Wilson v. R., [1996] 2 CTC 2099, 97 DTC 278

Sobier J.T.C.C.: — The Appellant appeals from the assessment by the Minister of National Revenue (“the Minister”) pursuant to subsection 227.1 of the Income Tax Act (“the Act”) whereby the Minister assessed the Appellant for federal income tax deducted at source but not remitted by Browning Communications Canada Inc., (“the Company”) together with interest and penalties.

The Appellant was a director, president and shareholder of the Company during the relevant period of time. He was responsible for its day-to-day operations. The Company experienced cash flow problems and was apparently undercapitalized. The largest shareholder while appearing to want to inject funds into the Company may have had another agenda and that was to take control of the Company.

The Appellant’s evidence was directed to show the problems faced by the Company which may have resulted in part by the struggle between the shareholder, Coaster Holding and Finance B.V. (“Coaster”) and the Company’s lawyers, Weir & Foulds. Both parties held security interests over the Company’s assets and according to the Appellant used this to favour their own positions.

Be that as it may, the Company did fail to remit source deductions during the later half of 1989 and the first part of 1990.

In order for the Appellant to escape liability under subsection 227.1, he must establish that he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

During the period after July 1989, the Appellant was valiantly engaged in trying to save the Company. He tried to raise money through the existing shareholders by means of loans, options and other financial tools, because if this was accomplished, the amounts owing to Revenue Canada could be paid. However, during this time other creditors and suppliers were being paid but not Revenue Canada, the failure to remit continued.

The operative words in subsection 227.1(3) are that the director:

...exercised the degree of care, diligence and skill to prevent the failure....

The Appellant’s attempts to raise monies would have successfully allowed the Company to pay arrears and perhaps to keep current with remittances, however, nothing came of this.

In Manning v. Minister of National Revenue (sub nom. Manning v. Minister of National Revenue, [1995] 2 C.T.C. 2411 (T.C.C.), Associate Chief Judge Christie of this Court referred to the reasons for judgment of Judge Rip, also of this Court, in Ho v. Minister of National Revenue (sub nom. Ho v. Minister of National Revenue, [1990] 2 C.T.C. 2623 (T.C.C.) 91 D.T.C. 76, when dealing with the meaning of the word “prevent”. At page 80 of Judge Rip’s reasons for judgment he said:

The third point argued by appellant’s counsel was that section 227.1 applies to the period both before and after the failure to remit has taken place. In other words, if I understand counsel, the failure to remit is a continuing failure and if a person exercises a degree of care, diligence and skill to halt the failure, that is, to attempt to cause the delinquent corporation to pay after it has failed to remit, the person, if he was a director, is not liable. Ho tried to prevent the continuation of the failure, counsel declared.

I do not agree with counsel. The words of subsection 227.1(3) provide a director is not liable under subsection 227.1(1) “where and he exercised the degree of care ... to prevent the failure”.

Judge Rip then referred to definitions in both French and English dictionaries and concluded:

The words “prevent” and “prévenir” mean the same: to stop an event from happening before it happens. Once a failure to remit takes place, its prevention is no longer possible. Anything Ho or Lawlor or Ho’s counsel may have done after November, 1986 was too late to prevent the failures that have already occurred.

Although other authorities were referred to, they merely confirm what was said in Ho and Manning. However, I believe that what Judge Mogan of this Court said in Charkowy v. Minister of National Revenue (sub nom. Charkowy v. Minister of National Revenue, [1991] 1 C.T.C. 2095, 91 D.T.C. 284 bears repeating. At page 286 Judge Mogan states:

If the “failure” in subsection 227.1(3) is an isolated event, then the conduct of a director after that event would in most circumstances be irrelevant. In other words, a director who has not exercised the required degree of care, diligence and skill to prevent the failure cannot bootstrap himself under subsection 227.1(3) by proving how hard he tried after the event to rectify or remedy the default.

Although he tried to save the Company, the Appellant did not try to prevent the default, merely to remedy it.

For these reasons, the appeal is dismissed. There will be no Order as to costs.

Appeal dismissed.