T-1957-87
Lucette Robitaille (Plaintiff)
v.
The Queen (Defendant)
INDEXED As: ROBITAILLE V. CANADA (T.D.)
Trial Division, Addy J.—Montréal, November 23,
24; Ottawa, December 19, 1989.
Income tax — Corporations — Liability of liquidated com-
pany's directors under Act s. 227.1 for failure to deduct or
withhold taxes — Director not held personally liable where, in
fact, did not take part in company business and where control
of company, to knowledge and with consent of defendant,
effectively taken over by bank — S. 227.1 contemplating
company acting freely under Board of Directors — Exercise of
freedom of choice by directors essential to establish personal
liability.
The plaintiff was a nominal director of Placage St-Laurent
Limitée which went into liquidation in September 1983, follow
ing seizure by a bank of all of its assets. She was the wife of one
of the owners of the company and was issued one share and
named a director in order to comply with what were thought to
be the legal requirements at that time. The plaintiff never took
an active part in the management or operations of the com
pany. National Revenue claimed from the plaintiff approxi
mately $50,000 plus interest pursuant to section 227.1 of the
Income Tax Act with respect to non-remitted deductions at
source from the salaries of employees.
In January 1981, the company's financial situation started to
deteriorate and in October 1982, a bank took control of the
company and of all payments because it had exceeded its
authorized credit. Business was carried on under the control of
the bank until liquidation in September 1983. Since it could not
recover in full from the company, National Revenue resorted to
section 227.1 and, two years after the company had gone out of
business, assessed the plaintiff for the amounts due for the
months in which the deductions were not made.
This trial involved an appeal from the Tax Court of Canada
decision holding the plaintiff liable.
Held, the action should be allowed.
This was the first case to be heard by this Court on the issue
of the common law duty of directors of corporations and the
degree to which that duty has been extended by codification in
taxing statutes. Until recently, the Tax Court had held that
there was an absolute duty on the directors to take positive
action to ensure that the deductions were properly made. They
had to prove affirmatively that, both before and after the
occurrence, there had been on their part an exercise of care,
skill and diligence in the performance of the duties normally
incumbent upon a director. This was based on the common law
principle that no distinction was to be made between directors
whether active or purely nominal. Recently, the Tax Court has
been more lenient towards directors. Qualifying as an exemp
tion under subsection 227.1(3) was not the only way to escape
liability. This was one of the cases where there were certain
exceptional circumstances such that a distinction could and
should be made.
The fact that the bank, to the knowledge and with the
consent of the defendant, took effective control of the company
and assumed sole control over all disbursements constituted a
very important circumstance. From then on, the actions of the
company regarding the payment or withholding of monies were
essentially those of the bank. So even without considering
subsection 227.1(3), there could be no liability on the directors
under subsection 227.1(1) because it could attach only where
the company was freely acting through its Board of Directors.
The exercise of freedom of choice on the part of the director is
essential in order to establish personal liability.
In the present case, the plaintiff had not one iota of interest
in the operation of the company nor did she, at any relevant
time, have any knowledge of the situation regarding the non
payment of payroll deductions. Even had she known of the
situation, she could not have done anything about it. The
defendant, on the other hand, was fully aware of the situation
and not only allowed it to continue but also tolerated further
non-payments in the hope of keeping the company operating.
STATUTES AND REGULATIONS JUDICIALLY
CONSIDERED
Bank Act, S.C. 1980-81-82-83, c. 40, s. 178.
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 223(2),
227.1 (as enacted by S.C. 1980-81-82-83, c. 140, s.
124(1)), (1),(3).
CASES JUDICIALLY CONSIDERED
APPLIED:
Fancy v. M.N.R. (1988), 88 DTC 1641 (T.C.C.).
REFERRED TO:
Barnett, J. V. v. M.N.R. (1985), 85 DTC 619; [1985] 2
C.T.C. 2336 (T.C.C.); Fraser, H. (Trustee of) v. M.N.R.
(1987), 87 DTC 250; [1987] 1 C.T.C. 2311; 64 C.B.R.
(N.S.) 58; 37 B.L.R. 309 (T.C.C.); Quantz, C. v. M.N.R.
(1988), 88 DTC 1201; [1988] 1 C.T.C. 2276 (T.C.C.);
Beutler, O. v. M.N.R. (1988), 88 DTC 1286; [1988] 1
C.T.C. 2414 (T.C.C.); Cybulski, D. J. v. M.N.R. (1988),
88 DTC 1531 (T.C.C.); Moore, R. M. v. M.N.R. (1988),
88 DTC 1537 (T.C.C.); Edmondson, S. G. v. M.N.R.
(1988), 88 DTC 1542 (T.C.C.); Merson, K. v. M.N.R.,
(1989), 89 DTC 22 (T.C.C.); Pilling, D. and H. v.
