Tax Court of Canada Judgments

Docket: 2002-2926(IT)G

BETWEEN:

DAN HAMILTON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on January 19, 2004 at Vancouver, British Columbia

Before: The Honourable Justice J.E. Hershfield
Appearances:
Counsel for the Appellant:	D.E. Graham
Counsel for the Respondent:	K. Foreman Gear

____________________________________________________________________

JUDGMENT

          The appeal from Notice of Assessment No. 17472 made under subsection 227.1(1) the Income Tax Act is dismissed with costs, for the reasons set out in the attached Reasons for Judgment.

Signed at Ottawa, Canada, this 3rd day of June 2004.

"J.E. Hershfield"

Hershfield J.

Citation: 2004TCC173

Date: 20040603

Docket: 2002-2926(IT)G

BETWEEN:

DAN HAMILTON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Hershfield, J.

[1]      This is an appeal from an assessment under subsection 227.1(1) of the Income Tax Act (the "Act") pursuant to which the Appellant was assessed as liable for the failure by Best Fresh Holdings Corporation (the "Corporation") to make certain remittances to the Receiver General on account of federal income tax source deductions (payroll deductions) made by the Corporation.

[2]      It is not in dispute that the Appellant was a director and general manager of the Corporation from August 16, 1996 to March 30, 1998. It is not in dispute that as a director of the Corporation, the Appellant is jointly and severally liable with other directors for source deduction amounts not remitted by the Corporation as required by the Act. The issue in the appeal is whether the Appellant is relieved of liability by reason of having exercised a sufficient degree of care, diligence and skill in his role as a director pursuant to subsection 227.1(3) of the Act.

[3]      As a preliminary matter I note that the remittance failures appear to have occurred over the period commencing about April 1997 through some time in 1998 when the business ceased to operate. During most of this time there were two directors: Craig Markovic, the President of the Corporation and the Appellant. The Appellant resigned on March 30^th 1998 while Markovic stayed on much longer. Both were assessed and both appealed. Markovic's assessment was for a greater amount presumably for remittance failures occurring after the Appellant's resignation. A consent Judgment was obtained in respect of the Markovic appeal, however such judgment does not particularize whether the liability agreed upon relates to the period when the Appellant was also a director. Clearly, if monies paid under the consent Judgment relate to the period when the Appellant was a director and jointly and severally liable for the remittance shortfalls (if that is my finding in this appeal) then a question arises in respect of the collection of amounts owing under this judgment as to whether payments under the consent Judgment have relieved a payment obligation of the Appellant. However, whether or not such question arises is not a question before me. Subject to his due diligence defense, the Appellant has not put in dispute the amount assessed for which he is jointly and severally liable.

[4]      To best frame the due diligence defense to the assessment, it should be noted at the outset that the Notice of Appeal and the position of the Appellant at the hearing put reliance on his assertion that he was unable to do anything to cause the required remittances to be made. It was admitted that he was aware that the Corporation was not making the required remittances and that he was, as well, actively involved in the day-to-day operation of the business of the Corporation and was not an outside director. The due diligence defense is based on the assertion that the Appellant was in effect a puppet, a powerless director, appointed by shareholders who in fact controlled the day-to-day operations of the Corporation at least in respect of the application of funds and any major business decisions.

[5]      While the shareholdings of the Corporation and the historical dealings amongst its shareholders would not normally be relevant to the issue before me, the Appellant's due diligence defense as framed by his counsel, does invite consideration of such dealings.

