Sanford v. R., [1996] 1 CTC 2016, 96 DTC 1912

Bell J.T.C.C.:—The issue is whether the appellant is liable under section 227.1 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) to pay tax that Ramona Beauchamp International (1976) Inc. (“company”), of which she was a director, failed to deduct or withhold and pay to the Receiver General for Canada. On October 31, 1989, the Minister of National Revenue assessed the appellant in the amount of $44,543.09 for income tax, unemployment insurance premiums and Canada pension plan contributions not paid by the company.

The appellant commenced employment with the company in the sales area in 1985 for salary plus commission. She became a director and officer in the spring of 1986 and four or five months later became a minor shareholder. The other directors of the company were Ramona Beauchamp, Evelyn Campsail and Sherry Bell. At the request of Ramona Beauchamp she invested $25,000 in the company. Prior to this employment the appellant was a make-up artist and had experience in retail sales of clothing and jewelry but had never been in management. She has a grade 12 education but has not had training in business administration or management.

She was given signing authority on company cheques with another director in late 1986. She stated that she did not know how many bank accounts the company had and that Beauchamp and Campsall usually signed the cheques. The company had a bookkeeper. The appellant testified that she had minimal involvement in bill paying, that she made requests to purchase certain items and that she never went through the company books. She had never been a director or officer of a corporation before and had never been involved with payroll or other deductions and did not know “how to do deductions”. She stated that she did not know that directors had personal liability until the spring of 1988 when she learned this from persons outside the company.

The company ceased to pay her but she continued in sales. She stated that she worked about 12 to 14 months without being paid until she had to stop in the early fall of 1987 in order to find a source of funds to look after herself and her child.

She stated that she was aware that the company had financial problems but that her focus was continually trying to increase sales to bring in more money. She stated that the other directors kept asking her to produce more sales. She testified that she never saw the books and that she never went through the expenses, had never seen any N.S.F. cheques and was never told that there were any N.S.F. cheques. She said it was clear from all that occurred that her area was sales and that she was expected to, and continually tried to, promote sales.

She said that she learned in the fall of 1987 about remittances owed to the Department of National Revenue and that she had never heard before that remittances were owed. She stated that when she found that out she asked the accountant to provide her with a cheque for same that she could sign and this was done. She said she was not aware that she would be liable but did not like the idea of having an amount outstanding to the government. She requested a cheque in late September 1987 and signed same together with another director. She was unable to explain why the cheque was dated January 4, 1988 saying simply that she signed it and gave it to the accountant. This cheque was returned stamped N.S.F. She stated that she assumed there was enough money in the company account to honour the cheque and that she would be advised otherwise. She also stated that Cheryl Stuart and Neil Soper became directors. Apparently Sherry Bell ceased to be a director. She stated that she was not involved in the management of the company and that she had attended “maybe” two directors’ meetings after having received notice by telephone.

The appellant said that she had submitted a letter dated November 3, 1987 to the company to the attention of the other four directors outlining her desire to be selected in their search for a Sales Manager and/or Sales Director. Shortly after the rejection of her application for that position she went to see Evelyn Campsall and resigned by submitting a letter of resignation dated October 14, 1988. Evelyn Campsail asked her not to “rock the boat” because the company was “going public”. Ramona Beauchamp had resigned and the appellant decided to remain as a director, there then being a total of four directors.

The appellant sought other employment and had minimal presence in the office, namely on weekends, in the evenings and at certain events. She stated that from September to December 31, 1987 she felt she had no influence in the company and remained as a director because of the time she had invested in the company and because of her hope that the company would go public. She stated that she knew in the spring of 1988 money was owing to the Department of National Revenue because she was given an Accounts Payable list showing $23,000 of outstanding payroll deductions. She stated that she asked Cheryl Stuart if this was correct and what was going to be done about it. She testified that Cheryl Stuart said that something would be done about it with the “seed money” that would be raised to assist in the public financing. She wrote on that list “Discuss with directors! Must do something here”. She said she was concerned because it was a large amount, that she then knew about directors’ liability and believed that it would be “handled” after discussing it with Cheryl Stuart. She stated that she was never a vice-president, treasurer or secretary of the company. The appellant testified that she resigned because the public offering had not happened and that she was involved with a new endeavour. She also stated that she had been told by two of the directors that her resignation would hurt the image of the company. The appellant testified further that she had no knowledge that the company was on the verge of bankruptcy, that she had never given a Power of Attorney to anyone to sign a balance sheet on her behalf and that she had never seen the company’s payroll records or books.

On cross-examination the appellant stated that she did not know what system existed respecting deductions, did not know whether all deductions were entered in the company’s books, did know that the rent was periodically in arrears but did know that the company had financial difficulties from time to time. She stated that she had nothing to do with the company budget, that she was simply asked to increase sales, that she had no discussions about bills not being paid on time, did not know what was done each month to ensure that deductions were remitted and did nothing to ensure that deductions were made. She stated that she did not check whether the payroll deductions were in arrears and that it was not her area, her responsibility being sales. She stated that she did check with Cheryl Stuart at the beginning of May 1988 to see if remittances had been made.

The appellant also testified that between July 1986 and January 1988 the company had repaid $21,000 of the loan she had made to it and that she had not checked with the accountant to see if the remittances were up to date.

It is my conclusion that the appellant should succeed.

Subsection 227.1(3) provides that a director is not liable for a corporation’s failure to remit 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.

In my view, the appellant was credible. I had no doubt about the veracity of her evidence.

