Cosmas Ho v. Minister of National Revenue, [1990] 2 CTC 2623, 91 DTC 76

Rip, T.C.J.:— The appellant Cosmas V. Ho ("Ho") appeals from an assessment of $57,471.15, notice of which is dated November 18, 1988, which was issued pursuant to subsection 227(10) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and other legislation. [1] The Minister of National Revenue, the respondent, assessed Ho on the basis that Trouty Seafoods Ltd. ("Trouty"), a corporation of which he was a director at the time, failed to remit taxes, unemployment insurance premiums and Canada Pension Plan contributions withheld from its employees as required by section 153 of the Act and other relevant legislation; therefore, according to the respondent, pursuant to section 227.1 of the Act Ho is jointly and severally liable together with Trouty to pay that amount and any interest or penalties relating thereto.

Trouty had been assessed for failure to remit amounts withheld prior to November 1986 by notices dated July 3, 1986; September 15, 1986; December 3, 1986; July 9, 1987; October 21, 1987; November 18, 1987; February 5, 1988 and April 20, 1988.

The first three assessments were for the following periods respectively when no amounts were remitted to the Receiver General: May 1986; June and July 1986; September and October 1986; and the other assessments were for other times in 1986, when the amounts remitted were less than required.

At all relevant times Ho carried on the practice of medicine as a general practitioner three mornings and five afternoons each week in St. John's, Newfoundland. Ho directly or indirectly through a corporation also had, and continues to have, investments including real estate holdings and a restaurant. He describes himself as a “silent partner type of investor".

Ho also owns 30 per cent of the issued shares of Terra Nova Fishery Company Ltd. ("Terra"); the other shares are held by a corporation owned by members of his family. Terra carries on the business of processing fish for frozen products. The fish are processed into an artificial product such as fish sausages and is sold to European countries, Italy in particular. The basic fish for this business, known as surimi, is cod. The processing is carried on in Claren- ville, Newfoundland; the head office of Terra is in the same building in St. John’s where Ho carries on his medical practice.

Ho is, and during 1985 to 1987 was, president and director of Terra; he was responsible for financing, major marketing of products and carried on Terra's research and development program in conjunction with Memorial University. The day-to-day business of Terra was, and continues to be, managed by Joseph Ho, the appellant's brother, who is the other director of Terra and David Ho, his nephew. At all relevant times all decisions of a “significant” nature were made by Ho; his brother was responsible for “in plant” matters. However, at the end of the day, Ho has and had the ultimate decision on any matter.

Terra did not have a licence to fish snow crab and such a licence was difficult to obtain in the early 1980s. Messrs. Leslie and Claude Pottle, brothers, did have a snow crab licence. The benefit of a snow crab licence to Terra was that it would facilitate obtaining product for creating the imitation product Terra sold. Ho and the Pottles agreed to carry on business together. Terra owned a plant in Trouty, Newfoundland that it was not using. Trouty was incorporated on January 4, 1983 under the laws of Newfoundland. Shares in Trouty were issued as to 51 per cent to Leslie Pottle, 25 per cent to Terra and 24 per cent to Claude Pottle. Trouty and Terra agreed that the Trouty facility would be Terra's feeder plant, supplying fish to Terra.

The officers and directors of Trouty were Leslie Pottle, president, Claude Pottle and Ho. In cross-examination Ho was unable to confirm he was vice- president of Trouty; he stated he was surprised to learn in October 1986 he was a director of Trouty. His evidence was that when Trouty was incorporated, Newfoundland corporate law required a minimum of two directors and the solicitor setting up Trouty made him a director without his knowledge. However, during his cross-examination, Ho admitted he had executed the two documents produced by counsel for the respondent in his capacity of director on behalf of Trouty. These were an agreement of July 13, 1984 between Trouty and the Minister of Finance of Newfoundland with respect to a guarantee to the Bank of Nova Scotia (“bank”) by the Government of Newfoundland for a loan by the bank to Trouty and a deed dated May 3, 1985 to rectify the June 12, 1984 agreement. Leslie Pottle had also executed the latter document. The witness to the agreement of June 12, 1984 said in his affidavit that the document was executed “for and on behalf of Trouty Seafoods Ltd. by its duly authorized officers”.

