Date: 20010629
Docket: T-2218-96
Neutral Citation: 2001 FCT 726
Between:
MICHEL LASSONDE
Applicant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
LEMIEUX J.
1. INTRODUCTION
[1] This is an appeal de novo from a decision of the Tax Court of Canada, on June 10, 1996, ruling that the applicant was liable to the Department of National Revenue (hereinafter the "Department") pursuant to subsection 227(10) of the Income Tax Act (hereinafter the "Act") in the amount of $3,506.62. This subsection makes a director liable for the failure of a corporation to deduct or withhold deductions at source ("DAS") and pay them to the Department unless due diligence is demonstrated.
2. FACTS
[2] During 1980 the applicant became a shareholder, director and secretary-treasurer of Radio C.J.S.A. (hereinafter "the company"), for which he was also the legal counsel, when he purchased forty-nine percent (49%) of its shares. At the time, the board of directors was composed of the applicant and two other directors, André Senez and his wife Mireille Senez. Mr. Senez held the position of chief executive officer of the company. In 1984, Mr. Senez was replaced in this position by Serge Raymond. In 1985, the applicant sold a portion of his shares, retaining a twenty-five percent (25%) interest. The company declared bankruptcy under a receiving order on May 27, 1986.
[3] The Department issued three assessments against the company for failure either to pay the DASs or to pay them by the prescribed date:
(a) on May 30, 1985, after an audit, an assessment of $7,555.04, including penalties and interest for the non-remittance of DASs for the months of November and December, 1984 and January to April, 1985;
(b) on November 24, 1985, after a second audit, an assessment of $301.46 reflecting the late DAS payments;
(c) on November 18, 1988, after an audit of the trustee on August 13, 1986, the Department issued a claim to Mr. Lassonde for (1) $1,334.01 for 1985, the result of a reconciliation between the T-4s issued by the company and the DASs paid, and (2) $2,121.27 for failure to remit the deductions for March, April and May, 1986. This assessment totalled $3,506.62, and it is the subject matter of Mr. Lassonde's appeal.
4. The company's financial health deteriorated in 1982 as a result of the recession and an expansion. It had a cash-flow problem.
[5] A deficit of $53,000 in its working capital was recorded for the fiscal year ending August 31, 1983. In 1984 this deficit was $42,000 and in 1985, $92,544.
[6] The company managed to pay the May 30, 1985 assessment following an arrangement between it and the Department under which five cheques post-dated from June 21, 1985 to August 23, 1985 were given to the Department. The final cheque could not be cashed owing to insufficient funds in the company's account.
[7] On September 17, 1985, a garnishment on the company's bank account was executed by the Department. As a result of this demand for payment, the company's line of credit was increased; it was personally guaranteed by Mr. Lassonde.
[8] On April 11, 1986, a month and a half prior to the bankruptcy, a second demand for payment was executed by the Department on the National Bank of Canada, where the company had its accounts, owing to the company's failure to make the remittances to the Receiver General. Following this second demand for payment, the applicant once again agreed to increase his guarantee, and the arrears in the source deductions were paid.
[9] In May 1986, a meeting of the shareholders was held during which the company's financing was discussed, since the main lending institution was requiring some supplementary investments. During this meeting, Mr. Lassonde used the occasion to ask Mr. Raymond, then the chief executive officer, whether there were any problems in the remittances of the source deductions. Mr. Raymond replied in the negative. Mr. Lassonde was satisfied with this reply and did not ask to see a copy of the cheques or the books of the company.
[10] The company's shareholders refused to increase their investments, and this led to its bankruptcy.
