October 07, 2011

The Attorney General of Canada and Her Majesty the Queen (Applicants) v. Lynda McKinnon, Ronald LaPointe and Brad Worrell (Respondents)

2000 DTC 6593
Federal Court of Appeal
October 24, 2000

(Court File Nos. A-421-98, A-422-98, A-423-98, A-424-98, A-425-98 and A-426-98.)

Federal goods and services tax (“GST”) — Directors’ personal liability for corporation’s unremitted source deductions and GST — Whether directors’ loss of de facto control over the corporation’s affairs automatically exonerating them from personal liability for the corporation’s unremitted amounts — Whether, on the facts of this case, taxpayers having exercised due diligence as directors — Excise Tax Act, R.S.C. 1985, c. E-15, as amended, ss. 323(1) and (3) — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 227.1(1) and 227.1(3) — Unemployment Insurance Act, R.S.C. 1985, c. U-1, s. 54(1) — Canada Pension Plan, R.S.C. 1985, c.?C-8, s.?21.1.

The Minister assessed the taxpayers in their personal capacity as directors of A Ltd. for the latter’s unremitted source deductions and unremitted GST for periods following October 18, 1993. The taxpayers’ appeals to the Tax Court of Canada were allowed (98 DTC 1783). That Court found, inter alia: (a) that, after October 18, 1993, the taxpayers, as directors, did not have de jure control of A Ltd., and did not have the necessary freedom of choice to enable them to act freely; (b) that, following the advice of a financial consultant, they had not closed down A Ltd., but had attempted to keep it running to save jobs for its 70 employees; (c) that, until September 30, 1993, A Ltd.’s bills had always been paid, and the taxpayers had made efforts to have its bank make payroll remittances, with the result that the employee portion thereof had always been remitted; (d) that, to have shut down A Ltd. as the Minister suggested they should have, the taxpayers would not have been demonstrating due diligence. In light of all of the foregoing, the Tax Court found that the taxpayers had exercised due diligence, and were, therefore, not to be held personally liable as assessed. The Minister’s assessments were vacated accordingly. The Crown appealed to the Federal Court of Appeal.

Held: The Crown’s appeal was dismissed. Preliminary Observations: At the outset, it was to be noted that nearly all of A Ltd.’s debt to Revenue Canada for unremitted payments (from which the taxpayers’ personal liability had derived) had accrued after October 18, 1993, when A Ltd.’s bank started to exercise control over the cheques that it issued. In addition, the outstanding employee portion of the amounts in issue was paid in full by A Ltd.’s trustee in bankruptcy, so that the $133,747 forming the subject-matter of the assessments against the taxpayers concerned only the employer portion. Subsection 227.1(1) — a Requirement of Control?: Turning to the question of the directors’ personal liability under subsection 227.1(1) of the Income Tax Act, it is inappropriate to import into that subsection a requirement that it is only engaged if the directors have de facto control over the financial operation of the company, particularly the payment of its bills. Indeed, despite some broad statements by Addy, J. in Robitaille v. The Queen, 90 DTC 6059 (F.C.T.D.), that case could not be regarded as authority for the general proposition that once a bank exercises control over the cheques written by a company, the directors are not vicariously liable for unremitted source deductions. Such language does not appear in the subsection, and, in any event, the due diligence exemption in subsection 227.1(3) will prove broad enough to provide a defence to directors who have acted with propriety in attempting to prevent defaults by their company. It is, therefore, unnecessary to read the notion of control into subsection 227.1(1) of the Act, as the Tax Court judge did. Due Diligence: In this case, the “due diligence” owed by the taxpayers was at the high end of the spectrum. They were “inside” directors who managed A Ltd. and had been associated with it from its early days. Hence, they were very experienced in, and knowledgeable about, the corporation’s business. The focus of the appeal, however, should be on the taxpayers’ conduct as directors after October 18, 1993, when A Ltd.’s bank dishonoured the second remittance cheque (for which, admittedly, the taxpayers could not be held responsible). On the facts, the taxpayers did exercise the required degree of care, diligence and skill. One of A Ltd.’s employees continued to prepare remittance cheques, even though without a realistic hope that A Ltd.’s bank would honour them. Of more importance, the taxpayers had engaged a consultant who continued to make efforts to find a new investor, given his belief that the corporation could then be quickly turned around. In the end, therefore, the taxpayers were not to be held personally liable as assessed. The Minister’s assessments were vacated accordingly.