INCOME TAX |
Corporations |
Smith v. Canada
A-154-00
2001 FCA 84, Sharlow J.A.
26/3/01
14 pp.
Judicial review of T.C.C.'s dismissal (Smith v. Canada (2000), 2000 DTC 1888) of taxpayer's appeal from assessments for amounts owed by corporation of which taxpayer director (unremitted employee source deductions, GST)--Income Tax Act, s. 227.1(3), Excise Tax Act, s. 323(3) exempting director from liability for corporation's failure to deduct, withhold, remit such amounts where director exercised degree of care, skill to prevent failure that reasonably prudent person would have exercised in comparable circumstances--What may reasonably be expected of director for purposes of those sections depending upon facts of case, and has both objective, subjective aspects--Subjective aspect depending upon director's personal attributes, including knowledge, experience--Generally person experienced in business, financial matters held to higher standard than person with no business acumen, experience--In assessing objective reasonableness of conduct of director, factors considered including size, nature, complexity of business, customs, practices--More reasonable for directors of larger, more complex businesses to allocate responsibilities among themselves--Resulting in higher standard of care being imposed on some directors of corporation than on others eg. may be more appropriate to impose higher standard of care on "inside director" (director involved in hands-on management) than "outside director" (director with only superficial knowledge of, involvement in affairs of corporation), particularly if outside director reasonably relied on assurances from inside directors that corporation's tax remittance obligations being met--Taxpayer director of corporation from February 1993 to October 1995--When first became director, no business training, experience--Minority shareholder, elected to board of directors to act as liaison between minority, majority shareholders--Expected to neither participate in day-to-day operations of company nor to understand details of financial affairs--Aware of company's financial difficulties--Sought legal advice about legal duties of directors--At first board meeting after appointment proposed motion priority be given to payment of Revenue Canada accounts; motion approved--Reports presented to directors at every meeting leading taxpayer to believe Revenue Canada remittances not in default--Application allowed--Tax Court Judge misdirected himself when determined taxpayer "inside director" at time of appointment because of education, willingness to act as director, efforts to understand obligations--Generally, for purposes of due diligence defence, "inside directors" involved in day-to-day management of company, influence conduct of business affairs: Soper v. Canada, [1998] 1 F.C. 124 (C.A.)--Taxpayer not assuming that role--Facts relevant to determination of whether "inside director" relating to tasks person undertakes as director, degree of person's involvement in business of corporation--Standard of care imposed on taxpayer too high--As outside director, reasonable for taxpayer to propose motion to keep Revenue Canada accounts current, thereafter rely on inside directors to ensure instructions followed--Due diligence defence established up to June 1995, when taxpayer becoming inside director by becoming more extensively involved in company's financial affairs in effort to keep company afloat--From July to September 1995 company's remittance obligations with respect to employee source deductions met --Taxpayer relied on information provided by corporate officers, Revenue Canada to ascertain amount of corporation's liabilities--Given limited experience in tax, business affairs reasonable for him to accept such information as reliable, although in fact inaccurate--Tried hard, if unsuccessfully, to ensure federal government research grant would be applied to company's obligations--Tax Court recognized efforts, but erred in application of due diligence defence when concluded actions did nothing to prevent failure--Director only required to act reasonably in circumstances--That efforts unsuccessful not establishing failure to act reasonably--Matter remitted to Tax Court with direction appeal be allowed, assessments vacated--Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, s. 227.1(3)--Excise Tax Act, R.S.C., 1985, c. E-15, s. 323(3) (as enacted by S.C. 1990, c. 45, s. 12).