[11] The applicant appealed the assessment of November 18, 1988 to the Tax Court of Canada. The preliminary motion to allow the appeal on the ground that the assessment had been made outside the two-year limitation period provided in subsection 227.1(4) of the Act was dismissed on the ground that the company's bankruptcy did not terminate a director's liability. In regard to the applicant's due diligence defence, the Court held that the applicant had not sufficiently proved due diligence to be relieved of his liability. In her decision, Lamarre Proulx T.C.J. concluded, at page 8, that:
It is my view that there was no evidence of a positive action by the appellant to prevent the failures to remit the deductions at source to the Receiver General. The financial situation has been precarious since 1983. While the appellant did increase the line of credit so that the Minister's garnishment could be removed, this was not a way of preventing the failures since it came after the failures. He said he relied on the manager, but, according to the case law, this is not an act of prevention, particularly in the case of a director whose role is to control the financial administration of the corporation. The appellant was a lawyer and the corporation's secretary-treasurer. In accordance with the provisions of the Act that I have to apply, he therefore should have taken specific precautions to prevent the failure in question and there was no evidence that such an internal control procedure was established.
[Emphasis added]
[12] It is this decision that the applicant has appealed.
3. ISSUES IN DISPUTE
[13] The two issues raised by this appeal are as follows: (1) Was assessment number 574795, dated November 18, 1988, issued outside the limitation period set out in subsection 227.1(4) of the Act? (2) If not, has the applicant proved that he acted with sufficient due diligence to be relieved of his liability for failure in his capacity as a director, as provided in subsection 227.1(3) of the Act?
4. STATUTORY PROVISIONS
[14] The applicable provisions of the Act are as follows:
| 227.1 (1) Liability of directors for failure to deduct -- Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or section 153 or 215, has failed to remit such an amount or has failed to pay an amount of tax for a taxation year as required under Part VII or VIII, the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest or penalties relating thereto. |
227.1 (1) Responsabilité des administrateurs pour défaut d'effectuer les retenues -- Lorsqu'une société a omis de déduire ou de retenir une somme, tel que prévu au paragraphe 135(3) ou à l'article 153 ou 215, ou a omis de remettre cette somme ou a omis de payer un montant d'impôt en vertu de la partie VII ou VIII pour une année d'imposition, les administrateurs de la société, au moment où celle-ci était tenue de déduire, de retenir, de verser ou de payer la somme, sont solidairement responsables, avec la société, du paiement de cette somme, y compris les intéréts et les pénalités s'y rapportant. |
|
| (3) Idem - A director 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. 4) Limitation period - 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 the director last ceased to be a director of that corporation. 10) Assessment - The Minister may at any time assess any amount payable under (a) subsection (8), (8.1), (8.2), (8.3) or (8.4) or 224(4) or (4.1) or section 227.1 or 235 by a person, (b) subsection 237.1(7.4) by a person or partnership, (c) subsection (10.2) by a person as a consequence of a failure of a non-resident person to deduct or withhold any amount, or (d) Part XIII by a person resident in Canada, and, where the Minister sends a notice of assessment to that person or partnership, Divisions I and J of Part I apply with any modifications that the circumstances require. |
(3) Idem - Un administrateur n'est pas responsable de l'omission visée au paragraphe (1) lorsqu'il a agi avec le degré de soin, de diligence et d'habileté pour prévenir le manquement qu'une personne raisonnablement prudente aurait exercé dans des circonstances comparables. (4) Prescription - L'action ou les procédures visant le recouvrement d'une somme payable par un administrateur d'une société en vertu du paragraphe (1) se prescrivent par deux ans à compter de la date à laquelle l'administrateur cesse pour la dernière fois d'être un administrateur de cette société. (10) Cotisation -- Le ministre peut, en tout temps, établir une cotisation pour les montants suivants : a) un montant payable par une personne en vertu des paragraphes (8), (8.1), (8.2), (8.3) ou (8.4) ou 224(4) ou (4.1) ou des articles 227.1 ou 235; b) un montant payable par une personne ou une société de personnes en vertu du paragraphe 237.1(7.4); c) un montant payable par une personne en vertu du paragraphe (10.2) pour défaut par une personne non-résidente d'effectuer une déduction ou une retenue; d) un montant payable en vertu de la partie XIII par une personne qui réside au Canada. Les sections I et J de la partie I s'appliquent, avec les modifications nécessaires, à tout avis de cotisation que le ministre envoie à la personne ou à la société de personnes. [1998, c. 19, art. 226(3)] |
|
Translator's note: Subsection (10), supra, is a subsection of s. 227, not s. 227.1.
