Date: 19991223
Docket: 1999-959-IT-I
BETWEEN:
CHARLES ARTHUR WRIGHT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Mogan J.T.C.C.
[1] The Appellant is a businessman who lives in Saskatoon. Over a period of more than 20 years, he has controlled and operated a number of corporations engaged in business. The issue in this appeal is whether the Appellant, as a director of one of his corporations, is liable under section 227.1 of the Income Tax Act because the corporation failed to remit a certain amount to Revenue Canada. In the assessment under appeal, the Appellant is required to pay the following amounts resulting from failure to remit in the period January 1 to December 31, 1992:
Federal Tax $ 5,267.73
Provincial Tax 3,580.01
Penalty and Interest 5,005.71
Total $13,853.45
The Appellant has elected the informal procedure.
[2] The circumstances in this appeal arise out of a project which had been developed in Prince Albert in the period 1991 and 1992. The Appellant was the only witness to testify and he described the construction of what he called a SuperStore in Prince Albert. The general contractor was The Dominion Company Inc. ("Dominion"), a corporation which apparently was not connected or affiliated in any way with the Appellant or any of his companies. I drew the inference from the Appellant’s evidence that the Appellant and his companies were totally at arm's length with Dominion. One of the Appellant’s corporations was identified as Renex Enterprises Ltd. ("Renex") engaged in the batching and delivering of redi-mix concrete. Jim Marshall was the comptroller of the Appellant’s companies and either the Appellant or Mr. Marshall was authorized to sign cheques for the operating companies.
[3] At the start of the SuperStore project in Prince Albert, Renex was one of the original subcontractors providing redi-mix concrete to Dominion. After the project commenced, Renex was forced into bankruptcy and was unable to continue to supply the concrete. According to the Appellant, Dominion attempted to obtain concrete from other sources but, being in the middle of a project and turning to other sources, Dominion was being overcharged for regular concrete. I drew the inference, although the Appellant did not say this, that the redi-mix concrete suppliers in the Prince Albert area were holding Dominion to ransom more or less because it was in the middle of a project and they had not signed on as the original concrete subcontractors. There is no evidence to that effect, but that was an inference I drew from the Appellant’s description of events.
[4] When Dominion concluded that it was being overcharged, it turned to the Appellant and asked him if there was some kind of arrangement which could be worked out to provide concrete to Dominion at a more favourable price. According to the Appellant, the workers who had been employed by Renex were still available because they had been put out of work when Renex went into bankruptcy and they were known to the Appellant or his manager. He suggested to Dominion that the workers who used to batch and deliver the concrete were available and unemployed, but of course the Appellant’s company, Renex, could not engage in any business because it was bankrupt.
[5] An arrangement was worked out between the Appellant and Dominion whereby the Appellant would either provide the names of the former workers of Renex or contact them himself; and they would become employed by Dominion or Dominion would at least pay them and obtain the raw materials for concrete, (i.e. cement, sand and gravel). One of the Appellant’s other companies, Arlo Investments ("Arlo"), happened to own a property in Prince Albert with a concrete batching plant which was idle at the time. It seemed a natural fit then that if the concrete plant on the Arlo property could be put into operation and if Dominion could find people who knew how to mix, batch and deliver concrete, an arrangement with Dominion could be worked out. The arrangement was actually put into place and confirmed by a letter dated February 17, 1992 from Dominion to Renex and Arlo (Exhibit A-1). It appears that Arlo is a holding company which owns all the shares of Renex and the Appellant is a principal shareholder in Arlo. Also, the Appellant was the sole director of Renex at all relevant times.
[6] Exhibit A-1 is interesting because it is a letter addressed to both Renex and Arlo to the attention of Mr. Art Wright and it sets out the arrangements entered into between Dominion and the Appellant's two companies, Renex and Arlo. The letter states in part:
RE: SUPERSTORE, P.A.
CONCRETE SUPPLY
This letter will confirm our discussion with regards to supply of redi-mix concrete to the subject project, to the following terms and conditions.
