Tax Court of Canada Judgments

Docket: 2002-2219(IT)I

BETWEEN:

CONNIE BIRCHARD,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on common evidence with the appeals of Connie Birchard (2002-2216(GST)I) and Perry Birchard (2002-2214(GST)I and 2002-2218(IT)I) on January 6, 2003 at Nanaimo, British Columbia,

Before: The Honourable Deputy Judge D.W. Rowe
Appearances:
For the Appellant:	The Appellant herself
Counsel for the Respondent:	Raj Grewal

____________________________________________________________________

JUDGMENT

          The appeal from the assessment made under the Income Tax Act, notice of which is dated February 7, 2002 and bears number 27044 is dismissed in accordance with the attached Reasons for Judgment.

Signed at Sidney, British Columbia, this 6th day of March 2003.

"D.W. Rowe"

D.J.T.C.C.

Citation: 2003TCC90

Date: 20030306

Dockets: 2002-2219(IT)I 2002-2216(GST)I

BETWEEN:

CONNIE BIRCHARD,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent,

AND

Dockets: 2002-2218(IT)I 2002-2214(GST)I

PERRY BIRCHARD,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Rowe, D.J.T.C.C.

[1]      The appellant - Connie Birchard - (Birchard) appeared on her own behalf and as agent for her husband, Perry Birchard. Counsel for the respondent and Birchard agreed her appeal from assessment 76627 - dated October 9, 2001 - issued by the Minister of National Revenue (the "Minister") pursuant to subsection 323(1) of the Excise Tax Act (ETA) - in the amount of $4,828.15, representing net tax, interest and penalties - in respect of the failure of Dortec Distributors Ltd. (Dortec) to remit tax pursuant to subsection 228(2) of the ETA could be heard with the appeal of Perry Birchard from assessment 76628 - also dated October 9, 2001 - issued by the Minister - in the same amount - in respect of the failure of Dortec to remit Goods and Services Tax (GST) as required by the ETA.

[2]      Counsel for the respondent and Birchard also agreed her appeal from assessment 27044 - dated February 7, 2002 - issued by the Minister for federal income tax, Employment Insurance (EI) premiums, Canada Pension Plan (CPP) contributions - deducted at source but not remitted by Dortec - as detailed in Schedule "A" attached to the Reply to the Notice of Appeal (Reply) - pursuant to subsection 227.1(1) of the Income Tax Act (ITA), section 83 of the Employment Insurance Act (EIA) and section 21.1 of the Canada Pension Plan (Plan) could be heard with the appeal of Perry Birchard from assessment 27045 - dated February 7, 2002 - issued by the Minister under the same provisions of the aforementioned legislation - in the same amounts - also arising from the default of Dortec to make remittances, as required.

[3]      Counsel for the respondent and Birchard agreed the evidence - where relevant - could be applied to any of the above-referenced appeals in respect of assessments issued pursuant to the ETA and/or ITA.