5. ANALYSIS
(a) Limitation period
[15] Under subsection 227.1(4) of the Act, the recovery of any amount payable by a director shall not be commenced more than two years after the director ceased to be a director of the company.
[16] The applicant argues that the limitation period began to run on May 14, 1996, the date of filing of the petition in bankruptcy. However, the cases hold otherwise. In Kalef v. Canada (1996), 194 N.R. 39 (F.C.A.), McDonald J.A. repeats the comments of MacKay J. in Canada v. Wellburn (1995), 98 F.T.R. 161, and writes, at paragraphs 14 and 15:
[14] 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:
[. . .]
[15] 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.
[Emphasis added]
[17] In the case at bar, it is necessary to consult the Quebec Companies Act. Under that Act, a director's term of office does not come to an end until the following conditions have been met:
Continuance in office.
123.76. Notwithstanding the expiry of his term, a director remains in office until he is re-elected, replaced, or removed.
Resignation.
A director may resign from office by giving notice to that effect.
Removal.
123.77. Unless otherwise provided in the articles, the shareholders may, by resolution, remove a director at a special meeting called for that purpose.
[18] These provisions of the Quebec Companies Act are similar to those in the Ontario Business Corporations Act, S.O. 1982, c. 4, which were reviewed by MacDonald J. in Kalef, supra, and those in the British Columbia Company Act, R.S.B.C. 1979, c. 59, reviewed by MacKay J. in Wellburn, supra.
[19] Both judges conclude, on the basis of these provisions, that a director does not cease to be a director as a result of the appointment of the trustee in bankruptcy. I reach the same conclusion in the case at bar.
[20] The applicant argues that "under the scheme of the Code" the director's term comes to an end when the company goes bankrupt, and he refers to the Civil Code of Lower Canada (hereinafter the "Civil Code") in support of his submission. Although the Companies Act provides that directors are analogous with mandataries (of the company) and article 1755 of the Civil Code provides that the mandate terminates by bankruptcy of either party, this does not mean that the director ceases to be a director when the company becomes bankrupt. I repeat the words of Aznar J. in Aikens v. St-Pierre, [1997] A.Q. no. 3066 (Court of Québec, Civil Division), who cites Cimon J. in Messier et als. v. Palomba et al., J.E. 93-1693, (500-02-022793-926), at paragraph 69:
[Translation] Article 1755(4) does not say that the directors through whom a corporation acts cease to act by virtue of its bankruptcy, since the directors are not mandataries within the meaning of that article; I repeat, the directors are but natural persons through whom a corporation acts. What this article says is that the mandate that a person (natural or corporate) has given to a third party ceases by operation of the bankruptcy of the person who gave the mandate to a third party. If, for example, prior to its bankruptcy, the company in question, by a resolution of its directors, had given their president a mandate to negotiate the purchase of an immovable property, its is quite evident, pursuant to this article, that the mandate would terminate through the bankruptcy of the mandator, the company in question.
[21] Consequently, the assessment of November 18, 1988, was not issued outside the limitation period set out in subsection 227.1(4) of the Act.
(b) Defence of due diligence
(i) The principles
[22] The Federal Court of Appeal, in Soper v. Her Majesty the Queen, [1998] 1 F.C. 124, lays down the applicable principles the courts should follow in interpreting the liability of company directors and the defence of due diligence. These principles were reiterated by that Court in Canada (Attorney General) v. McKinnon et al., [2001] 2 F.C. 203 (F.C.A.). Here are the principles established by Robertson J.A. in Soper, supra.
[23] In the first place, Robertson J.A., in paragraph 11, discusses the purpose contemplated by section 227.1 in these terms:
Non-remittance of taxes withheld on behalf of a third party was likewise not uncommon during the recession. Faced with a choice between remitting such amounts to the Crown or drawing on such amounts to pay key creditors whose goods or services were necessary to the continued operation of the business, corporate directors often followed the latter course. Such patent abuse and mismanagement on the part of directors constituted the "mischief" at which section 227.1 was directed....
