Date: 19980515
Docket: 95-4143-IT-G
BETWEEN:
ABRAMO POZZEBON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] This appeal was heard at Toronto, Ontario on February 23, 1998 pursuant to the General Procedure of this Court.
[2] For the Appellant testimony was given by himself and his sister, Ivana. For the Respondent ("Minister") testimony was given by Maria Cesario, a collection officer. Several exhibits were filed including Appellant's Book of Documents ("ABD") containing 31 tabs.
[3] The Appellant appeals a Notice of Assessment dated November 17, 1994 which, inter alia, assessed the Appellant a director's liability under subsection 227.1(1) of the Income Tax Act ("Act") for federal income taxes deducted at source but not remitted by Ontario Masonry (1988) Ltd. ("Corporation") in the taxation years 1990, 1991 and 1992. The total amount of the said taxes was $73,697.20 plus interest of $6,225.63. The assessment was contested by a Notice of Objection and the Minister confirmed the assessment by a Notice of Confirmation dated July 13, 1995.
Facts
[4] The Corporation was incorporated on March 29, 1988. Its sole directors were the Appellant and his sister, Ivana who were also the sole shareholders in the proportions of 70% for the Appellant and 30% for Ivana. The Appellant was president and Ivana was secretary-treasurer. The Corporation carried on a masonry business. The Appellant and Ivana were the only permanent employees. Other employees were hired from time to time as work required.
[5] As salaries, the Appellant received approximately $60,000 per annum and Ivana $20,000 per annum. The Appellant and Ivana had separate functions. The Appellant tendered and secured jobs and made estimates and as well supervised the construction work in the field. Ivana was in charge of internal office matters including preparation of payroll, issuing cheques, making necessary deductions, handling all banking matters and doing bookkeeping generally. The Appellant's main input in respect to Ivana's work involved supplying her with foremen's sheets showing hours worked by the employees. These sheets formed the basis for preparation of the payroll.
[6] As to education, the Appellant graduated from high school and took two and one-half semesters at Humber College on business matters. Ivana's education was more advanced and she had bookkeeping education experience. As to work experience, the Appellant started working for his father in his father's masonry business and continued that work from 1983 until 1988 when the Corporation was formed. His work with his father's operation provided the experience for his work for the Corporation. The Appellant alleges that he had no knowledge of problems with source deductions until he received a call from a Revenue Canada collector in the Spring of 1993 who advised at that time the Corporation was in arrears in an amount of approximately $50,000. The Respondent of course contends that the Appellant must have known long before that call.
[7] After realizing that the Corporation was seriously indebted to Revenue Canada, Ivana set up a payment schedule with Revenue Canada. However, the financial obligations were so great that the Corporation was unable to afford the original schedule of payments of $7,500 per month after only a few months of making payments.
[8] The Corporation was modestly successful at first and showed only relatively modest losses of approximately $7,000 in each of its fiscal years ended March 31, 1990 and March 31, 1991.
[9] The Appellant explained how the recession, which took hold in 1991, reduced work and profit margins with the result that he had to work longer hours obtaining work and supervising same and attempting to reduce costs wherever possible. The recession affected the construction industry generally and collection of receivables grew more difficult.
[10] It is clear from Tabs 4 and 6 of the ABD that salaries and benefits were the largest expense of the Corporation amounting to approximately 95% of gross revenues in the fiscal years ending March 31, 1990 and March 31, 1991.
[11] The Corporation had insignificant assets since all of its equipment and premises were leased.
[12] Economic and financial difficulties forced the Corporation to cease operations in July of 1994 and it was dissolved pursuant to The Ontario Business Corporations Act by an Order dated May 15, 1995 for default in complying with the Corporations Tax Act (Ontario).
[13] A Certificate of the Minister (the "1993 Certificate") was registered on July 6, 1993 in the Federal Court of Canada under subsection 223(3) of the Act relative to the assessments issued against the Corporation on February 22 and August 22, 1992 and March 30, 1993.