[6]      Three individuals who were friends since university days, and who have on other occasions combined their respective talents to exploit commercial opportunities, owned shares in the Corporation. These individuals and their holdings are Jim Thompson as to 27.7%, Fraser Atkinson as to 21.4% (including indirect holdings) and Markovic as to 3.5%. They were, if acting in concert, the controlling shareholders at all relevant times. A fourth individual, Scott Morrice, who also had historical dealings with this trio, held 21.4% of the shares of the Corporation. A venture capital corporation (the "VCC") held 26%. The Appellant owned an estimated 4% of the shares in the VCC for which he paid some $15,000.00.[1]

[7]      Markovic was an engineer and in addition to being on the Board of Directors he was a technical advisor to the Corporation and was actively involved at the outset in getting things going. He was less involved in the Corporation after that although he was the president and secretary of the Corporation at all relevant times.[2] Morrice was a lawyer who helped set up the corporations and do the legal work. He was not actively involved in the operations of the Corporation. Thompson was an accomplished businessman. Atkinson was a chartered accountant, a partner at KPMG. Both Thomson and Atkinson were active in the affairs of the Corporation notwithstanding that they held no formal office with it.

[8]      The Appellant and Atkinson testified at the hearing. Atkinson testified on behalf of the Respondent.

[9]      The Appellant's background is as follows. Prior to his joining the Corporation in 1996, he held several positions. After graduating high school in 1975 and working in retail sales for about six years, he obtained his Bachelor of Arts degree. He studied history and political science. He did not study business or accounting. Following that he held sales, customer service and multi-level marketing positions and spent three years with Polaris Water Products. He started there as a tele-marketer and ended up in a supervisory position. After that he did some contract work in the publishing/printing business having developed skills using word-processing and desktop publishing software. In about 1996 he was hired on a contract basis by Thompson, acting as president of a company operating as Glacier Water Products, to assist in sales of that company. When that contract ended Thompson told the Appellant about a new venture started by himself and Atkinson and invited the Appellant to attend an investors' meeting that was showcasing a new fresh-cut fruit packaging technology.[3] The new venture, being undertaken by the Corporation, was to license this technology and operate a fruit packaging business consisting of buying, cutting and selling specially packaged fresh fruits to retail grocery stores.

[10]     Although the Appellant started work with the Corporation as a general manager he was asked early on to be a director along with Markovic. He was told it would be helpful if he was a director in order to sign documents that may require a director's signature while Markovic was away. This never occurred although Markovic did travel quite a bit and was away from the office frequently once things were up and running. The Appellant was not aware of any additional actual authority, responsibility or liability being bestowed or imposed on him by virtue of becoming a director. He signed directors' resolutions as presented to him. From his perspective, his bosses were Thompson and Atkinson. He said that he reported to Thompson and Atkinson who were both regularly involved in ongoing discussions concerning the business of the Corporation. Thompson was in the office daily (ostensibly as president of Glacier Water Products with which the Corporation apparently shared space) and the Appellant reported to him on a day-to-day basis in respect of sales of the Corporation. Atkinson oversaw all financing and accounting decisions. The Appellant reported to Atkinson on all financial matters. Atkinson had signing authority with the bank. The Appellant did not.[4]

[11]     I accept that the Appellant's principle role was that of general manager of the Corporation's operations. In that capacity his responsibilities included ordering inventory, making bank deposits, maintaining the accounting systems (an Excel program set up by Atkinson) and inputting payroll data on Revenue Canada software. Indeed he was solely responsible for payroll deduction and remittance calculations. However, since he could not sign cheques, he had to defer to Atkinson to ultimately effect payment. To assist in this process he regularly prepared a list of payables which he sent to or kept for Atkinson for review and payment.[5]

[12]     A brief comment on the procedure for writing cheques is worth noting at this point. The Corporation dealt with the TD bank until about June 1997 and then with the HK bank. The switch to the HK bank was apparently to enable a loan to the Corporation guaranteed in part by Atkinson and Morrice. In the case of payments from the TD, Atkinson held the cheque book and delivered signed cheques to the Appellant with ledger notations to "hold" particular cheques. However, Atkinson relied on the Appellant to describe all payables. A printout faxed to Atkinson by the Appellant in April 1997 was tendered as an example of the Appellant's description of payables. The printout showed a negative balance after workers' salaries and then showed other payables. The Appellant described some such items as "must be paid" (e.g. telephone "to avoid disconnect"). The payable for his salary was separated and noted as a "hold until funds available".[6] Revenue Canada remittances were separated as well but the Appellant made no notations. He said he relied on Atkinson's instruction, as he was a knowledgeable chartered accountant. He also knew that there were no funds at that time and that payments were dependant on future revenues or advances or refinancing arrangements which would be for Atkinson to resolve. Later he would have known that shortfalls in funds would have to be advanced to the Corporation by shareholders.[7] In any event, Atkinson responded to the fax with respect to payroll remittances as follows: "Better to make a partial than none at all. (it has to be in on the 15^th)". The Appellant testified that he relied on this single instruction on a going-forward basis.[8] He said he understood that he was required to make partial payments toward remittance obligations.