[24] In the case at bar, there is no indication in the record that we are confronted with a situation that involves the type of abuse or mismanagement described by Robertson J.A. The evidence discloses that the company had failed to remit the source deductions to the Department on several occasions. However, the sums the Department is seeking to recover are small unremitted amounts, as well as the difference following the reconciliation of the payroll with the T-4s. In this case there is no question of the company's having failed to make the remittances in favour of its other creditors.
[25] Secondly, Robertson J.A. states that the test for determining whether the director demonstrated due diligence is a test that is both objective and subjective. Here is what he says, at paragraph 41:
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".
[26] In McKinnon, supra, Evans J.A. states the objective subjective "standard" as follows, in paragraph 28:
. . . Soper, supra, clarified the "due diligence" test applicable under subsection 227.1(3). Robertson J.A. held that the test is hybrid "objective-subjective" in nature. Thus, in deciding whether a director has "exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have shown in comparable circumstances", the court must take into account the characteristics of the directors whose conduct is in question, including their levels of relevant skill, experience and knowledge. The court must then ask whether, if faced with similar circumstances, a reasonably prudent director, with comparable levels of skill, experience and qualifications would have acted in the same way as these directors: paragraph 25. Applying this test, Robertson J.A. said (at paragraph 44):
. . . 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.
[Emphasis added]
[27] Thirdly, according to Robertson J.A., the purpose of subsection 227.1(3) is the purpose as he states it in paragraph 48:
I wish to make it clear, however, that the purpose of subsection 227.1(3) is to prevent failure to make remittances and not to cure default after the fact (though, as a practical matter, the provision should have the latter effect as well).
[28] In McKinnon, supra, Evans J.A. elaborates on this principle of prevention as follows, at paragraphs 34 and 35:
[34] . . . the due diligence required of company directors by subsection 227.1(3) is to prevent the failure to remit. This has been held to mean that, if directors become liable prima facie for a company's failure to remit, they normally cannot claim the benefit of subsection 227.1(3) if their efforts were capable only of enabling them to remedy defaults after they had occurred. Accordingly, of the measures taken in an attempt to rescue Abel, those most relevant to this inquiry are limited to the ones that were logically capable of preventing failures to remit the source deductions and GST when they became due.
[35] This point was made in Canada v. Corsano, [1999] 3 F.C. 173 (C.A), where the Court emphasized (at paragraph 35) that a director's duty is to prevent default, not to condone it in the hope that matters can be rectified subsequently. . . .
Similarly, in Canales v. R., [1997] 1 C.T.C. 2001 (T.C.C.) McArthur T.C.J. (at page 2003) described it as a well-established principle that
. . . the Appellant must demonstrate that a reasonable attempt was made to prevent the failure to deduct and remit and not just an attempt to remedy the situation after the failure.
Most recently, writing for this Court in Ruffo v. M.N.R. (2000), 2000 DTC 6317, Létourneau J.A. said (at paragraph 6):
The appellant's duty as a director was to anticipate and prevent the failure to pay the sums owing and not to commit such failure or perpetuate it as he did from March 1992 in the hope that at the end of the day the firm would again become profitable or there would be enough money, even if it were wound up, to pay all the creditors.
[29] Fourthly, Robertson J.A., in Soper, supra, discusses how a director could establish a due diligence defence and in what circumstances the duty to act by taking positive steps arises. He states, at paragraphs 50 to 53:
[50] In order to satisfy the due diligence requirement laid down in subsection 227.1(3) a director may, as the Department of National Revenue has noted, take "positive action" by setting up controls to account for remittances, by asking for regular reports from the company's financial officers on the ongoing use of such controls, and by obtaining confirmation at regular intervals that withholding and remittance has taken place as required by the Act. . . .