[14] A Writ of Fieri Facias was issued dated August 11, 1993 (the "1993 Writ") to the Sheriff of the Regional Municipality of York, Ontario, in respect of the 1993 Certificate. The August 11 date appears in paragraph 20 of the Amended Notice of Appeal. That paragraph is admitted in the Reply but the date on the actual Writ is July 6, 1993. However this is of no consequence.
[15] An undated report by Stuart Reid, Senior Enforcement Officer of the Sheriff's Office Regional Municipality of York returned the 1993 Writ marked "Nulla Bona". Although undated, this report mentions that Mr. Reid visited the premises of the Corporation on October 19, 1993.
Law
[16] The relevant provisions of the Income Tax Act, Federal Court Act and Rules, the Ontario Rules of Civil Procedure and The Ontario Business Corporations Act follow:
Income Tax Act
166 Irregularities - An assessment shall not be vacated or varied on appeal by reason only of any irregularity, informality, omission or error on the part of any person in the observation of any directory provision of this Act.
227.1. (1) Liability of directors for failure to deduct - 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.
(2) Limitations on liability - A director is not liable under subsection (1), unless
(a) a certificate for the amount of the corporation's liability referred to in that subsection has been registered in the Federal Court under section 223 and execution for that amount has been returned unsatisfied in whole or in part;
(b) the corporation has commenced liquidation or dissolution proceedings or has been dissolved and a claim for the amount of the corporation's liability referred to in that subsection has been proved within six months after the earlier of the date of commencement of the proceedings and the date of dissolution; or
(c) the corporation has made an assignment or a receiving order has been made against it under the Bankruptcy and Insolvency Act and a claim for the amount of the corporation's liability referred to in that subsection has been proved within six months after the date of the assignment or receiving order.
(3) Idem - 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.
(4) Limitation period - 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.
(5) Amount recoverable - Where execution referred to in paragraph (2)(a) has issued, the amount recoverable from a director is the amount remaining unsatisfied after execution.
223. (1) Definition of “amount payable” - For the purposes of subsection (2), an “amount payable” by a person means any or all of
(a) an amount payable under this Act by the person;
(b) an amount payable under the Unemployment Insurance Act by the person;
(c) an amount payable under the Canada Pension Plan by the person; and
(d) an amount payable by the person under an Act of a province with which the Minister of Finance has entered into an agreement for the collection of taxes payable to the province under that Act.
(2) Certificates - An amount payable by a person (in this section referred to as a “debtor”) that has not been paid or any part of an amount payable by the debtor that has not been paid may be certified by the Minister as an amount payable by the debtor.
(3) Registration in court - On production to the Federal Court, a certificate made under subsection (2) in respect of a debtor shall be registered in the Court and when so registered has the same effect, and all proceedings may be taken thereon, as if the certificate were a judgment obtained in the Court against the debtor for a debt in the amount certified plus interest thereon to the day of payment as provided by the statute or statutes referred to in subsection (1) under which the amount is payable and, for the purpose of any such proceedings, the certificate shall be deemed to be a judgment of the Court against the debtor for a debt due to Her Majesty, enforceable in the amount certified plus interest thereon to the day of payment as provided by that statute or statutes.
History:S. 223(3) was amended by S.C. 1994, c. 7, Sched. VIII, s. 129, effective on Royal Assent, May 12, 1994. S. 223(3) formerly read:
(3) On production to the Federal Court, a certificate made under subsection (2) in respect of a debtor shall be registered in the Court and when so registered has the same effect, and all proceedings may be taken thereon, as if the certificate were a judgment obtained in the Court against the debtor for a debt in the amount certified plus interest thereon to the day of payment as provided by law and, for the purposes of any such proceedings, the certificate shall be deemed to be a judgment of the Court against the debtor for a debt due to Her Majesty enforceable in the amount certified plus interest thereon to the day of payment as provided by law.
Federal Court Act
Section 56 Analogy to provincial process - Process against person - Process against property - Claim against property seized
56. (1) In addition to any writs of execution or other process that are prescribed by the rules for enforcement of its judgments or orders, the Court may issue process against the person or the property of any party, of the same tenor and effect as those that may be issued out of any of the superior courts of the province in which any judgment or order is to be executed; and where, by the law of that province, an order of a judge is required for the issue of any process, a judge of the Court may make a similar order with respect to like process to issue out of the Court.