1. That Arlo Investments will provide a lease for the property and a full and operative redi-mix concrete plant capable of supplying The Dominion Company Inc. (hereinafter known as Dominion) required concrete quantities, to Renex Enterprises Ltd., which will in turn supply the required concrete quantities as discussed (approx. 2000 m3, 20 mm, 25 mpa).
2. The quantity price per m3, as per Northern Concrete's quote dated Oct. 7, 1991, and our previous purchase order #510577 with Northern Concrete, will be $73.13 for concrete, $5.00 for heating, $21.00 for delivery, and $5.47 for pst. GST will be 7%.
3. Dominion will purchase the following for Renex Enterprises Ltd.'s use in the supply of redi-mix concrete to the subject project.
- purchase of cement from Ideal Cement Ltd., including all applicable taxes.
- purchase of sand from the trustee for Tru-Mix Ltd. at a normal industry cost of $8.00 per yd3, plus all applicable taxes.
DOMINION CONSTRUCTION
- payment of the normal utilities of natural gas, electrical, & water to operate the concrete plant for this project.
4. Renex Enterprises Ltd. will supply all necessary labour for operation & delivery of the redi-mix concrete, to the subject project and Dominion agrees to pay on approved labour statements from Renex Enterprises Ltd., with payment made directly to the individual employees on a 2 week pay period sequence.
5. The following "payment schedule example" will be used to pay Renex Enterprises Ltd.
The letter required testimony from the Appellant to make it understandable because there are terms in the letter which indicate that the author and the Appellant, as the recipient, understood certain circumstances which were taken for granted within the knowledge of both Dominion and Mr. Wright. In paragraph one, there is a statement that Arlo will provide a lease for the property and a full and operative redi-mix concrete plant capable of supplying Dominion. That of course was necessary because, on the Appellant's evidence, Arlo owned the concrete plant in Prince Albert. Paragraph two deals with the price per cubic yard of concrete to be delivered to the site with extra charges for heating, delivery and provincial sales tax. The third paragraph provides that Dominion will purchase the following for Renex's use in the supply of redi-mix concrete; and then it lists the purchase of cement and the purchase of sand and the payment of normal utilities. One can see that it is really the financial resources of Dominion which are bankrolling the operation because it is buying the supplies that will be necessary to produce the concrete.
[7] The fourth paragraph is most important because it states that Renex will supply all necessary labour for the operation and delivery of redi-mix concrete to the project and Dominion agrees to pay, on approved labour statements from Renex, with payment made directly to the individual employees on a two-week pay period sequence. That paragraph, according to the Appellant, meant what it said. The Appellant recruited the former workers of Renex; gave the list to Dominion; the batcher at Arlo's concrete plant in Prince Albert provided the time sheets to Dominion showing who had worked on certain days and what hours they had worked and what their pay would be; and Dominion paid those workers in accordance with paragraph four. That was the arrangement and the way the matter proceeded for a period of time. I am not sure how long but, at some point, that arrangement was changed and, while the project was still continuing, the workers whom Dominion had agreed to pay on approved labour statements from Renex were transferred from what I would call the payroll of Dominion to the payroll of Renex. I use the word "payroll" as my own. It was not used by the Appellant.
[8] The Appellant also entered Exhibit A-2 which is a fax dated March 4, 1992, approximately 15 days after the letter agreement of February 17, 1992. The fax was sent by Dominion to the Appellant and it states: "I assume from these rates we deduct UIC, CPP, etc., and no other benefits are payable other than the normal amounts. Please confirm." The Appellant confirmed that the fax was in agreement with his understanding of the letter agreement of February 17 (Exhibit A-1). Therefore, when the arrangement began, Dominion paid the workers and withheld the normal source deductions for unemployment insurance premiums, Canada Pension Plan contributions and income tax. There was some suggestion from the Appellant that the workers were transferred from Dominion to Renex at the insistence of Revenue Canada and counsel for the Appellant made that point in argument. I will come back to that later because I have doubts about the accuracy and relevancy of that statement.