Ho testified Terra invested funds in Trouty but that he was not involved in Trouty's affairs. According to Ho, he "never intended to be involved” in the affairs of Trouty. The company was to be run by the Pottles who lived near the facility and were experienced in crab fishing. The evidence of all witnesses for the appellant was that Leslie Pottle managed Trouty.

Ho affirmed he never attended a directors' meeting (or a shareholders' meeting) of Trouty, never received notice of a directors' meeting of that corporation and was never remunerated by Trouty; it appears no directors' meeting had ever been held by Trouty. Terra never received any dividends from Trouty.

According to Claude Pottle, he was given only one financial statement in the five years he was with Trouty. Claude Pottle testified Trouty's accountant, William Francis, told him Leslie would not permit Claude access to Trouty's financial statements or ledger, even though he was his brother and a director of the corporation. In Claude Pottle's view, his brother wanted to run Trouty without interference. Each year, at the beginning of the year, Ho would meet Leslie Pottle. Ho said the purpose of the annual meetings was to discuss how much Trouty owed Terra and for Ho to sign documents for the bank. Ho was given financial information concerning Trouty by William Francis. Trouty had paid Terra rent for the plant and equipment for only one year. At the meetings, Leslie Pottle “would sit down with me and explain why he could not pay the rent". However, the financial situation of Trouty, aside from rent, was also reviewed. Ho recalled "some" accounts payable but did not specifically recall accounts payable to Revenue Canada.

In early 1986 it was clear Trouty was losing money although, in Ho's view, every other crab plant in the area was profitable. Trouty could not even pay its rent, Ho lamented. Ho then arranged for Terra to be Trouty's marketing agent. Terra began sending Trouty's product to Boston and upon payment, which was immediate, would transfer the receipts to Trouty. This helped Trouty's cash flow while Terra controlled the marketing. In the meantime Ho learned Leslie Pottle caused Trouty to sell product to a third party, unknown to him. Ho was upset that Leslie Pottle was "not honest with me".

Ho complained that “nobody told me Trouty had problems". He claims he first found out about Trouty's difficulties on October 15, 1986 when Revenue Canada sent Terra a third party demand (garnishment) for $74,950.20. He said he immediately called his lawyer and his lawyer informed him Trouty owed money to Revenue Canada. He testified his lawyer asked him if he was a director of Trouty; he replied he did not know and asked the lawyer to find out. The lawyer later informed him he was a director and he may be liable for Trouty's debt to Revenue Canada. The lawyer also recommended Ho resign as director and on October 20 Ho did resign effective 30 days later, November 19. [2]

Ho then telephoned Leslie Pottle to inquire from him what the situation was. Pottle, said Ho, was surprised. Pottle informed Ho he would arrange to see Tom Rideout, the Minister of Fisheries of Newfoundland at the time, who he knew, to obtain an extension of the government guarantee of the loan Trouty had with the Bank of Nova Scotia. On October 20, 1986 the third party demand of October 15 was withdrawn by Revenue Canada. Ho concluded "things were fixed up with Revenue Canada".

Terra continued acting as Trouty's marketing agent and according to Ho, Terra paid over to Trouty during 1987 approximately $600,000. In 1986, after the third party demand was rescinded, Terra paid Trouty approximately $100,000. Terra also had advanced funds to Trouty after it became its marketing agent.

