The Tax Court of Canada recently considered whether a director could establish a due diligence defence with respect to unremitted source deductions where the responsibility for remittance lay with an employee in Roitelman v. The Queen, 2014 TCC 139.
Roitelman owned an electrical contracting business. Initially, he personally remitted all source deductions. However, as his business expanded and he was required to travel more frequently, Roitelman hired and trained a bookkeeper who was to take over this role. In the beginning, he oversaw her work and ensured remittances were made in a timely fashion, but once this oversight ceased, the company fell behind in its remittance obligations.
The CRA sent five letters to the company about repeated failures to remit source deductions, and seven Notices of Assessment. Roitelman did not receive and was not aware of many of these letters and assessments. After the bookkeeper had been dismissed, he discovered hidden documents and unsent remittance cheques in the office. Roitelman admitted he relied on the bookkeeper to make the remittances without much direct supervision. He left her signed blank cheques to make the remittances and relied on her assurances that the remittances had been made.
The CRA assessed Roitelman for directors’ liability for unremitted source deductions under subsection 227.1(1) of the Income Tax Act for two taxation years. Roitelman appealed to the Tax Court and advanced a due diligence defence under subsection 227.1(3) of the ITA.
The Court allowed Roitelman’s appeal, finding he established a due diligence defence and was not personally liable for the unremitted amounts.
In rendering its decision, the Court reviewed the key due diligence decisions, and reiterated that the due diligence test is objective and contemplates the degree of care, diligence and skill exercised by the director in preventing a failure to remit. Thus, the focus is on whether attempts were made to prevent the failure to remit and not merely taking steps to remedy the failure after it occurred.
In determining whether Roitelman acted diligently, the Court considered what the reasonably prudent person would have done in similar circumstances and examined his actions against the prudent person standard. The Court also emphasized that the director’s actions should not be analyzed in hindsight, but in the context of the circumstances as they existed at the time the failures took place. The due diligence test does not require that the steps taken by the director be effective in ensuring future compliance; the test only requires that a director take steps to prevent the failure and that those steps would be proactive steps that a reasonably prudent person would have exercised in similar circumstances.
The Court found that the bookkeeper’s action and errors were not simple oversights or mistakes; she acted fraudulently with an intention to deceive. As a result, the proactive steps taken by Roitelman (hiring the bookkeeper, providing training, supervising her until level of comfort reached, trying to correct failures he was aware of) were reasonable, but frustrated by the bookkeeper’s fraudulent and deceitful behaviour. The Court concluded that it was reasonable for Roitelman to expect that his bookkeeper would bring any important correspondence to his attention and believe that when he signed the remittance cheques that they were being sent to the Receiver General. The Court also noted that despite the proactive steps taken, Roitelman was unable to discover or ascertain the extent of the remittance failures because the bookkeeper thwarted his attempts to ensure compliance. The Court held that Roitelman could not reasonably have known that the bookkeeper would engage in fraudulent and misleading actions.
The Court’s decision in Roitelman is of interest because rarely has a taxpayer been able to establish a due diligence defence where responsibility for bookkeeping and remittances has been delegated to another and relied upon. In prior cases, the courts have emphasized that a director’s oversight responsibilities with respect to remittances cannot be entirely delegated to another and that individual cannot be blindly relied upon. The deciding factor in Roitelman was likely the fact that the bookkeeper actively deceived the director/taxpayer, and no amount of oversight could likely have avoided the failure to remit.