasurer shortly after commencing employment. He thought he was being given a promotion when he became a director. His responsibility included payroll and preparing the forms for source deductions. However, after preparing the forms he would give them to Mr. Paul Redfern, the president of the company, who was to issue a cheque to the Receiver General to accompany the forms.

The appellant claimed to have made many inquiries as to the company's finances and payment of bills which he said included payment of source deductions. The appellant stated that he was at all times assured by Mr. Redfern that his "position was secure, the bills were all in a current mode and the bank was in the plus”. He also stated that" (t)his I was convinced of so many times I had to believe that the company was financially stable".

It was the appellant's evidence from the prepared statement that he did not know anything was amiss until he received a letter dated February 23, 1987, from Revenue Canada stating that he could be held responsible for payment of unpaid source deductions. He also stated that he had had no contact with Revenue Canada until that letter. However, the evidence of Mr. Dan Shea, a collection officer for Revenue Canada, indicated clearly that Mr. Shea had dealt with the appellant by telephone as early as July 2, 1986 when Mr. Shea was attempting to collect unremitted source deductions. In particular, he dealt with the appellant concerning late payment of the May 1986 deductions and that after threatening legal action the appellant appeared at the offices of Revenue Canada with proof of payment of the May deductions. Mr. Shea indicated that the company had a history of late payments but no legal action was ever taken. There was no direct evidence that the appellant was aware of all of the history of the late payments. The company ceased to exist in December 1986. A corporation with a similar name commenced doing business in January 1987.

Mr. Shea stated that he attempted collection of the November and December 1986 remittances in March 1987, which included discussions with the appellant and the other directors.

The evidence is clear that the appellant was aware of the failure to deduct, withhold and remit source deductions as required.

The appellant attempted to bring himself under the saving provisions of subsection 227.1(3) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the"Act") which states:

A director is not liable for a failure under subsection (1) where he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

It has been established by this Court that in order to succeed in this defence, an attempt must be made " to prevent the failure (to deduct or remit)” and not just an "attempt to rectify or remedy the failure at a point in time subsequent to the failure itself. See James White v. M.N.R., [1990] 2 C.T.C. 2566; 91 D.T.C. 54 (T.C.C.) at 2574 (D.T.C. 59). His Honour Judge Taylor in part went on to state on page 2574 (D.T.C. 59) as follows:

Further, in my view, a director may be considered to possess the attributes of “care, diligence and skill” that would be found in a "reasonably prudent person". No one should be expected to act in a fashion which would be at a level higher than that of which he is capable. But perhaps the Court is entitled to ask—would not a "reasonably prudent person" have made enquiries at a very early point in time to determine the personal parameters and responsibilities of the position of director—particularly those which might be imposed by third party obligations? The Act seems to presume that anyone occupying the position of director would be a" reasonably prudent person". It does not refer simply to a "person", nor to a "prudent person", nor to a“ reasonable person", but to a “ reasonably prudent person". I make no effort beyond that point to refine or define the impact of that description on the requirements of the "due diligence” test. I leave that to those more learned than I am to pursue, other than my earlier reliance on Fraser, supra. I can only conclude that the standard of "care, diligence and skill” to be demonstrated under subsection 227.1(3) of the Act to be” not liable” is of a relatively high order, and not accomplished by the simple protestation of the appellant director that he was unaware that he should respond to or that he was unable to do so in that corporate situation. In addition, I have earlier noted (Clark, supra) that the word "exercised" to me represents some form of demonstrable positive action— and I have not been persuaded otherwise by the representations in this appeal. I would also refer to a view brought forward in this appeal, which would import to the phrase "in comparable circumstances”, references to a general lack of sophistication, knowledge, experience or training of the appellant director himself as some form of excuse or reason for not fulfilling the conditions required under subsection 227.1(3) of the Act. I do not understand that perspective. The word "circumstances" in my opinion, refers to the operational and administrative situation in the corporation in which the director who has responsibility finds himself, not to the personal attributes or characteristics which he brings (or does not bring) to the corporate duties. A reasonably prudent person, therefore, would be capable of exercising care, diligence and skill in the corporate business. The nature of the directors" particular functional responsibilities in the corporation, if completely disconnected from the realm of administrative and financial operations, might provide some relief to a director—if such disconnection was the result of something other than his own volition—but I have seen little indication or evidence that this would be anything other than a very exceptional situation, not merely some form of internal division of day-to-day authority.

That the appellant took no positive action to prevent the failure, there is no doubt he merely reacted at times to the failure.

The language of section 227.1 of the Act is clear in imposing liability on directors for failure of the corporation to withhold and remit. The liability can only be tempered by the provisions of subsection 221.7(3). The appellant has not brought himself under these tempering provisions.

Accordingly, the appeal is dismissed.

Appeal dismissed.