Archambault T.C.J.:
1 This is an appeal from an assessment by the Minister of National Revenue (Minister) dated October 6, 1992, respecting Mr. Fauteux's alleged liability under subsection 227.1(1) of the Income Tax Act (Act) and section 68.1 of the Unemployment Insurance Act, 1971.
2 The assessment is for a total of $19,340.29 representing deductions at source (DAS) in respect of income tax and unemployment insurance premiums which the company 2327-3170 Québec Inc. (company) was required to remit for the months from July 1989 to January 1990, with penalties and interest.
3 In making the assessment in respect of Mr. Fauteux, the Minister made the following assumptions of fact, which appear in paragraph 12 of the reply to the notice of appeal:
[TRANSLATION]
(a) the company “2327-3170 Québec Inc.” (the “company”) owed the Department of National Revenue $21,319.76 in respect of assessments made on December 19, 1988 (for the 1987 taxation year), September 4, 1990 (for the 1989 taxation year), and October 22, 1990 (for the 1990 taxation year), representing deductions at source in respect of income tax and unemployment insurance premiums, as well as penalties and interest relating thereto to July 18, 1991;
(b) in light of the company's failure to remit, the Department of National Revenue filed a certificate with the Federal Court Registry in accordance with section 223 of the Income Tax Act on August 2, 1991;
(c) on the same date, the Federal Court issued a writ of fieri facias, ordering that the Department of National Revenue's claim be paid out of the company's assets;
(d) on September 26, 1991, a bailiff acting pursuant to the writ of fieri facias filed a nulla bona return of execution;
(e) the appellant was not held liable for the amounts owed by the company pursuant to the assessment made in respect of it on December 19, 1988 (for the 1987 taxation year);
(f) the appellant was held liable however for the amounts owed by the company pursuant to the assessments made in respect of it on September 4 and October 22, 1990, particulars of which are provided below:
| Year | 1989 | 1990 | |
|---|
| Date of assessment | 04/09/1990 | 22/10/1990 | |
| Income tax | $11,255.11 | $ 847.45 | |
| Unemployment insurance | NIL | $ 553.22 | |
| Interest and penalties to October 6, 1992 | $ 5,926.22 | $ 758.29 | |
| Total | $17,181.33 | $2,158.96 | |
| Grand Total: | | | $19,340.29 |
(g) having regard to the appellant's liability, the deductions at source not remitted to the Receiver General of Canada relate to the months from July to December 1989 and a T-4 difference (for 1989) and to January 1990;
(h) the appellant was a director of the company during the periods in 1989 and 1990 when it was required to pay the amounts withheld in issue to the Receiver General of Canada;
(i) in his capacity as a director of the company, the appellant did not exercise the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances to prevent the failure by the company to remit the amounts withheld in issue;
(j) accordingly, the appellant is jointly and severally liable, together with the company, to pay the $19,340.29 in issue.
4 At the start of the hearing, Mr. Fauteux admitted paragraphs (b), (c), (e), (f), (g), and (h).
5 Mr. Fauteux contested the assessment, citing subsection 227.1(3) of the Act, which provides that a director is relieved of all liability where he exercises the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.
6 This is the only point at issue. It should be noted that Mr. Fauteux did not dispute the amount of the deductions at source that the company failed to remit.
Facts
7 The Court heard the testimony of Mr. Fauteux and Robert Vallières, an auditor for Revenue Canada.
8 According to Mr. Fauteux's testimony, the company had operated a restaurant business known as Le Restaurant St-Honoré in Montréal since 1987. Mr. Fauteux became a shareholder and director of the company around the end of 1988. He purchased 25 per cent of the company's shares from a Mr. Dubuc.
9 At the start of January 1989, Mr. Fauteux was hired as an employee at a salary of $600 a week. He stated that he did not have any specific responsibilities because he did not have any expertise or experience in the restaurant business. He worked 12 or 13 hours a day, seven days a week. He handled things like shopping, did the bank deposits and signed the pay cheques, with another director.
10 A Ms. Legault started handling the payroll in July 1989. The cheques had previously been prepared by a business specializing in this kind of service.
