Lamarre Proulx, T.C.J.:—The appellant is appealing the respondent's assessment made pursuant to section 227.1 of the Income Tax Act (the Act).
The appellant was assessed with nine other persons. The appeal of John Laxton v. M.N.R., [[1989] 2 C.T.C. 2407] sets out the circumstances of this appeal. In the present case, the appellant in addition to the defence raised by the other appellant put forward a defence of due diligence pursuant to subsection 227.1(3) of the Act.
The facts pertaining to the appellant's case are the following: In October 1983, when the Vancouver Whitecaps Soccer Partnership (partnership) became the Vancouver Whitecaps Soccer Limited Partnership (limited partnership), the appellant's brother who was also a partner decided to retire from the partnership and he strongly advised the appellant to do likewise. The appellant did terminate his obligations as a partner in the partnership but subscribed $20,000 to the limited partnership. He did so for his interest in promoting soccer, but did not want to participate any further. The appellant terminated his obligations as a partner in the partnership by transferring for an amount of $400,000 his interest to another person involved, Mr. Carter. This is related in an agreement dated November 7, 1983. Article 1 of this agreement reads as follows:
1. Purchase and Sale
Cosmopolitan agrees to sell and transfer to Carter all of its right, title and interest in and to:
(a) Vancouver Whitecaps Partnership;
(b) Whitecaps Soccer Limited Partnership;
and all of its shares in the capital stock of:
(c) Vancouver Professional Soccer Ltd;
(d) Whitecaps International Tours Ltd.
(which interest and shares are collectively referred to as the "Property").
The purchase of the units in the Limited Partnership is worded as follows:
5. Purchase of Limited Partnership Units
Carter warrants to Cosmopolitan that it shall have the right to purchase 45,000 units in the new Limited Partnership (representing 3% of the total units of the new Partnership) which is to be established to carry on the operations of the Vancouver Whitecaps Soccer Team and Cosmopolitan covenants and agrees with Carter to purchase same. In accordance with this provision, Cosmopolitan agrees to execute the promissory note and the subscription form attached to this letter and return the document together with payment of $22,500 to Davis & Company in trust upon acceptance of this letter agreement.
Cosmopolitan is for Cosmopolitan Wine Agents (B.C.) Ltd. which is the appellant's company. The appellant and the appellant's solicitor testified in this case. Both testimonies were to the effect that they believed that the appellant's links with the corporation had been severed at the time of the sale of the appellant's interest in the partnership. Here is an excerpt from Mr. Jones’ testimony in his direct examination:
Q. Now, did you have, at least at the time of your dealings in November of 1983, did you know that Mr. Panz, Mr. Gus Panz was a director of Vancouver Whitecaps Soccer Ltd.?
A. That was the general partner of the limited partnership?
Q. Yes.
A. No. I would have been very surprised at that.
Q. I'm sorry, I meant to say Vancouver Professional Soccer Ltd.
A. Yes.
Q. You didn't know that at that time?
A. No, we didn't know.
Q. Did you know that Eric Panz was a director?
A. No, I didn't.
Q. Did you have any discussions with either of Eric or Gus Panz at the time of the sale of their interest to Mr. Carter concerning their participation as directors of the limited company?
A. Not until later.
Q. And when you say later, when was that?
A. It would be around the middle of 1984.
Q. And at the time of, or at least at that time what discussions did you have, and with whom?
A. The financial affairs of the club were getting steadily worse, and I was concerned for their liability if they were still involved. And I asked Gus Panz if he did have any involvement with the general partner, and he told me he did not. But just to be safe I did a search at the Registrar of Companies Office, and I found to my great surprise that he was a director.
Q. When did you find that out, do you recall?
A. It would have been in the fall of ‘84, probably around September.
Q. And as a result of finding that information out what did you do?
A. I served the resignation immediately on the registered office of the general partner.
Q. And that resignation was served in October, is that correct?
A. It was about that, yes.
Q. Okay, and was it at about the time that you found out that he was a director that you served the notice?
A. Yes, yes. Within days.
The appellant's perception of his status in the Limited Partnership was as follows:
A. . . . I knew I was a limited partner, but I did not realize I was a director. But I do realize I was a limited partner.
Q. Now, when did you find out that you were a director of the limited company?
A. Not until I talked to Mr. Jones.
Q. And when was that?
A. My corporate lawyer.
Q. And when was that?
A. I don't exactly recall a date. He just advised me he researched the thing and he told me I was a director and I was just stunned.
Counsel for the appellant referred me to the following cases:
Cybulski v. M.N.R., [1988] 2 C.T.C. 2180; 88 D.T.C. 1531;
Edmondson v. M.N.R., [1988] 2 C.T.C. 2185; 88 D.T.C. 1542;
Fancy v. M.N.R., [1988] 2 C.T.C. 2256; 88 D.T.C. 1641;
Merson v. The M.N.R., [1989] 1 C.T.C. 2074; 89 D.T.C. 22.
Though it remains unexplained why the appellant's name remained on the list of the corporation’s directors at the Registry of Companies office and not that of his brother, nevertheless, I am of the view that the appellant strongly believed that, in 1983, he had severed all his links with the previous structures (partnership and corporation) and had only assumed the respon sibility of a limited partner. He had reasonable grounds to entertain this belief since in November 1983, he had to pay a large sum of money to divest himself of his interest in the partnership and of all his shares in the corporation. I accept his testimony that his investment and participation in 1983 were intended to be in the limited partnership only.
On this aspect, I find the circumstances of this appeal to be akin to those of the Cybulski case, supra, where the Associate Chief Judge of this Court says at page 2184 (D.T.C. 1535):
I am satisfied that reasonable grounds existed for the appellant's belief that he had severed his connection with the Company as director and secretary-treasurer and concomitantly his responsibility for it when he placed his resignation in the hands of the Company's president and it was accepted by him. This relieves him of vicarious liability for the Company's default in remitting the deductions at source. . .
For these reasons, the appeal is allowed with costs.
Appeal allowed.