[13]     While the April 1997 printout referred to above deals with payables during the period the Corporation was dealing with the TD, the Appellant testified that the procedure did not really change after the switch to the HK bank even though after the switch, cheques were held and filled out by the Appellant and sent to or held for Atkinson to sign. No payments were made unless Atkinson gave his approval by signing the cheques without an instruction to hold back delivery.

[14]     While the testimony of both witnesses was that Atkinson held the TD cheque book, it does not appear that Atkinson actually prepared the cheque for a partial remittance for April 1997 at the time of making the notation. No explanation was offered as to how a remittance amount was ultimately determined. On a going-forward basis it seems more apparent that the Appellant himself knowingly made determinations of affordable remittances as a means of funding operations relying on the April notation as his authority to do so. By about June 1997 he had possession of the HK cheque book and filled the cheques out for signature by Atkinson. It appears that he did not always request payment (or fill out cheques) for even partial remittances on a timely basis. While I might have suspected that there would have been more discussion between the parties on this question, there was no suggestion at the hearing that that was the case. The Appellant seems to have loyally applied amounts, required to be remitted, to the operations of the Corporation as he saw fit, asserting reliance on Atkinson's advice that it was acceptable to do so and on his own belief that it would be covered at a later time.

[15]     It is interesting that the Appellant acknowledged that following Atkinson's note referred to above, he prepared remittance cheques for Atkinson's signature for partial remittances thinking "possibly" it was wrong. Further, in payroll reports that he completed and sent to the CCRA he did not show amounts owing until, in respect of the 1997 year, he prepared T4 summaries in February 1998.[9] He said that he understood that the payroll reports were being completed as Atkinson wanted them to be completed. He said that he trusted that Atkinson, as an expert, knew this was okay. He also said he did not want to talk to others about it as it would be perceived as an "end-run around" Atkinson who he found intimidating and, further, he believed that there would be catch-up payments down the road when there was more funding.[10]

[16]     By March of 1998 the cash flow problems that started in April of 1997 worsened. A major retail customer was lost and the Hikari arrangement had ended. On March 5^th 1998 the Appellant wrote Atkinson and Morrice recommending immediate action to restructure or wind-up the Corporation. He advised of amounts owed to him and Revenue Canada. At this point the Appellant seemed less concerned about a confrontation with Atkinson as he saw the writing on the wall. He resigned shortly after this communication presumably after it was apparent that there was no help being offered. It was also at about this time that he said that he learned, for the first time, of his potential liability for payroll deduction remittance shortfalls in a conversation with his uncle, a retired lawyer.

[17]     As noted, in about a two-month period just prior to leaving, the Appellant cashed cheques for some three months' salary. No payroll remittances were made in respect of these payments. There were still at least five unpaid months for which the Appellant had signed cheques and for which there were funds in the bank to cash on at least one occasion prior to the Appellant's resignation. On other occasions there were sufficient funds to cash some, although not all of these cheques. On these occasions there would have been funds available to make remittance payments as well. Still, the Appellant did not attempt to cause or even encourage signing officers to make remittance payments.

[18]     As to the testimony of Atkinson, it was not helpful. He was not a credible witness. He clearly understated his role as minder of funds and overstated the effective authority he and the other shareholders intended to give the Appellant when appointing him as a director.

