Date: 20011003
Dockets: 1999-2147-IT-G,
1999-2152-IT-G, 1999-2154-IT-G
BETWEEN:
PATRICIA NICOL, ROBERT J. NICOL,
LINDSAY NICOL
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre, J.T.C.C.
[1] These appeals were heard on common evidence. The appellants are appealing assessments made against them by the Minister of National Revenue ("Minister") pursuant to section 227.1 of the Income Tax Act ("Act"). They are assessments for unpaid federal and provincial income tax and for Canada Pension Plan contributions and unemployment insurance premiums deducted at source but not remitted by R.J. Nicol Construction (1975) Ltd. ("the Corporation") for the 1992 taxation year and for the months of January and February 1993, and for penalties and interest relating thereto.
[2] Liability under section 227.1 of the Act has been analysed by the Federal Court of Appeal in Soper v. The Queen, 97 DTC 5407, where Robertson J. A. summarizes the situation as follows at page 5408:
. . . Subsection 153(1) of the Income Tax Act ("the Act")imposes a duty on corporations to withhold taxes and other source deductions from an employee's salary and to remit such amounts to the Receiver General of Canada. Subsection 227.1(1) of the Act makes a corporation liable for unremitted amounts while at the same time imposing joint and several liability on its directors. However, that obligation is tempered by subsection 227.1(3) which enables corporate directors to escape liability for non-remittance if they can establish that they "exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances."
[3] Section 227.1 reads as follows:
SECTION 227.1: Liability of directors for failure to deduct.
(1) 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.
4227.1(2)3
(2) Limitations on liability. A director is not liable under subsection (1), unless
(a) a certificate for the amount of the corporation's liability referred to in that subsection has been registered in the Federal Court under section 223 and execution for that amount has been returned unsatisfied in whole or in part;
(b) the corporation has commenced liquidation or dissolution proceedings or has been dissolved and a claim for the amount of the corporation's liability referred to in that subsection has been proved within six months after the earlier of the date of commencement of the proceedings and the date of dissolution; or
(c) the corporation has made an assignment or a receiving order has been made against it under the Bankruptcy and Insolvency Act and a claim for the amount of the corporation's liability referred to in that subsection has been proved within six months after the date of the assignment or receiving order.
4227.1(3)3
(3) 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.
4227.1(4)3
(4) Limitation period. No action or proceedings to recover any amount payable by a director of a corporation under subsection (1) shall be commenced more than two years after the director last ceased to be a director of that corporation.
4227.1(5)3
(5) Amount recoverable. Where execution referred to in paragraph (2)(a) has issued, the amount recoverable from a director is the amount remaining unsatisfied after execution.
4227.1(6)3
(6) Preference. Where a director pays an amount in respect of a corporation's liability referred to in subsection (1) that is proved in liquidation, dissolution or bankruptcy proceedings, the director is entitled to any preference that Her Majesty in right of Canada would have been entitled to had that amount not been so paid and, where a certificate that relates to that amount has been registered, the director is entitled to an assignment of the certificate to the extent of the director's payment, which assignment the Minister is hereby empowered to make.
4227.1(7)3
(7) Contribution. A director who has satisfied a claim under this section is entitled to contribution from the other directors who were liable for the claim.
Preliminary Issue
[4] The Corporation was duly incorporated under the Ontario Business Corporations Act. It was a family corporation of which the appellants -- father, mother and son -- were the sole directors. On December 18, 1992, the Corporation was petitioned into bankruptcy under the Bankruptcy Act by three of its creditors, and a Receiving Order officially declared the Corporation bankrupt on March 30, 1993. On May 17, 1993, which was within six months after the date of the Receiving Order, the respondent filed in the matter of the Corporation's bankruptcy proofs of claim with respect to the unremitted source deductions at issue in these appeals (see Exhibit R-1, Tab 1). It appears that those proofs of claim were accepted by the trustee in bankruptcy without any question. Although the appellants questioned the validity of the proofs of claim, I do not find that they have adduced any evidence proving their invalidity, and consequently, I am of the opinion that the condition imposed by paragraph 227.1(2)(c) has been complied with by the respondent.
[5] It must be pointed out here that the Corporation had two accounts during the period at issue and that the appellants have been assessed for an amount of $31,212.46 with respect to one and $25,925.81 with respect to the other, interest and penalties included. Counsel for the respondent has raised the point that those amounts included amounts of unremitted source deductions pertaining to the month of July 1993, which came to $5,393.66 for one account and $2,944.38 for the other one.
