Jose Cortes Manago v. Minister of National Revenue, [1990] 2 CTC 2459, 90 DTC 1889

Kempo, T.C.J.:—This appeal is from an assessment made under what is commonly known as the directors' liability provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

At the hearing the appellant's agent advised the Court that no argument would be made or advanced with respect to the due diligence provisions of subsection 227.1(3) of the Act. Accordingly the matter proceeded on the basis that this aspect of possible exculpation from liability had been abandoned for the purposes of the hearing.

Facts

A brief summary of the background situation is that the appellant was a shareholder and director of Samdo Enterprises Ltd. (which conducted a restaurant business) from 1977 until September 9, 1986 when it was placed into receivership. October 14, 1986 was the date the company went into bankruptcy. Prior to bankruptcy, the appellant had injected funds into the enterprise to keep it afloat pending its sale. He made the frank admission that the source deductions, which are subject matter of the assessments against the company and himself, were not made in order to keep the business going.

When the receiver-manager came in the appellant did not formally resign his directorship but rather assumed he had ceased to be able to run things. Thereafter he worked in the restaurant as an employee and continued his efforts to find a buyer of the business.

An agreed statement of facts was submitted and was marked in Exhibit A-1. It reads thusly:

1. Samdo Enterprises Ltd. failed to remit source deductions as required under the Income Tax Act, the Canada Pension Act, the Unemployment Insurance Act, and the B.C. Income Tax Act for the months of May, June, July and August, 1986.

2. Samdo Enterprises Ltd. went into receivership on September 9, 1986.

3. On October 14, 1986, Samdo Enterprises went into bankruptcy.

4. Manning Jamison Ltd. was the Receiver and/or Trustee in Bankruptcy from September 9, 1986 until October 27, 1987.

5. On February 14, 1987 a Proof of Claim in the amount of Can. $2,735.49 as a preferred creditor and a Proof of Claim (Property) in the amount of Can. $2,522.08 submitted in accordance with Section 59 of the Bankruptcy Act, was proved by Revenue Canada.

6. The Proof of Claim in the amount of Can. $2,735.49 was made up of B.C. Income Tax deducted from the Employees' wages, the Employer's contributions toward C.P.P. and U.I.C. and penalties and interest on all the outstanding amounts.

7. The Proof of Claim (Property) of Can. $2,522.08 was made up of Federal Income Tax deducted from Employees' wages, and contributions to C.P.P. and U.I.C. deducted from Employees' wages.

8. Sometime between June 3, 1987 and June 8, 1987 a claim was made by the Trustee in Bankruptcy to Revenue Canada for the B.C. Small Business Employment Tax Credit to which Samdo Enterprises Ltd. was entitled.

9. This B.C. Small Business Employment Tax Credit was for the amount of Can. $2,330.19. (Please refer to attached Exhibit 1.)

10. On filing for the B.C. Small Business Employment Tax Credit, Manning Jamison Ltd. did not indicate to Revenue Canada that there was an amount outstanding by Samdo Enterprises Ltd. for source deductions.

11. Form 68, Notice of Application for Discharge of Trustee, was sent by Manning Jamison Ltd. to Revenue Canada, Taxation by registered mail on July 10, 1987. 12. On August 17, 1987 Manning Jamison Ltd. was discharged as Trustee in Bankruptcy.

13. On or about September 18, 1987 Revenue Canada sent a cheque to Samdo Enterprises Ltd. c/o Manning Jamison Ltd. for the B.C. Small Business Employment Tax Credits in the amount of Can. $2,330.

14. On October 27,1987 Manning Jamison Ltd. sent a cheque to Revenue Canada for the amount of Can. $2,522.08 to pay the deemed trust claim for federal income tax and employee withholdings. (Please refer to attached Exhibit 2.)

15. The payment received from Manning Jamison Lid. was applied to the outstanding amounts of Provincial Income Tax, C.P.P., and a portion of the U.I.C. owed by Samdo Enterprises Ltd.

16. Revenue Canada sent an Assessment Notice to Mr. Jose Manago under s. 227(10) and s. 227.1(1) of the Income Tax Act assessing him as director of Samdo Enterprises Ltd. for the amount of Can. $2,735.49 on August 8, 1988. (Please refer to attached Exhibit 3.)