[51] Likewise, some commentators have advised directors that, if they wish to be able to rely successfully on the due diligence defence, it would be wise for them to consider undertaking a number of "positive steps" including, in certain circumstances, the establishment and monitoring of a trust account from which both employee wages and remittances owing to Her Majesty would be paid. . . .
[52] While such precautionary measures may be regarded as persuasive evidence of due diligence on the part of a director, in my view, those steps are not necessary conditions precedent to the establishment of that defence. . . .
[53] In my view, the positive duty to act arises where a director obtains information, or becomes aware of facts, which might lead one to conclude that there is, or could reasonably be, a potential problem with remittances. Put differently, it is indeed incumbent upon an outside director to take positive steps if he or she knew, or ought to have known, that the corporation could be experiencing a remittance problem. The typical situation in which a director is, or ought to have been, apprised of the possibility of such a problem is where the company is having financial difficulties. . . .
[Emphasis added]
(c) Testimony of the applicant and conclusions
[30] The applicant was the company's secretary-treasurer, a lawyer with several years of experience who was practising in a legal firm. Moreover, in his testimony, which is at pages 39, 40, 41 and 42 of the record, the applicant acknowledges that he was aware of the obligation to make deductions at source.
[Translation]
Q. So, you were aware of the obligation to make deductions at source?
A. Certainly. Not only that, I have taught corporate law for a long time in the Faculty of Law of the University of Montréal, at the École du Barreau, I have practised corporate law, so you cannot have a better witness than this for that.
Q. So, we cannot have anyone more informed than you?
A. Clearly.
. . .
Q. So, Your Honour, you also were aware of how frequently the source deductions were to be remitted?
A. Absolutely.
Q. As a very informed person. So, it was once a month?
A. That is correct.
Q. The fifteenth (15th) day of the following month?
A. I agree completely with that.
[31] It appears to me, in view of the applicant's personal characteristics, the fact that he is a lawyer by profession and teaches corporate law, that he is a well informed person from whom one could expect a high degree of diligence. I am of the opnion that a reasonable person in the same situation, having the same degree of knowledge, would have acted otherwise. Indeed, once the applicant learned of the difficulties the company was experiencing in remitting the source deductions, he should have taken action to prevent further breaches by way of positive measures.
[32] In this case, the applicant's obligation arose once he became aware of the fact that the company had a deficit in its current assets, and no later than when he learned for the first time that the source deductions had not been remitted to the Receiver General.
[33] The applicant testified that he had taken some positive steps to prevent a situation in which the source deductions were not being remitted to the Department. However, his testimony indicates that his actions were of a remedial rather than preventive nature. He testified as follows, at pages 23, 27 and 28 of the record:
[Translation]
Q. What did you do exactly to settle the matter?
A. I had the company's line of credit increased, and at the same time I increased my guarantee, in order to allow the line of credit to be increased. So I think it was settled within one day and at that point I notified the people at the Department that if there were any problems in the future they should contact me, keep me informed if there were any problems so that I could settle them.
. . .
Q. And that famous seizure in which you were involved to increase the line of credit, it was in which year?
A. It was in September eight-five (1985). The fall of eighty-five (1985).
Q. Thank you.
Mr. FRANCIS ROULEAU:
Q. Once you had settled that seizure, what happened subsequently in terms of the continuation of the company?
A. Obviously, I asked Mr. Raymond.... First, I had been somewhat surprised, and I asked Mr. Raymond and the people in the Department to notify me if there were any problems so I would know before rather than after.
So, I said to Mr. Raymond: "If there are ever any problems, notify me." And after that, regularly, when we were talking, I would check each month whether the DASs had been paid. I made sure, I asked him, I asked the question quite clearly, quite precisely. And I got some positive replies until a new bombshell, which was in April I think, there was another seizure.
THE COURT:
Q. April what year?
A. Eight-six (1986), Your Honour. I'm sorry.
Q. That's all right.
A. And I settled that one as well, which was about, what, a month and a half before the bankruptcy. And that is why I was pretty hopping mad to find out two years after the bankruptcy that when I had settled that in April eighty-six (1986), the Department after that came back and said there were some things that were not settled in eighty-five (1985) when I, for my part, had settled everything in April eighty-six (1986).
