Date: 19991123
Dockets: 98-2659-IT-I; 98-2660-GST-I
BETWEEN:
HELEN WHITEHOUSE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
RIP, J.T.C.C.
[1] The issue in these appeals is whether Ms. Whitehouse is vicariously liable under the provisions of subsection 227.1(1) of the Income Tax Act ("ITA") and subsection 323(1) of the Excise Tax Act ("ETA") (Part IX) for the failure by Whitehouse & Brodmann Trucking & Excavation Limited ("Corporation") to remit to the Receiver General for Canada source deductions in respect of wages paid to its employees and net Goods and Services Tax ("GST") respectively, including penalties and interest.
[2] Subsection 153(1) of the ITA imposes a duty on employers to withhold taxes and other source deductions from an employee's salary and remit such amounts to the Receiver General for Canada. Subsection 227.1(1) of the ITA makes the directors of a corporation that failed to remit amounts jointly and severally liable with the corporation to pay the amounts and any interest and penalties. Corporate directors are freed of their joint and several liability for the corporation's non remittance of source deductions by subsection 227.1(3) if they can establish that they "exercised a degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances". Section 323 of the ETA is analogous to section 227.1 of the ITA; subsection 228(2) of the ETA requires a person to file a return under Division V of Part IX of the ETA to remit an amount of net GST to the Receiver General for Canada.
[3] The Corporation was incorporated in 1994 by the appellant, Mr. Martin Brodmann and Mr. Kevin Whitehouse, the appellant's son. Each held one share in the Corporation. Mr. Brodmann was a director and president; the appellant was a director and secretary. Mr. Kevin Whitehouse was neither an officer nor a director.
[4] When the Corporation was incorporated, it acquired the equipment and trucks used by the appellant's former husband in the business of road construction and excavation. The Corporation also assumed Mr. Whitehouse's debt originally incurred to purchase the equipment. (Mr. Whitehouse and the appellant were divorced in 1994.) Ms. Whitehouse had personally guaranteed loans of approximately $10,000 taken by Mr. Whitehouse with a credit union to purchase the equipment. The company also borrowed money from the Bank of Nova Scotia and Ms. Whitehouse guaranteed the loan.
[5] One of the reasons Ms. Whitehouse assisted in incorporating the Corporation was to insure her son's employment in a job he enjoyed. Mr. Kevin Whitehouse had been employed by her former husband's business and she "feared" her son would be unemployed. Apparently, Ms. Whitehouse's former husband had been having "difficulty" with the business and "it looked like the company would fail". As well, Ms. Whitehouse wanted to ensure that there was a source available to repay the loan to the credit union.
[6] Ms. Whitehouse knew Mr. Brodmann as a result of her husband performing certain services for Mr. Brodmann. Mr. Brodmann carried on a "road development and land development" business. Mr. Brodmann moved to Nova Scotia from Switzerland in about 1991. According to Ms. Whitehouse he had "overseas contacts" and could give the Corporation development work. Ms. Whitehouse had met Mr. Brodmann soon after his arrival in Nova Scotia and they became friends.
[7] Ms. Whitehouse has been employed for over 31 years by a manufacturer of hardboard and at the time of trial was that company's Human Resources Manager. That company has 350 employees. The appellant is in charge of administering employee benefits and recruitment, among other things. Hers is a full time job and she had neither the interest nor the inclination to become involved in the business of the Corporation. She was a director of the Corporation but, she insisted, she had no duties.
[8] The only reason the appellant was "on paper" and was named director of the Corporation was to make sure her son would have work and she did not lose any money on the equipment acquired by the Corporation from her former husband. She was not involved in the "day-to-day" business of the Corporation, she never attended any directors meetings, if any were held, and she was never consulted by management.
[9] The Corporation's business was managed by Brodmann Management, either a sole proprietorship carried on by, or a corporation owned by, Mr. Brodmann. Brodmann Management was responsible for the day-to-day operations of the Corporation, including all dealings with customers and employees. Mr. Brodmann had sole cheque signing authority for the Corporation, the appellant assumed at trial. She stated she did not know where the Corporation maintained its regular bank account.
[10] Ms. Whitehouse had no knowledge of the Corporation's failures to remit source deductions and GST until she was assessed in December 1996. She was unaware that the Corporation was in arrears to Revenue Canada before December. When she confronted Mr. Brodmann, he told her, she testified, not to worry: the bills would be paid. She never asked specific questions to Mr. Brodmann concerning payment of source deductions or GST. She assumed Brodmann Management was current with the payments. When she asked Mr. Brodmann or her son how things were going, she said she was told "things were good".
[11] The Corporation had ceased operations during the first quarter of 1996. As far as Ms. Whitehouse had been aware, the Corporation was "selling off" its equipment to pay off the bank loan. In March 1996, she resigned as director because she "wanted to stop being part" of the Corporation. She was not at the time aware of her potential statutory tax liabilities. In April 1996, the Bank of Nova Scotia sued Ms. Whitehouse, as well as her former husband, to recover on its loan.