In Cloutier v. Minister of National Revenue, [1993] 2 C.T.C. 2038, 93 D.T.C. 544 (T.C.C.) at page 2041 (D.T.C. 546), Bowman J.T.C.C. said with respect to what a reasonably prudent person ought to have done that tests had been developed but that ultimately the judge deciding the matter must apply his own concepts of common sense and fairness. He then referred to a statement of the test found in Canadian Business Corporations by lacobucci, Pilkington and Pritchard at page 287 that a director must exercise the reasonable care and skill which an ordinary person might be expected to exercise in the circumstances on his own behalf. The text refers to the statements of Mr. Justice Romer in Re City Equitable Fire Insurance Co. [1925] Ch. 407, 40 T.L.R. 664 (U.K.C.A.) at page (T.L.R. 428), affirmed [1925] Ch. 500 (C.A.) that the common law standard is also partly subjective in that a director need not exhibit a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. He continues with the statement that at common law the degree of care and skill demanded of a director varies with the type and size of the company he serves.

In Fancy v. Minister of National Revenue, [1988] 2 C.T.C. 2256, 88 D.T.C. 1641 (T.C.C.), Couture, C.J.T.C.C., at page 2261 (D.T.C. 1644) said that the personal liability of directors created by subsection 227.1(1) is not an absolute liability but is conditional upon their personal conduct in respect of the circumstances linked to the omission by their company to remit the deductions from its employees’ salary. In Cybulski v. Minister of National Revenue, [1988] 2 C.T.C. 2180, 88 D.T.C. 1531 (T.C.C.), Christie A.C.J.T.C. said, at page 2185 (D.T.C. 1535):

In my opinion the general principle that ignorance of the law is no excuse can have no application here. In enacting subsection 227.1(3) Parliament established an exonerating standard of conduct the presence of which is to be determined in particular cases by the actual relevant facts and not by fixing to a taxpayer knowledge of a somewhat esoteric point of corporation law that in reality is probably not within the actual knowledge of a good number of legal practitioners. While at first blush subsection 227.1(3) suggests a requirement for positive assertion on the part of a taxpayer in order to bring himself within its ambit, this is not necessarily so in all situations. It may well be that a taxpayer would not take positive steps in some circumstances and still be correctly regarded as having “exercised” that degree of care, diligence and skill expected of a reasonably prudent person that creates the protection from liability afforded by the subsection.

In Robitaille v. R (sub nom. Robitaille v. Canada), [1990] 1 C.T.C. 121, 90 D.T.C. 6059 (F.C.T.D.), at page 126 (D.T.C. 6063), Addy, J. said,

The term “diligence”, which is now codified, provides a higher objective standard than that imposed by the common law on directors generally. Although the test is to a large extent an objective one, the question remains, however, what a reasonably prudent person would do in the circumstances in which a director finds himself. These circumstances include subjective elements such as, degree of education, business knowledge and general ability of the director.

[Emphasis added.]

The appellant was engaged by the company in the sales area with a specific commission to expand sales. She had no business training, no management training, was given very little information about the company’s financial affairs and had, in the past, worked at make-up and retail sales in a beauty shop. The evidence clearly indicates that the company’s principals wanted her to carry on with that type of work while likely wanting her to invest in the corporation. She left the management of the company’s affairs, including payment of obligations, to other personnel. She never saw the books and had little or no influence on the company. Her evidence was that she signed a cheque because she thought the amounts would be paid. There was no indication that she sought to avoid liability by so doing. The appellant was a minimal director. She had submitted her resignation and was talked out of it with the promise of the company going public. Her domain in the company’s operation was in the area of sales. She left the administrative matters to others. She was not part of the company going public. She was not trained as a bookkeeper or in business management. She did make some effort to see that an amount of arrears was paid. She was seldom party to the financial operations of the company. In my opinion she exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. Those circumstances include the presence of a person who was sought by the company for her skills in an area totally unrelated to the technical business aspects.

Although the decision is not based upon or influenced by other evidence adduced by appellant’s counsel, mention should be made of same.

Appellant’s counsel, in an examination for discovery of an official of the Department of National Revenue, asked whether the books of the company had been audited. The response was that they had been audited but that the Department now only had photocopies of portions of those audits, the original documents having been destroyed. It is not clear as to what impact, if any, this had upon the computation of amounts assessed against the appellant.

Also, on that examination for discovery, appellant’s counsel sought to obtain information from the Department respecting amounts paid to other employees in order to determine whether any amounts had been remitted and whether the employee had paid any tax in respect thereof. In short, he sought to discover whether any amounts that had been paid were included in the assessment against the appellant. The departmental official sought refuge under section 241 of the Income Tax Act with the ultimate result that no such records were produced. That section provides that except as authorized therein, no official of the Department could knowingly communicate to any person any information obtained by the Minister of National Revenue for the purposes of that Act. An exception to that provision, found in subsection 241(3) is that the prohibition did not apply in respect of proceedings relating to the administration or enforcement of the Act. Further, subsection 241(4) provided that a departmental official could communicate taxpayer information obtained under the Act that may reasonably be regarded as necessary for the purposes of determining any tax, interest, penalty or other amounts payable by a taxpayer. The Department’s steadfast refusal to communicate any such information to appellant’s counsel continued even after a letter from that counsel’s law firm to the Department of Justice pointing out the exceptions to confidentiality just described. Appellant’s counsel said that an action for mandamus compelling the production of this information was available but the appellant had already been put to great expense.

For the reasons outlined herein, the appeal is allowed with costs.

Appeal allowed.