Mr. FRANCIS ROULEAU:
Q. Why do you say you had settled everything in eighty-six (1986)? Did you meet with someone, participate in a meeting?
A. Well, I did the same thing as in eighty-five (1985): I discussed with the people from the Department; they told me: "It is this amount that is owing." So I did the same thing, I had the line of credit increased, I increased my guarantee and I settled the problem..
But then two years after the bankruptcy, I learned that for eighty-five (1985) there had been some readjustments, so of course I couldn't know when I settled the matter in eighty-six (1986).
[Emphasis added]
[34] He also testified as follows on cross-examination, at pages 54 and 55 of the record:
[Translation]
Q. You were well aware of those obligations. How do you explain that in eighty-five (1985) the company was always remitting its source deductions late? How do you explain that?
A. I think you would be better off putting the question to Mr. Raymond. It was certainly not me who gave him instructions to remit it late because, on the contrary, after the first seizure incident, I had asked him to be diligent. So I have no answer to that question.
Q. But after the first seizure, did you look at which date... did you inquire of Mr. Raymond to find out the date on which the amounts were remitted?
A. Well, I was speaking to him regularly, I was asking him: "Are the DASs up to date?" He was telling me: "Yes, yes, everything's OK. Don't worry."
Well, Mr. Raymond is a person who was reliable. I had no reason whatsoever not to rely on him. And in life, what can you do, you have to rely on a certain number of people.
So, if you start questioning everything, you won't live long. Well, Mr. Raymond was reliable. I asked him regularly, especially after that affair, and he always told me it was all right.
[Emphasis added]
[35] At page 57, he testifies as follows:
[Translation]
Q. But you have to be careful when you are having financial difficulties?
A. Exactly, and that is what I was doing.
Q. You have to be more careful than usual?
A. It doesn't change much, I think it is the same care. It is not because there were some problems that I was not asking the question. I asked the question because after the first seizure I wanted to satisfy myself that there wouldn't be a second one.
Q. Did you ask to see any documents?
A. Well, I relied on what I was told, of course.
Q. But you did not see any documents?
A. What documents do you think I should see?
Q. You didn't see any documents saying ... When Mr. Raymond said "Yes, I have remitted the source deductions", he never gave you any proof: "Here's the cheque I gave to Revenue"? He didn't show you that?
A. If you take that attitude of asking everyone for documents where you are a director, you are going to spend your entire day examining some documents. I don't think that's the right way to proceed in everyday life, in any event.
I was a shareholder in several companies. It would be completely -- I don't know -- ridiculous to always be asking for documents. I relied on Mr. Raymond and I think that in all my experience with him he proved to be someone reliable. I had no reason to doubt his word.
If I had asked him: Will you send me a copy of the cheque? He would have said: What's the matter? Do you doubt my word? Ultimately, it would have meant I was ... I don't know, questioning his credibility, and where does that lead? I really wasn't thinking of that.
You have to understand, nevertheless, that the amounts were not huge, Your Honour. We were dealing with amounts of a few hundred dollars per month. So you have to put the whole thing in perspective.
If you are dealing with five hundred thousand dollars ($500,000) or two hundred thousand dollars ($200,000), your behaviour will be quite different. Here, these were not great amounts each month.
What I am saying is, of course, I asked him, I wanted to satisfy myself that it was paid because I was getting fed up -- it was in fact the first time and it was the only time in my life that I was involved in this, despite all the investments I have made in businesses -- so the size of the amounts meant that the kind of oversight I engaged in seemed reasonable to me in the circumstances. It's as clear as that.
[Emphasis added]
[36] It is apparent from this testimony that the applicant took no positive steps to prevent the failure to remit source deductions to Revenue Canada.