17. This Assessment was objected to on August 23, 1988.

18. On May 3, 1989 Revenue Canada confirmed the Assessment of August 8, 1988.

The attachments to the agreed facts are not reproduced as they do not add anything to the basic factual statements made.

The appellant’s grounds of appeal have been succinctly advanced in his amended notice of appeal. They are twofold, and at trial were raised in reverse order. I propose to deal with each in the order presented. Clause 2 of the amended appeal reads:

2. Because the “action of proceeding to recover" the amount owing to Revenue Canada under s. 227.1(1) was not begun until more than two years after the Taxpayer ceased to be a director of the Company, this "action or proceeding" against the Taxpayer as director of the Company, is barred by s. 227.1(4) of the Income Tax Act.

(a) The Taxpayer ceased to be a director of the Company on September 9, 1986 when the Company went into receivership.

(b) The Notice of Assessment was mailed August 8, 1988.

(c) Had there been no Objection to the Notice of Assessment, the earliest that Revenue Canada could have begun an “action or proceeding” as contemplated in sections like s. 225.1(1) would have been 90 days after the notice of assessment had been mailed out.

(d) The Notice of Assessment was not confirmed until May 3, 1989, two years and eight months after the Taxpayer ceased to be a director of the Company.

Clause 1 of the amended appeal was essentially an alternative position taken. It reads:

1. Revenue Canada should have offset under s. 224.1 of the Income Tax Act the B.C. Small Business Employment Tax Credit refund of $2,330 against the liability of Samdo Enterprises Ltd. (hereafter called the Company) leaving the Taxpayer personally liable for the amount of $405.49.

(a) Knowing that the Company was bankrupt and that Revenue Canada's Preferred Claim for $2,735.49 would potentially rank below other claims, Revenue Canada should have offset the refund amount against the Company's liability.

(b) The Trustee in Bankruptcy was discharged on August 17, 1987 and therefore Revenue Canada should not have sent the refund cheque to the now discharged Trustee in Bankruptcy but should have offset the refund amount against the whole liability of the Company.

(c) As the Provincial Income Tax which was supposed to be deducted was in fact trust funds under s. 40(4) of the B.C. Income Tax Act, at a minimum, Revenue Canada should have offset this amount, $713.27, against the liability of the Company.

The appellant’s prayer for relief, at the bottom of page two of the amended appeals, asks:

WHEREFORE the Appellant submits that this appeal ought to be allowed and this Honourable Court ought to find that the Appellant is not liable under s. 227.1(1) of the Income Tax Act. In the alternative, the Appellant submits that the appeal ought to be allowed in respect of the $2,330 and the amount owing by the Appellant be reduced to $405.49. In the further alternative, the Appellant submits that the appeal be allowed in respect of $713.27, and the amount owing by the Appellant be reduced to $2,022.22.

Both the law student agent for the appellant, and the counsel for the respondent, are to be commended on their very able presentation of the matter.

The First Ground

1. The Appellant's Position

The analysis submitted on behalf of the appellant on the first ground was that the words used in subsection 227.1(4) limitation provision “action or proceedings to recover any amount payable”, do not include a notice of assessment or reassessment of liability for the reason that the nature of the latter is that of a mere administrative function which simply sets the quantum. Recovery thereof, in the sense of the words employed in the limitative provision, is precluded until the liability or quantum has been finally fixed in the form of acceptance by the taxpayer as evidenced by non-objection or appeal abandonment, or by a final judicial determination. Parliament, by the use of the phraseology employed, chose to impose a limitation period commencing with the date of the cessation of a directorship and ended with the date of the commencement of a legal action or proceedings for recovery of the amount payable.

With respect to recovery of the debt by any proceedings, this has been legislatively pre-empted by application of the applicable provisions of section 225.1. In the absence of a notice of objection, it is 90 days from the date of the assessment. If an objection has been made (as was done here), it is 90 days after the date the Minister had confirmed or varied the assessment. On an appeal the date is related to the issuance of the judgment of the Court.

Transposing the above to the facts at hand, the cessation of the appellant's directorship was the date of the company's receivership, September 9, 1986, the notice of assessment was dated August 8, 1988, and upon application of any of the three above-mentioned scenarios the commencement of any action or legal proceedings to recover must necessarily be well beyond the two-year limitation period. A notice of assessment itself is not an action or proceeding to recover an amount payable by a director, and thus the respondent had not at a minimum commenced any "recovery" action or proceedings prior to the two-year anniversary time, September 9, 1988.