[9] In any event, it is not disputed that at some time after March 1992, the workers came on the payroll of Renex and, for whatever reason, Renex paid the workers; withheld the source deductions; and certain of those source deductions were not remitted to Revenue Canada. That is the cornerstone of the assessment against the Appellant as the sole director of Renex. Under section 227.1 of the Income Tax Act, there are certain conditions which have to be satisfied before a director can be held liable and those conditions are primarily set out in subsection 227.1(2). The Appellant does not argue that any of those conditions was not satisfied. The only issue before the Court is whether the Appellant had satisfied the due diligence test in subsection 227.1(3). The Appellant is satisfied that he had done what any diligent director would do. Subsection 227.1(3) states:
(3) A director is not liable for a failure under subsection (1) where he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.
[10] There is a great volume of jurisprudence on the question of a director's liability. Many cases have come to this Court and it is a daunting task to synthesize them because they fall into different categories. The decision of the Federal Court of Appeal in Soper v. The Queen, 97 DTC 5407 offers useful guidance on certain areas of directors' liability. It is a unanimous decision and I rely on the following statement of Robertson, J.A. at page 5416:
... 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.
[11] The important words in subsection 227.1(3) are "care, diligence and skill", "a reasonably prudent person", and "comparable circumstances" because those words permitted Robertson J.A. to establish both an objective standard and a subjective standard. Those two standards lead me to find against the Appellant in this appeal. There are a number of cases which deal with inside and outside directors, and I am satisfied that the Appellant was an inside director because he was the only director and he had signing authority at the bank. He is an experienced businessman which identifies him as an individual with superior qualifications because he has owned a number of operating companies. Also, he employed a trusted person, Jim Marshall, as the comptroller of his companies. Either the Appellant or Jim Marshall could sign the cheques of the companies but the Appellant was the only director. Therefore, of necessity, I would say he was an inside director. Robertson J.A. stated at page 5417:
... I intend to focus on the category of cases respecting the distinction between inside and outside directors since that line of authority is the most pertinent to this appeal.
At the outset, I wish to emphasize that in adopting this analytical approach I am not suggesting that liability is dependent simply upon whether a person is classified as an inside as opposed to an outside director. Rather, that characterization is simply the starting point of my analysis. 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. 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.
[12] Relying on the above, I find that the Appellant failed to discharge the burden of showing that he had exercised due diligence. In fact, on the evidence before me, I find that the Appellant failed to demonstrate that he exercised any diligence at all. There was simply no evidence as to what happened when the workers were taken on by Renex as a liability to pay their wages. There was no evidence as to what happened to the source deductions or why they were not set aside and remitted to Revenue Canada. There was just a bland statement by the Appellant that he had been duly diligent. Much more is required of a man with his business acumen, a man who really made the deal with Dominion and who must have known, or ought to have known, that at some later time the workers were transferred from what I would call the payroll of Dominion to the payroll of Renex.
[13] In closing, I come back to a statement made by the Appellant that Revenue Canada was at fault for forcing the transfer of the workers from Dominion to Renex. The Appellant said that when he finally went to the offices of Revenue Canada (either after he was assessed as a director or after he received a letter indicating he was going to be assessed) somebody at Revenue Canada reviewed some documents or correspondence from which the Appellant drew the conclusion that Revenue Canada had forced the transfer of the workers from being paid by Dominion to being paid by Renex.
[14] Revenue Canada no doubt has a lot of clout in the assessment and collection of tax but, in terms of forcing one corporation to transfer the payment of workers to a totally arm's length corporation, I do not know how Revenue Canada could bring about that business result. I am not impressed with the rather vague statements of the Appellant that he drew that conclusion by watching some documents called up on a computer screen in a Revenue Canada office sometime long after the failure to remit the source deductions. Even if Revenue Canada could, by some means or other, persuade Dominion to transfer the workers to Renex (and there is no evidence that it did), I do not know how it would have any bearing on or any relevance to the obligations of Renex as a corporation making payments of salary and wages. I do not know how it could absolve Renex of the obligation to withhold and remit source deductions under section 153 of the Income Tax Act. I place no weight on this argument concerning Revenue Canada. For these reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 23rd day of December 1999.
"M.A. Mogan"
J.T.C.C.