Date: 20010619
Docket: A-763-99
CORAM: LINDEN J.A.
BETWEEN:
ALEXANDER BRUCE CAMERON
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
Heard at Calgary, Alberta on Monday, June 18, 2001.
JUDGMENTdelivered at Calgary, Alberta on Tuesday, June 19, 2001.
REASONS FOR JUDGMENT BY: LINDEN J.A.
Date: 20010619
Docket: A-763-99
Neutral Citation: 2001 FCA 208
CORAM: LINDEN J.A.
ISAAC J.A.
MALONE J.A.
BETWEEN:
ALEXANDER BRUCE CAMERON
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
(Delivered from the Bench at Calgary, Alberta, on Tuesday, June 19, 2001)
LINDEN J.A.
The main issue in this case is whether the Tax Court Judge correctly held the appellant, a
director of a corporation, liable for the failure of the corporation to make certain tax remittances during his tenure in office, pursuant to subsection 227.1(1) of the Income Tax Act.
The appellant contends that the Tax Court Judge erred and that he is not liable for the
failure to remit because he exercised due diligence with regard to his responsibilities in accordance with subsection 227.1(3) which reads:
227.1 (3) 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 circumstance.
In our respectful view, the Tax Court Judge did not correctly apply the jurisprudence of
this Court as outlined in Soper [1998] I.F.C.R. 124; Smith [2001] F.C.J. 448; Worrell [2000] F.C.J. 1730, and Corsano [1999] 3 F.C. 173. First, he appears to have held the appellant to a stricter standard of care than the statute and jurisprudence require. He stated that the appellant had a "duty to prevent defalcation (default, according to the brief of the Crown) under the circumstance." That is not the law; his duty was only to use reasonable care to prevent defalcation (or default). As Justice Sharlow explained in Smith, supra;
"A director is required only to act reasonably in the circumstance. The fact that his efforts are unsuccessful does not establish that he has failed to act reasonably."
She concluded that the standard is reasonableness, "not perfection."
Moreover, the Tax Court Judge held that the appellant took "no positive action to set up
or place into existence controls to account for remittances and the ongoing use of any controls." Although the appellant made "some efforts to protect Revenue Canada's arrears", he said, these were "immaterial." Here too, however, he erred, because, although positive steps are required of directors, they need only be reasonable, positive steps, not foolproof ones.
According to these principles and based on largely uncontested facts, the appellant, in our
view, complied with his legal obligation under sub section 27.1(3), that is, the objective-subjective standard to act as a reasonably prudent person would have in the circumstance of this case.
True, the appellant was a lawyer, but his role as a director of the corporation was
primarily to help raise money for it through a public offering. He was not a hands-on person involved in the day-to-day operation of the company, but he was concerned mainly with general policy. He was not a signing officer and had only limited influence on management. He was, therefore, more an outside director than an inside one. While these facts certainly do not exempt him from his legal obligation, something he himself recognized, they are relevant matters in assessing whether he behaved in a reasonably prudent manner.
Let us look more closely at his conduct. Early in his tenure of office, and on many
occasions thereafter, the appellant, because he was aware of some problems, frequently asked management about the status of the tax remittances and he was always assured that they were in order. He unwisely relied on these false assurances; in fact, the remittances were not in order as management professed.
In September of 1994, documentary evidence emerged to demonstrate that management
had not been truthful and that past remittance amounts were still owing and that current obligations were still not being met. Included in this documentation were an auditor's report, draft financial statements, and a letter from Revenue Canada dated September 19, 1994 to the effect that arrears of $205,000 were owing.
As a result of this, the appellant, Cameron, and his fellow directors decided to appoint
Mr. McArthur, an accountant who had done a report about the corporation's financial status, as a director of the company and Chief Financial Officer to correct and oversee these matters. In addition, a certified management accountant, Mr. Solomon was appointed to be specifically responsible for remittance compliance. As a result of these efforts, it appeared as though matters were brought under control and that remittances were being made as required by law.
In addition, as part of this clean up operation, on September 28, 1994 an assignment
agreement was entered into between the corporation and Revenue Canada, whereby the expected proceeds of a fire insurance claim with the Zurich Insurance Company were assigned to Revenue Canada up to an amount $215,000 in return for the assignee's agreement not to take steps to enforce the debt owing, that is a"standstill agreement".
A further step was later taken by the Board of Directors on March 23, 1995 to set aside
monies as a second potential source for paying the overdue remittances. Out of the monies received from the public offering $213,000 was earmarked to repay the Alberta Opportunities Corporation and the arrears of source deductions. None of these funds were to be disbursed with out the written authorization of one of the outside directors, which included Mr. Cameron.
At the meeting, however, it also became known that there were arrears of $25,000 in
current source deductions. The Board directed that these arrears be paid immediately. The Board decided to meet again on April 12, 1995.
It was at the April 12, 1995 meeting that the appellant and the other board members
learned that the $25,000 had not been paid as ordered. A cheque had been issued, but it was returned N.S.F. Another cheque covering the amount was later issued for $38,703.09 on May 4, 1995. Surprisingly, the April 12, 1995 board meeting was mistakenly told that the source deductions were current.
At this same April 12 meeting, the appellant learned that management had not complied
with the board's direction to protect $213,000 from the proceeds of the public offering and that $113,000 of it had been spent without the consent of any outside director. This caused Mr. McArthur to resign from the Board. The appellant understandably became angry, decided to resign that evening and eventually did resign as of June 6, 1995.
These uncontested facts indicate that the appellant was not passive. He did as much as he
could reasonably be expected to do in order to protect the interests of Revenue Canada. He may not have been as attentive, as skeptical and as assertive as he might have been, especially in allowing himself to be misled by management. But it is not easy to see what more he was required to do in the circumstances to comply with his director's duty to be reasonably prudent in the circumstances.
In the light of this conclusion, there is no need to deal with the issues concerning the
allocation of the various amounts received by Revenue Canada from the corporation and the other various sources.
The appeal should be allowed, with costs, and the assessment should be vacated on the
basis that the appellant met the standard of due diligence required of him in these circumstances, according to subsection 227.1(3) of the Income Tax Act.
"Allen M. Linden"
J.A.
FEDERAL COURT OF APPEAL
Date: 20010619
Docket: A-763-99
BETWEEN:
ALEXANDER BRUCE CAMERON
Appellant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-763-99
STYLE OF CAUSE: Alexander Bruce Cameron v. Her Majesty The Queen
PLACE OF HEARING: Calgary, Alberta
DATE OF HEARING: June 18, 2001
REASONS FOR JUDGMENT BY (Linden J.A., Isaac J.A., Malone J.A.)
CONCURRED IN BY: Linden J.A.
DATED: June 19, 2001
APPEARANCES:
Mr. Clarence J. Hookenson, FOR THE APPELLANT
Mr. Olivier Faldauer
Mr. Louis A.T. Williams FOR THE RESPONDENT
SOLICITORS OF RECORD:
Zenith Hookenson Vogel FOR THE APPELLANT
Calgary, Alberta
Morris A. Rosenberg FOR THE RESPONDENT
Deputy Attorney General of Canada