In support of this position the appellant relied on the plain meaning of the applicable fiscal provisions which are hereafter set out.

Further reliance was placed on the authority of Perri v. M.N.R., [1990] 1 C.T.C. 2071; 89 D.T.C. 723 (T.C.C.) for the proposition that, in British Columbia at least, the appellant's directorship ceased on the date of the corporate receivership. Also noted were Flemming (H.J.) Estate v. M.N.R., [1983] C.T.C. 321; 83 D.T.C. 5329 (F.C.T.D.) at 324 (D.T.C. 5332), reversed for other reasons [1984] C.T.C. 352; 84 D.T.C. 6345 (F.C.A.), and Re Norris (In Bankruptcy), 67 C.B.R. 246 (Ont. S.C.) at 253 reversed for other reasons [1989] 2 C.T.C. 185; 89 D.T.C. 5493 (Ont. C.A.) as authorities for the proposition that an assessment is the performance of an administrative and not a judicial act by the respondent. In Flemming, at page 324 (D.T.C. 5332), Justice Cattanach was also of the view that an objection to an assessment was part and parcel of the assessment process.

2. The Law

The fiscal provisions of application with respect to the appellant's first position are:

227.1. (1) Where a corporation has failed to deduct or withhold an amount as required by. . .subsection 153. . ., has failed to remit such an amount or. . .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.

(4) No action or proceeding to recover any amount payable by a director of a corporation until subsection (1) shall be commenced more than two years after he last ceased to be a director of that corporation.

227. (10) The Minister may assess

(a) any person for any amount payable by that person under section 227.1, and

(b) (not applicable)

and, where he sends a notice of assessment to that person, Divisions I and J of Part I are applicable with such modificationsas the circumstances require.

222. All taxes, interest, penalties, costs and other amounts payable under this Act are debts due to Her Majesty and recoverable as such in the Federal Court of Canada or any other court of competent jurisdiction or in any other manner provided by this Act.

225.1 (1) Where a taxpayer is liable for the payment of an amount assessed under this Act (in this subsection referred to as the "unpaid amount") the Minister shall not, for the purpose of collecting the unpaid amount,

(a) commence legal proceedings in a court,

(b) certify the unpaid amount under subsection 223(1),

(c) require a person to make a payment under subsection 224(1),

(d) require an institution or person to make a payment under subsection 224(1.1),

(e) require the retention of the unpaid amount by way of deduction or set-off under section 224.1,

(f) require a person to turn over moneys under subsection 224.3(1), or

(g) give a notice, issue a certificate or make a direction under subsection 225(1)

before the day that is 90 days after the day of mailing of the notice of assessment.

(2) Where a taxpayer has served a notice of objection under this Act to an assessment of an amount payable under this Act,. . .the Minister shall not, for the purpose of collecting the amount in controversy, take any of the actions described in paragraphs (1)(a) to (g) before the day that is 90 days after the day on which notice is mailed to the taxpayer that the Minister has confirmed or varied the assessment.

(3) Where a taxpayer has appealed from an assessment of an amount payable under this Act to the Tax Court of Canada or to the Federal Court-Trial Division. . .the Minister shall not, for the purpose of collecting the amount in controversy, take any of the actions described in paragraphs 1(a) to (g),

(a) where the appeal is to the Tax Court of Canada, before the day of mailing of a copy of the decision of the Court to the taxpayer; and

(b) where the appeal is to the Federal Court-Trial Division, before the day on which the judgment of the Court is pronounced or the day on which the taxpayer discontinues the appeal, whichever is the earlier.

171. (1) The Tax Court of Canada may dispose of an appeal by

(a) dismissing it, or

(b) allowing it and

(i) vacating the assessment,

(ii) varying the assessment, or

(iii) referring the assessment back to the Minister for reconsideration and reassessment.

3. Analysis

The first, and very startling, consequence of the appellant's analysis is that it would permit a taxpayer to use his objection and appeal rights to completely nullify the time limitation provisions which operate against the respondent and which, it can be said, have been put in the legislation for the benefit of the taxpayer. Secondly, an immediate anomaly arises because this interpretation contemplates no limitation period within which the assessment itself may be made, but which in the end may be an empty exercise because judicial appeals are often ongoing for significant time periods.