(2) No person shall be taken into custody under process of execution for debt issued out of the Court.
(3) All writs of execution or other process against property, whether prescribed by the Rules or authorized by subsection (1), shall, unless otherwise provided by the Rules, be executed, with respect to the property liable to execution and the mode of seizure and sale, as nearly as possible in the same manner as similar writs or process, issued out of the superior courts of the province, required to be executed, and the writs or other process issued by the Court shall bind property in the same manner as such similar writs or process issued by the provincial superior courts, and the rights of purchasers thereunder are the same as those of purchasers under those similar writs or process.
(4) Every claim made by any person to property seized under a writ of execution or other process issued out of the Court, or to the proceeds of the sale of such property, shall, unless otherwise provided by the Rules, be heard and disposed of as nearly as may be according to the procedure applicable to like claims to property seized under similar writs or process issued out of the courts of the province.
(5) Repealed. [S.C. 1990, c.8, s.18]
Rule 2008
2008. (1) Any party at whose instance a writ of execution was issued may serve a notice on the sheriff to whom the writ was directed requiring him, within such reasonable time as may be specified in the notice, to endorse on the writ a statement of the manner in which he has executed it and to send to that party a copy of the statement.
(2) If a sheriff on whom such a notice is served under paragraph (1) fails to comply with it, the party by whom it was served may apply to the Court for an order directing the sheriff to comply with the notice.
Ontario Rules of Civil Procedure
Sheriff’s Report on Execution of Writ
60.14 (1) A party or solicitor who has filed a writ with a sheriff may in writing require the sheriff to report the manner in which he or she has executed the writ and the sheriff shall do so forthwith by mailing to the party or solicitor a sheriff’s report (Form 60N).
Withdrawal of Writ
(2) A party or solicitor who has filed a writ with a sheriff may withdraw it as against one or more of the debtors named in it by giving the sheriff written instructions to that effect. O. Regs. 560/84, r. 60.15(2); 478/85, s.1.
(3) When a writ is withdrawn, the sheriff shall record the date and the time of withdrawal in a memorandum on the writ, and where it is withdrawn as against all debtors named in it, shall remove the writ from his or her file and return it to the person who withdrew it. O. Regs. 560/84, r. 60.15(3); 478/85, s.1.
Form 60 N
Sheriff’s Report
(General heading)
SHERIFF’S REPORT
In response to your request of (date) concerning the execution of the writ of seizure and sale (or possession, delivery or sequestration) against (name of party) filed with me, I report that I have taken the following action, with the following results: (Give particulars.)
(Date) (Signature of sheriff)
TO (Name and address of
creditor or solicitor)
Ontario Business Corporations Act
242.(1) Despite the dissolution of a corporation under this Act,
(a) a civil, criminal or administrative action or proceeding commenced by or against the corporation before its dissolution may be continued as if the corporation had not been dissolved;
(b) a civil, criminal or administrative action or proceeding may be brought against the corporation within five years after its dissolution as if the corporation had not been dissolved; and
(c) any property that would have been available to satisfy any judgment or order if the corporation had not been dissolved remains available for such purpose. 1982, c.4, s. 241(1); 1986, c.57, s.19.
Appellant's Position
[17] The Appellant states that a director is not liable under section 227.1 of the Act unless and until one of the conditions of subsection 227.1(2) is satisfied and that the Minister has the onus of proof in this regard. The Appellant submits, that since the 1993 Sheriff’s Report is undated, he was not liable under paragraph 227.1(2)(a) of the Act on November 17, 1994, the date of the Assessment.
[18] The Assessment was issued to the Appellant prior to the Corporation’s Assessment upon which the Assessment is based and the Corporation’s Assessment was issued against the Corporation after the Corporation was dissolved.