11 Before taking on his role in the company, Mr. Fauteux had worked in sales: 10 years for a design and decoration business, 20 years for a heavy equipment sales business and two to three years for an investment dealer. In addition, his spouse operated a small restaurant from 1983 to 1995, first at Place Dupuis, then at Faubourg Ste-Catherine, next to the Restaurant St-Honoré. Mr. Fauteux stated that this business had always made its deductions at source, without fail, during this entire period.
12 The company faced financial difficulties from the outset. First, it suffered the consequences when the restaurant had to cease operations for a few weeks as the result of a flood. The company had to absorb the loss of profits during those weeks of inactivity and pay expenses such as salaries.
13 The company further owed the Quebec ministère du Revenu $75,000 in retail sales tax arrears. The company negotiated an arrangement to pay $6,500 a month in settlement of this tax liability. When he had difficulty making these payments, Mr. Fauteux negotiated arrangements with the representative of the Quebec ministère du Revenu.
14 In March 1989, the company received a business tax assessment of $25,000 from the City of Montréal. This figure represented unpaid taxes for a period of approximately two years and a few months. No reserve had been allowed for this liability in the company's financial statements for 1988.
15 Lastly, the economy was not in very good shape in 1989. The restaurant's turnover declined from $1,000,000 to $700,000 that year.
16 These economic and financial difficulties forced the company to take measures to economize; for one, the directors' salaries were reduced to $100 a week. However, it did not have the necessary cash to pay all its creditors. Forced to choose between the need to pay for wine purchases and to pay the DAS due on the fifteenth of each month, Mr. Fauteux chose to pay for the wine. He said: [TRANSLATION] “You can't operate a restaurant without wine.” His intention was to pay the DAS later, even though he would have to pay additional interest and penalties.
17 Mr. Fauteux informed the Revenue Canada auditor that the cash shortage explained why the deductions at source had not been paid. It should be noted that the DAS were paid without any problem prior to July 1989. In January 1990, the Quebec ministère du Revenu seized the company's bank accounts and the owner changed the restaurant's locks the next day. The company was dissolved in February 1990.
Analysis
18 Although Mr. Fauteux described the company's financial difficulties during 1989, there was very little evidence concerning the efforts made or actions taken by the directors to prevent the company from failing to meet its obligations to make and remit the DAS on time for the period from July 1989 to January 1990.
19 What can be said about Mr. Fauteux's role and personal conduct over the period during which the company failed to meet its obligations?
20 No evidence was adduced to show that Mr. Fauteux made any efforts to prevent the company's failure to meet its obligation to remit the deductions at source. On the contrary, the evidence in fact shows that Mr. Fauteux chose to pay the wine suppliers instead of the Minister to whom the company owed the DAS.
21 Mr. Fauteux acted like a typical businessman who must pay the bills that are the most pressing and most essential if the company is to continue its operations. I have no doubt that Mr. Fauteux acted in good faith and that he did not intend for the company to evade payment of its taxes. The idea was merely to postpone payment of the DAS, even though the company would have to pay additional penalties and interest. Mr. Fauteux did a great deal to save the company. He invested large sums, approximately $60,000, and he accepted a reduction in his weekly salary from $600 to $100.
22 However, by adopting this strategy of giving preference to the company's suppliers over the Minister, Mr. Fauteux exposed himself to personal liability if the company became unable to pay the DAS at a later date. The fact that the Quebec ministère du Revenu seized the bank accounts and precipitated the restaurant's closing does not relieve Mr. Fauteux of his liability for the failure to do what was needed to ensure that the DAS were made each month from July 1989 to January 1990.
23 It must be kept in mind that the DAS represented monies that belonged not to the company, but rather to the Minister of National Revenue. Furthermore, the company held those monies as his trustee: subsection 227(4) of the Act. In borrowing, as it were, the amounts held in trust for the Minister in order to pay its other creditors, the company acted wrongfully.
24 In a number of judgments, this Court has held a director liable when he or she allowed a company to postpone payment of its DAS in order to pay its suppliers. This was the case, inter alia, in the decisions in Hamel v. The Minister of National Revenue (1991), 91 D.T.C. 1240 (T.C.C.), Short v. The Minister of National Revenue (1990), 91 D.T.C. 67 (T.C.C.), and Michel v. The Minister of National Revenue (IT), 87-1894(IT) (T.C.C.).
25 In my view, the course of conduct adopted by Mr. Fauteux does not show that he acted with the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.
26 For all these reasons, the appeal is dismissed, without costs.
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