[4]      Connie Birchard testified she received her designation as a Certified General Accountant (CGA) in 2001 and resides in Black Creek, British Columbia. Dortec was incorporated on February 26, 1996 and a GST registration - with a quarterly reporting requirement - was completed on February 28, 1996. Dortec manufactured and installed windows and doors for use in residences and commercial premises and operated from leased premises in Campbell River, B.C. Birchard stated she and her husband Perry Birchard had invested money in Dortec - in 1996 - because her brother-in-law - Mark Johnson - had been working in the predecessor business while holding a 10% equity in that entity. When Johnson was presented with an opportunity to participate in the purchase of that business, Birchard and her husband raised funds by placing a mortgage - in the sum of $150,000 - on their residence. The plan had been that Johnson - from his earnings at Dortec - would make the ensuing mortgage payments. Johnson and his fellow shareholder - David Terence Bridges - each holding 1/3 of the shares - had been appointed directors and officers of Dortec. Although the Birchards also held - together - 1/3 of the Dortec shares, they were not appointed directors. Within a year, the Birchards were not receiving payments from Johnson and undertook legal action in order to obtain control of Dortec by assuming - together - total ownership of company shares. On March 1, 1998, both of them were appointed directors of the company. Birchard stated she and her husband had signed several documents at the office of their solicitor but had not realized they were directors until September, 1998. Birchard was a student in the CGA program and - since March, 1998 - had assumed an active role in managing the financial affairs of Dortec. She examined various documents and files and spoke with the accountant who had been responsible for filing Dortec corporate returns. Birchard had no previous experience in business and had never served as a director. In June or July, 1998, Birchard stated she had uncovered fraud and embezzlement on the part of a bookkeeper who had been employed by Dortec Securities Ltd. (DSL), a home security business owned by Birchard and her husband which he operated from their residence. Criminal charges were laid and the individual was convicted of fraud and theft of the sum of $9,000. In the course of the ensuing accounting investigation undertaken by Birchard, she estimated the actual amount of the defalcation was approximately $20,000. Since the person responsible for the theft was on social assistance and without assets, the Birchards decided it was not worth pursuing any civil remedy. As a result of the activities of the former bookkeeper, Birchard stated she had to re-construct the books and records of DSL for the period of March to September, 1998, by examining original documents such as invoices and cheques. During this period, Dortec had been operating on the basis that the two shareholders - Johnson and Bridges - worked in the business with the assistance of one or two part-time employees. When Birchard examined the books and records of Dortec, she discovered GST returns had been prepared but not filed. In addition, she determined the numbers therein were incorrect and had to revise the returns in order to provide accurate information prior to submitting them to Revenue Canada, the predecessor of Canada Customs and Revenue Agency (CCRA). Birchard also discovered Dortec had not remitted the Provincial Sales Tax (PST), as required. As a result, she contacted the appropriate officials in that agency and entered into an arrangement whereby the arrears would be paid by the end of September, 1998. Birchard also became aware of several accounts payable - to major suppliers - that were in arrears and decided these debts had to be paid in order that Dortec could continue to receive material required for manufacturing the products offered for sale. Bridges and Johnson agreed to reduce their drawings - per month - from $2,220 to $1,100 and Johnson's wife worked as a bookkeeper/receptionist for Dortec for a small wage which was attributed to her from a portion of the total amount of $1,100 assigned to her husband. On September 11, 1998, Birchard filed GST returns for reporting periods from September 1, 1997 through May 31, 1998. By October, 1998, the payroll remittance return required by provisions of the ITA had been correctly filed. Dortec had secured a contract to supply a substantial amount of product to a customer, commencing in March, 1999. However, the Campbell River branch of the Royal Bank (Royal) elected to pursue legal remedies in relation to an outstanding loan and a bailiff seized Dortec assets and locked the doors on December 21, 1998. Birchard stated that - subsequently - all control over Dortec affairs was assumed by the bailiff and/or a receiver. Mark Johnson and David Bridges were assigned into bankruptcy on June 21, 1999 and July 19, 1999, respectively, and ceased to be directors of Dortec on said respective dates. Birchard stated that, until March 1, 1998, she and her husband had not been directors of Dortec nor had they held out to any person that they were involved in that capacity. Instead, they had been serving as "silent partners" and had invested money in order to assist Johnson in purchasing the business. After assuming control of Dortec, Birchard became aware there were not sufficient funds on hand to remit the outstanding GST amount. The PST arrears were considered to present a more pressing and potentially harmful problem than the amount owed in respect of GST and, in compliance with the adage, "the squeakiest wheel gets the grease", Birchard - on behalf of Dortec - began submitting monthly payments - in the sum of $1,700 - to pay off the PST debt. By September, 1998, those arrears had been paid in full and Dortec was able to remit ongoing PST on a current basis when due. During this period, major suppliers of Dortec were also receiving large payments in order to maintain ongoing business relationships. By the beginning of December, 1998, Birchard stated she had formulated a plan whereby Dortec - by the end of February, 1999 - could reduce - by 50% - the amount owed to CCRA relating to unremitted source deductions. Concurrently - on the strength of the substantial contract beginning in March, 1999 - Birchard stated she had drafted a plan to "plug away a little more aggressively" at paying off the amount Dortec owed in respect of unpaid GST. Birchard stated she obtained a bundle of documents - Exhibit A-1 - in May, 1999, pertaining to the seizure of Dortec assets by the bailiff acting on behalf of Royal. An examination of various documents and letters revealed that Dortec employees had accepted a settlement - in the sum of $6,300 - with respect to unpaid wages. Two separate documents - each entitled "Demand Notice" - dated January 25, 1999 and February 1, 1999, respectively, had been issued by a delegate of the Director of Employment Standards - an agency of the provincial government - to Vancouver Island Bailiffs Ltd., the entity that had carried out the seizure on December 21, 1998. A certain amount had also been paid in respect of PST payable from the sale - by the bailiff - of seized Dortec equipment to buyers; two sets of bailiff fees in the sums of $5,507.20 and $5,229.75, respectively, were also paid from the proceeds of the sale of seized Dortec assets. The sum of $13,838.61 was remitted to Royal on the basis it was a secured creditor. The Deputy Commissioner administering collection provisions pursuant to section 107 of the Social Security Tax Act, R.S.B.C. 1996 Chapter 431, had caused a Certificate to be filed in the Supreme Court of British Columbia on July 21, 1998 in relation to an outstanding amount of $8,698.00 owed by Dortec. In accordance with the provisions of said Certificate, it continued to be of the same force and effect and all proceedings could be taken after it - as if it were a judgment of the Supreme Court - for the recovery of a debt of the amount stated against the person (Dortec) named therein. Birchard estimated Dortec owed Royal approximately $150,000 prior to the seizure. In the months following March, 1998, she had analyzed the overall financial situation of Dortec and concluded it would take the company about 5 years to pay down debt to the point where it could become a profitable business. The purchase price of the former business - later owned and operated by the newly-incorporated Dortec - was approximately $100,000 but an additional $50,000 had been invested as working capital. Birchard referred to a letter - Exhibit A-2 - dated March 1, 1999 addressed to Dortec, wherein she and her husband - Perry Birchard - resigned as directors of Dortec, effective immediately. Birchard delivered this letter to the residence of another Dortec director, her brother-in-law Mark Johnson. On October 9, 2001, the Minister issued an assessment - Exhibit A-3 - to Perry Birchard, pursuant to subsection 228(2) of the ETA. On October 9, 2001, the Minister issued an assessment - Exhibit A-5 - to Connie Birchard, pursuant to subsection 227.1(1) of the ITA and relevant provisions of the EIA and the Plan. On February 7, 2002, the Minister issued an assessment - 27044 - Exhibit A-4 - in respect of the same indebtedness but including interest to that date. Birchard stated that when the bailiff arrived at the Dortec premises to carry out the seizure - on December 21, 1998, she telephoned Jeff Harris at Revenue Canada and advised him of the action being taken at that moment by Royal. Shortly thereafter, she faxed a list - to Harris - of Dortec accounts receivable in order that Revenue Canada could issue appropriate documents to Dortec customers and obtain payment directly of the specific amount stated on the invoices. Subsequently, several Statements of Account were sent by Revenue Canada to Dortec and Birchard noted the various amounts of payments acknowledged therein corresponded with certain accounts receivable included on the list she had faxed to Harris. Copies of said statements were filed as Exhibit A-6 and contain her handwritten notations as to the identity of the customer responsible for the payment directly to Revenue Canada. Birchard received a statement of disbursements - Exhibit A-7 - from the bailiff. In order to demonstrate compliance with GST reporting requirements and to demonstrate her attempts to negotiate a payment schedule with respect to arrears, Birchard referred to certain documents - Exhibit A-8 - including copies of three GST returns - relating to various periods - accompanied by a payment - in the sum of $200 - to be applied on arrears as a gesture of good faith. A statement of arrears - Exhibit A-9 - issued by the new agency CCRA - dated December 6, 2002 - informed Birchard she owed - in her capacity as director - the sum of $5,330.14 - in respect of GST - as a consequence of the default of Dortec.