[19]     Atkinson testified that he thought the Appellant had signing authority at the bank and when asked why he was not given such authority he said he did not know - it was up to the board. This smugness in light of established routines whereby he, Atkinson, signed every cheque and monitored cash flows including bank loan repayments in February and March 1998 for which he was personally liable, reveals a very sharp attitude in my view. His testimony is further betrayed by evidence that he told CCRA auditors that he had signing authority to protect his investment and as a partner of KPMG to protect the VCC, a client of the firm. This is not consistent with affording the board as constituted the power to let the Appellant sign cheques. While there is no evidence that there was a unanimous shareholders' agreement usurping the power of the board to manage the day-to-day operations of the Corporation, in practical terms there may as well have been. Atkinson testified that from the outset Markovic (President and a director) was not to be involved in the financial activities. Whose decision was that? The Appellant's? The board's? Or, the principal shareholders'? In practical terms there was no elected board making such decisions.

[20]     Atkinson denied being informed of ongoing remittance shortfalls in spite of his notation to the Appellant that partial remittances were better than none at all. He signed all payroll cheques and remittance cheques. Does he seriously expect me to believe that he did not notice remittance shortfalls? He, on behalf of KPMG, filed T4 summaries and slips prepared for the Corporation. He saw in late February or early March of 1998 the amount of the payroll deductions but claimed he did not know of the extent of the failure to remit deducted amounts until much later. He is an experienced and knowledgeable professional accountant. The evidence suggests that he knew the extent of the shortfalls or intentionally turned a blind eye to them and knowingly (as the signing authority at the bank) applied the Corporation's funds in a manner wholly inconsistent with its remittance obligations at times during the Appellant's tenure as a director when funds were available for such remittances and when he, Atkinson, knew the seriousness of the financial problems of the Corporation. His ultimate answer to this was he would have signed remittance cheques if the Appellant had presented them to him.

COMMENTS

[21]     The Appellant's employment duties as general manager as set out in paragraph 11 above are distinct from his duties as a director - a distinction the Appellant may never have made or understood. In respect of all these duties he felt he was under the direction of the principals, most particularly Atkinson, in respect of accounting and financial regulatory matters. He viewed the Corporation as basically their company and that they were ultimately in charge of everything he was or was not to do. Reporting to shareholders (who are neither officers nor directors) in respect of the day-to-day management of a corporation is not a situation contemplated by corporate law but that is not to say it was not the real environment in the which the Appellant worked. He was, in that real environment, a subordinate to two de facto bosses, particularly Atkinson. The Appellant testified that he was intimidated by Atkinson. I accept that he was. Atkinson was an aggressive entrepreneur who I have no doubt held himself out as the Appellant's boss. Atkinson dictated the accounting systems used and was on top of all financing decisions. The Appellant could not stand up to Atkinson; nor did he ever attempt to. He took direction as a subordinate would take direction and then went further, taking the initiative to determine remittance amounts from time to time for which Atkinson then signed cheques. His conduct might be attributable simply to employee insecurity or misguided loyalty to and trust in the principals of the Corporation. It might have been related to his own ambition as well. These principals were movers, capable of bringing him along on other ventures. Pleasing them had a potential upside. Explaining (as the Appellant did) a positively phrased letter of resignation as intending to keep other employment opportunities with this group open is clear evidence of conduct driven by self-interest. It cannot be forgotten as well that the Appellant had a material financial interest in the Corporation. That is, he had an economic interest in applying corporate funds in a manner that best served that interest. Based on my impression of the witness, his actions and non-actions were the result of all of these factors.