M.N.R. (1989), 89 DTC 327; [1989] 2 C.T.C. 2037
(T.C.C.); Michel v. M.N.R., 87-1893(IT)/87-1894(IT),
St-Onge J., decision dated 21/6/89, T.C.C., not yet
reported; Denis v. M.N.R., 87-962(IT)/87-963(IT), Sar-
chuk J., decision dated 28/8/89, T.C.C., not yet reported;
Gagnon v. M.N.R., 87-244(IT), Rip J., decision dated
22/9/89, T.C.C., not yet reported.
COUNSEL:
Wilfrid Lefebvre for plaintiff.
Daniel Marecki for defendant.
SOLICITORS:
Ogilvy, Renault, Montréal, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
ADDY J.: The trial involved an appeal by the
plaintiff from a decision rendered by the Tax
Court of Canada regarding the application of sub
sections (1) and (3) of section 227.1 of the Income
Tax Act [S.C. 1970-71-72, c. 63 (as enacted by
S.C. 1980-81-82-83, c. 140, s. 124(1))] which read
as follows:•
227.1 (1) Where a corporation has failed to deduct or with
hold an amount as required by subsection 135(3) or section 153
or 215 or has failed to remit such an amount, the directors of
the corporation at the 'time the corporation was required to
deduct or withhold the amount, or remit the amount, are jointly
and severally liable, together with the corporation, to pay any
amount that the corporation is liable to pay under this Act in
respect of that amount, including any interest or penalties
related thereto.
(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.
The plaintiff was a director of Placage St-Lau-
rent Limitée, a federally incorporated company
which went into liquidation on September 2, 1983,
following seizure by the Bank of all of its assets.
National Revenue is claiming from the plaintiff
pursuant to subsection 227.1(1) for certain non-
remitted deductions at source from the salaries of
employees the sum of approximately $20,000 plus
accumulated interest for deductions made during
the period of September to November 1982 and
not remitted and the amount of approximately
$30,000 plus interest for those made during the
period of May to September 1983.
The plaintiff's husband, Claude Robitaille and
his brother Guy Robitaille, had been in business
for some time as joint owners in equal shares of a
company known as TransCanada Industries Inc.
In 1978, they purchased Placage St-Laurent
Limitée, in equal shares. At the time of purchase
of the shares they were told by their legal advisers
that the law required a minimum of three share
holders and three directors for a federal corpora
tion to operate. In order to conform to that
requirement, and at the same time ensure that
there would be an equal division, one share was
issued to each of the two wives and they were
made directors with the two brothers.
•
The law had in fact been changed in 1978,
allowing a federally appointed company hence
forth to reduce to one the number of directors. No
change in the number of directors was made by the
company, possibly because the owners were not
aware of the amended legislation.
It was agreed that the plaintiffs husband,
Claude, would operate and manage TransCanada
while her brother-in-law, Guy, would manage and
operate the newly acquired company, Placage
St-Laurent Limitée, with any profits or dividends
realized from either company being divided equal
ly between the two brothers. This is in fact what
happened. The last annual report of the Placage
St-Laurent signed in 1981 indicates a 50% owner
ship of shares in each of the two brothers and none
in the name of the wives. The wives are, however,
still listed as directors and were in fact still holders
of one share each.
Placage St-Laurent normally employed between
42 and 45 persons. In January 1981, however,
things began to deteriorate as the number of
orders were diminishing. In September 1982 the
deductions at source were not forwarded to the
Department of National Revenue and the follow
ing month the Bank sent a controller to the com
pany who took control over all payments because
the company had exceeded its authorized credit.
No cheques from then on could be issued, nor in
fact were any issued, without the authorization of
the controller. From sometime early in 1981, the
company had been expecting to receive a federal
loan of some $160,000 provided for the economic
expansion of certain companies. The company also
applied for and eventually received from the Prov
ince of Quebec the sum of $200,000. The $200,000
was in fact received at the beginning of 1983. The
bank took $160,000 of these monies and applied it
to its debt and authorized the issue of $40,000 to
pay accounts of certain creditors of the company.
At various times throughout the years previous
to September 1982, various charges and mortgages
against the plant equipment and effectively all
assets of the company, had been required by the
Bank. Following the taking over of the issuing of
cheques in October, the Bank also had on Novem-
ber 2, pursuant to section 178 of the Bank Act
[S.C. 1980-81-82-83, c. 40], obtained a general
assignment of inventories. After the Bank had
taken over control of disbursements in October
1982, it did not authorize the reimbursement of
salary deductions at source for that month or for
the month of November nor for the arrears for
September. On January 24, 1983, a demand on
third parties was served on the Bank by the
Department of National Revenue. Following dis
cussions with the Bank and in anticipation of the
advance of certain grants from the federal and
provincial governments, the Department, on Feb-
ruary 12, 1983, agreed to withdraw its demand in
order to allow the business to continue, as the
Bank had informed them that if they insisted on
payment of their demands, it would be obliged to
realize immediately on its securities and effectively
close down the business. Henceforth, the Depart
ment dealt exclusively with the Bank and the
evidence indicates that there was no consultation
with the directors. Guy Robitaille was told to
obtain orders and see to the operation of the plant.