[5]      In cross-examination by counsel for the respondent, Connie Birchard agreed she had been aware of GST, income tax and other source deduction reporting and remitting requirements. As a result, she was shocked to discover the requisite GST returns had not been filed up to July 1, 1998. The other company - DSL - operated by her husband - Perry Birchard had received a notice from the Workers' Compensation Board (WCB) that it had not paid an assessment in respect of premiums. An employee of DSL had been injured and, during the claim process, the absence of a premium payment had been discovered. Birchard stated that, apart from the problems with DSL created by the theft and fraud committed by a former bookkeeper, the financial problems of Dortec consumed her time and she decided the PST arrears and payments to major suppliers were a priority. Dortec was not using a bank account to issue cheques to suppliers and relied on a method whereby money orders were purchased and sent to a supplier/creditor in order to demonstrate the payment was guaranteed. Birchard stated her husband was working full time for a cablevision company and had begun DSL as a sideline business which continues to operate from the Birchard residence in Black Creek. In 1999, her husband and her brother-in-law - Mark Johnson - both suffered serious health problems. Because Perry Birchard was not knowledgeable in financial matters, Connie Birchard stated the Dortec financial problems were not explained to him in great detail but she informed him about the problems with GST arrears, unremitted income tax and other source deductions. A bundle of documents - Exhibit A-10 - was identified by Birchard as relating to remittances by Dortec in 1998.

[6]      Following notice to - and with the consent of - Birchard, counsel for the respondent filed certain documents including a Writ of Seizure and Sale - Exhibit R-1 - dated June 8, 2001 - issued by the Federal Court - Trial Division - directed to the Sheriffs of British Columbia with instructions to seize and sell the real and personal property of Dortec in order to satisfy an amount owing, as stated in a Certificate made under the ITA. On June 19, 2001, a Writ of Seizure and Sale - Exhibit R-2 - was issued by the Federal Court - Trial Division - to the Sheriffs of British Columbia to carry out a seizure against the property of Dortec in order to satisfy an amount owing under a Certificate issued pursuant to the ETA. With respect to the seizure for the amount owing under the ITA, the Writ was returned - nulla bona - on August 7, 2001. The other Writ relating to the seizure for a debt owing under the ETA was also returned nulla bona on August 13, 2001. Certain certified true copies of documents obtained from the Registrar of Companies, Province of British Columbia - pertaining to Dortec - were filed as Exhibit R-3.

[7]      Jennifer Steele testified she is a Collection Officer for CCRA and had been employed with its predecessor - Revenue Canada - for almost 20 years. The account of Connie Birchard and Perry Birchard was assigned to her for collection. She examined certain documents and discovered David Bridges had made a bankruptcy proposal wherein the debt owing to CCRA had been included. She also received certain documents - Exhibit R-4 - from Comox Valley Bailiffs Ltd. reporting - inter alia - on the lack of exigible assets as well as a copy of a Certificate - Exhibit R-5 - bearing Federal Court of Canada Registry stamp - issued under section 316 of the ETA. Another report - Exhibit R-6 - containing several documents was received from the bailiff firm advising that no exigible assets had been located in order to satisfy the Writ issued in relation to the indebtedness of Dortec under the ITA. The amount owing - as stated in the Certificate - Exhibit R-7 - issued by the Federal Court - Trial Division - was $15,030.89 from May 24, 2001 to the day of payment.

[8]      In cross-examination by the appellant - Connie Birchard - Jennifer Steele agreed the bailiff had been directed to attend at the Birchard residence in order to search for assets. The assessment against Birchard and her husband had been confirmed on the basis they were both directors of Dortec and were jointly and severally liable pursuant to subsection 227.1(1) of the ITA. A Notification of Confirmation - Exhibit R-8 - dated March 4, 2002 -had been sent to Perry Birchard. Steele stated that a search at the Registrar of Companies - in 2001 - had revealed the appellants were directors of Dortec. Steele stated the only information she received pertaining to any resignation - by the Birchards - as directors, was following issuance of the assessments - based on personal liability - to each of them.