[22]     Relying on Atkinson's single notation relating to unfunded accounts payable, the Appellant used the payroll deductions to finance the day-to-day operations of the Corporation. He did not keep a running total of the amount of unpaid remittances and knowingly did not report shortfalls. That he was encouraged by Atkinson expressly or implicitly, I have little doubt. The Appellant's conduct saved Atkinson and the other principals from having to fund operations. I have the impression that Atkinson knowingly used the Appellant. There was no bona fide reason advanced at the hearing to have put the Appellant on the Board of Directors. He was afforded no real role as a director per se. De facto, Atkinson was one of a group in charge of the management of the affairs of the Corporation.[11] Regrettably, however, I know of no principle of law and Appellant's counsel raised no cases on point, to the effect that de jure directors are not responsible as directors even though little is expected of them by shareholders. A de jure director cannot delegate his or her director's responsibilities. Aside from unanimous shareholder agreements usurping authority, a director cannot rely on the notion of being under the direction of the owners - of those that appoint him or her to the board. Further, that Atkinson might have been assessed as a de facto director does not help the Appellant. That Atkinson might be held jointly and severally liable for the amount assessed would not prevent the Respondent from looking to the Appellant pursuant to his several liability.

[23]     At the end of the day, the Appellant allowed himself to be used. He took on an employment role that denied him any opportunity, as a director, to claim the benefit of a due diligence defense. Wearing his director's hat, he cannot say that he did not know what was happening. He was at the heart of the remittance failures. He was the responsible person. What due diligence can he then claim? He never asked for funds for remittances. He obtained signed cheques for his salary but asked for none for remittances. Even sensing something was wrong he never broached the subject with anyone. He could have requested cheques or presented cheques to Atkinson for signature for remittances as he did for his own salary or, at least, when he started cashing his salary cheques and funds were available, he could, at that time, have presented cheques to Atkinson to sign for remittances. Appellant's counsel suggests that presenting cheques to Atkinson to sign would have been a fruitless exercise yet refusing to sign remittance cheques or requesting the Appellant to "hold" them may have exposed Atkinson to personal liability. It seems plausible to suggest then that Atkinson would have done, in that case, what he testified he would have done, namely sign the remittance cheques. It seems plausible that he was counting on that not happening since it would have been apparent to him that the Appellant had, based on his (Atkinson's) advice, taken the initiative on a going-forward basis to use remittance amounts to fund the operation of the business of the Corporation. While in the circumstances of this case I do not condone the attitude reflected by the testimony that if presented with a remittance cheque "I would have signed it", Atkinson may not have a duty of care to the Appellant to protect him from liability. Persons who accept directorships, accept this type of liability whether they know it or not. Wearing his director's hat, the Appellant cannot claim ignorance of what was happening and being ignorant of the law, if he was, does not help him. Directors must be presumed to know their duties. It is incumbent on directors to inform themselves of the duties and responsibilities associated with their office. While the law relating to a due diligence defense may permit some tolerance in the application of this principle, something approaching zero tolerance would attach itself to directors whose employment duties include the responsibility to administer remittance payments which is the case here as admitted by the Appellant. Directors cannot assume a subservient role and rely on that conflict as a ground to escape their fiduciary duties. To say "my hands were tied as a director because they were tied as an employee" is to disregard the duties of the office held as director. Also, in the case at bar, the Appellant to some extent at least acted in his own interests in respect to the application of available funds. This is inconsistent, indeed incompatible, with a due diligence defense.

[24]     While these comments form the basis of my reasons to dismiss the appeal, an analysis of authorities relied on by the parties is required.

ANALYSIS OF CASES ARGUED

[25]     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. That obligation is modified 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".

[26]     In the case of Soper v. R., [1997] 3 C.T.C. 242 relied on by the Respondent, Robertson J.A. reviews the standard of care imposed on directors in light of the due diligence defense under subsection 227.1(3). After confirming that the requirement in section 227 of the Act that deems amounts deducted or withheld to be held in trust separate and apart from the corporation's own monies did not constitute directors as trustees in respect of amounts so deemed to be held in trust, he found that the standard of care imposed on a director is partly objective (the standard of the reasonable person) and partly subjective in that the reasonable person is judged on the basis that he or she has the knowledge and experience of the particular individual.[12] Simply put, based on my comments above, I do not think the Appellant meets this standard of care.

[27]     In discussing such standard of care, Robertson J.A. goes on to saythat the law today can scarcely be said to embrace the principle that the less a director does or knows or cares, the less likely it is that he or she will be held liable. Further, he notes that the statutory standard of care will surely be interpreted and applied in a manner that encourages responsibility.[13] To relieve the Appellant of liability in this case would not encourage responsible acquittal of the duties imposed on directors - duties that, in the public interest (including the fisc), must be taken most seriously by directors.

[28]     Robertson J.A. observes as well that in the absence of grounds for suspicion, it is not improper for a director to rely on company officials to perform honestly duties that have been properly delegated to them.[14] This forgives directors for the failures of company officials. Such proposition however assumes that the director and the company official upon whom that director may be entitled to rely are different persons. In the case at bar they are the same person but for the Appellant's assertion that shareholders, particularly Atkinson, were persons upon whom he could rely to perform, honestly, duties that had been effectively delegated to them. To apply the notion of defensible reliance in the way in which the Appellant seeks to apply it, would in my view essentially and fundamentally encourage irresponsibility in the performance of the duties of a director. Shareholders can and indeed are expected to act in self-interest. For a de jure director to rely on de facto delegation of duties to a shareholder with the expectation that they would be honestly performed in the best interests of the corporation as opposed to the best interests of that particular shareholder is to undermine the role of a director. Put another way, while directors can rely on advice honestly provided by officials inside the corporation and while they can rely on competent outside advice, I think the caveat to the latter would be that they can rely on disinterested competent outside advice. A reasonable person having the knowledge and experience of the Appellant could and would make that distinction in my view. However, the case at bar is not so straightforward. The outside advisor is also a professional accountant, a partner in a large respected accounting firm. Would not a reasonable person of any background or experience assume that such a professional would not put himself or herself in such a conflicted position as Atkinson was in without at least being cautious to respond to a remittance enquiry as a professional would respond (as opposed to how a shareholder would respond)? This is a most troubling question. While I do not want to suggest that a reasonable person must assume conflicted people cannot be trusted and while I believe Atkinson acted improperly having put himself in such a conflicted position, I believe in this case that the Appellant knew which hat Atkinson was wearing when dealing with payroll deduction remittances. It was his shareholder's hat. The Appellant's sense of wrongdoing underlines this. The Appellant too willingly became a party to an approach to remittances that he sensed was not appropriate. He was alert to the notion that Atkinson may not have been responding in a disinterested professional manner. From the Appellant's perspective he was working for Atkinson in Atkinson's capacity as a principal of the Corporation. Something more was required of him to allay his sense of wrongdoing. The Appellant's reliance on Atkinson as a disinterested professional advisor in the circumstances of this case is not reasonable in my view.

[29]     Further, there is no doubt that the Appellant was, in the parlance of director's liability cases, an "inside director". Part of his role in corporate management was to handle payroll and payroll deductions and he ably used CCRA software in the performance of this role. He was aware of remittance requirement shortfalls and applying both the subjective and objective standard of care, I find it difficult to say that he exercised any degree of care, diligence and skill to prevent the remittance failures. In respect of inside directors Robertson J.A. remarked as follows at paragraph 33:

... 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 defense. 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.

In the case at bar there is not only an assumption that the Appellant, as an inside director, knew of a problem, there is his admission that he knew something was wrong.[15]

[30]     It has been noted that the purpose of subsection 227.1(3) is to prevent failure to make remittances and not to cure a default after the fact.[16] Accordingly I would not put too much emphasis on my findings that the Appellant could have done more to cure past defaults from December 1997 to his departure in 1998 given that there seemed to be sufficient funds on deposit to pay at least some part of the shortfalls. However, the question as to what the Appellant could have done to prevent remittance failures in the first place is much the same question in this case as what the Appellant could have done to prevent continuing remittance failures from December 1997 to his departure in 1998. He could have acted on his suspicions that not remitting was wrong. He could have presented cheques for signing. If remittance failures continued he could have sought advice from disinterested persons as he ultimately did when he spoke to his uncle, a retired lawyer. He might have approached Morrice, a lawyer and a second person who was authorized to sign cheques.[17] It seems unlikely that he would have been looked upon badly for seeking further advice while continuing to work for free. A reasonable person in the Appellant's circumstances, assumed to know the law, would not in my view have simply gone along with the remittance failures as a means of supporting the failing activities of the Corporation. Directors who do "go along" with such failures do so at their peril.