[6] As the Corporation was bankrupt in July 1993, the respondent no longer holds the appellants liable for those amounts and is ready to consent to judgment for that portion only of the unremitted source deductions (see Exhibit R-1, Tab 11).
[7] For the remaining portion, the respondent takes issue with the appellants' defence that they did exercise the degree of care, diligence and skill to prevent the Corporation's failure to remit the said amounts that a reasonably prudent person would have exercised in comparable circumstances.
Due diligence issue
[8] The evidence has revealed that the Corporation had been carrying out construction projects for more than 20 years before the bankruptcy. In those years, the Corporation was prosperous and, it seems, never defaulted in remitting source deductions from its employees' salaries. Mr. Robert Nicol was the directing mind and the president of the Corporation. In the 1980s, Robert Nicol began suffering from heart problems and his wife was then appointed as a director of the Corporation. His son, Lindsay, was also appointed as a director, on July 17, 1990 (Exhibit A-1, Tab 9).
[9] Ms. Patricia Nicol attended to all accounting and financial matters for the Corporation, while Lindsay Nicol was gradually vested with responsibilities with respect to the construction projects. In the years preceding the bankruptcy, Robert Nicol was still involved in the day-to-day management of the Corporation and still influenced the conduct of its activities to a certain degree.
[10] According to Patricia Nicol, the Corporation was a family affair and no meetings of the board of directors ever occurred. She informally discussed financial aspects with her husband but Robert Nicol was never involved in paperwork such as source deduction remittances. In Robert Nicol's own words, he did not have the time or the inclination to handle details like source deductions. When he was active in the corporation, he hired Ms. Doreen Paul as a financial manager to handle the source deductions.
[11] After the petition for bankruptcy was filed in December 1992, a deal was reached in early 1993 between the owners of the Corporation's uncompleted projects and Laurentian Casualty Insurance Co. for the completion of those projects. Laurentian Casualty Insurance Co. would act as the bonding company and would assume control of the projects to be completed. The Corporation was to remain as the general contractor for the projects, even though the project owners would be dealing directly with the bonding company.
[12] Patricia Nicol explained that from that point forward, she was not calling the shots anymore. She had to submit reconciliation sheets to the bonding company in order to receive money to pay the Corporation's employees. Although the bonding company was paying the subcontractors directly, the Corporation continued to be responsible for paying its own employees and remitting all source deductions.
[13] In January 1993 Patricia Nicol received a call from a trust examiner from Revenue Canada, as it was then called, informing her that he wanted to audit the Corporation with respect to source deductions. Since Ms. Doreen Paul, the employee in charge of making the payments for the Corporation, was on holidays for the month of January 1993, Ms. Nicol requested that the audit not be done before the return of that employee. The audit was completed on February 11, 1993 and, according to Ms. Nicol, the auditor told her that with the exception of the month of January 1993, all deductions at source were up-to-date. In actual fact, according to the testimony of Ms. Nicole Kirouac, a collection officer for Revenue Canada, there was a deficiency of $877 in tax remittances for 1992, in addition to which a penalty and interest were owed. The Corporation also defaulted on tax remittances for four weeks in January 1993 and one week in February 1993. In fact, the total amount assessed on February 11, 1993 came to approximately $60,000. Patricia Nicol said that there was no money in the Corporation's bank account at that time, and the trust examiner agreed to accept postdated cheques for the amount owed, which were to be cashed by Revenue Canada on March 15, 1993. On March 16, 1993, when the collection officer wanted to cash the cheques, he learned that Patricia Nicol had stopped payment on them. Patricia Nicol said that she issued a stop payment on the cheques on March 15, 1993 at the request of the bank, as there were not sufficient funds to cover them. (Apparently, that statement has not been corroborated by the bank.) Thereafter, according to Ms. Nicol, she was not able to contact the trust examiner before March 23, 1993, when, at her request, he agreed to wait until April 15, 1993 for the arrears for the month of January to be paid.
[14] It appears that in the meantime the bonding company had paid the sum of $188,711.50 into the Corporation's account on March 15, 1993. In her testimony, Patricia Nicol said that she issued the stop payment on the cheques before that money was deposited into the account. She claims that she was not aware on March 15 or on March 23, 1993, that that sum of money was put into the Corporation's account. In her words, this was not a significant amount of money compared to what she was used to dealing with.
[15] As she had reached another agreement with Revenue Canada, under which the arrears did not have to be paid until April 15, 1993, she did not see fit to inform Revenue Canada after that agreement that there was money in the Corporation's bank account. A Receiving Order was then issued against the Corporation and on March 31, 1993, the trustee in bankruptcy seized the Corporation's bank account; consequently, the payment was never made to Revenue Canada.