[37] Mr. Lassonde maintained this mindset to the end. The meeting of the directors in early May 1986 at the Sheraton Hotel in Montréal was important to the company's survival. There was discussion of the company's debts and the need for new investments. However, Mr. Lassonde even then was waiving any audits in connection with source deductions. On cross-examination, he was asked if he had seen any documents attesting that the source deductions had been paid. Mr. Lassonde replied as follows, at page 64:
[Translation]
Q. What documents would you want me to have seen? I did ask him there whether the DASs were up to date and he told me: yes. I said: "I hope we don't still owe any DAS." And the reply was positive.
[38] Mr. Raymond also testified in this court. Here is what he said in cross-examination, at pages 84-85 of the record:
[Translation]
Q. When Mr. Lassonde asked you whether you had made the source deductions....
Q. ... did you always tell the truth?
A. Yes.
Q. When the deductions were not made, did you tell him?
A. I think I informed him. If we could sign the cheques, I was signing them.
Q. Were you informing him adequately?
A. Yes, yes, yes, definitely.
Q. You never said anything like: the deductions were paid and they were not paid. You never said anything like that?
A. No, no, no.
Q. When he asked you a question, you always told him the truth?
A. Well, I think so.
[39] The assessment claimed by the Department is for the unpaid DASs for the months of March, April and May, 1986 and an additional sum for 1985 as a result of a reconciliation between the T-4s and the DASs.
[40] I accept the truth of the testimony of Mr Lassonde and Mr. Raymond. The cause of the non-payment of the amounts sought by the assessment is a lack of control and a lack of timely reports resulting from the distressed situation that existed in the company immediately before and after its bankruptcy, which demonstrates the validity of the duty to take positive action as referred to in Soper, supra, including controls and reports to audit the payments.
[41] In my opinion, the lack of such controls and such systems defeats the defence of due diligence relied on by Mr. Lassonde.
[42] The assessment issued by the Department comprises a further dimension, since it encompasses an amount identified following a reconciliation between the T-4s and the DASs for 1985 carried out during an audit by the Department of the trustee in August, 1986 after the bankruptcy. It may be asked how Mr. Lassonde could have prevented that.
[43] I accept the testimony of André Fournelle of the Department in this regard. He told the Court that when a company prepares the T-4s, normally in January and February of each year, it notices whether there is a difference between them and the DASs. He testifies that the Department received the company's T-4s in March 1986; it should have noticed the difference and should have made up the difference by a cheque at that time.
[44] The Federal Court of Appeal, in Drover v. Her Majesty the Queen, [1998] D.T.C. 6378, solves the problem. Robertson J.A. writes, at paragraph 8:
The present case adds a further dimension to the principles set out in Soper. The obligation imposed on directors is not limited to that of exercising the requisite standard of care in ensuring that GST as calculated was remitted. There is also an obligation to exercise the same standard with respect to ensuring that GST is properly calculated. To interpret s. 321(1) of the Excise Tax Act, (or for that matter s. 227.1(1) of the Income Tax Act) in a contrary manner would undermine the purpose of that section. Carelessness in calculation is as unacceptable as carelessness in remittance.
[Emphasis added]
6. CONCLUSION
[45] For the reasons stated, I am of the opinion that this appeal should be dismissed, with costs.
"François Lemieux"
J.
OTTAWA, ONTARIO
June 29, 2001
Certified true translation
Suzanne M. Gauthier, LL.L., Trad. a.
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
FILE NO: T-2218-96
STYLE: Michel Lassonde v. Her Majesty the Queen
PLACE OF HEARING: Montréal, Quebec
DATE OF HEARING: December 12, 2000
REASONS FOR JUDGMENT OF LEMIEUX J.
DATED: June 29, 2001
APPEARANCES:
Francis Rouleau FOR THE APPLICANT
Nathalie Labbé FOR THE RESPONDENT
SOLICITORS OF RECORD:
PINSONNAULT TORRALBO HUDON FOR THE APPLICANT
Montréal, Quebec
MORRIS ROSENBERG FOR THE RESPONDENT
Deputy Attorney General of Canada