Neutral citation: 2001 FCA 110
Coram: DESJARDINS J.A.
DÉCARY J.A.
NOËL J.A.
Between:
ANDRÉ VEILLEUX
Appellant
AND
HER MAJESTY THE QUEEN
Respondent
Hearing held at Montréal, Quebec
on Tuesday, April 3, 2001
Judgment delivered at Montréal, Quebec
on Friday, April 6, 2001
REASONS FOR JUDGMENT OF THE COURT BY: DESJARDINS J.A.
Date: 20010406
Docket: A-86-99
Neutral citation: 2001 FCA 110
Coram: DESJARDINS J.A.
DÉCARY J.A.
Between:
ANDRÉ VEILLEUX
Appellant
AND
HER MAJESTY THE QUEEN
Respondent
[1] The appellant, representing himself, is appealing a decision of the Tax Court of Canada (reported at (1999) 99 DTC 402, Pierre Archambault J.T.C.C.) that confirmed his liability as director of Les Entreprises Melateck Inc. (Melateck) for the sum of $39,239.18, representing deductions at source that should have been remitted to the Minister of National Revenue, from salaries paid to employees of Melateck from September 1994 to December 1994, with penalties and interest.
[2] The only issue is whether the judge below erred by finding that the appellant, as a director, did not exercise the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised under similar circumstances, as prescribed by subsection 227.1(3) of the Income Tax Act (the Act).
[3] Under subsection 227.1(3), which must be read in conjunction with subsection 227(1) of the Act, the director's personal liability under subsection (1) is not at stake when the director exercises the standard of care prescribed:
| 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. 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. (emphasis added) |
227.1(1) Responsabilité des administrateurs pour défaut d'effectuer les retenues -Lorsqu'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 VIII pour une année d'imposition, les administrateurs de la société, au moment où celle-ci était tenue de déduire, de retenir, de verser ou de payer la somme, sont solidairement responsables, avec la société, du paiement de cette somme, y compris les intérêts et les pénalités s'y rapportant. Idem - Un administrateur n'est pas responsable de l'omission visée au paragraphe (1) lorsqu'il a agi avec le degré de soin, de diligence et d'habileté pour prévenir le manquement qu'une personne raisonnablement prudente aurait exercé dans des circonstances comparables. (Je souligne) |
|
[4] The appellant was the sole shareholder and director of a company he founded in 1978 that manufactured melamine furniture. The cash flow problems experienced by the company from July to September 1994 were so significant that in October 1994, Melateck was informed by its banker that it had to find another bank with which to do business; it was also decided to transfer the supervision of the loans made to Melateck to a special unit of the bank's branch. Furthermore, the banker stated that he would monitor the company's account daily and would not hesitate to refuse to honour the company's cheques if its line of credit was overdrawn.
[5] The appellant argued orally that from that time forward, the bank's representative, Mr. Cayer, was in charge of making the company's payments and handled all of its financial transactions; as a result, Mr.Veilleux had no choice but to comply with his bank manager.
[6] Nonetheless, the judge below stated the following in his reasons at paragraph 19:
Nor is there any evidence that the bank prevented Melateck from paying the Minister.
1. Evidence
[7] The evidence shows that the bank was not in charge of cheques that were already drawn. At the hearing, the bank's representative, Mr. Cayer (Appeal book, volume I,
pp.159-160), testified as follows:
[TRANSLATION]
Q. As for the cheques, I will rephrase my question. How were the cheques drawn? Was the bank in charge of cheques previously issued to pay employees or suppliers, for example?
A. No, it was not as though we would monitor and authorize each individual cheque. It wasn't like that. That is what is called a "receivership." We, on the other hand, would go over things at the end of the day. The situation had to improve. If he thought there was no chance of improving it, he would not draw cheques. It was that simple.
[8] As for source deductions, at issue in this case, Mr. Cayer added the following (Appeal book, volume I, p. 166):
[TRANSLATION]
Q. Alright. Now, what was the nature of your agreement with
Mr. Veilleux concerning the remittance of source deductions to the government?
A.I had no agreement with him.
Q. You had no agreement with him. Did you refuse to issue any cheques?
A. As I said before, I don't remember. I would have to check the records, but I don't remember.
[9] Claude Morrissette, the accountant, explained that Mrs. Boisvert, the appellant's wife, was in charge of writing out the cheques, but that her husband decided which creditors to pay. He stated the following (Appeal book, volume II, pp. 247-248):
[TRANSLATION]
Q.Can we say that it was Mrs. Boisvert who wrote out and signed the cheques as you had instructed. Did she decide whether or not to mail out the cheques?
A. No. She would write out a series of cheques. At first, in September or early October, I let her decide. Afterwards, it was no longer up to her to decide. The rules were very clear. She knew . . .
Q. What instructions did you give her?
A. Well, I told her, "Don't mail these ones, we can't." We can't mail them out because we called and it was out of the question.
Q. In other words, did you tell her, "Don't mail out the DAS cheques, we can't afford it." Is that how it was?
A. She was only allowed to issue two types of cheques: paycheques and cheques to suppliers. So long as the bank's position was not jeopardized.
Q. In other words, as of September, you said to your wife: "Don't mail out the DAS cheques, it's pointless?"
R. That's right, as of mid-October. That's right, mid-October. Because we wanted to avoid, Ma'am, we were still hoping to salvage the business, so we could not afford to have cheques bounce.
[10] The appellant wanted to salvage his business at all costs. He even withdrew $80,000 from his registered retirement savings plan to invest in the company. He had difficult choices to make concerning which of Melateck's creditors to pay. As he himself stated (Appeal book, volume II, pp. 271-273):
[TRANSLATION]
Q. Were you aware that the company was still required to withhold source deductions on employees' salaries?
A. Yes, I was aware of that.
Q. But you were unaware that you could be held personally liable?
A. That's right. And it's not just a question of being liable or not. There were many people around who had also provided services to me, be it Perry, Goodfellow, Kenmade, Richelieu, . . . lots of suppliers. It wasn't only one person. These people become your friends when you've dealt with them for . . .
Q. Were those your suppliers?
A. My suppliers. Who were my suppliers?
Q. That's right.
A. They were all friends of mine. I was stiffing them all. I don't know. It wasn't only the government that had been my . . . It's understandable for the government to put pressure on me. But myself, I didn't think I only owed the government. I saw all those that had helped build the company for 16 years - we had some good years despite everything, you know! So, as for those people, you can't overnight just . . . I couldn't see how the whole picture would turn out until December came along. In December, that's when I realized.
Q. That?
A. I realized that the situation was taking a serious turn and that I had to come up with other solutions.
Q. And when Mr. Morrissette made the decision whether or not to pay such and such a person . . .
A. I would ask permission to buy lumber. I would say "Claude, could I have four or five grand ($4000-5000)? I need to pick up a hundred or so sheets of wood. I would ask for permission.
Q. And did Mr. Morrissette discuss his decision not to pay the Minister with you?
A. Not at all.
Q. He didn't consult with you on that. He never mentioned that you could be held liable?
A. Personally?
Q. Yes.
A. No.
[11] The testimony reveals that the banker had not prevented Melateck from paying the Minister. The decision as to which creditor should get paid was made by the appellant and those who helped run his business.
2. Analysis
[12] In Soper v. Canada, [1998] 1 F.C. 124 (C.A.); [1997] F.C.J. No. 881 (QL), Robertson J.A. of this Court noted that before section 227.1 came into force, it was not uncommon for directors to prefer paying creditors whose goods and services were essential to continue the company's operations rather than to remit source deductions to the Minister of National Revenue. The directors' abuse and mismanagement contributed to the enactment of section 227.1 of the Act.
[13] Subsection 227.1(3) establishes both an objective and subjective standard of care (Soper v.Canada, [1998] 1 F.C. 124 (C.A.) and [1997] F.C.J. No. 881 (QL). In this case, the judge below found that the appellant knew or should have known that it was important to remit source deductions to the Minister. The appellant had 16 years experience as sole shareholder and director of Melateck. Even though he had only a Grade 11 eduction, he had worked in business for many years. He had previously experienced financial difficulties in 1984, and this lead him to postpone the remittance of source deductions owed by Melateck to the Minister. He had paid arrears afterwards.
[14] By 1994, the appellant was aware of the company's financial difficulties. He sought new sources of financing. Even though Mr. Morrissette admitted that
Mr. Veilleux was mainly in charge of production and sales and was not involved in deciding which creditors Melateck would pay (see paragraph 8 of the reasons for judgment below), the appellant failed to take the steps as a director to ensure that source deductions were remitted.
[15] The appellant was also under a duty to anticipate and prevent the failure to pay the sums owing, and that was not done. (Canada v. Corsano, [1999] 3 F.C. 173 (C.A); Ruffo v. Minister of National Revenue (F.C.A. A-429-97, April 13, 2000) and Worrell v. Canada, [2000] F.C.J. No. 1730).
[16] In this case, given the bank's neutral role and the choices made by the appellant and those involved in the company's management, I am of the view that the finding of the judge below at paragraph 23 of his reasons was well-founded:
In the case at bar, the evidence clearly shows that the bank did not decide which of Melateck's creditors were to be paid. There is no evidence that the bank ever refused to honour a cheque to the Minister for the payment of source deductions and employment insurance premiums. The bank honoured all cheques, provided that there were sufficient bank deposits to cover them. The evidence also shows that it was Melateck and more particularly Mr. Morrissette that decided which creditors were to be paid. It is quite obvious that Melateck had little room to manoeuvre and could not expect all its cheques to be honoured if it paid each of its creditors. It therefore had to make a choice, and the Minister was not one of its important creditors. It was precisely to prevent such a situation occurring that section 227.1 of the Act was enacted. Having decided to pay its employees their wages, Melateck had to remit the corresponding source deductions and premiums under the UIA to the Minister. Since he did not take the necessary steps to prevent the failure to fulfil that obligation, Mr. Veilleux cannot escape the liability that results from subsection 227.1(1) of the Act.
[17] I would dismiss the appeal with costs.
Alice Desjardins
J.A.
I concur.
Robert Décary, J.A.
I concur.
Marc Noël, J.A.
Certified true translation
Sophie Debbané, LL.B.
FEDERAL COURT OF CANADA
APPEAL DIVISION
Date: 20010406
Docket: A-86-99
Between:
ANDRÉ VEILLEUX
Appellant
AND
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
OF THE COURT
Date: 20010406
Docket: A-86-99
MONTRÉAL, QUEBEC, THE 6th DAY OF APRIL 2001
Coram: DESJARDINS J.A.
DÉCARY J.A.
NOËL J.A.
Between:
ANDRÉ VEILLEUX
Appellant
AND
HER MAJESTY THE QUEEN
Respondent
JUDGMENT
The appeal is dismissed with costs.
Alice Desjardins
J.A.
Certified true translation
Sophie Debbané, LL.B.
FEDERAL COURT OF CANADA
APPEAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-86-99
STYLE OF CAUSE: ANDRÉ VEILLEUX
Appellant
AND
HER MAJESTY THE QUEEN
Respondent
PLACE OF HEARING: Montréal, Quebec
DATE OF HEARING: April 3, 2001
REASONS FOR JUDGMENT BYTHE HONOURABLE DESJARDINS J.A.
DATED: April 6, 2001
APPEARANCES:
André Veilleux FOR HIMSELF
Janie Payette FOR THE RESPONDENT
SOLICITORS OF RECORD:
Morris Rosenberg
Attorney General of Canada
Ottawa, Ontario FOR THE RESPONDENT