[9]      The appellant - Connie Birchard - submitted that she and her husband had tendered their resignations as directors of Dortec, effective March 1, 1999. In view of that, the assessments issued by the Minister - based on personal liability arising from their role as directors - were out of time since the relevant provisions of the ETA and the ITA state no action or proceedings to recover any amount payable by a director of a corporation can be taken more than two years after the director last ceased to be a director of the corporation. Since the first assessments issued to the appellants were dated October 9, 2001, Birchard submitted the relevant provisions of the two Acts prohibited the Minister from assessing them on the basis of personal liability as directors. Birchard also submitted the evidence revealed she had attempted to resolve the problems encountered by Dortec and had made every reasonable effort to ensure that arrears in GST and unremitted source deductions would be paid within a certain period.

[10]     Counsel for the respondent submitted the purported resignation - as director - by each of the appellants was inadequate and of no force and effect because it did not comply with the relevant provision of the Company Act of British Columbia concerning resignation of directors. Further, counsel submitted the resignation was merely delivered to the home of Mark Johnson, a fellow director, and such act could not have provided notice to any person entitled to be so advised. Counsel submitted the evidence had disclosed Connie Birchard - and her husband - had not taken positive action to prevent the failure of Dortec to remit the amounts due under the ITA and/or the ETA and had not exercised the degree of care, diligence and skill that would have been exercised by a reasonably prudent person in comparable circumstances.

[11]     The issues in the within appeals are:

1.        whether the Minister assessed each appellant within the time permitted by the relevant provisions of the ETA and/or ITA in respect of the failure of Dortec to remit GST as required by subsection 228(2) of the ETA and the failure of the company to remit federal income tax, EI premiums and CPP contributions, as required by relevant provisions of the ITA, EIA and the Plan, respectively; and:

2.        whether each appellant has demonstrated an exercise of sufficient care, skill and diligence under the circumstances to prevent the failure of Dortec to remit certain amounts due.

[12]     The relevant provisions of the ETA are as follows:

323(1) Liability of directors - Where a corporation fails to remit an amount of net tax as required under subsection 228(2) or (2.3), the directors of the corporation at the time the corporation was required to remit the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest thereon or penalties relating thereto.

323(3) Diligence - A director of a corporation 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.

323(5) Time Limit - An assessment under subsection (4) of any amount payable

by a person who is a director of a corporation shall not be made more than two

years after the person last ceased to be a director of the corporation.

[13]     The relevant subsection of the ITA - establishing liability of directors - is 227.1(1) and the wording of the due diligence provision found at subsection 227.1(2) is identical to the one quoted above from the ETA and the time limit for issuing an assessment against a director is also two years.

[14]     The first matter I have to deal with is whether the assessments were issued within the time limit imposed by the legislation. One of the documents obtained from the Registrar of Companies - contained in Exhibit R-3 - is a Notice to Change Office, filed on October 14, 1998, by Mark Johnson, as a director of Dortec. The address of the Registered Office was changed from a previous location in Campbell River to 1620 -15th Ave., Campbell River, B.C. V9W 4J4. This Registered Address was the premise at which Dortec carried on its manufacturing and sales business. The seizure was effected by the bailiff at this location and the doors were locked. The position taken by Connie Birchard is that there was no point in delivering a letter of resignation - by herself and her husband - as directors, to premises that were now empty with no one in charge to receive the letter or to take notice of it.

[15]     The relevant provisions of the Company Act, RSBC, chapter 62, are below:

Ceasing to hold office

130       (1)         A director ceases to hold office when his or her term expires in accordance with the articles or when he or she

(a)         dies or resigns,

(b)         is remove in accordance with subsection (3),

(c)         is not qualified under section 114, or

(d)         is removed in accordance with the memorandum or articles.

Notice of cessation

132       (1)         Every company, within 14 days after the resignation or removal of a director or the company becoming aware of a director of the company not being qualified, must file with the registrar a notice, in Form 9 in the Second Schedule, of a director ceasing to hold office, but no filing is necessary for a director who ceases to be a director and is re-elected or reappointed the same day.

            (2)         A company that contravenes subsection (1) commits an offence and is liable to a fine not exceeding $50 for each day it is in default..

[16]     In the case of Pidskalny v. Minister of National Revenue, 91 DTC 1046, Judge Kempo, T.C.C. dealt with a purported resignation by a director of a corporation who had delivered a single copy of his letter of resignation to his brother at the shop. In that case, the appellant had been unaware that, in order for his resignation to be effective, it should have been delivered to the registered office of the company. Although now re-numbered, the applicable provisions of the Company Act - at that time - were worded the same as those quoted above. Judge Kempo observed that it was not necessary for a director's resignation to be filed - within the 14-day time limit, or at all - in order to be effective and the fact a company could be liable to prosecution for failure to comply with the provision would not negate the validity of a resignation. At page 1049 of her judgment, Judge Kempo commented as follows:

In my opinion, while the Appellant "ceased" to be a director when he resigned, it nonetheless remained statutorily ineffective pending compliance with subsection 154(2). To interpret this result otherwise would require a reading-out or disregard of the statutory words. I have been provided with no good reason or authority to do this.

Subsection 227.1(4) of the Income Tax Act uses the following terminology:

(4) 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 he last ceased to be a director of that corporation.

Of interest is the highlighted word in the phrase "ceased to be a director" which is almost identical to the terminology used in subsection 154(1) of the British Columbia legislation, "cease to hold office". While the emphasis of both appears to be in respect of "cessation", it would be meaningless to view that aspect in isolation and apart form the substantive matters pertaining to its legal effectiveness. The resolution of the cessation of a directorship in its full legal sense remains to be resolved according to the particular law of the province or territory having jurisdiction.