Financial matters were effectively entirely under
control of the bank.
In 1983, cheques covering deductions at source
from employees' salaries were in fact authorized
by the Bank for the months of January to April
inclusively, but no cheques were issued for deduc
tions made during May to September.
Although the company's original margin of
credit with the Bank had been $350,000 and this
limit had been reached in 1981, by June 1983
$1,500,000 had been advanced by the bank but the
repayment of a good portion of this had been
guaranteed by both the federal and provincial
governments. The Department of National Reve
nue was in effect kept advised of the operations
and of the financial situation throughout and car
ried out audits during 1983. In the first week of
June of that year, a departmental auditor advised
it was impossible for a cheque to be issued to the
Department at that time but that the company was
expecting a $160,000 grant and enclosed a copy of
a letter from the Bank dated June 9, 1983 con
firming that they were expecting to receive the
$160,000 grant during the month of July and
requesting that a second demand on third parties
which had been served on them on June 2, be
removed to allow them to carry on with the busi
ness. This apparently was done, or at least no
action was taken under it. On November 2, 1983,
the Bank took possession of the assets of the
company and the latter effectively then went out
of business. Since then, the two Robitaille brothers
declared personal bankruptcy.
In March 1983, a certificate covering the
amount owing by the company had been deposited
in the Federal Court pursuant to subsection 223(2)
of the [Income Tax] Act and a writ of fieri facias
was obtained two years later on April 24, 1985. A
nulla bona return followed and on August 28,
1985, a notice of assessment was sent to the plain
tiff who immediately objected to it.
At the end of August 1983, there had been an
understanding between the Bank and the Depart
ment that post-dated cheques would be issued to
cover the arrears. They were issued but were not
subsequently honoured by the Bank.
The Bank at no time requested personal guaran
tees from the plaintiff or from any of the directors.
The representative of the defendant who was
examined for discovery, stated that all negotiations
and discussions took place with the Bank since
there was no use discussing matters with the direc
tors as the Bank had assumed control and that all
the directors would have replied was that the
Department had seized the bank accounts and
there was nothing they could do about it.
Before the notice of assessment of the plaintiff
was sent in August 1985, there was no communi
cation whatsoever between the Department and
the plaintiff regarding the debt or regarding the
company. The aforementioned notice of assess
ment was sent to her some two years after the
company had gone out of business. It was the first
inkling she had of the possibility of liability on her
part.
Counsel, in addition to several cases and articles
dealing with the common law duty of directors of
corporations and the degree to which that duty has
been extended by codification in taxing statutes,
referred at some length to several articles and to
twelve reported cases decided by the Tax Court of
Canada since the enactment of the section and also
to the as yet unreported case of Gagnon v. M.N.R.,
appeal 87-244(IT), Rip J., dated September 22,
1989. These apparently are all of the cases decided
by that Court on the effects of subsections
227.1(1) and 227.1(3) and they are listed
hereunder:
Barnett, J. V. v. M.N.R. (1985), 85 DTC 619;
[ 1985] 2 C.T.0 2336;
Fraser, H. (Trustee of) v. M.N.R. (1987), 87
DTC 250; [1987] 1 C.T.C. 2311; 64 C.B.R.
(N.S.) 58; 37 B.L.R. 309;
Quantz, C. v. M.N.R. (1988), 88 DTC 1201;
[1988] 1 C.T.C. 2276;
Beutler, O. v. M.N.R. (1988), 88 DTC 1286;
[1988] 1 C.T.C. 2414;
Cybulski, D. J. v. M.N.R. (1988), 88 DTC
1531;
Moore, R. M. v. M.N.R. (1988), 88 DTC 1537;
Edmondson, S. G. v. M.N.R. (1988), 88 DTC
1542;
Fancy v. M.N.R. (1988), 88 DTC 1641;
Merson, K. v. M.N.R. (1989), 89 DTC 22;
Pilling, D. and H. v. M.N.R. (1989), 89 DTC
327; [ 1989] 2 C.T.C. 2037;
Michel v. M.N.R., appeals 87-1893(1T)/87-
1894(IT), not yet reported decision of His
Honour Judge St-Onge of the Tax Court of
Canada, dated June 21, 1989.
Denis v. M.N.R., appeals 87-962(1T)/87-
963(1T), not yet reported decision of the Hon.
Judge Sarchuk of the Tax Court of Canada,
dated August 28, 1989.