[16] Patricia Nicol claims that, as soon as the bonding company took over the operations of the Corporation at the beginning of 1993, she lost control over all payments to be made by the Corporation. She claims that in the circumstances she could not do more than she actually did to exercise the required degree of care, diligence and skill to prevent the failure to remit the source deductions.
[17] She also claims that if Revenue Canada had moved earlier to collect the arrears, the Corporation would not have been delinquent in its remittances, nor would its directors be liable today. Indeed, it appears that the bank seized the funds in the corporation's account without previously obtaining her consent or the consent of the Corporation's auditors, thus contravening a forbearance agreement between the bank and the Corporation that was to expire on October 1, 1993.
[18] On that second point, I do not see how Revenue Canada could have collected its arrears after the Receiving Order was made on March 30, 1993. Revenue Canada filed proofs of claim as required, but all the money was seized by the trustee in bankruptcy who was thereafter in possession of the estate of the bankrupt. Prior to the Receiving Order, Revenue Canada was specifically requested by Ms. Nicol to wait until April 15, 1993 to collect the arrears. She herself stopped payment on the cheques made out to Revenue Canada to be cashed on March 15, 1993. In so doing, Ms. Nicol was giving priority to the bank to the detriment of Revenue Canada. Clearly, she was in a position to give preference to the payment to Revenue Canada but deliberately chose not to do so.
[19] With respect to the due diligence defence, the appellants had a positive duty to act to prevent failure to make current and future remittances and not just simply cure any default after the fact (see The Queen v. Corsano et al., 99 DTC 5658, at page 5667 (F.C.A.) and Soper, supra, at page 5417).
[20] I do not think it was shown that this positive duty was carried out, at least in the case of Ms. Patricia Nicol and Mr. Robert Nicol, who were well aware of the problems. Indeed, Mr. Robert Nicol said that he relied on Ms. Doreen Paul and on his wife to make the remittances. Ms. Paul was away on holidays in January 1993. Did the Corporation's liabilities then cease because one employee was on holidays? Obviously not! The Nicols had been in business for more than 20 years. They had stopped paying some of their creditors since the month of June 1992, as specified in the Receiving Order (Exhibit R-1, Tab 2). Although, there was a petition in bankruptcy, they reached an agreement with the bonding company to remain as the general contractor for the projects still to be completed. They knew their obligations towards their creditors and towards Revenue Canada. Patricia Nicol said that the money was put into the Corporation's account on acceptance by the bonding company of proof, provided by the Nicols, of the payments (referred to by Ms. Nicol as "reconciliation payments"), including source deduction payments, that had to be made by the Corporation. When the money was put into the Corporation's account, only the Nicols had control over it. Indeed, it was neither the bank nor the bonding company but Ms. Patricia Nicol herself that issued on March 15, 1993 the stop payment on the postdated cheques made out to Revenue Canada. Furthermore, an amount of $188,711.50 was deposited in the Corporation's account on March 15, 1993. I find it strange that Ms. Nicol, who spoke to the trust examiner on March 23, 1993, did not inform Revenue Canada that there was money in the bank account at that time. Her explanation that she was not aware on March 23, 1993 that amounts had been deposited into the Corporation's bank account is simply unbelievable and does not stand up. After all, she and her husband were the signing officers with respect to the Corporation's bank account. In that context, I find that the agreement supposedly reached with the trust examiner to postpone payment to April 15 cannot be relied upon as a defense by the appellants. Rather, I find that the way the Nicols acted indicates that they gave precedence to other creditors (such as the bank), and as directors they must be held jointly liable with the Corporation for their failure to remit the source deductions pursuant to section 227.1 of the Act. Although there were only a few remittance payments that were not made, this does not discharge the directors from their duty to act positively to prevent the failure to remit source deductions.
[21] With respect to Lindsay Nicol, I am ready to give him the benefit of the doubt. The evidence reveals that he was appointed as a director in 1990 following the illness of his father but was not really involved in the business decisions. Ms. Doreen Paul confirmed that Lindsay was not consulted on financial aspects of the business. No questions were asked in cross-examination concerning Lindsay's education or background or even regarding his age at the time of the bankruptcy. Lindsay said that he was young and that he was just doing what his parents told him to do. He gradually learned to work on construction projects but was obviously not the directing mind behind the business operations. He was not the one who influenced the conduct of the Corporation's affairs. Although he was asked to sign, in the bankruptcy proceedings, a document providing assurance that all accounting documents and records of the appellants would remain intact, I do not find that this is proof of an active role played by Lindsay. He was asked to sign because his name appeared as a director, and again, he signed at the request of his parents. Furthermore, although it was not filed with the Ontario Ministry of Consumer and Commercial Relations, Lindsay had signed a letter of resignation from his directorship in 1992. Although I will not consider that resignation as official, it is an indication, in my view, that Lindsay had limited influence on the corporate management of the business.
