Helgesen, 2017 FCA 21: a director who relied on assurances from people who had already misled him did not exercise due diligence

2017 FCA 21 · Federal Court of Appeal

Author: Sas Tullo

This is a short judgment delivered from the bench on an appeal from the Tax Court in a director’s liability case. Mr. Helgesen was a director of an Alberta corporation that stopped remitting the income tax, Canada Pension Plan contributions, and Employment Insurance premiums it had deducted from its employees’ pay. The Canada Revenue Agency assessed him personally for $111,482.41 under section 227.1 of the Income Tax Act and the parallel provisions of the other statutes, and the Tax Court confirmed the assessment. The Federal Court of Appeal dismissed his appeal in a few paragraphs. Anyone who sits on the board of a small company should read it, because it shows how little room there is to argue that the corporation’s other people were to blame once the CRA has written to say that remittances are not being made.

Facts

The Tax Court, in reasons cited as 2016 TCC 114, found that the appellant was liable as a director of 1072519 Alberta Ltd. for unremitted payroll deductions under section 227.1 of the Income Tax Act, section 21.1 of the Canada Pension Plan, section 83 of the Employment Insurance Act, and section 77 of the Alberta Personal Income Tax Act, and confirmed the Minister’s assessment of $111,482.41 including interest and penalties (para 1). The Tax Court judge characterized the appellant as an experienced businessman who had failed to act as a reasonably prudent person would have in comparable circumstances to prevent the corporation’s failure to remit (para 2). The appellant had relied on assurances from third parties that remittances were being made, although those persons had misled him about remittances in the past, and he had received letters from the Canada Revenue Agency dated July 16, July 18, and August 2, 2008 telling him that remittances had not been made (para 5).

Issues

Whether the Tax Court judge misapplied the due diligence defence in subsection 227.1(3) of the Income Tax Act by failing to consider contextual and subjective circumstances, in particular the malfeasance of the corporation’s other director, and whether the evidence in the record supported the defence (para 3). A subsidiary point was whether the judge had said, at paragraph 27 of his reasons, that the appellant should have made a personal payment to discharge his duty (para 6).

Holding

The appeal was dismissed with costs fixed at $500, all inclusive (para 7). The Tax Court judge made no palpable and overriding error in finding that the due diligence defence was not established (para 5), and he did not say that the appellant ought to have paid the corporation’s remittances personally (para 6).

The court’s reasoning

The court began with the structure of the provision. Subsection 227.1(1) of the Income Tax Act imposes liability on directors for a corporation’s failure to remit, and subsection 227.1(3) supplies a defence 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. Because the defence is the director’s to make out, the Tax Court judge was right to require the appellant to show that he had turned his attention to the required remittances with a view to preventing a failure to remit, citing Buckingham v. Canada, 2011 FCA 142, [2013] 1 F.C.R. 86 (para 2).

The standard of review disposed of most of the appeal. Whether the due diligence defence has been established requires the application of a legal standard to a set of facts; it is a question of mixed fact and law reviewable only for palpable and overriding error unless an error of law or an extricable legal principle can be identified, and none was identified here (para 4). The court relied on Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paragraphs 26-37, and on Canada v. Chriss, 2016 FCA 236, [2017] 1 C.T.C. 107, at paragraph 7 (para 4).

On the facts, the court held that the appellant “has failed to establish that a reasonably prudent person would rely simply on third party assurances that remittances were being made when it was clear that these persons had misled him about making remittances in the past” (para 5). The CRA letters of July and August 2008 meant that he knew remittances were not being made, and he “failed to take any direct action to ensure that the corporation made its remittances as required” (para 5). The argument that the judge had demanded a personal payment from the appellant was rejected on a reading of the reasons below (para 6).

Practical implications

The judgment adds nothing new to the law, but it applies the Buckingham framework in a way that matters to directors of closely held companies. Since Buckingham, the question is not whether the director acted reasonably in the running of the business generally but whether the director took steps directed at preventing the failure to remit. Two features of this case made the defence hopeless: the appellant relied on people who had already misled him about remittances, and he continued to rely on them after the CRA itself had told him in writing that the money was not arriving. In my view the second feature is the decisive one. A CRA arrears letter to a director marks the point after which passivity will almost never satisfy subsection 227.1(3), whatever the director’s subjective belief about the honesty of the other people in the company.

The standard of review point is also worth noting. Once the Tax Court has found the facts and applied the Buckingham test, the Federal Court of Appeal will not reweigh the evidence; an appellant must point to an extricable error of law. Arguments framed as a failure to consider the “contextual and subjective circumstances” of the director, as this one was, are likely to be treated as invitations to reweigh unless a specific legal misstep is identified (paras 3-4). The current text of section 227.1 on the Justice Laws website shows no amendment since the decision. Whether an appeal was taken is not verified here.

For a director of a small corporation, the lesson is simple: when the CRA writes to say that source deductions have not been remitted, verify the position yourself, act directly, and keep a record of what you did. Relying on a co-director or a bookkeeper who has already let you down will not protect you from personal liability for the corporation’s payroll debt.

This comment is general information, not legal advice. The law may have changed since the decision; check the current text in the tax wiki.

Citation and links

Thomas Helgesen v. Her Majesty the Queen in Right of Canada, 2017 FCA 21, judgment delivered from the bench at Edmonton on 1 February 2017, Stratas, Webb, and Scott JJ.A., reasons by Scott J.A. Reasons on the court’s site. Also on CanLII. The decision under appeal is the judgment of Ouimet J. of the Tax Court of Canada dated May 5, 2016, cited as 2016 TCC 114 (para 1).