Unfortunately for this Appellant his unawareness of and his failure to comply with the service requirement upon the Company's registered office effectively put his cessation of directorship into legal abeyance. However this abeyance would in my view have terminated upon any form of or attempt at compliance with subsection 154(2) and/or 156(1) of the British Columbia legislation.

In the result the Appellant had not legally divested himself of his directorship after July 1, 1986 and his two-year limitative argument therefore fails.

[17]     In the case of Her Majesty The Queen v. Harvey Kalef, 96 DTC 6132, the Federal Court of Appeal considered whether the taxpayer had ceased to be a director upon the appointment of control over affairs of the corporation by the trustee in bankruptcy. The reasons for judgment were delivered by McDonald J.A. who commented at page 6134 and following:

The Income Tax Act neither defines the term director, nor establishes any criteria for when a person ceases to hold such a position. Given the silence of the Income Tax Act, it only makes sense to look to the company's incorporating legislation for guidance. Bynamics was incorporated under the Ontario Business Corporations Act. [S.O. 1982, c. 4.] Subsection 1(1) of the Ontario Business Corporations Act defines the term "director" as follows:

1. (1) "director" means a person occupying the position of director of a corporation by whatever name called and "directors" and "board of directors" include a single director.

Pursuant to subsection 1(1) of that statute, if a person is "occupying the position of director of a corporation" he or she is a director. The definition is quite passive. There is no requirement that the person exercise the power of a director or exert direct control over the company's assets in order to be a "director".

The Ontario Business Corporations Act also outlines the circumstances under which a director ceases to occupy the position. Subsection 121(1) of the statute states:

121. (1) A director of a corporation ceases to hold office when he or she,

(a)         dies or, subject to subsection 119(2), resigns;

(b)         is removed in accordance with section 122; or

(c)         becomes disqualified under subsection 118(1).

Mr. Kalef did not fulfil any of these requirements. He could have resigned or attempted to resign from his position as a director of the company but he did not do so. The only impediment to resignation in the Ontario Business Corporations Act is found in subsection 119(2). That subsection states that the first directors of a company cannot resign unless a successor is appointed. Mr. Kalef was not one of the first directors of Bynamics and that subsection therefore does not apply. For the purposes of the Ontario Business Corporations Act Mr. Kalef remained a director of Bynamics notwithstanding the appointment of the Trustee in Bankruptcy.

The Federal Court Trial Division decision in The Queen v. Wellburn and Perri [95 DTC 5417] was released after the decision of the Tax Court Judge in this matter. In that case MacKay, J. concluded that the appointment of a receiver does not indicate the time at which the directors of the company cease to hold their positions for the purposes of the Income Tax Act. He discussed the proper interpretation to be given to subsection 227.1(4) as follows:

Subsection 227.1(4) limits an action to recover on that vicarious liability, not with reference to the ability of directors to redress any failure of the corporation, that is, within the term of their office as directors, but to a reasonable period after they cease to hold office, i.e., two years after the person last ceased to be a director of the corporation. Termination of office under the law generally may vary from province to province and from one circumstance to another depending upon the relevant provincial or federal legislation. I may not fully comprehend what was contemplated when the learned Tax Court Judge suggested such a view "would in some circumstances, such as those under consideration, render the limitation period devoid of meaningful substance". In my view, the limitation period would be no more or less devoid of substance if it commences to run when a director's office terminates under applicable legislation than if the limitation period runs with the result of the Tax Court's decision, for in either case vicarious liability extends for two years after a former director can act, as a director, to do anything about a failure by the corporation to meet its obligations under the Act.

I agree with the reasoning of MacKay, J. While it may be open to Parliament to expressly deviate from the principles of corporate law for the purposes of the Income Tax Act, I do not think such an intention should be imputed. Given the silence of the Income Tax Act I think the guidance of the applicable corporate legislation, in this case the Ontario Business Corporations Act, should be taken. A director cannot and should not obtain the benefits of incorporation under the Ontario Business Corporations Act without accepting the responsibilities as well. At all pertinent times Mr. Kalef was a director of Bynamics. He did not cease to be a director by virtue of the appointment of the Trustee in Bankruptcy. He did not meet any of the requirements for ceasing to be a director established by the Ontario Business Corporations Act. The time limit found in subsection 227.1(4) of the Income Tax Act does not apply to bar the reassessments.

[18]     In the within appeals, the appellants delivered a letter of resignation - as directors of Dortec - to the residence of Mark Johnson, a fellow director. Unfortunately, they did not seek legal advice and did not contemplate filing a notice of their resignation with the Registrar of Companies. The letter of resignation could have been tacked to the door of the now-vacant Dortec business premises and a copy thereof later provided to either or both of the bailiff firms and to CCRA. The empty building was still designated as the Dortec Registered Office and, at this point, Connie Birchard and Perry Birchard were the sole shareholders of Dortec. Johnson made an assignment in bankruptcy on June 21, 1999 - approximately 3 months after the putative resignation was delivered to him. I have difficulty in understanding what goal the appellants thought they were achieving by taking that course of action since it was the act of giving notice to the public at large - by filing the proper document with the Registrar of Companies - that was important. Moreover, proper notice of a legal resignation - as director - by each appellant was critical as it pertained to specific Dortec debts which - if left unpaid - presented an ever-increasing risk of personal liability.

[19]     In light of the matters discussed within the context of the relevant jurisprudence, I conclude neither of the appellants had ceased to be a director of Dortec on March 1, 1999 and the two-year limitative argument therefore fails.