[22] For these reasons, I am of the opinion that Lindsay Nicol should not be held jointly and severally liable with the Corporation for the unremitted source deductions. The appeal of Lindsay Nicol is allowed and his assessment is vacated.
[23] The appeals of Patricia and Robert Nicol are allowed only to the extent of taking into account the amounts on which there was consent by counsel for the respondent at the beginning of the hearing. Their assessments are therefore referred back to the Minister for reconsideration and reassessment on the basis that the amounts assessed shall be reduced by an amount of $5,393.66 with respect to one account and by an amount of $2,944.38 with respect to the other. Patricia and Robert Nicol remain liable under section 227.1 of the Act for the balance of the amounts assessed.
[24] Each party shall bear their own costs.
Signed at Ottawa, Canada, this 3rd day of October 2001.
"Lucie Lamarre"
J.T.C.C.
COURT FILE NO.: 1999-2147(IT)G, 1999-2152(IT)G and
1999-2154(IT)G
STYLE OF CAUSE: Patricia Nicol, Robert J. Nicol and
Lindsay Nicol v. The Queen
PLACE OF HEARING: Ottawa, Ontario
DATE OF HEARING: September 12, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge Lucie Lamarre
DATE OF JUDGMENT: October 3, 2001
APPEARANCES:
For the Appellants: The Appellant themselves
Counsel for the Respondent: Pierre-Paul Trottier
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-2147(IT)G
BETWEEN:
PATRICIA NICOL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Robert J. Nicol (1999-2152(IT)G)and Lindsay Nicol (1999-2154(IT)G) on September 12, 2001, and judgment rendered orally on September 14, 2001, at Ottawa, Ontario, by
the Honourable Judge Lucie Lamarre
Appearances
For the Appellant: The Appellant herself
Counsel for the Respondent: Pierre-Paul Trottier
JUDGMENT
The appeals from the assessments made under section 227.1 of the Income Tax Act ("Act"), notices of which are dated February 1, 1994, and bear numbers 31086 and 31090, are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the sole basis that the amounts assessed shall be reduced by an amount of $5,393.66 with respect to one account and by an amount of $2,944.38 with respect to the other (as consented to by counsel for the respondent), the appellant remaining liable under section 227.1 of the Act for the balance of the amounts assessed.
Each party shall bear their own costs.
Signed at Ottawa, Canada, this 3rd day of October 2001.
|
"Lucie Lamarre" |
J.T.C.C.
1999-2152(IT)G
BETWEEN:
ROBERT J. NICOL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Patricia Nicol (1999-2147(IT)G)and Lindsay Nicol (1999-2154(IT)G) on September 12, 2001, and judgment rendered orally on September 14, 2001, at Ottawa, Ontario, by
the Honourable Judge Lucie Lamarre
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Pierre-Paul Trottier
JUDGMENT
The appeals from the assessments made under section 227.1 of the Income Tax Act ("Act"), notices of which are dated February 1, 1994, and bear numbers 31084 and 31088, are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the sole basis that the amounts assessed shall be reduced by an amount of $5,393.66 with respect to one account and by an amount of $2,944.38 with respect to the other (as consented to by counsel for the respondent), the appellant remaining liable under section 227.1 of the Act for the balance of the amounts assessed.
Each party shall bear their own costs.
Signed at Ottawa, Canada, this 3rd day of October 2001.
|
"Lucie Lamarre" |
J.T.C.C.
1999-2154(IT)G
BETWEEN:
LINDSAY NICOL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Patricia Nicol (1999-2147(IT)G)and Robert J. Nicol (1999-2152(IT)G) on September 12, 2001, and judgment rendered orally on September 14, 2001, at Ottawa, Ontario, by
the Honourable Judge Lucie Lamarre
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Pierre-Paul Trottier
JUDGMENT
The appeals from the assessments made under section 227.1 of the Income Tax Act, notices of which are dated February 1, 1994, and bear numbers 31085 and 31089, are allowed and the assessments are vacated.
Each party shall bear their own costs.
Signed at Ottawa, Canada, this 3rd day of October 2001.
|
"Lucie Lamarre" |
J.T.C.C.