[12] Before 1994, Ms. Whitehouse had not been a director of any corporation. She had no idea of what a director's responsibilities were, or what a director's liability was under the ITA and ETA. She never made any inquiries of her responsibility as director. As director she did not think she had to do anything since Brodmann Management was managing the Corporation.
[13] Ms. Whitehouse acknowledged she knew a corporation had to withhold and remit source deductions and pay GST.
[14] The appellant knew little, if anything, about Mr. Brodmann's business. Mr. Brodmann did prepare financial projections for the Corporation before commencing business and, Ms. Whitehouse stated, these projections were used to obtain the loan with the Bank of Nova Scotia that Ms. Whitehouse guaranteed.
[15] Respondent's counsel relied on the reasons for judgment in Stuart v. M.N.R.,[1] where a wholly passive and unassertive taxpayer who never inquired about the responsibilities of directors was liable under section 227.1 of the ITA. The trial judge referred to Black v. The Queen[2] for the proposition that nothing in the language of section 227.1 suggests the existence of a legislative intention to offer relief to a director who fails to act because he or she is ignorant of and indifferent to his or her responsibilities and those of the company.
[16] Counsel for both parties referred the Court to Soper v. The Queen[3] where Robertson J.A. summarized his findings in respect of subsection 227.1(3) of the ITA as follows:
29. ... 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).
30. 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".
[17] It is quite obvious that Ms. Whitehouse was an "outside director". The affairs of the Corporation were being run by Mr. Brodmann and I doubt he would have tolerated any interference by Ms. Whitehouse who had no experience in the business, notwithstanding that she was a Human Resource Manager responsible for employee benefits, among other things, for her employer's 350 employees.
[18] Ms. Whitehouse knew very little of Mr. Brodmann's business and did not believe it was necessary to make any inquiries. She considered themselves friends and, rightly or wrongly, relied on his purported expertise and contacts to give him full rein to operate the Corporation. She placed her full confidence in Mr. Brodmann and she knew that source deductions and GST had to be paid regularly. She never inquired if these payments where being made as required. Ms. Whitehouse was satisfied with the reply that all was well when she would make a general inquiry.
[19] 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.[4] An entirely passive approach on the part of a director may not help that director's defence of an assessment but, unless there is 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.[5] A director of a company who never put his or her mind to exercise his or her duty to prevent the company from failing to remit source deductions and pay GST as required by section 227.1 of the ITA and section 323 of the ETA respectively and has remained completely uninterested and passive with respect to his or her duty is going to be vicariously liable for the payments required to be made by the company.[6]
[20] Both counsel also discussed the reasons in Hevenor v. Canada.[7] In Hevenor an elderly taxpayer became the sole director of his son's corporation as a favour for his son. He did not fully understand his responsibilities and liabilities as a corporate director and was not involved in the decisions or operations of the company. Had he been shown financial statements, he would not understand them. His degree of care as a director was limited by his lack of skill and his appeal from an assessment pursuant to section 323 of the ETA was allowed.
[21] In many ways Ms. Whitehouse finds herself in the same situation as Mr. Hevenor did: both were directors as a favour for their children, both assisted in financing the particular business, neither was involved in the day-to-day operations of the business, neither company appears to have had any meetings of shareholders or directors, neither parent knew of an impending financial crisis, neither parent was aware of the liabilities and responsibilities of a director. On the other hand Ms. Whitehouse knew that source deductions had to be paid on a regular basis and that GST was payable.
[22] I cannot accept the respondent's submission that Ms. Whitehouse was "more comfortable in the business world" than Mr. Hevenor could be said to be and "possessed a capacity for greater understanding of business matters" than Mr. Hevenor. Ms. Whitehouse's so-called business experience was as an employee of a company. She was an administrator, not a business woman who made decisions. She simply executed the work assigned to her. My impression of her is that she was probably a valued employee for what she did but no more. Ms. Whitehouse was not a person who made decisions or developed her employer's policies.
[23] Ms. Whitehouse's ignorance was not deliberate and did not result from wilful negligence. She was a mother who, like Mr. Hevenor, wanted the best for her son and relied on a person she respected to operate a business that would hopefully pay the debts assumed and benefit her son. She acted as most mothers would act in similar circumstances. There is no evidence that Ms. Whitehouse's lack of experience as a director and her ignorance of what the office of director entailed could have been remedied by her experience as an employee of her employer. I cannot find that her situation is so different from Mr. Hevenor.
[24] The appeals are allowed and the assessments are vacated. The appellant is entitled to her costs for preparation of the notices of appeal but only one set of costs for preparation and conduct of the hearing and taxation, if any.
Signed at Ottawa, Canada, this 23rd day of November 1999.
"Gerald J. Rip"
J.T.C.C.