I am aware of the interpretative principal that the plain meaning rule, the application of which may lead to perverse consequences, must nonetheless be applied where the words or phrases employed are clear, unambiguous and incapable of any other interpretation. I am also aware that vicarious liability provisions often produce onerous financial consequences to taxpayers, and that this therefore may attract a more rigorous approach to the nature and construction of such provisions.

In my view an ambiguity does present itself on a plain meaning of the words used in subsection 227.1(4), and that the disputed phrase is not to be read in isolation from either the rest of that section or from the terminology, nature and effect of other provisions of the Act which deal with procedural and collection matters. The appellant has urged that the plain meaning mandates a narrow scope, while the respondent has urged that the plain meaning invites a broad approach.

A very important aspect of the matter to be remembered is that a limitative period, which embodies many substantive attributes, is the very antithesis to a procedurally driven open-ended result that the appellant is suggesting. A further antithesis ensues in the purported limitative treatment being accorded to taxpayers solely on the basis of their own individual circumstances.

In my view the interpretative approach to be employed here is one that is in accord with section 12 of the Interpretation Act, R.S.C. 1985, c. 1-21 and one which is in harmony with the scheme of the Income Tax Act. Section 12 of the Interpretation Act states that:

12. Every enactment is deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects.

The fact that subsection (10) of section 227.1, which empowered the respondent to make the assessment, incorporates the procedural objection and appeal rights under Divisions I and J, signifies a legislative intent that the subsection (4) phrase "action or proceeding to recover" is not necessarily isolative and restrictive in nature. It is my considered opinion that that phrase includes an assessment made under subsection (10) of section 227.1. Common sense dictates that there must first be an amount of a debt which is crystallized by the fixation of the liability in the form of an assessment. This is then followed by its means of recovery, and that for limitation purposes, absent any specific words of a restrictive or modifying nature, the phrase "action or proceeding to recover" is not confined to proceedings that are solely legal in nature. The subject phrase is worded broadly enough to encompass and include the administrative act of recovery of the liability in the form of a notice of assessment or reassessment. In any event, I am unable to ascertain any interpretative rule or principle as to why a broad meaning is or ought to be precluded in favour of a narrow and technical one. As noted earlier, the narrow approach does produce anomalies which are completely out of harmony with the scheme of the Act.

These were the essential arguments put forth by counsel for the respondent with which I concur. Counsel has also noted that as collection matters and proceedings are solely within the purview of the Federal Court, and that as the appellant's analysis had led him to the conclusion that subsection 227.1(4) is not a bar to the Minister assessing at any time, that therefore the subject assessment is prima facie valid which in turn precludes this Court from exercising its jurisdiction as found within the four corners of subsection 171(1) to vary or vacate the assessment. Obviously, this is another anomalous aspect of the appellant's analysis.

In conclusion then, the first ground of appeal fails.

The Second Ground

The second ground of the appeal, being an alternative one only, involved the set-off provisions of the Act and whether the Minister should have set off the amount of the British Columbia Small Business Employment Tax Credit against the outstanding deficiencies in payroll deductions by the company.

It is essential to note that the fiscal provisions, the appellant's agent referred to subsection 164(2) and counsel referred to section 224.1, are permissive in nature and are not mandatory.

What is also essential to note, and which is even more unfavourable to this appellant, is that the amount of the tax credit was the property of the estate of the corporate bankrupt and that as such it was subject to the distributive priorities set out in the Bankruptcy Act, R.S.C. 1985, c. B-3.

As noted by respondent's counsel, there is a hiatus between the Bankruptcy Act priorities and the Income Tax Act set-off rights which may well explain the reason for the permissive wording in the latter statute.

Finally, the trustee of the corporate bankrupt, on application for the tax credit, did not make any directions concerning its payment nor was any set-off request made. While the Minister may, in its permissive sense, have exercised the set-off rights granted under the Income Tax Act for Revenue Canada, Taxation purposes, this appellant was without legal position or status at that time to say what should or must have been done either by the Minister, or the trustee for that matter, to reduce or obviate his own vicarious liabilities.

Therefore, and for the reasons stated, the appellant's second ground also fails.

Conclusion

In conclusion then, the appeal is to be dismissed.

Appeal dismissed.