[20]     The next issue is whether the appellants have demonstrated that they acted in a manner capable of supporting their claim of exculpation, as permitted by the provisions of subsections 227.1(3) of the ITAand 313(3) of the ETA, respectively.

[21]     The decision of the Federal Court of Appeal in Soper v. The Queen, 97 DTC 5407 dealt extensively with the matter of directors' personal liability for a corporation's unremitted source deductions for income tax. The wording of that provision of the Income Tax Act under consideration - subsection 227.1(3) - is identical to that of subsection 323(3) of the ETA relevant to the within appeals. In the course of his judgment, Roberston J.A. reviewed the legislative history and framework of the provisions concerning personal liability of directors together with the standard of care as illustrated by the jurisprudence in this field. At page 5416 and following, Robertson J.A. stated:

This is a convenient place to summarize my findings in respect of subsection 227.1(3) of the Income Tax Act. The standard of care laid down in subsection 227.1(3) of the Act is inherently flexible. Rather than treating directors as a homogeneous group of professionals whose conduct is governed by a single, unchanging standard, that provision embraces a subjective element which takes into account the personal knowledge and background of the director, as well as his or her corporate circumstances in the form of, inter alia, the company's organization, resources, customs and conduct. Thus, for example, more is expected of individuals with superior qualifications (e.g. experienced business-persons).

The standard of care set out in subsection 227.1(3) of the Act is, therefore, not purely objective. Nor is it purely subjective. It is not enough for a director to say he or she did his or her best, for that is an invocation of the purely subjective standard. Equally clear is that honesty is not enough. However, the standard is not a professional one. Nor is it the negligence law standard that governs these cases. Rather, the Act contains both objective elements - embodied in the reasonable person language - and subjective elements - inherent in individual considerations like "skill" and the idea of "comparable circumstances". Accordingly, the standard can be properly described as "objective subjective".

V. ANALYSIS

There are far too many cases dealing with section 227.1 of the Act. One way to appreciate the breadth of the extant law is to categorize the relevant cases. That task has, in fact, already been accomplished in large part by some of the commentators: see e.g. Moskowitz ...; see also R.L. Campbell, "Directors' Liability for Unremitted Employee Deductions" (1933) 14 Advocates' Q. 453.

For example, in some instances the relevant issue will be whether an individual was in fact or in law a director at the relevant time for purposes of imposing personal liability or whether that individual ceased to hold office by operation of a valid resignation. In other cases, such as those involving bankruptcy and receivership, the central issue will be de jure control. Yet another cluster of cases, including situations in which a dominant director is able to limit others' influence over corporate affairs, will deal with de facto control. I intend to focus on the category of cases respecting the distinction between inside and outside directors since that line of authority is the most pertinent to this appeal.

At the outset, I wish to emphasize that in adopting this analytical approach I am not suggesting that liability is dependent simply upon whether a person is classified as an inside as opposed to an outside director. Rather, that characterization is simply the starting point of my analysis. 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 defence. 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 some instances, it is easy to see why inside directors have been held liable. Such is true in respect of Barnett, ..., the first case which dealt with the due diligence defence. In that case the taxpayer, as director and sole shareholder of the company, hired a comptroller. When the latter informed the taxpayer that the company was short of cash, the taxpayer instructed that the business' key suppliers should be paid first. In these circumstances, the Tax Court dismissed the taxpayer's appeal from the Minister's assessment which held the taxpayer personally liable for the source deductions withheld but not remitted. Equally understandable is the imposition of liability in the following cases involving inside directors:Quantz v. M.N.R., 88 DTC 1201 (T.C.C.); and Beutler v. M.N.R., 88 DTC 1286 (T.C.C.).

[22]     In the within appeals, Connie Birchard was in the process of completing the CGA program and received her designation in 2001. Although she had not served previously as a director of a corporation nor had she been involved in business, she was well aware of reporting and remitting requirements related to GST and source deductions. Her husband - Perry Birchard - operated DSL - a security business - as a sideline to his full-time employment. Once alerted to a potential problem in the cash flow of DSL, Connie Birchard was extremely capable in tracking down details of the defalcation committed by a former bookkeeper who, although employed by DSL, was also involved with financial matters and record-keeping requirements of Dortec. In her testimony, Connie Birchard stated she had informed her husband - Perry Birchard - of the state of affairs of Dortec following their assumption of control as a result of acquiring all shares on March 1, 1998. According to Connie Birchard, her husband was not knowledgeable in business matters relating to Dortec, particularly in regard to details of actions then being undertaken - by her - in order to resolve the company's precarious financial situation including the pressing need to pay PST arrears and to satisfy major suppliers in order that Dortec could continue to receive raw material necessary to manufacture its products.

[23]     In the case of A.G. of Canada et al. v. McKinnon et al., 2000 DTC 6593. the Federal Court of Appeal considered the matter of directors' personal liability for unremitted source deductions and GST. Apart from the usual considerations pertaining to the issue of due diligence, there was also the matter of the directors' loss of de facto control arising from the corporation's bank deciding - suddenly - to reduce the line of credit and to dishonour cheques made payable to the Receiver General for source deductions.

[24]     Following a thorough review of existing jurisprudence arising from similar fact situations, at page 6603 - and following - of his judgment, Evans J.A stated:

In my opinion, it is essential to keep in mind the relevant question in this appeal: did the directors exercise due diligence to prevent the company's failure to remit? This is not necessarily the same as asking whether it was reasonable from a business point of view for the directors to continue to operate the business. In order to avail themselves of the defence provided by subsection 227.1(3) directors must normally have taken positive steps which, if successful, could have prevented the company's failure to remit from occuring. The question then is whether what the directors did to prevent the failure meets the standard of the care, diligence and skill that would have been exercised by a reasonably prudent person in comparable circumstances.