By letter dated March 6, 1987 Revenue Canada wrote Ho advising him that Trouty was indebted to Revenue Canada and he, as director of Trouty, could be held jointly and severally liable with Trouty for the debt. His lawyer wrote Revenue Canada on March 23, 1987 that Ho was not involved in the management or affairs of Trouty and "the total management of that company was left to Mr. Leslie Pottle as president. Dr. Ho had no participation in any decision to withhold income taxes or not to make any payment of income taxes and was never consulted in this regard" and thus he was not liable for the indebtedness. Revenue Canada sent further third party demand letters to Terra for $109,834.08 on May 22, 1987; $187,650.65 on September 11, 1987 and $144,558.56 on September 22, 1987. The third party demand of May 22 required the payment to be made at the rate of 20 per cent of each future gross payment to Trouty; the rate of payment was reduced to 10 per cent in the letter of September 22, 1987. Terra paid to Revenue Canada pursuant to the third party demands the aggregate sum of $62,371.41 between June 15,1987 and October 14, 1987. Ho believed the rates of payment of 20 per cent and 10 per cent were negotiated with Revenue Canada by Leslie Pottle.

In cross-examination Ho described one Barbara Lawlor ("Lawlor") as "my right hand". Lawlor has worked for Ho and Terra, during the past ten years. She has been, and still is, his administrative assistant and at the time of trial was also vice-president of marketing for Terra. Her office is next to Ho's. Lawlor is fully involved in the administrative and general supervision of all Ho's financial interests, including his medical practice, and reports to Ho on a regular basis. She also decides minor matters in his place. She had no responsibility for Trouty prior to 1986 but did work for Trouty once Terra became its marketing agent. She is, as far as I appreciate the evidence, Ho's eyes and ears.

Lawlor corroborated Ho's testimony that he was not involved in Trouty management and his practice is not to attend to the day-to-day operation of his investments. She stated she was aware of Trouty's cash flow problem in the spring of 1986 and recommended to Ho that Terra take over Trouty's marketing. Lawlor advised this would result in helping Trouty and helping "us keep an eye on Trouty". She revealed she kept her own records on inflow and outflow of Trouty product and of money passing between Trouty and Terra. Once Terra commenced marketing Trouty product, Trouty's cash flow problems evaporated, she testified.

Claude Pottle testified Trouty's payroll was prepared “by a couple of girls” in Bonavista. Ho said Leslie Pottle signed the cheques, although in the earlier years of the company's existence both he and his brother signed cheques. Claude Pottle, who at time of trial was employed by Terra, also stated Ho had nothing to do with Trouty's management.

On October 16, 1986 Lawlor received a telephone call from Terra's Claren- ville office advising her of the third party demand. She got in touch with Ho and Leslie Pottle and spoke to a Mr. Dudley March of Revenue Canada. Mr. March advised her on October 20 the demand was withdrawn. She testified she believed the demand was withdrawn because the debt was satisfied.

Later on, in 1988, she and Ho's solicitor were in contact with Revenue Canada by telephone and in person in order to resolve the matter. Specifically, representations were made with respect to the third party demands against Terra and the sums the Receiver General had recovered from Trouty. Officials of Revenue Canada, Ms. Patricia Maddigan, Mr. March and Ms. Barbara Carter also testified. However, their evidence related to matters taking place after the failure of Trouty to remit or pay the source deductions to the Receiver General. Evidence was led by Ho's counsel to suggest that because the respondent's official did not reply to Ho's lawyer's letter of March 6, 1987 until September 30, 1988, the respondent had misled Ho into believing no assessment would be issued against him.

The provisions of the Act bearing on this appeal read:

227.1 (1) Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or section 153 or 215, has failed to remit such an amount or has failed to pay an amount of tax for a taxation year as required under Part VII or VIII, 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.

227.1 (3) 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,

Mr. Dickie, Ho's counsel, raised three arguments in support of his client's appeal. Firstly he questioned the veracity of the respondent's accounting of the amounts assessed and concluded that since the calculations were inaccurate to "some degree" they were not binding on Ho. A good portion of the evidence of Lawlor, Maddigan, March and Carter described meetings and telephone conversations where the calculation of the assessment was discussed. However, as the unremitted amounts, interest and penalties were detailed in a schedule to the respondent's reply to the notice of appeal, counsel abandoned the first argument. [3]

Counsel's second argument was that Ho exercised the degree of care, diligence and skill to prevent the failure of Trouty to remit the source deductions. According to counsel, Ho was only a nominal director. He played a passive role in Trouty. He never visited the Trouty plant. He never attended a director's meeting. He was a full-time medical practitioner who invested in Trouty without any intention of getting involved in its management. He was, claimed counsel, unaware of Trouty accounts payable; he was only concerned with Trouty's liability to Terra as a landlord. Ho never considered himself a director of Trouty. In the appellant's view Leslie Pottle ran Trouty.

Appellant's counsel argued that his client had no knowledge Trouty was not remitting. Ho had no knowledge of Trouty's day-to-day business operations. Ho's own experience did not include preparation of payroll; even in his medical practice this was done by employees. Counsel wished the Court to find that Ho was an investor, completely disinterested in Trouty's administration and business operations.

The mere fact of being a director, counsel for the appellant submitted, does not impose absolute liability on a director. His authority was Fancy v. M.N.R., [1988] 2 C.T.C. 2256; 88 D.T.C. 1641 at 2261 (D.T.C. 1644). However, the liability is conditional on the personal conduct of the director.

I cannot find that Ho "had not one iota of interest in the operations" of Trouty nor can I agree that even if Ho had no knowledge of the situation regarding the non-payment of payroll deductions he could not have done anything about it: L. Robitaille v. Canada, [1990] 1 C.T.C. 121; 90 D.T.C. 6059 at 126 (D.T.C. 6062-63). Ho did have an interest in Trouty's operations aside from his interest in trying to cause Trouty to pay rent to Terra. He expressed his concern Trouty was the only crab processing plant not showing a profit. To remedy this situation and, in Lawlor's words, to help “up keep an eye on Trouty", in spring, 1986 Ho caused Trouty to relinquish its marketing to Terra. If Ho wanted something done at Trouty, it would be done. He was constantly in a position where, if he had wanted to, he could have vigorously reviewed the operations of Trouty. He had the skill and influence to do so; he had the clout to cause Trouty to do things. Leslie Pottle’s attitude towards his brother does not influence me to conclude he treated Ho in the same way as his brother. Ho had influence, power and skill, which he neglected to exercise.

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 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 he exercised the degree of care. . .to prevent the failure".

The word "prevent" is defined in The Shorter Oxford Dictionary On Historical Principles as:

1. To act in anticipation of or in preparation for (a future event, or a point in time); to act as if the event or time had already come. . . To meet beforehand. . . 3. To stop, keep or hinder from doing something. . . 4. To provide beforehand against the occurrence of (something); to preclude, stop, hinder. . . 6. To frustrate, defeat, bring to naught. . . 7. To use preventative measures. . . .

In the French language, the word "prévenir" is used in subsection 227.1(3). Le Petit Robert I defines the word "prévenir":

1. Devancer (qqn) dans l'accomplissement d'une chose, agir avant (un autre). . . 2. Aller au-devant de (qqch.) pour hâter l'accomplissement. . . 3. Aller au-devant pour faire obstacle; empêcher pas ses précautions. . . .

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 had already occurred.

Counsel for the appellant also argued that the withdrawal of the third party notice of October 15, 1986 to Terra by the respondent was a surrender by the respondent of his claim of the money represented by the notice. Counsel relied on the decision of this Court in McCullough v. M.N.R., [1989] 2 C.T.C. 2230; 89 D.T.C. 447. In that case money was seized by the respondent and then returned; it was held the respondent was not entitled under section 227.1 to pursue the taxpayer in respect of the same amount that had been collected. In the appeal at bar no money was seized or collected by the respondent. A third party notice is a means to collect, not the collection itself. This submission must fail.

The appeal is therefore dismissed.

Appeal dismissed.