Date: 20010618
Docket: 2000-3764-IT-I
BETWEEN:
BRUCE G. LOCKHART,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Hamlyn, J.T.C.C.
[1] By Notice of Assessment No. 11922 dated June 10, 1999, the Minister of National Revenue (the "Minister") assessed the Appellant for federal income tax deducted at source but not remitted by Kootenay Cutting & Coring Ltd. ("Kootenay") and for penalties and interest.
[2] The following are the undisputed facts accepted by the Appellant as stated in the Reply of the Respondent:
a) the Corporation was incorporated in the Province of British Columbia on March 30, 1995;
b) the Corporation opened an employer account with the Canada Customs and Revenue Agency in April 1995;
c) the Corporation employed employees in its operations;
d) the Corporation did not remit any source deductions for April and May 1995;
e) on June 5, 1995 the Minister issued a PD14 Notification to notify the Corporation of the non-remittance of source deductions;
f) on July 13, 1995 the Corporation remitted the appropriate source deductions for April, May and June of 1995 to the Receiver General;
g) the Corporation remitted to the Receiver General the appropriate source deductions for July and August 1995 on time as required by the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended (the "Act");
...
i) on November 6, 1995 the Minister issued a PD14 Notification to notify the Corporation of the non-remittance of source deductions and gave 30 days for the Corporation to reply;
j) the Corporation did not reply to the November 6, 1995 PD14 Notification;
k) on January 6, 1996 the Minister issued a letter to notify the Corporation of the non-remittance of source deductions and gave 20 days for the Corporation to reply;
...
m) the Appellant was, at all material times, a director of the Corporation;
n) the Corporation failed to remit to the Receiver General federal income tax withheld from wages paid to its employees, penalties and interest relating to the unremitted federal tax;
o) on January 5, 1999 the liability of the Corporation for the unremitted federal tax, penalties and interest were registered and certified in the Federal Court of Canada in the amount of $6,208.99;
p) on January 5, 1999 the Minister forwarded the Writ of Seizure and Sale to the Sheriffs of British Columbia for seizure and sale of the real property or immovables and the personal property or movables within the jurisdiction of the Corporation; and
q) on February 18, 1999 the Writ of Seizure and Sale was returned nulla bona.
...
[3] The issue is whether the Appellant is liable as a director for the failure by Kootenay to remit to the Receiver General an amount of federal income tax, with penalties and interest thereon.
[4] From the Notice of Appeal adopted by the Appellant as part of the evidence, the Appellant states that while he was a director, he acted with due diligence. He asserts that while he was a director, he reviewed the Statements of Account for Current Source Deductions. He states that the Statement dated October 27, 1997 showed a balance owing of $3,958.96 with $0.00 paid in 1996. The Appellant then said that he has records which show that cheques in the amount of $3,900.00 were issued for source deductions and that the CCRA did not record this payment.
[5] The Appellant also states that Kootenay's bookkeeper left town and that the books and records were in disarray. He said Kootenay's end of month statements for March 31, 1996 and April 30, 1996 showed amounts payable of $95.23 and $574.51, respectively. In his opinion, these statements were misleading. He feels that he was misled as to the status of Kootenay's accounts by his daughter Lesley and her husband Raymond who were also directors, and this was because they knew that he was about to lose his $25,000.00 investment in the business. He states that Lesley and Raymond were involved in the day-to-day affairs of the business and that he had a full-time job, a home design business and cared for his wife and a mentally ill daughter.
JURISPRUDENCE
[6] The foundation for the determination of whether the Appellant exercised due diligence can be found in Soper v. The Queen[1] in which the Federal Court of Appeal described the standard which was applicable. Robertson J.A. was of the opinion that the standard of care in subsection 227.1(3) of the Act, was a flexible one and was not governed by a single, unchanging standard:
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 organization, resources, customs and conduct. Thus, for example, more is expected of individuals with superior qualifications (e.g. experienced business-persons).
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 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".[2]
[7] The Federal Court of Appeal in Canada v. Corsano[3] held that there is one standard of care for all directors and that the application of the standard is flexible because it weighs the varying and different skills, factors and circumstances of a director in determining whether he lived up to such standard.
[8] It is also important to note that it is in Soper that the Court established the distinction between inside and outside directors. The Court defined the meaning of "inside director" but omitted to define an "outside director":
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.[4]
[9] In Cadrin v. R.[5], the Federal Court of Appeal found it reasonable for an outside director to rely on assurances from inside directors that obligations were being met.
[10] In Whitehouse v. The Queen[6], Rip J. stated on the subject of subsections 227.1(3) of the Act and 323(3) of the Excise Tax Act:
Whether a standard of care by a director has been met for purposes of subsections 227.1(3) and 323(3) is predominantly a question of fact to be resolved in the light of the personal knowledge and experience of the director at issue. An entirely possible approach on the part of a director may not help that director's defence of an assessment but, unless there is a reason for suspicion, the director is permitted to rely on the day-to-day corporate managers to be responsible for payment of statutory debt obligations. An outside director who knows or suspects or ought to know something is amiss must take positive steps to try to remedy the situation.[7]
ANALYSIS
[11] In applying the standard of care in the present appeal, it is necessary to take into account the Appellant's personal knowledge, background and experience. The Appellant seems to be a fairly intelligent, knowledgeable man based on his various business ventures and employment placements. He is by profession an architectural technician.
[12] He states that subsequent to the bookkeeper's departure, the books and records were a mess and he could not put things in order, as he did not fully understand accounting procedures.
[13] The Appellant said he was an outside director, and he was not involved in the day-to-day management of Kootenay. He bolsters this argument by stating his competing occupations and endeavours. At one point he said that he was confident that his daughter and her husband could run the business and states that he was misled by them. At another point he said he did not have full faith in his daughter and her husband and from the beginning the relationship was difficult.
[14] There are two areas of the evidence that are significant. The Appellant said he first learned of the source deductions remission default was in 1998 in a due diligence letter to Revenue Canada (Exhibit R-2). However, to the contrary, from the evidence, the first notice that there had been a source deductions remission default that the Appellant was aware of was in July 1995 (Exhibit A-2). Otherwise from the company's inception the Appellant knew there was a source deductions problem. This evidence conflict was not satisfactorily resolved.
[15] The Appellant knew there were cash flow problems as he made several cash advances including October 1995, (Exhibit A-2) and April 4, 1996. While he apparently reviewed interim monthly statements from Kootenay for 1995, as to source deductions, he appears to have not inquired from his daughter, his son-in-law or Revenue Canada as to the status of the source deductions account thereafter.
[16] The Appellant stated he received misinformation with respect to directors' liability from his lawyer, stated he was misled about source deductions by his daughter and son-in-law, and at one point the bookkeeper permanently disappeared. Certainly his daughter, son-in-law, his lawyer and his accountant[8] the alleged sources of misinformation could have been subponaed to give evidence. None were called.
[17] His assertion he was an outside director is significantly qualified in that (i) he was the principal investor, (the investment was 75% of his personal resources); (ii) the corporation was operated from the home of his daughter and son-in-law of which the Appellant was the owner and landlord; and (iii) the business operation was approximately 10 minutes from the Appellant's own home. Further, he was in receipt of financial reports from Kootenay for 1995, and he was the guarantor of the corporation institution loans as well as he was the source from time to time for funds to continue the corporate life of Kootenay. He was not an outside director.
CONCLUSION
[18] I conclude, the Appellant from his evidence did nothing in terms of due diligence to ensure source deductions were remitted after the corporation commenced business. He said he relied on his daughter, son-in-law, the bookkeeper and the accountant. He says he was intimidated by his daughter and son-in-law and yet in the face of this intimidation he still provided continuing funds. He said the documents provided to him misled him, yet he knew from July 1995 there was a source deduction problem (Exhibit A-1). The Appellant's claim that the Kootenay operation was secondary to other matters in his life may well have been true but the legal obligations of a corporate directorship were not extinguished by these personal factors.
[19] The Appellant did not exercise the degree of care, diligence and skill to prevent the failure to remit by Kootenay that a reasonable prudent person would have exercise in comparable circumstances.
DECISION
[20] The appeal is dismissed.
Signed at Ottawa, Canada, this 18th day of June 2001.
"D. Hamlyn"
J.T.C.C.
COURT FILE NO.: 2000-3764(IT)I
STYLE OF CAUSE: Bruce G. Lockhart and
Her Majesty the Queen
PLACE OF HEARING: Castlegar, British Columbia
DATE OF HEARING: May 31, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge D. Hamlyn
DATE OF JUDGMENT: June 18, 2001
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Johanna Russell
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-3764(IT)I
BETWEEN:
BRUCE G. LOCKHART,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 31, 2001 at Castlegar, British Columbia, by
the Honourable Judge D. Hamlyn
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Johanna Russell
JUDGMENT
The appeal from assessment number 11922 dated June 10, 1999 issued pursuant to section 227.1 of the Income Tax Act is dismissed.
Signed at Ottawa, Canada, this 18th day of June 2001.
|
"D. Hamlyn" |
J.T.C.C.