It will normally not be sufficient for the directors simply to have carried on the business, knowing that a failure to remit was likely but hoping that the company's fortunes would revive with an upturn in the economy or in their market position. In such circumstances directors will generally be held to have assumed the risk that the company will subsequently be able to make its remittances. Taxpayers are not required involuntarily to underwrite this risk, no matter how reasonable it may have been from a business perspective for the directors to have continued the business without doing anything to prevent future failures to remit.

This point was recently made in Ruffo v. R., [1998] 2 C.T.C. 2203 (T.C.C.), affirmed by this Court on April 13, 2000 (A-429-97), where Lamarre Proulx, J.T.C.C. stated at paragraph [20]:

I am of the opinion that the case law of the Court is consistent on the diligence that the director of a corporation must show to avoid the liability prescribed in subsection 227.1(3) of the Act. It is the diligence that is concerned with preventing the failure that can, in many instances, differ from the diligence that the director must exercise toward the corporation.

She went on to cite with approval the following statements by Rip, J.T.C.C. in Merson v. R., 89 DTC 22, where he said (at page 28):

The prudence required by subsection 227.1(3) in the exercise of care diligence and skill is different from that required by a director performing his duties, under corporate law, notwithstanding that subsection 227.1(3) and subsection 122(1)(b) of the Canadian Business Corporations Act, for example, both use identical words. The exercise of care, diligence and skill by the director contemplated by subsection 227.1(3) is not founded on the director's obligations to the corporation; it is based on one of the corporation's obligations under the Act and the failure of the corporation to fulfil such obligation. A director who manages a business is expected to take risks to increase the profitability of the business and the duties of care, diligence and skill are measured by this expectation. The degree of prudence required by subsection 227.1(3) leaves no room for risk.

I do not understand Rip, J.T.C.C.'s statement that the 'degree of prudence required by subsection 227.1(3) leaves no room for risk' to mean that section 227.1 imposes strict liability on directors whose company ultimately proves to be unable to make good defaults in its remittances. Such a view would clearly be contrary to subsection 227.1(3), which only becomes relevant when Revenue Canada is unable to recover the money that the company ought to have remitted.

Rather, I take him to have meant that, if directors decide to continue the business in the expectation that the company will turn around and will be able to make good its remittance defaults after they have occurred, if the company nonetheless fails without paying its tax debts, it is no defence for the directors to say that the risk that they took would have been taken by a reasonable person. The subsection 227.1(3) defence only applies if it can be demonstrated that the directors exercised the care, diligence and skill that a reasonably prudent business person in comparable circumstances would have exercised to prevent a future default.

Whether directors have exercised due diligence to prevent such failures from occurring has both a legal and a factual aspect. As matter of law, the liability of a director for unremitted source deductions and G.S.T. does not crystallise until the conditions prescribed by subsection 227.1(2) have been satisfied. Moreover, if the remittances are made in full, albeit late, the directors will not be liable for the company's previous failure to remit.

However, the fact that, before crystallisation, the liability of the director is inchoate is not incompatible with a finding that there was a failure to remit when no remittance was made on the date prescribed in the relevant legislation as the date when the remittance was due. Thus, for example, subsection 108(1) of the Income Tax Regulations, C.R.C. 1978, c. 945 provides that amounts deducted from employees' wages in a month pursuant to subsection 153(1) of the Act shall be remitted to the Receiver General on or before the 15th day of the following month.

Accordingly, in my view, the directors of Abel could not have obtained the benefit of subsection 227.1(3) on the basis of an assertion that they had continued the business, reasonably relying on Mr. Humphrey's advice that it could be turned around in eighteen months' time by which time the economy should have improved. Even if the company successfully positioned itself to take advantage of the economic upturn and became profitable, it would only have become able to discharge its accrued liability and to prevent future failures to remit. Following this advice could not have prevented any failures to remit that occured prior the revival of the company's fortunes, even if the advice had proved to be correct.

Given the limitations placed upon them by the bank's de facto control of the company's finances, I am satisfied that, on the facts of this case, the directors exercised the degree of care, diligence and skill to prevent failures to remit that would have been shown by a reasonably prudent person in comparable circumstances. That Ms. McKinnon continued to prepare remittance cheques, admittedly without a realistic hope that the bank would honour them all, also indicates that the directors were not unmindful of the company's debt to Revenue Canada....

[25]     Unlike the situation in McKinnon, supra, Connie Birchard implemented a system for paying Dortec invoices due from suppliers by sending money orders rather than incurring the risk that Royal management might suddenly decide to dishonour a cheque payable to an important supplier. Once Connie Birchard became involved in the management of the financial affairs of Dortec, she corrected the GST returns she had found in a file, inserted correct information, and submitted them to Revenue Canada. The source deduction forms in relation to income tax, EI premiums and CPP contributions were properly completed and submitted.

