Leblanc v. R., [1999] 4 CTC 286, 99 DTC 5470

Pinard J.:

This is an appeal de novo from a decision of the Tax Court of Canada on December 11, 1989, dismissing the plaintiffs appeal from assessments made by the Minister of National Revenue on December 9, 1987 and February 24, 1988, which claimed payment of an amount of $15,134.50.

In assessing the plaintiff, which he did pursuant to ss. 227.1 of the Income Tax Act! [1] and 68.1 of the Unemployment Insurance Act? [2] the Minister of National Revenue relied inter alia on the following facts, which were expressly admitted at trial:

• the company “Atelier de Confection R.P.L. Inc.” (“R.P.L.”) was created pursuant to Part 1A of the Quebec Companies Act on October 3 1, 1985:

° on February 24, 1988 R.P.L. owed the Minister of National Revenue an amount of $15,134.50:

• this amount of $15, 134.50 consists of income tax deductions and unemployment insurance premiums, with penalties and interest, for February, April, May and June 1986, T-4 differences for 1985 and 1986 and court costs, the whole as follows:

• R.P.L. failed to remit the income tax source deductions and unemployment insurance premiums mentioned in the preceding paragraph to the Receiver General of Canada within the specified deadlines;

• on June 5, 1987 and January 19, 1988 the Minister of National Revenue, in view of R.P.L.’s failure to act, filed two certificates in the Registry of the Federal Court of Canada under ss. 223(2) of the Income Tax Act and 79(2) of the Unemployment Insurance Act, 1971;

• on June 10, 1987 and January 19, 1988 two writs of fieri facias were issued by the Federal Court of Canada to execute the debt of the Minister of National Revenue on the assets of R.P.L.;

• as the company no longer had any property, the writs of fieri facias could not be executed;

• the plaintiff was a director of R.P.L. on the dates on which that company was required to pay the sums of money in question to the Receiver General of Canada.

The relevant provisions of ss. 227. 1 of the Income Tax Act and 68.1 of the Unemployment Insurance Act, 1971 are the following:

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 VIT 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.

(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.

68.1 (1) Where an employer who fails to deduct or remit an amount as and when required under subsection 68(1) is a corporation, the persons who were the directors of the corporation at the time when the failure occurred are jointly and severally liable, together with the corporation, to pay to Her Majesty that amount and any interest or penalties relating thereto.

(2) Subsections 227.1(2) to (7) of the Income Tax: Act apply, with such modifications as the circumstances require, in respect of a director of a corporation referred to in subsection (1).

(3) The provisions of this Part respecting the assessment of an employer for an amount payable by him under this Act and respecting the rights and obligations of an employer so assessed apply in respect of a director of a corporation in respect of an amount payable by the director under subsection (1) in the same manner and to the same extent as if the director were the employer referred to in those provisions.

227.1 (1) Lorsqu’une corporation a omis de déduire ou de retenir une somme, tel que prévu au paragraphe 135(3) ou à l’article 153 ou 215, ou a omis de remettre cette somme ou a omis de payer un montant d’impôt en vertu de la Partie VII ou de la Partie VIII pour une année d’imposition, les administrateurs de la corporation, à la date a laquelle la corporation était tenue de déduire, de retenir, de verser ou de payer la somme, sent solidairement responsables, avec la corporation, du paiement de cette somme, incluant tous les intérêts et toutes les pénalités d’y rapportant.

(3) Un administrateur n’est pas responsable de l’omission visée au paragraphe (1) lorsqu'il a agi avec le degrt de soin, de diligence et d’habileté pour prévenir le manquement qu’une personne raisonnablement prudente aurait exercé dans des circonstances comparables.

68.1 (1) Dans les cas où un employeur corporation omet de verser ou de déduire un montant de la manière et au moment prévus au paragraphe 68(1), les administrateurs de la corporation au moment de l’omission et la corporation sent solidairement responsables de payer à Sa Majesté cc montant ainsi que les intérêts et les amendes qui s’y rapportent.

(2) Les paragraphes 227.1(2) à (7) de la Loi de l'impôt sur le revenu s’appliquent, avec les adaptations de circonstances, à l’administrateur d’une corporation visé au paragraphe (1).

(3) Les dispositions de la présente Partie concernant la cotisation d’un employeur pour un montant qu’il doit payer en vertu de la présente loi et concernant les droits et les obligations d’un employeur cotisé ainsi s’appliquent a l’administrateur d’une corporation pour un montant que celuici doit payer en vertu du paragraphe (1) de la manière et dans la mesure applicables à l’employeur visé par ces dispositions.

The only issue is whether the plaintiff has proven that, in accordance with s. 227.1(3) of the Income Tax Act, he exercised the degree of care, diligence and skill to prevent the failure by the corporation in question that a reasonably prudent person would have exercised in comparable circumstances.

The authority on this point is a judgment by the Federal Court of Appeal on June 27, 1997. In Soper v. R. (1997), [1998] 1 F.C. 124 (Fed. C.A.), Robertson J.A. said the following regarding the standard of care and the positive duty of directors to act with reference to s. 227. 1(3) above. First, at 155:

This is a convenient place to summarize my findings in respect of subsection 227.1(3) of the Income Tax Act. The standard of care laid down in subsection 227.1(3) of the Act is inherently flexible. Rather than treating directors as a homogeneous group of professionals whose conduct is governed by a single, unchanging standard, that provision embraces a subjective element which takes into account the personal knowledge and background of the director, as well as his or her corporate circumstances in the form of, inter alia, the company’s organisation, resources, customs and conduct. Thus, for example, more is expected of individuals with superior qualifications (e.g. experienced businesspersons).