[19] The Appellant states that Section 56 of the Federal Court Act requires that in Federal Court a process analogous to the process of the Superior Court of the Province may be used in addition to the Writs of Execution and process prescribed by the Federal Rules. The Appellant submits that the Ontario Rules require that the Sheriff complete his report in Form 60N. Form 60N sets out on its face, the requirement that the Sheriff’s report be dated and signed by the Sheriff. The 1993 Sheriff’s Report is deficient because it is undated.
[20] The Appellant submits that Federal Rule 2008 requires the Sheriff to endorse on the Writ a statement of the manner in which he has executed it and to send to that party a copy of the statement. Thus, the 1993 Sheriff’s Report is deficient pursuant to the Federal Rules as the Sheriff has not endorsed on the Writ of Fieri Facias itself a statement of the manner in which he has executed it as required pursuant to Rule 2008.
[21] The Appellant submits that the undated Sheriff s Report is deficient in that the Sheriff has not fulfilled his duties in completing his report because his report does not demonstrate that he made all reasonable inquiries to discover what assets the Corporation had to seize in satisfaction of the 1993 Writ before marking the report "NULLA BONA".
[22] The Minister is unable to answer these deficiencies in the undated Sheriff's Report and the Appellant submits that these deficiencies show that the undated Sheriffs Report is insupportable in fact. Consequently, the Appellant submits that the Minister failed to take the requisite steps provided in paragraph 227.1(2)(a) of the Act as he failed to exhaust recourse against the Corporation before calling upon the Appellant, who is not directly liable for the Corporation's income tax.
[23] Moreover, section 166 of the Act is of no use to the Minister. In other words the undating and the flaws described above go beyond the protection given to the Minister by section 166.
[24] The Ontario Business Corporations Act does not provide a mechanism for a creditor to prove a claim and it was not possible for the Minister to prove a claim for the amount of the Corporation’s tax liability under the Act within six months after the earlier of the date of commencement of the dissolution proceedings under The Ontario Business Corporations Act and the date of dissolution.
[25] The Corporation did not make an assignment in bankruptcy nor was a receiving order made against it under the Bankruptcy and Insolvency Act (Canada), and therefore the Minister did not prove a claim for the amount of the Corporation’s tax liability under the Act within six months after the earlier of the date of any such assignment or receiving order.
[26] The Appellant further submits that no claim for the amount of the Corporation’s liability referred to in subsection 227.1(1) was proved in accordance with paragraph 227.1(2)(b) or (c) of the Act.
[27] The Appellant ceased to be a director on May 15, 1995 and the Minister is statute barred from commencing an action or proceeding against the Appellant for his role as a director of the Corporation after May 15, 1997 because of the limitation contained in subsection 227.1(4) of the Act.
[28] In the alternative, the Appellant submits that he is not liable under subsection 227.1(1) of the Act because he exercised the degree of care, diligence and skill required by subsection 227.1(3).
Minister's Position
[29] The Minister submits that he properly assessed the Appellant pursuant to sections 227 and 227.1 of the Act for the failure by the Corporation to remit to the Receiver General an amount of federal income tax, with penalties and interest thereon, as required by section 153 of the Act.
[30] The Minister submits that the Appellant did not exercise the degree of care, diligence and skill to prevent the failure to remit the amount by the Corporation that a reasonably prudent person would have exercised in comparable circumstances.
[31] The Minister submits that the assessment raised against the Appellant pursuant to sections 227 and 227.1 of the Act is proper as, before the assessment was raised, the requirements of the condition precedent found in paragraph 227.1(2)(a) of the Act had been satisfied, that is, a certificate for the amount of the Corporation’s liability had been registered in the Federal Court of Canada under section 223 of the Act and execution for such amount was returned unsatisfied.
[32] The Minister submits that the assessment raised against the Appellant under sections 227 and 227.1 of the Act is proper notwithstanding the failure by the Sheriff to date his Nulla Bona Report. He submits further that subsection 56(3) of the Federal Court Act does not incorporate by reference the whole of the Ontario Rules dealing with executions against property such that the failure by the Sheriff to exactly follow Form 60N of the Ontario Rules and date his Nulla Bona Report does not remove the Appellant’s joint liability with the Corporation under sections 227 and 227.1 of the Act.
[33] The Minister submits that the Writ of Fieri Facias is not deficient as Rule 2008 of the Federal Rules does not require the Sheriff to endorse on the Writ of Fieri Facias itself a statement of the manner in which he has executed unless so requested by the party at whose instance the Writ of Fieri Facias was issued. Moreover, the assessment is deemed valid pursuant to section 166 of the Act.
[34] The Minister submits that as the Corporation was dissolved pursuant to section 241 of The Ontario Business Corporations Act it was not possible for the Minister to meet the requirements of the condition precedent in paragraph 227.1(2)(b) of the Act before assessing the Appellant under section 227 and 227.1 of the Act and that therefore the Minister properly proceeded under paragraph 227.1(2)(a) of the Act.
[35] The Minister submits that there is no statutory precondition in the Act that requires the Minister to assess a corporation in respect of its unremitted source deductions before assessing the director of the corporation under sections 227 and 227.1 of the Act.
[36] The Minister submits that pursuant to section 242 of The Ontario Business Corporations Act, a civil, criminal, or administrative action may be brought against a dissolved corporation within five years after its dissolution as if the corporation had not been dissolved.
Analysis and Decision
[37] As to the undated Sheriff's Report and to the other alleged deficiencies in the Sheriff's process, I am of the view that the Minister's position set forth above is correct.
[38] I have difficulty in accepting that the lack of a date and the other irregularities alleged by the Appellant are sufficient to void the assessment. Moreover, it is clear from all of the evidence that the company had no assets and the allegations that the sheriff did not do his job properly in ascertaining assets is not all that material. Moreover, I believe section 166 of the Act protects the Minister. The Sheriff's Report does mention a date where he visited the premises, namely October 19, 1993 which should be satisfactory in determining a date.
[39] Moreover, it may well be that irregularities in a process governed by the Federal Court Act must be ruled upon by the Federal Court. See Curylo v. M.N.R., 92 DTC 1250 (T.C.C.) where Beaubier J. stated:
It is this Court's finding that if the Certificate filed in the Federal Court of Canada by the Minister of National Revenue on February 10, 1986 names the wrong corporation, or if the amendment the Minister of National Revenue purported to make is invalid, then that must be determined by an appropriate action in the Federal Court of Canada to terminate the Certificate in question. To use the words of Cattanach, J. in Her Majesty The Queen v. Star Treck Holdings Ltd., et al., 77 DTC 5311 (F.C.T.D.) at 5313:
On the contrary it is authority for the proposition that a person affected by the registration of such a certificate is entitled to invoke the exercise of this Court's jurisdiction to determine the propriety or otherwise of the registration and that it is open to a person against whom such a certificate is registered to contest it by way of an independent proceeding claiming invalidity in the certificate or its registration.
The Tax Court is a creation of statute and has no inherent jurisdiction. Therefore it would appear that the Federal Court is the proper forum to determine the merits of the Appellant’s argument that the Minister, and the Sheriff, did not correctly follow the procedural rules set out in the Federal Court Act.
[40] The only preconditions in the Act that must be satisfied before a director is deemed liable for a corporation’s unremitted source deductions are those set out in subsection 227.1(2). There is nothing in that subsection which states that the corporation must be assessed for the unremitted source deductions prior to the director being assessed. Subsection 223(3) of the Act states that the filing of the certificate in Federal Court has the same effect as a judgment obtained in that Court. It is the certificate referred to in that subsection that the Appellant’s liability is based upon, not the corporation’s original assessment.
[41] According to The Ontario Business Corporations Act, a civil, criminal or administrative action may be brought against a dissolved corporation within five years after its dissolution as if the corporation had not been dissolved.
[42] With respect to the Appellant's position on the interpretation of paragraphs 227.1(2)(a), (b) and (c), it is my opinion that the ruling by Christie A.C.J. in Kennedy v. M.N.R., 91 DTC 1037 (T.C.C.), is directly on point. He stated at 1040 that:
It is the appellant's contention that fulfilling the requirements of paragraph 227.1(2)(a) is not compliance with the condition precedent in all cases. Whether there must be observance of paragraph 227.1(2)(a) or (b) or (c) in order to do so will depend on the facts of each case. If a corporation has commenced liquidation or dissolution proceedings or has been dissolved, the route designated under paragraph 227.1(2)(b) must be followed. If a corporation has made an assignment or a receiving order has been made against it under the Bankruptcy Act, paragraph 227.1(2)(c) governs. In other circumstances, paragraph 227.1(2)(a) is applicable. I think that the foregoing is the proper approach.
Travel Consultants having been dissolved, it is said that the appellant is entitled to succeed because the Minister complied with paragraph 227.1(2)(a) and not paragraph 227.1(2)(b) as required. This argument is sustainable only if in the case at hand it was possible for the Minister to comply with paragraph 227.1(2)(b). It requires that where a corporation has been dissolved without it having commenced liquidation or dissolution proceedings, which is what occurred regarding Travel Consultants, a claim for the amount of the corporation's liability referred to in subsection 227.1(1) shall be proved within six months after the date of dissolution. In the event, however, that a corporation is dissolved by the Registrar under section 205 there is no provision for the appointment of a liquidator to whom proof of the corporation's liability can be made and, in fact, no liquidator was appointed with relation to the dissolution of Travel Consultants. The matter is different if under section 205 the Registrar makes application to the Court of Queen's Bench of Alberta for an order dissolving a corporation because of its default in filing annual returns. In such case, section 210 of the Business Corporations Act applies. It deals with the power of the Court respecting the dissolution of a corporation, which includes authority to make an order appointing a liquidator. Paragraph 214(a), subparagraph 214(b)(iii) and paragraph 214(c) provide:
214. A liquidator shall
(a) forthwith after his appointment give notice of his appointment to the Registrar and to each claimant and creditor known to the liquidator,
(b) forthwith publish notice in the Registrar's periodical and once a week for 2 consecutive weeks in a newspaper published or distributed in the place where the corporation has its registered office and take reasonable steps to give notice in each province in Canada where the corporation carries on business, stating the fact of his appointment and requiring any person
(iii) having a claim against the corporation, whether liquidated, unliquidated, future or contingent, to present particulars of the claim in writing to the liquidator not later than 2 months after the first publication of the notice,
(c) take into his custody and control the property of the corporation,
Paragraph 227.1(2)(b) being inapplicable to this appeal and the Minister having observed the requirements of paragraph 227.1(2)(a) as permitted by paragraph 219(2)(b) of the Business Corporations Act, which was the only effectual course of action open to him under subsection 227.1(2), this appeal cannot succeed.
[43] The Appellant has clearly stated in his Notice of Appeal that the Minister did not prove his claim under paragraph 227.1(2)(b) or (c) nor, was the Minister capable of proving that claim. However, following the reasoning of Christie, A.C.J. in Kennedy, supra, the Minister correctly observed the requirements of paragraph 227.1(a) of the Act.
[44] With respect to the two year limitation rule, the assessment for income tax which set out the Appellant’s liability, and from which he is appealing, is dated November 17, 1994. The alleged date on which the Appellant ceased to be a director was May 15, 1995. The assessment was made within the two year period.
[45] The issue as to whether an assessment is an action or proceeding was dealt with by Kempo, J. in Jose Cortes Manago v. M.N.R., 90 DTC 1889 (T.C.C.). The relevant argument in Manago, supra, are set out by Kempo, J. at 1891:
The analysis submitted on behalf of the Appellant on the first ground was that the words used in subsection 227.1(4) limitation provision "action or proceedings to recover any amount payable", do not include a notice of assessment or reassessment of liability for the reason that the nature of the latter is that of a mere administrative function which simply sets the quantum. Recovery thereof, in the sense of the words employed in the limitative provision, is precluded until the liability or quantum has been finally fixed in the form of acceptance by the taxpayer as evidenced by non-objection or appeal abandonment, or by a final judicial determination. Parliament, by the use of the phraseology employed, chose to impose a limitation period commencing with the date of the cessation of a directorship and ended with the date of the commencement of a legal action or proceedings for recovery of the amount payable.