[31]     Appellant's counsel argued that the Appellant did all that a reasonable person could be expected to do in the circumstances. He relies on the decision of Justice Bowman (now Associate Chief Justice) in Cloutier et al. v. M.N.R., 93 DTC 544. That case dealt with two appellants being personally responsible as directors for Part VIII tax pursuant to section 227.1. Associate Chief Justice Bowman found that there was nothing that the two directors could have done as a practical matter to prevent the failure of the company to satisfy its Part VIII tax liability. To resign from the board in protest would have accomplished nothing. They acted with the advice and guidance of a large firm of chartered accountants and were essentially powerless to alter the course of events that led to the demise of the company. In such circumstances Associate Chief Justice Bowman found that a director's liability under section 227.1 or his exoneration therefrom under subsection 227.1(3) does not depend on his adopting postures that would objectively have had no practical affect on the outcome of events.

[32]     I do not think the Cloutier case is on all fours with the case at bar. The accountants relied on in the Cloutier case were disinterested outside advisers. Importantly as well, there is nothing in Cloutier to suggest that the directors in that case were employed in a capacity that put them squarely in the role of persons responsible for administering payroll deduction and remittance matters. Further, it appeared relevant that there was an administrative practice which extended the deadline for the Part VIII tax liability payment to the end of the year. Accordingly, Associate Chief Justice Bowman found that it was open to the Appellants to assume that the Part VIII tax liability could be deferred. This afforded time and funds to carry out research which was planned and which the Appellants genuinely believed would be carried out. This is not the same as self-generated deferral tactics being employed in the belief that funds will be forthcoming in the future.

[33]     Notwithstanding such distinctions Respondent's counsel argues, as remarked in Cloutier, that powerless directors cannot be insurers of the fisc and that as a practical matter the Appellant did all he could do to prevent the failure to make remittances. He argues that at an early stage, possibly on the first occasion where a remittance shortfall was identified by the Appellant, the Appellant effectively asked Atkinson, a knowledgeable accountant, what to do. Putting emphasis on Atkinson as a knowledgeable accountant is to ignore the obvious conflict discussed above. Atkinson as a shareholder who might have had to put his hand in his own pocket to make good a remittance payment was not a disinterested advisor. The Appellant knew this and relying on such person, who he was afraid to challenge in any way in spite of a feeling of wrongdoing, is simply not reasonable for a person in his circumstances having accepted a position on the board of the Corporation.

[34]     As noted, the problem here is that the Appellant did not understand his duties as a director. He did not see his role as being responsible to take any further steps to prevent the failure to make remittances once he received his first instruction. Thereafter, he took things in his own hands. He did not advise of ongoing shortfalls on a regular basis and did not provide cumulative totals of shortfalls. He did not present cheques for signature. He did not seek further direction or advice. No such positive steps were taken where taking any one of them might have changed the course of events.

[35]     Accordingly, I must find against the Appellant in this matter. The due diligence defense does not save the Appellant on the facts of this case. The appeal is dismissed with costs.

Signed at Ottawa, Canada, this 3rd day of June 2004.

"J.E. Hershfield"

Hershfield J.

CITATION:

2004TCC173

COURT FILE NO.:

2002-2926(IT)G

STYLE OF CAUSE:

Dan Hamilton and Her Majesty the Queen

PLACE OF HEARING:

Vancouver, British Columbia

DATE OF HEARING:

January 19, 2004

REASONS FOR JUDGMENT BY:

The Honourable Justice J.E. Hershfield

DATE OF JUDGMENT:

June 3, 2004

APPEARANCES:

Counsel for the Appellant:

D.E. Graham

Counsel for the Respondent:

K. Foreman Gear

COUNSEL OF RECORD:

For the Appellant:

Name:

D.E. Graham

Firm:

Koffman Kalef Vancouver, British Columbia

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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