Two of them, namely, Fancy v. M.N.R. and Beut-
ler, O. v. M.N.R. are presently under appeal but
have not yet been heard. Therefore, the present
case is apparently the first one to be heard by our
Court.
Although, when dealing with "the degree of
care, diligence and skill" to be exercised by "a
reasonably prudent person" in "comparable cir
cumstances", each case must necessarily depend
on its particular facts, it appears that the Tax
Court in its more recent decisions might have been
more lenient towards directors than the previous
cases, which seemed to insist on a somewhat
higher duty, the duty presumably being an abso
lute one for the director to take positive action,
since he or she must, in all cases, regardless of the
situation, prove affirmatively that, both before and
after the occurrence, there was on his or her part
an exercise of care, skill and diligence in the
performance of the duties normally incumbent
upon a director. The argument is based on the
common law principle that no distinction is to be
made between directors whether they are active or
purely nominal directors. Although that burden
would, in the vast majority of cases, fall upon any
director seeking to escape liability under subsec-
tion 227.1(1) by qualifying as an exemption under
subsection 227.1(3), I cannot accept that it is an
inflexible rule of universal application regardless
of the facts of any case. There exists, as was
decided by Chief Judge Couture, of the Tax Court
of Canada in the reported case of Fancy v. M.N.R.
(supra), certain exceptional situations where a
distinction can and should be made. Be that as it
may, the "circumstances" referred to in subsection
(3) must be those which, either directly or in
directly, would have an effect on the actions or on
the inaction of the person sought to be held liable
under subsection (1). The fact that the Bank, to
the knowledge of and with the consent of the
defendant, from October 1982, effectively assumed
sole control over all disbursements of the corpora
tion, constitutes a very important circumstance.
Furthermore, where the effective control of the
corporation has been taken over by a bank such as
in the case under appeal, without the Bank being
requested or invited to do so by the directors, and
where the decisions as to what cheques will or will
not be issued without consultation with the Board
of Directors, are exclusively those of the bank,
then from that time the actions of the corporation
regarding the payment or withholding of monies
are essentially those of the Bank and I would be
prepared to hold that, even without considering
subsection 227.1(3), there would be no liability on
the directors under subsection 227.1(1) because
the latter obviously contemplates that the corpora
tion is freely acting through its Board of Directors.
The exercise of freedom of choice on the part of
the director is essential in order to establish per
sonal liability.
The term "diligence", which is now codified,
provides a higher objective standard than that
imposed by the common law on directors general
ly. Although the test is to a large extent an objec
tive one, the question remains, however, what a
reasonably prudent person would do in the circum
stances in which a director finds himself. These
circumstances include subjective elements such as,
degree of education, business knowledge and gen
eral ability of the director.
The plaintiff was not ignorant of corporate
affairs as she had a small corporation of her own
of which she was president and manager. It is
probable, therefore, that she was aware at least of
some of the general duties of a director.
She was also employed by her husband at
TransCanada for general office work involving
duties of a receptionist, and some bookkeeping,
filing and payroll duties. She never, however, at
any time, did any work whatsoever for Placage
St-Laurent Limitée, nor did she ever attend any
directors' meetings or any other meetings or dis
cussions regarding that company, she never
received any dividends or any other remuneration
or any other emoluments or monies by way of loan
or otherwise. She never carried out any duties or
work for the company either as a director, an
employee, an agent or otherwise. Although she was
employed as aforementioned and received a salary
from TransCanada Industries which her husband
was managing, she never attended or took part
either in any of the meetings of directors of that
corporation.
The plaintiff was unaware of the situation
regarding the failure to remit deductions until
after the affairs of the corporation had been taken
over by the Bank. She knew things had been
deteriorating because of lack of orders; she had
been told of this by her husband but she was not at
all aware of the details except to the extent that
reports were made by her brother-in-law to her
husband and forwarded to TransCanada where she
was working.
I find that, except to the extent that any wife
might benefit from the financial success of her
husband, the plaintiff had not one iota of interest
in the operations of Placage St-Laurent Limitée
nor did she, at any relevant time, have any knowl
edge of the situation regarding the non-payment of
payroll deductions. Even had she known of the
situation, she could not have done anything about
it. The defendant on the other hand, from the
outset, was fully aware of the situation and, as
stated previously, agreed with the Bank to allow
the condition to continue and further non-pay
ments to occur in the hope of keeping the company
operating. I do not wish to infer that the actions of
the defendant were blame-worthy since it would
have been to the advantage of everybody if the
business could finally have been saved. The Feder
al Government itself, independently of the tax
situation, in view of the substantial grants made to
the company, had a real interest in ensuring its
financial survival.
My concern here is obviously limited to the issue
of whether the plaintiff should be held responsible
for the arrears of payment. In the circumstances of
this case, I find that she should not. The plaintiff
will therefore be entitled to judgment and to her
costs throughout.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.