[46] Kempo J. determines the issue at 1892:
The first, and very startling, consequence of the Appellant's analysis is that it would permit a taxpayer to use his objection and appeal rights to completely nullify the time limitation provisions which operate against the Respondent and which, it can be said, have been put in the legislation for the benefit of the taxpayer. Secondly, an immediate anomaly arises because this interpretation contemplates no limitation period within which the assessment itself may be made, but which in the end may be an empty exercise because judicial appeals are often ongoing for significant time periods.
[47] And at 1893:
The fact that clause (10) of section 227.1, which empowered the Respondent to make the assessment, incorporates the procedural objection and appeal rights under Divisions I and J, signifies a legislative intent that the clause (4) phrase "action or proceeding to recover" is not necessarily isolative and restrictive in nature. It is my considered opinion that that phrase includes an assessment made under clause (10) of section 227.1. Common sense dictates that there must first be an amount of a debt which is crystallized by the fixation of the liability in the form of an assessment. This is then followed by its means of recovery, and that for limitation purposes, absent any specific words of a restrictive or modifying nature, the phrase "action or proceedings to recover" is not confined to proceedings that are solely legal in nature. The subject phrase is worded broadly enough to encompass and include the administrative act of recovery of the liability in the form of a notice of assessment or reassessment. In any event, I am unable to ascertain any interpretative rule or principle as to why a broad meaning is or ought to be precluded in favour of a narrow and technical one. As noted earlier, the narrow approach does produce anomalies which are completely out of harmony with the scheme of the Act.
[Note: the references to clause 10 of section 227.1 should read clause 10 of section 227]
[48] There may be some remaining doubt in certain minds as to whether an assessment is "an action or legal proceeding". However, in my opinion, it is certain that the registration of the certificate on July 6, 1993, the first step in proceeding against a director, constituted a legal proceeding and since it was made within the two year period the Appellant's position on this front cannot succeed.
[49] As to due diligence, subsection 227.1(3) allows a director that defence.
[50] Thus, I need to determine whether the Appellant acted as a reasonably prudent person would have in similar circumstances in an attempt to prevent the failure of the corporation to remit the required withholding taxes.
[51] As Rip, J. of this Court said in Cosmas V. Ho v. M.N.R., 91 DTC 76 (T.C.C.), at page 80:
The word "prevent" is defined in The Shorter Oxford Dictionary On Historical Principals [sic] 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 ... b. 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 par 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.
[52] Rip, J. found that the action taken by the Appellant, after the Appellant realized that the withholding taxes were not being remitted as required by the Act, did not suffice in making out a defence of due diligence. He stated that the Appellant must take positive action to prevent the corporation’s failure to remit withholding taxes.
[53] In Soper v. The Queen, 97 DTC 5408, a decision of the Federal Court of Appeal, Robertson, J.A. analysed the requirements of the due diligence defence for directors attempting to avoid liability for unremitted source deductions.
[54] Robertson, J.A. characterized the test as an “objective-subjective” test. He stated at 5417 that:
... 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.
[55] Robertson, J.A., by categorizing directors as being either inside or outside directors, has seriously limited the subjective portion of the due diligence test for taxpayers that are involved in the day-to-day running of a company.
[56] Robertson, J.A. also stated, with reference to an outside director, that
... 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.
[57] The Appellant has the onus with respect to due diligence. He was one of only two directors at all relevant times, was a 70% shareholder with a direct interest in the profitability of the Corporation and all of its goings on and was president and directly in charge of obtaining contracts which would produce the bottom line for the Corporation. Moreover the Corporation paid out large salaries to the Appellant and his sister. The Appellant must be considered as an inside director and the onus on him as set forth in the Federal Court of Appeal decision in Soper is an onerous one. To conclude that he was never aware of the source deduction problems requires a leap of faith which I find too broad in every respect.
[58] For all of these reasons, the appeal is dismissed with costs.
Signed at Ottawa, ,Canada this 15th day of May 1998.
"T.P. O'Connor"
J.T.C.C.