October 07, 2011

Bradley Worrell, Lynda McKinnon and Ronald Lapointe (Appellants) v. Her Majesty the Queen (Respondent)

98 DTC 1783
Tax Court of Canada
June 4, 1998

(Court File Nos. 96-1749(IT)G, 96-1750(IT)G and 97-1752(IT)G; 97-944(GST)I, 97-945(GST)I and 97-946(GST)I.)

Directors’ personal liability for corporation’s unremitted source deductions and federal GST — Whether taxpayers having de jure control of the corporation — Whether taxpayers having demonstrated due diligence — Income Tax Act, R.S.C. 1985 (5th Supp.), c.?1, as amended, ss.?227.1(1) and 227.1(3) — Excise Tax Act, R.S.C. 1985, c.?E-15, as amended, ss.?323(1) and (3).

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 appealed to the Tax Court of Canada.

Held: The taxpayers’ appeals were allowed. Between October 18, 1993 and the date on which A Ltd. became bankrupt (i.e., April 28, 1994), its bank, and not its directors, controlled its finances. Accordingly, after October 18, 1993, the taxpayers, as directors, did not have de jure control of the corporation, and did not have the necessary freedom of choice to enable it to act freely. Applying the principles in Soper v. The Queen 97 DTC 5407 (F.C.A.), a necessary pre-condition for the imposition of personal liability is that the directors must have the necessary freedom of choice such that the corporation is freely acting through its board of directors, which was not the situation in A Ltd.’s case after October 18, 1993. In addition, prior to October?18, 1993, the taxpayers had not closed A Ltd. down but had followed the advice of a consultant in an attempt to save jobs for its 70 employees. Furthermore, the business had survived down turns in the past, and until September 30, 1993, its bills had always been paid. And the taxpayers had made efforts to have the bank make payroll remittances. Indeed the employee portion thereof had been remitted, so that only the employer portion was at issue, along with the GST. Accordingly, had the taxpayers shut A Ltd. down as the Minister’s counsel had suggested they ought to have, they would not have been demonstrating due diligence. In light of all of the foregoing, the taxpayers were not personally liable. The Minister’s assessments were vacated accordingly.