Canales v. R., [1997] 1 CTC 2001, 97 DTC 49

McArthur J.T.C.C.: - Manuel Canales appeals from an assessment of the Minister of National Revenue (the “Minister”) The Minister assessed the Appellant, as director of County Press Limited in the amount of $23,670.74 being unpaid deductions interest and penalties.

The Company was liable to pay federal income tax, provincial income tax, Canada Pension Plan contributions and Unemployment Insurance premiums for the years 1989, 1990 and 1991 which it deducted from employee salaries but failed to remit.

The Appellant was the director and president of the Company during the relevant years. The Company was in the publishing business. It was never financially sound particularly in 1990 to June of 1991 when it ceased operation.

The issue is whether the Appellant exercised the degree of care, diligence and skill to prevent the Company’s failure to remit the amounts of federal tax that a reasonably prudent person would have exercised in comparable circumstances.

The troubled Company had 12 to 14 employees for whom the usual payroll deduction book keeping entries were made yet the money was not remitted as required under the Income Tax Act (the “Act”). The Minister made several attempts to recover the deductions, receiving part payments from time to time through postdated cheques and taking possession of and attempting to collect Company accounts payable. The Appellant was aware that the Company in 1990 and 1991 was financially desperate. He struggled to keep the Company operating during a period when it must have been insolvent. During its final 18 months, the Company paid the most critical creditors. It paid utility companies to prevent them from cutting services.

When Revenue collectors attended its premises the Company tried to placate them. In his struggle to keep the Company in operation the Appellant was aware that deductions were not being remitted as required under the Act.

Position of the Appellant

1. He exercised the degree of care, diligence and skill required of him in subsection 227.1(3).

2. The Respondent’s accounting is not accurate and is incomprehensible, The Appellant was not credited with all payments made.

3. The Respondent failed to mitigate its damages by collecting the Appellant’s accounts receivable.

Position of the Respondent

1. The Appellant is liable under subsection 227.1(1) for failure to remit federal taxes to the Receiver General.

2. The Appellant, as director of the Company, did not exercise the degree of care, diligence and skill to prevent the Company’s failure to pay its liability calculated as per paragraph (b) herein, that a reasonably prudent person would have exercised in comparable circumstances.

Counsel referred the Court to Van Leenen v. Minister of National Revenue, [1991] 2 C.T.C. 2442, 91 D.T.C. 1265.

Legislation

For the purposes of this appeal, subsections 227.1(1) and 227.1(3) of the Act read as follows:

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 the director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

Analysis

The Appellant was aware of the failure to deduct, withhold and remit source deductions. The Appellant was determined to have his Company survive. It needed money and became selective in paying its creditors. The creditors who could close the Company down were the first to be paid.

Through an abundance of jurisprudence, it is well established that, to be successful, the Appellant must demonstrate that a reasonable attempt was made to prevent the failure to deduct and remit and not just an attempt to remedy the situation after the failure.

In White v. Minister of National Revenue, [1990] 2 C.T.C. 2566, 91 D.T.C. 54, Taylor J. referred to subsection 227.1(3) and stated, at page 2574 (D.T.C. 59):

As I read that subsection, it would seem to me that the direct responsibility of a director - any director - is to prevent the failure (to deduct or remit), not to attempt to rectify or remedy the failure at a point in time subsequent to the failure itself.

The facts in Van Leenen, supra, are similar to the present case. The Company had reached a point where it paid the creditors who shouted the loudest and whose service was most essential to its continued operation.

In Van Leenen, supra, Mogan J. made the following comments:

The words in subsection 227.1(3) are important because they indicate the time when a director must exercise a certain degree of care diligence and skill if he is to obtain the protection offered by that subsection.... If the failure under subsection (1) was a failure to remit before a prescribed date, the director must show that he exercised the required degree of care, diligence and skill before that date if his care, diligence and skill could possibly “prevent the failure”.

Considering Madison’s financial situation in the winter of 1983-84, it is not surprising that certain source deductions were not remitted on time or at any time because the Receiver General was not shouting for payment; ... the unremitted source deductions could provide cash to pay a more immediate threatening creditor. Under subsection 227(4), amounts deducted for income tax are deemed to be held in trust. It is to protect those trust funds and to ensure that they are remitted to the beneficiary of the trust...before a prescribed date that a personal liability is imposed on the directors of a corporation under subsection 227.1(1).

In my opinion, the Appellant did not exercise any degree of care, diligence or skill to prevent Madison’s failure to remit source deductions within the prescribed time. Indeed, the Appellant permitted the old administrative procedures to continue when it should have been apparent to him that Madison was on the road to insolvency.

After May 1984...the Appellant worked diligently attempting to obtain some funds for Revenue Canada from the disposition of Madison’s remaining properties and from the assignment of certain rents.

The Appellant claims to have tried in other ways to assist Revenue Canada in the collection of the amounts owing.... [Judge Mogan found that this was not sufficient to exonerate the taxpayer from liability under subsection 227.1(1)).]

In the present case it is clear that Revenue Canada made an effort to collect some accounts receivable although it owed no duty to the Appellant to do so.

The Appellant presented no evidence to satisfy the Court that the Respondent’s accounting was inaccurate. General statements are not sufficient.

The Appellant continued operating the Company despite serious financial difficulties. Having made that decision, it cannot pay employees and some creditors yet not pay employee deductions to Revenue Canada. The director cannot be said to have exercised care, diligence and skill by asking his banker to advance further funds to pay Revenue Canada after the fact. The Company, not the bank, had a duty to withhold and remit.

The Appellant took no positive steps to prevent the Company’s failure to remit. He did not exercise the the degree of “care, diligence and skill” required to exonerate him from personal liability under subsection 227.1(3).

The appeal is dismissed.

Appeal dismissed.