Lamarre Proulx T.C.J.:
This is an appeal pursuant to the informal procedure from an assessment bearing No. 09033, dated July 4, 1996, made under s. 227(10) of the Income Tax Act (“the Act”) concerning an amount payable by the appellant under s. 227.1 of the Act. That section provides that directors of a corporation which has failed to remit source deductions made on the salaries of the corporation employees shall be jointly and severally liable.
In the Notice of Appeal the issue was whether the appellant had exercised the diligence required by s. 227.1(3) of the Act. At the close of the argument, however, the appellant raised the possibility that the assessment was statute barred. The time limit is provided for in s. 227.1(4) of the Act. I allowed written submissions on this point.
The two points raised by the appellant in his Notice of Appeal are the following:
[TRANSLATION]
2. For the periods of May and June 1994 the company 3099-8413 Québec Inc. did business with Services de paie Desjardins: the appellant was entitled to expect that source deduction remittances would be made correctly, as will be shown at the hearing of this Notice of Appeal;
3. In June 1994 3099-8413 Québec Inc. made an assignment in bankruptcy: the appellant was entitled to expect that all monies due the Minister would be remitted since there was some $70,000 in cash on hand, as will be shown at the hearing of this Notice of Appeal...
The facts which the Minister of National Revenue (“the Minister”) assumed in arriving at his assessment are set out in paragraph 6 of the Reply to the Notice of Appeal (“the Reply”) as follows:
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(a) As employer the company 3099-8413 Québec Inc., doing business from time to time under the name “Le Vieux Munich”, had a legal obligation to deduct, withhold and remit to the Receiver General of Canada source deductions on the salary and other earnings of its employees.
(b) A review of the T4s showed that 3099-8413 Québec Inc. had failed to remit source deductions for February to June 1994, totalling an amount of $21,006.19.
(c) By a notice of assessment dated July 26, 1994 the Minister claimed from 3099-8413 Québec Inc. the payment of source deductions for February to June 1994.
(d) 3099-8413 Québec Inc. was declared bankrupt on July 25, 1994 retroactive to June 17, 1994, the date of the notice of intention to file a proposal.
(e) On August 3, 1994 the Minister sent a claim of property in the amount of $20,069.86 and a claim in the amount of $4,507.82.
(f) On October 5, 1994 a new notice of assessment was issued to 3099- 8413 Québec Inc.
(g) On October 11, 1994 the Minister sent an amended claim of property in the amount of $14,456.55 and an amended claim in the amount of $6,549.64.
(h) On May 2, 1995 the trustee in bankruptcy confirmed that no dividend would be paid following realization of the assets.
(1) The appellant was a director of 3099-8413 Québec Inc. from May 2, 1994 onwards.
(j) In his capacity as a director of 3099-8413 Québec Inc. the appellant did not exercise the degree of care, diligence and skill to prevent the failures that a reasonably prudent person would have exercised in comparable circumstances.
(k) The appellant did not take the necessary steps to prevent the failures by 3099-8413 Québec Inc. for May and June 1994.
At the start of the hearing counsel for the respondent reiterated a request to adjourn so that the instant appeal and that of Claude Lemay, also assessed as a director of the said corporation, could be heard on common evidence. The appellant had objected to this request and was still objecting at the time of the hearing. The request was denied on the following grounds: in appeals regarding directors’ liability, the functions of those directors may not be identical and their interests may diverge. Further, although counsel for the respondent cannot in any way be held responsible for the lateness of the request, it was only made a few days before the date set down for the hearing. The Court’s time had already been allocated to hear the instant appeal.
The appellant and Réjean Brasseur testified for the appellant. Agathe Leboeuf and Claude Gagnon testified at the request of counsel for the respondent.
The appellant explained to the Court that the corporation 3099-8413 Québec Inc., hereinafter referred to as “the corporation”, did business under the name “Le Vieux Munich”, a restaurant. On January 31, 1994 Claude Lemay, the appellant’s brother, purchased the shares of the said corporation for $1 and other consideration. According to Exhibit I-1 Claude Lemay was the corporation’s sole director since December 30, 1993. According to the same exhibit, the appellant was elected as another director of the corporation on May 2, 1994. The appellant was immediately appointed general manager of the business.
The corporation allegedly borrowed $100,000 from Mr. Bolay, the previous owner of the shares. He remained owner of the building. The corporation also obtained a loan in the amount of $250,000 from the Royal Bank under a government small business assistance program. The corporation declared bankruptcy on June 17, 1994.
The appellant filed as Exhibit A-1 a letter dated April 11, 1994 from the Service de paie Desjardins to 3099-8413 Québec Inc. (Le Vieux Munich), c/o Robert Lemay. The first paragraph reads as follows:
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Services de paie Desjardins is pleased to welcome you as a new customer for the processing of your payroll.
As we have seen in the appellant’s aforementioned Notice of Appeal, the payroll processing by Desjardins was one of the appellant’s two grounds of appeal, and certainly the one on which he placed the greater reliance. However, apart from this letter of welcome, which it should be noted was dated April 1994 although operation of the restaurant began in January 1994, the appellant produced no other documentation explaining the scope of the service and its terms and conditions, nor did he ask a representative of this Desjardins service to testify. On the lack of documentation, the appellant fell back on the fact that it was the corporation’s trustee in bankruptcy who had all the documents in his possession. To the question put to him as to why he had not asked Desjardins to give him the required documentation, he answered that he had not thought of asking Desjardins.
Réjean Brasseur testified to confirm the appellant’s statements that at the end, when the corporation was bankrupt, it was the appellant who himself paid the employees from the receipts of the business.
According to the testimony of the Minister’s representatives, a notice of intention to file a proposal was received by Revenue Canada on June 17, 1994. In July 1994 an auditor of the Minister went to the corporation’s office to check the payrolls. As he found it difficult to obtain specific information, the Minister’s representative first made an arbitrary assessment dated July 26, 1994 in the amount of $24,547.56 for the 1994 taxation year source deductions, based on the documents at his disposal (Exhibit 1-5).
On August 16, 1994 a letter was sent to the appellant by a Revenue Canada collection agent, informing him that the corporation had not paid the source deductions and that he could be held liable for this money unless he was able to submit a defence of reasonable diligence (Exhibit I-7). On September 21, 1994 another letter was sent to the appellant telling him that there had been no reply to the previous letter and that it was possible he would be assessed (Exhibit 1-8).
In the meantime the Minister’s representative, having obtained the T4s completed by the trustees in bankruptcy, prepared on October 5, 1994 a final assessment for the 1994 taxation year in the amount of $20,976.07. As no amount of source deductions was ever paid, the total amount of the deductions became the amount of the assessment.
The collection agent received a letter from the appellant’s counsel at that time, dated October 11, 1994, indicating that for the moment it was impossible to reply and requesting a delay of several months (Exhibit I-9).
The appellant’s assessment dated July 4, 1996, filed as Exhibit A-2, was made based on the number of months he had been a director of the corporation while the corporation was in operation. The assessment was in the amount of $8,402.48 and the months indicated in the explanatory table attached as an addendum were May and June 1994. This assessment was filed as Exhibit I-4.
As Exhibit A-3 the appellant filed the assessment of Claude Lemay, also dated July 4, 1996, but which is in the amount of $21,006.19. The months indicated were also May and June 1994. The Minister’s representative explained that this was an error and that it should read February to June 1994. He said this was explained to the appellant and Claude Lemay when they came to see him in his office in August 1996. He did not think it necessary to make the written correction as he had mentioned it orally, the amounts were different, the restaurant had been operated since January 1994 and no source deduction had ever been remitted. However, in hindsight he realized that it would have been better for him to make a correction of the months indicated in Claude Lemay’s assessment.
The appellant filed as Exhibit A-4 his Notice of Objection dated September 30, 1996. The two grounds were the following:
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First:
At this time the Vieux Munich was administered by trustees and they guaranteed the payment of their salaries, since they had been appointed by the Court and were officers of the Court. Contrary to their allegations, they paid themselves fees of over $70,000 and never paid the employees, the source deductions and the suppliers.
Second:
As to the period prior to the appointment of the trustees, Robert Lemay always acted with diligence and in accordance with his director’s mandate; I also put personal funds into the company to cover payrolls.
As can be seen, the appellant made it his principal argument in the Notice of Objection that the trustees had paid themselves high fees, an argument which in his Notice of Appeal became his second argument.
Exhibit 1-2 is the [TRANSLATION] “Trustee’s Report on Preliminary Administration”, dated August 24, 1994, Superior Court, Bankruptcy Division. It states the following regarding books and records:
[TRANSLATION]
Class 4 Books and records:
Possession was taken on July 26, 1994. The debtor’s only accounts consisted of daily reports and no other accounts were kept. Using the provisions of s. 200(2) of the Bankruptcy and Insolvency Act as a guide, we consider that such accounting is not adequate.
Exhibit 1-3 is a resolution of June 10, 1994 by the sole shareholder, authorizing the director Robert Lemay to sell a car owned by the corporation.
Exhibits I-10 and I-11 are prior assessments of the appellant in respect of various corporations in which he acted as director. One was in the amount of $6,211.09 and dated July 13, 1989, and the other dated September 6, 1989 in the amount of $6,807.65. According to the books of the Collections Branch of the Department of National Revenue (“the Department”), these assessments are unpaid to date.
Arguments and conclusions
The appellant maintained that he had exercised the required diligence by asking Desjardins to do the corporation employees’ payroll. He further submitted that he only became a director for the last two months of the life of the business, namely May and June, and could not be held liable for the non-payment of source deductions for those last two months. He also argued that those source deductions could have been paid if the trustees had not paid themselves fees.
At the close of his argument the appellant wondered, and also asked the Court, whether the evidence as presented by counsel for the respondent was legal. In particular, he raised this question regarding the collection agent, who in addition to reading his own notes used the notes of previous departmental employees. A witness may use his own notes to refresh his memory provided those notes were made at the time of the event. So far as the notes of other employees are concerned, a witness may not use these unless they are notes which are in the form of business records. In the instant case the collection agent used notes of other departmental employees to confirm that the appellant’s previous assessments as a director, filed as Exhibits I-10 and I-11, had not been paid. This information is admissible since it is an objective entry made in the ordinary course of business of the Department’s Collections Branch.
Counsel for the respondent argued that the appellant had not explained the terms and conditions of the agreement with Desjardins and that even if such an agreement existed, which was not admitted, the appellant did not show that he had exercised the necessary administrative control over his assignee’s duty to remit source deductions.
Section 227.1(3) of the Act reads as follows:
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.
I consider that the appellant has not presented evidence that he acted with the diligence required to prevent the failure to remit source deductions. The appellant was not initially a director of the corporation, but he was its general manager. He did not describe what was done about source deductions from January to April, the date of the welcoming letter from Desjardins. There was also no description of what happened after this welcoming letter. The appellant had been a director of other companies and knew what an employer’s duties were in this respect. In this appeal, we are faced with total non-payment of source deductions. The Minister’s representatives and the corporation’s trustees were all of the same view: the books, such as they were, were improperly kept. The argument concerning the fees which the trustees paid themselves is not a relevant one. These were facts that occurred after the events giving rise to the assessment on appeal. What is relevant to the defence under s. 227.1(3) of the Act is the creation of a reliable system for remitting source deductions initially and in the course of the operations of a business. As such evidence was not presented, the appeal cannot succeed by the defence provided for in s. 227.1(3) of the Act.
On the argument that the Minister’s action is statute barred, s. 227.1(4) of the Act reads as follows:
No action or proceedings to recover any amount payable by a director of a corporation under subsection (1) shall be commenced more than two years after the director last ceased to be a director of that corporation.
The appellant argued that he ceased to be a director on June 17, 1994, the date on which the corporation declared bankruptcy. The assessment was dated July 4, 1996.
Counsel for the appellant referred to the Federal Court of Appeal judgment in Kalef v. R. (1996), 96 D.T.C. 6132 (Fed. C.A.), which stated that the time at which a director ceased to be so should be determined in accordance with the legislation under which the corporation was incorporated:
The Income Tax Act neither defines the term director, nor establishes any criteria for when a person ceases to hold such a position. Given the silence of the Income Tax Act, it only makes sense to look to the company’s incorporating legislation for guidance....
The incorporating legislation in the instant case is the Companies Act, R.S.Q. c. C-38. Nowhere is it stated in that act that a director ceases to be one as a result of the bankruptcy of the corporation of which he is a director. There was no evidence that the appellant had resigned as director. In fact, the evidence according to his own testimony was that he continued acting as a director after the corporation declared bankruptcy. An example of this is the fact that he himself paid the employees’ net salaries from certain receipts of the business. The appellant’s appeal therefore also cannot succeed on the ground that the assessment is statute barred under s. 227.1(4) of the Act.
The appeal is accordingly dismissed.
Appeal dismissed.
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