The standard of care set out in subsection 227.1(3) of the Act is, therefore, not purely objective. Nor is it purely subjective. It is not enough for a director to say that he or she did his or her best, for that is an invocation of the purely subjective standard. Equally clear is that honesty is not enough. However, the standard is not a professional one. Nor is it the negligence law standard that governs these cases. Rather, the Act contains both objective elements — embodied in the reasonable person language and subjective elements — inherent in individual considerations like “skill” and the idea of “comparable circumstances”. Accordingly, the standard can be properly described as “objective subjective”.

At 156:

At the outset, I wish to emphasize that in adopting this analytical approach I am not suggesting that liability is dependent simply upon whether a person is classified as an inside as opposed to an outside director. Rather, that characterization is simply the starting point of my analysis. At the same time, however, it is difficult to deny that inside directors, meaning those involved in the day-to-day management of the company and who influence the conduct of its business affairs, will have the most difficulty in establishing the due diligence defence. For such individuals, it will be a challenge to argue convincingly that, despite their daily role in corporate management, they lacked business acumen to the extent that that factor should overtake the assumption that they did know, or ought to have known, of both remittance requirements and any problem in this regard. In short, inside directors will face a significant hurdle when arguing that the subjective element of the standard of care should predominate over its objective aspect.

And finally, at 160 and 161:

This is not to suggest that a director can adopt an entirely passive approach but only that, unless there is reason for suspicion, it is permissible to rely on the day-to-day corporate managers to be responsible for the payment of debt obligations such as those owing to Her Majesty. This falls within the fourth proposition in the City Equitable case: see discussion supra, at page 146-147. The question remains, however, as to when a positive duty to act arises.

In my view, the positive duty to act arises where a director obtains information, or becomes aware of facts, which might lead one to conclude that there is, or could reasonably be, a potential problem with remittances. Put differently, it is indeed incumbent upon an outside director to take positive steps if he or she knew, or ought to have known, that the corporation could be experiencing a remittance problem. The typical situation in which a director is, or ought to have been, apprised of the possibility of such a problem is where the company is having financial difficulties.

The evidence in the case at bar was that R.P.L. was created on October 31, 1985. Its directors were Jean-Claude Routhier and Luc Paradis, two truckers, and the plaintiff Bertrand Leblanc, an industrialist. Like the latter’s other two businesses in New-Brunswick, R.P.L. was a clothing manufacturing business. Although the plaintiff knew very little about the business background of Jean-Claude Routhier and Luc Paradis, he allowed them to manage the new business on a day-to-day basis while he ran his other two businesses in New-Brunswick. At the outset, to get R.P.L. going, the plaintiff endorsed a loan for the latter amounting to $8,000. Some two and a half months later, in mid-January 1986, R.P.L. obtained a loan from the Société Clé de 1’Amiante, a quasi-governmental body, totalling $25,000. In order to make this loan the lending body required that the directors of the borrowing company make a capital stock investment of at least $10,000, which was done. At trial, in the course of his generally vague and imprecise testimony, the plaintiff indicated that at the time he invested as a director an amount which he thought was around $5,000. All this money was to enable R.P.L. to acquire new equipment, an unspecified part of which was obtained from the plaintiff or from his businesses in New-Brunswick.

It further appeared from the evidence that from the beginning of the activities of R.P.L. at Black Lake, Quebec in October 1985, until early February 1986 inclusive, the plaintiff came to check the company’s accounting records on the spot. He stated that as a director he thought it was important to make such checks regularly. However, he had no further access to the accounting records after that time. He did try to check the books two or three times between February and late May 1986, but the directors on the spot told him that they were with the company’s accountant for auditing. As he had found no discrepancies in the books up to February 1986 he did not pursue his research any further and simply checked each time the check stubs for cheques issued by the company to its employees, which indicated

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source deductions required by the Income Tax Act and the Unemployment Insurance Act, 1971. It was not until late May 1986, some two weeks after the company closed down, that he learned that these amounts deducted at source had not been paid to the Minister of National Revenue.

Applying the rules of Soper, supra, to the case at bar, the plaintiff did not satisfy the court that he exercised the degree of care, diligence and skill required by s. 227. 1(3) of the Income Tax Act. As the owner and manager of two clothing businesses in New Brunswick, hiring a total of some 150 employees, the plaintiff is an industrialist and an experienced businessman. Furthermore, he himself indicated that he thought it was important to check R.P.L.’s accounting books regularly as he knew nothing about the background and qualifications of his co-directors on the spot, Jean-Claude Routhier and Luc Paradis, who were ordinary truckers. Checking the company’s accounting records in the first few months and finding no discrepancies in them could have sufficed. However, from mid-February 1986 onwards the new substantial debt of the business to Société Clé de 1’ Amiante and his additional investment as a director, as well as his endorsement of the initial $8,000 loan, should have prompted him to look more closely at R.P.L’s financial activities. In these circumstances, I cannot understand how the plaintiff was not put on his guard by being unable to check the accounting records in the company’s office for some three months, although he was able to see them without difficulty in the first four or five months of its operations. In the circumstances he not only could and should have contacted the accountant himself to obtain information, he should have contacted the bank to check R.P.L.’s accounts. Simply looking at check stubs did not in any way establish that the source deductions indicated on them had been paid to the Minister of National Revenue. This almost blind trust by a seasoned businessman in co-directors who were practically unknown and inexperienced essentially prevents the Court from concluding that the plaintiff exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances.

Consequently, subject to the consent that judgment be rendered for the plaintiff in an amount of $70.20, representing court costs (paragraph 6 of the Defence), the plaintiffs appeal is otherwise dismissed with costs.

Appeal dismissed.