[26]     The appellants found themselves in a difficult position. They had invested money in Dortec and - together - held 1/3 of the outstanding shares. For the most part, assisting their family member - Mark Johnson - was a major factor in their decision to become involved in the purchase of the business later owned and operated by Dortec. Connie Birchard began working at finding solutions to several pressing financial problems. By July 21, 1998, the PST arrears - in the sum of $8,698.00 - had been the subject of a Certificate - contained in Exhibit A-1 - filed in the Supreme Court of British Columbia by the Deputy Commissioner of the Social Service Tax Act. Connie Birchard elected to tackle this problem first by entering into an arrangement whereby Dortec paid the sum of $1,700 per month on the arrears and would remit ongoing PST as - and when - due. Concurrently, she had to ensure that major suppliers to Dortec were paid, in order to guarantee a regular flow of material needed to manufacture the doors and windows ordered by customers. She was aware that remittances of source deductions were in arrears and that amounts were owing in respect of GST. She included a payment - in the sum of $200 - when filing returns for certain reporting periods and intended to follow up on a plan to retire GST arrears as well as other accumulating amounts arising from various unremitted source deductions. Dortec was banking on increased product sales - pursuant to a substantial contract of supply and installation beginning in March, 1999 - as the significant event capable of improving the company's financial situation. Even then - according to Birchard - Dortec was not going to be truly profitable for at least 4 or 5 years because it had to pay down substantial debt, including nearly $150,000 owed to Royal. Unfortunately, the gamble did not pay off and Royal sent in the bailiff - just before Christmas, 1998 - to seize all corporate assets and close down the business. Connie Birchard acknowledged that she had chosen to give priority to paying off PST arrears and to satisfying the demands of important suppliers of material rather than remitting the requisite amounts due and owing for GST and/or source deductions. She was acting as the controller for Dortec which was wholly owned by her and Perry Birchard. Once the Birchards assumed full ownership of Dortec, and the full extent of the financial problems came to light, Perry Birchard was made aware of the situation by Connie Birchard who provided ongoing information - in a general sense - since he was not particularly adept at comprehending the nuts and bolts and inner workings of various reporting and remitting requirements and mechanisms.

[27]     Connie Birchard testified that she recalled signing various documents at the office of their solicitor prior to assuming full control of Dortec on March 1, 1998. However, she stated she did not specifically appreciate that she and her husband were directors of Dortec until September, 1998, when some event - or information received - caused them to be aware of their status. However, a Notice of Directors - dated March 1, 1998 - was filed with the Registrar of Companies on July 3, 1998, listing them as directors of Dortec. I can accept that Connie Birchard probably had not turned her mind to the consequences of being a Dortec director until squarely faced with the consequences at some later point, but I cannot find on the evidence adduced before me that she did not know she was a director of Dortec at the time of assuming control of the balance of the outstanding shares on March 1, 1998. She and her husband were taking that specific action in order to assume total control - and ownership - over the Dortec business operation in order that she could devote her time and expertise to solving a multitude of problems and to protect their investment which was secured by a mortgage against their personal residence. Certainly, it is difficult for someone to prove the negative but it is not reasonable to conclude - on the evidence - that Connie Birchard - and/or her husband - were not aware - on March 1, 1998 - that they were also becoming directors of Dortec in addition to assuming full ownership of the corporation.

[28]     Connie Birchard testified that she contacted an official at Revenue Canada in order to advise that a seizure - on behalf of Royal - was currently being carried out at the Dortec premises. She promptly faxed a list of Dortec accounts receivables to that individual so Revenue Canada could obtain payments directly and apply those sums to the arrears. Fortunately, Revenue Canada took appropriate action and some funds were collected as a result. However, it strikes me as somewhat strange that Revenue Canada or it successor - CCRA - did not undertake the necessary steps to assert priority - on behalf of Her Majesty in right of the Government of Canada - in the same manner as the Province of British Columbia had done in relation to PST arrears. Notification to Revenue Canada by Connie Birchard - while the seizure was taking place - was the proper course of action to follow and she is to be commended for that and for her valiant efforts throughout to keep the business afloat and in ensuring that proper filings and remittance forms were prepared and submitted to Revenue Canada even if accompanying payments could not be made. She contacted the collection department of Revenue Canada and attempted to enter into satisfactory arrangements for payment of all arrears, including those attributable to GST. By alerting Revenue Canada to the seizure by Royal, Birchard provided an opportunity to that agency to assert its claim in a manner befitting its probable superior status as a creditor in order to participate in the ultimate distribution of proceeds from the sale of seized assets.

[29]     The potential liability for directors is substantial and a mere lack of appreciation for potential legal consequences at a personal level when things go bad - and they often do - is rarely going to provide an adequate answer to satisfy the degree of diligence demanded by the relevant provisions of the applicable legislation.

[30]     The appellants were required to carry the burden of proof and to demonstrate the various assessments issued by the Minister - as set forth in the beginning of these Reasons - are incorrect. The evidence does not permit me to arrive at that conclusion. As a consequence, both appeals - by each appellant - are hereby dismissed.

Signed at Sidney, British Columbia, this 6th day of March 2003.

"D.W. Rowe"

D.J.T.C.C.

COURT FILE NO.:	2002-2219(IT)I, 2002-2216(GST)I 2002-2218(IT)I, 2002-2214(GST)I

STYLE OF CAUSE:

Connie Birchard and H.M.Q. Perry Birchard and H.M.Q.

PLACE OF HEARING

Nanaimo, British Columbia

DATE OF HEARING

January 6, 2003

REASONS FOR JUDGMENT BY:

the Honourable Deputy Judge D.W. Rowe

DATE OF JUDGMENT

March 6, 2003

APPEARANCES:

For the Appellant Connie Birchard: For the Appellant Perry Birchard:

The Appellant herself Connie Birchard (Agent)

Counsel for the Respondent:

Raj Grewal

COUNSEL OF RECORD:

For the Appellant:

Name:
Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada