Citation: 2009TCC557
Date: 20091104
Docket: 2006-3312(IT)G
BETWEEN:
ROY WALSH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
[1] In February
2005, the Appellant was assessed under section 227.1 of the Income Tax Act
for the unremitted source deductions of his solely owned company.
[2] The question raised
in the pleadings is whether the Appellant was a director during the period contemplated
by subsection 227.1(4) and if so, whether he exercised the due diligence
required under subsection 227.1(3) of the Act. At the hearing, a further
issue arose as to whether a writ of execution had been returned unsatisfied under
paragraph 227.1(2)(a) and is considered below under the heading
“Preliminary Matter”.
[3] Section 227.1
provides that:
Liability
of directors for failure to deduct
227.1(1) Where
a corporation has failed to deduct or withhold an amount as required by
subsection 135(3) or 135.1(7) 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, or solidarily, liable, together with the corporation, to
pay that amount and any interest or penalties relating to it.
Limitations on liability
227.1(2) A
director is not liable under subsection (1), unless
(a) a
certificate for the amount of the corporation's liability referred to in that
subsection has been registered in the Federal Court under section 223 and
execution for that amount has been returned unsatisfied in whole or in part;
(b) the
corporation has commenced liquidation or dissolution proceedings or has been
dissolved and a claim for the amount of the corporation's liability referred to
in that subsection has been proved within six months after the earlier of the
date of commencement of the proceedings and the date of dissolution; or
(c) the
corporation has made an assignment or a bankruptcy order has been made against
it under the Bankruptcy and Insolvency Act and a claim for the amount of
the corporation's liability referred to in that subsection has been proved
within six months after the date of the assignment or bankruptcy order.
227.1(3) 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.
Limitation
period
227.1(4) 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.
[4] The Appellant’s
primary position is that subsection 227.1(4) bars the Minister from recovering
the unremitted source deductions from him because he ceased to be a director of
the company on May 31, 2002, more than two years before he was assessed for those
amounts on February 2, 2005. He argues, alternatively, that if he was a
director of the company at the relevant time, he exercised the diligence
required of him by subsection 227.1(3).
[5] The Respondent
contends that at no time did the Appellant cease to be either a de jure
or de facto director of the company and that he failed to take
reasonable steps to prevent its failure to remit the source deductions.
Facts
[6] In December
1996, the Appellant purchased a company known as Jardine Security Ltd. (“JSL”)
from Douglas Jardine. At that time, JSL was in the business of providing
security services on public and private property as well as traffic safety
control on road construction sites in the Miramichi region of New Brunswick.
[7] The Appellant
and his wife acquired all the shares of the company. The Appellant became the
sole director. For some reason, a change of directors was never filed with the New Brunswick corporate
registry. Thus, at all times relevant to this appeal, the name of the former
owner of JSL, Douglas Jardine, was shown in the records of the New Brunswick
corporate registry as the sole director of JSL.
[8] The Appellant’s
goal when he acquired JSL was to expand its operations from the Miramichi
region to the entire province. With this in mind, he sought and was successful in
securing a contract with New Brunswick Power to provide traffic control
services across New Brunswick. He accomplished this by taking a calculated risk:
following his negotiations with New Brunswick Power, the Appellant was
confident that upon the satisfactory performance of its obligations, JSL’s contract
would be renewed at a higher price, thus permitting the company to compensate
for its low bid and to recoup its outlays for the additional staff, training
and equipment needed at the new job sites.
[9] Things looked
promising until 2000 when, contrary to all expectations, New Brunswick Power
did not renew its contract; at the last minute, JSL was underbid by one of its
own former employees. This was a devastating blow to the company. The Appellant
met with Hal Raper, Chartered Accountant, to review the company’s financial
situation and to develop a plan[1] to mitigate the effect of the lost contract. Mr.
Raper advised the Appellant to try to increase profit margins by renegotiating
contract prices; if this could be accomplished, his projections for the
company’s future were favourable. As a consequence, the Appellant met with JSL
clients and was able to persuade some of them to pay a higher price for the
company’s services[2]. Armed with this success and Mr. Raper’s projections,
the Appellant met with the company’s banker in the hope of securing additional
financing to cover, among other costs, the source deductions. By that time, the
company’s account manger at the bank had changed; the new representative did
not say no but deferred his decision for six months to see how the company
performed against its projections.
[10] Meanwhile, the
Appellant made some major changes to shore up the company: he laid off staff,
including the field manager and bookkeeper, whose respective duties were taken
over by the Appellant and his wife. He managed to get the company out of its
lease and relocated the business office to the basement of his home. The
Appellant injected his own funds into the company: he cashed in insurance policies
and RRSP’s, remortgaged his house and used his personal line of credit and
credit cards to cover the company’s expenses.
[11] Throughout this
time, the Appellant kept the Canada Revenue Agency informed of the company’s
difficulties and continued working with officials to reduce the company’s
outstanding liabilities. Although JSL would ultimately succeed in retiring its
HST debt, the company was unable to get caught up on its source deduction
remittances.
[12] Just when the
Appellant began to “see light at the end of the tunnel”[3], two new crises arose: one of its major clients was
bought out by an Ontario company which promptly reduced, by more than half, the
security services JSL had been providing. Around the same time, an
internationally owned security company that had traditionally confined its
operation to large urban centers began making incursions into the small events
market in the Miramichi. JSL was in no position to compete with the rates the
larger, more established firm could offer to its clients.
[13] Thus it was that
when the Appellant reported back to the bank in late March or early April 2002,
the necessary financing was refused. The Appellant’s last-ditch efforts to
secure new investors were equally unsuccessful. After consulting with Mr. Raper,
the Appellant decided there was nothing for it but to shut down JSL.
[14] The Appellant
immediately found employment at a local funeral home and began working long
hours to earn the money needed to pay off the personal debt he had incurred
trying to salvage the company. While the company’s bank account remained open,
it was not used for any purpose. After JSL ceased operations, a few cheques
came in from late-paying clients; these, the Appellant passed on to Mr. Raper
who, in turn, sent them directly to the CRA.
When letters from the CRA began arriving for JSL, the accumulated bundles of
unopened mail were also forwarded to Mr. Raper for his attention.
[15] When the
Appellant told Mr. Raper of his decision to close the company, Mr. Raper, as
was his practice, advised him that it would be prudent to resign his position
as sole director. About a month later, when Mr. Raper discovered that the
Appellant had not yet resigned and was at a loss as to how to go about it, he
drafted the following letter:
May 31, 2002
To: Jardine
Securty Ltd.
Fr: Roy Walsh
Delivered –
Letter of resignation
I am unable to
continue as a director. This is my notice of resignation as a director.
[Signature of
Roy Walsh]
Roy Walsh
[16] The Appellant
went to Mr. Raper’s office and signed the letter in his presence. Mr. Raper
told him to put the original in the JSL Minute Book. Although the Appellant had
no memory of what he had actually done with the letter, his usual practice was
to follow Mr. Raper’s instructions. In this case, however, he said he was
unlikely to have done so because he had never had the Minute Book in his
possession. His best guess was that he must have put the resignation letter
with the company’s general business records which, at the request of the CRA,
the Appellant had delivered to the official conducting the JSL payroll audit in
the fall of 2002. These documents were never returned to the company. When he
was unable to locate the original resignation letter, the Appellant concluded
that it must have been with the other JSL documents turned over to the CRA.
[17] Following the
payroll audit, in December 2002, JSL was assessed for unremitted payroll
deductions together with penalties and interest.
[18] In February 2003,
Lawrence Anderson, a CRA Collections Officer, called the Appellant to advise
that he was responsible for paying the company’s source deductions[6]. This came as a shock to the Appellant who had
believed that his obligations as a director ended when the company ceased
operations. Although he told Mr. Anderson he would have his accountant get
in touch with him, he did not, in fact, act on this promise immediately because
he owed money to Mr. Raper for past services and had no funds to pay either him
or the CRA. As it happened, around this same time he bumped into Mr. Raper who,
upon learning of the Appellant’s new difficulties, undertook to help him
notwithstanding his outstanding invoices. Thus it was that about a month later,
on March 12, 2003, Mr. Raper (with the Appellant in his office) called Mr.
Anderson to discuss the situation.
[19] The next
significant event occurred on May 14, 2004. Pursuant to paragraph 227.1(2)(a)
of the Act, the Minister registered a Certificate of Registration[7] in the Federal Court of Canada for $75,503.11
representing JSL’s unremitted source deductions for 2001 and 2002. On December
15, 2004, a Writ of Seizure and Sale[8] was issued and sent to the New Brunswick Sheriff’s
Office for execution. Whether the Writ was returned unsatisfied is in issue and
is discussed below under the heading “Preliminary Matter”.
[20] On February 2,
2005, the Appellant was assessed under section 227.1 for the company’s
unremitted source deductions.
1. Preliminary Matter
[21] At the hearing,
an issue arose as to whether the Minister was able to prove his compliance with
paragraph 227.1(2)(a); namely, that a writ of execution had been
returned unsatisfied:
227.1(2) A
director is not liable under subsection (1), unless
(a) a
certificate for the amount of the corporation's liability referred to in that
subsection has been registered in the Federal Court under section 223 and
execution for that amount has been returned unsatisfied in whole or in part;
[Emphasis
added.]
[22] The matter came up
during the examination of the CRA’s representative, Mr. Anderson. Counsel for
the Respondent had just put in evidence copies of the section 223 Certificate[9] and the Writ of Seizure and Sale[10] (the “Writ”) that had been sent to for execution.
Counsel then presented to Mr. Anderson a copy of a letter from the Sheriff’s
Office dated January 24, 2005 advising that the Writ had been returned
unsatisfied. At that point, counsel for the Appellant objected to the admission
of the letter on the ground that it had not been included in the Respondent’s
List of Documents and because it was hearsay. After a short break, counsel for
the Respondent (who had not been counsel during the exchange of documents or
examinations for discovery) confirmed that, contrary to his understanding, the
Sheriff’s letter had not been listed among the Respondent’s documents.
[23] This
led to the further question as to whether, if the letter were excluded from
evidence, the appeal ought to be allowed on the basis that a director is not liable
under subsection 227.1(1) unless the Minister can establish that he has
fulfilled the conditions of paragraph 227.1(2)(a). Counsel for the
Appellant argued that whether the Writ had been returned unsatisfied lay exclusively
within the knowledge of the Minister and the onus was upon him to prove his
strict compliance with all the elements of paragraph 227.1(2)(a). The
Minister’s failure to refer to the Sheriff’s letter in his List of Documents or
to call a witness with personal knowledge that the Writ had been returned
unsatisfied meant that the Minister was unable to do so; accordingly, the
Appellant was not liable under subsection 227.1(1) and the assessment was not
valid.
[24] My first inclination was
to admit the Sheriff’s letter. By the
time of counsel’s objection to its admission, the Appellant himself had testified
that “[t]here were no assets”[11] in the company. Until the Sheriff’s
letter was presented to Mr. Anderson, neither counsel seemed to have
realized that it had not been included in the Respondent’s List of Documents. Further,
while there was no reference to the letter itself in the Reply to the Notice of
Appeal, the assumption in paragraph 8(aa) stated that the execution of the Writ of Seizure and Sale was
returned unsatisfied on January 24, 2005, the date of the Sheriff’s letter.
Counsel for the Respondent pointed to certain representations made by counsel
for the Appellant at the examination for discovery: on his reading of the
transcript, he argued that counsel for the Appellant had indicated that his
client did not take issue with assumption 8(aa). Finally, there was Mr.
Anderson’s oral evidence that he had reviewed the CRA file and, in particular,
the documents filed with the Federal Court. Mr. Anderson is an official with
over 20 years experience with the CRA, most of it in Collections. Counsel for
the Appellant did not challenge Mr. Anderson’s credibility. For my part, I
found him to be a very reliable witness: he answered the questions put to him
with the facts as he knew them; as will be seen from my review below of his
testimony regarding the Appellant’s status as a director, he was not one to
embellish his answers to bolster the Respondent’s case. When he did not know an
answer or could not discern one from his colleagues’ diary notations, he
candidly said so.
[25] Notwithstanding the above, however, I ultimately decided
that the letter ought to be excluded. There was no justification to deviate
from the general rule of excluding from evidence documents not referred to in a
party’s pleadings or list of documents. While the Appellant’s testimony that JSL had no assets was consistent
with the Minister’s assumption that the execution of the Writ of Seizure and
Sale was returned unsatisfied, it is not proof that the Minister took the steps
required of him under paragraph 227.1(2)(a). Paragraph 227.1(2)(a) requires nothing of the taxpayer; its
focus is the action that must be taken by the Minister to trigger the
taxpayer’s liability under subsection 227.1(1) and, in turn, his power to assess.
As for the representations of counsel for the Appellant at examinations for
discovery, I accept his interpretation of the portions of the discovery read in
at the hearing[14]: that because his client had no knowledge of the
facts assumed in paragraph 8(aa), he could not dispute them, but nor did he
admit them. Finally, though a credible witness, Mr. Anderson’s involvement with
the Appellant’s file ended long before the Writ of Seizure and Sale was sent
for execution. His testimony that the Writ had been returned unsatisfied was
based entirely on the information in the excluded letter. Although counsel for the Respondent argued that hearsay went to
weight rather than admissibility, Rip, J. (as he then was) reached a different
conclusion in Gestions Rodney Cleary & Fils Ltée v. R., one of
the cases filed by the Respondent. In that case, C.J. Rip, compared the
Minister’s use of hearsay evidence during the assessment process and at trial:
I shall
consider the hearsay objection first. There is no doubt that in making an
assessment, officials of a taxing authority, such as the Canada Customs and
Revenue Agency and the Ministère du Revenu du Québec rely on hearsay as well as
direct evidence. An assessment is not bad simply because the assessor relied on
hearsay evidence. The problem is that if the assessment is questioned in a
court of law and the Minister has the onus of proving misrepresentation, for
example, or where the onus of proof shifts to the Crown, the hearsay evidence
gathered by the assessor cannot be used to defend the assessment; the ordinary
rules of evidence prevail.6
The evidence of an employee of the CCRA, the Ministère du Revenu du Québec or
any government department is subject to the same standards as the evidence of
any other citizen. That the person may hold a particular office does not grant
him or her the privilege of adducing inadequate evidence. A court cannot admit
statements as proof of their truth or as proof of assertions implicit therein
when such written or oral statements are made by persons otherwise than in
testimony and in the proceeding in which it is offered.
[26] What, then, is the consequence of having excluded the
Sheriff’s letter? Given the unexpected nature of the issue, counsel did not
have (or request) the opportunity to make submissions based on a careful review
of the legislation and jurisprudence, if any. However, in Worrell v. R., a decision of the Federal Court of Appeal cited by the Appellant in
respect of the due diligence issue, Evans, J.A. held:
Whether
directors have exercised due diligence to prevent [failures to remit] from
occurring has both a legal and a factual aspect. As a matter of law, the
liability of a director for unremitted source deductions and G.S.T. does not
crystallise until the conditions prescribed in subsection 227.1(2) have been
satisfied. Moreover, if the remittances are made in full, albeit late, the
directors will not be liable for the company’s previous failure to remit. [Emphasis added.]
[27] The purpose of paragraph 227.1(2)(a) is to
require the Minister to exhaust his remedies of recovery against the corporate
taxpayer before permitting him the extraordinary remedy of assessing a third
party, its director, for the company’s unremitted source deductions. While subsection
227(10) provides that the Minister “… may
at any time assess any amount payable under … section 227.1”, that otherwise
broad power to assess is contingent upon the fulfillment of the conditions set
out in paragraph 227.1(2)(a). In this way, paragraph 227.1(2)(a)
is analogous to subparagraph 152(4)(a)(i) which, briefly stated, limits
the Minister’s power to assess beyond the normal reassessment period to
circumstances where the taxpayer’s actions amount to misrepresentation. While
subparagraph 152(4)(a)(i) is silent as to onus and manner of proof, the
jurisprudence has established that the imposition of conditions on the
Minister’s power to assess has the effect of shifting the onus, which otherwise
lies with the taxpayer, to the Minister and that the Minister’s burden of proof
under that provision is a heavy one.
[28] Similarly,
the language of paragraph 227.1(2)(a) places the onus on the Minister
but does not specify how he is to prove his compliance with its conditions. Thus,
it is for the Court to decide whether the Minister has met his evidentiary
burden. While I have some sympathy for counsel for the Respondent’s
characterization of the omission of the Sheriff’s letter from the Respondent’s
List of Documents as “an irregularity”, it seems to me that proof of the
Minister’s fulfillment of the conditions in paragraph 227.1(2)(a) is so
fundamental to his power to assess under subsection 227(10) that any doubt on
that score must be resolved in favour of the taxpayer. Here, the Minister has
produced no evidence to show that the execution of the Writ of Seizure and Sale was
returned unsatisfied. Absent proof that the Minister has satisfied the requirements
of paragraph 227.1(2)(a), no liability attaches under subsection
227.1(1) and the assessment upon which it was based cannot stand.
[29] The
appeal is allowed, with costs, and the assessment is vacated on the basis that
the Minister has not proven that the execution of the Writ of Seizure and Sale
was returned unsatisfied in whole or in part as required by paragraph 227.1(2)(a)
of the Act.
2. Was
the Appellant a de jure or de facto director?
[30] In the event I am in error on the Preliminary Matter, I
have also considered the Appellant’s primary basis for his appeal; namely, that
he was not a director of JSL at the
relevant time under subsection 227.1(4) of the Act.
A. Was
the Appellant a de jure director?
[31] For the reasons
set out below, I am satisfied that the Appellant was not a de jure director
of JSL because he resigned from that position on May 31, 2002.
[32] The relevant
portions of section 66 of the Business Corporations Act of New Brunswick
provide that:
66(1) A
director of a corporation ceases to hold office when
(a) he dies or
resigns;
…
(2) A
resignation of a director becomes effective at the time a written resignation
is sent to the corporation, or at the time specified in the resignation,
whichever is later.
[33] The Crown’s
position is that given the absence of the original of the resignation letter
and the implausibility of its having gone astray when the company’s records
were turned over to the CRA, the Appellant is not to be believed in his
assertion that he signed a letter of resignation on or about May 31, 2002. On
this point, counsel submitted:
… if a letter
of resignation had been in [the JSL documents delivered to the CRA payroll
auditor], then it would have been brought to the attention of the CRA. The fact
that nobody there ever found it is why we are here today, and I would suggest
that is evidence in itself that the letter never made it to the company’s books
and records.[21]
[34] The first
weakness of this argument is that it is premised upon the infallibility of the
document management processes of a large government agency. In its
characterization of the letter not having been “found”, counsel’s argument also
presupposes that someone at the CRA was actually looking for it. I am unable to
embrace either of these hypotheses. The JSL payroll audit was a different beast
entirely from the Appellant’s personal assessment for the company’s unremitted
source deductions. Various CRA officials were involved with their files from
the time JSL first fell behind in its remittances to the moment of the
Appellant’s personal assessment in February 2005. In these circumstances, there
is no reason to conclude that the records from one file would necessarily make
their way to the other. Thus, the Appellant’s conclusion that the letter must have
gone astray along with the other JSL records turned over to the CRA is
plausible and, in any event, more likely than the thesis proposed by the
Respondent.
[35] Further, while
counsel for the Respondent invited the Court to draw the inference that the
letter did not exist because it could not now be found, he did not directly
challenge the credibility of the Appellant or Mr. Raper. The Appellant’s
candid admission that he had no memory of what he had done with the letter had
the ring of truth. He did not strike me as one with a penchant for filing
documents, even under ideal conditions. As it was, he had been living for several months
with the stress of keeping a sinking business afloat; when he signed the
resignation letter, he had just taken the difficult decision to close JSL. When
Mr. Raper suggested he resign his directorship, the Appellant felt, quite
understandably, the layman’s unease with the notion of writing a letter to
himself to say he had resigned. That unease led to procrastination, ended only
by Mr. Raper’s offer to draft the letter for him and insistence on getting it
signed. Although Mr. Raper did not specifically remember the events of May 31,
2002, he testified that it was his practice to record, for billing purposes,
the client’s name and the time spent in his daytimer. The Appellant put in
evidence a copy of Mr. Raper’s daytimer[23] showing a meeting with the Appellant of 15 minutes’
duration on May 31, 2002. This document was not challenged on cross‑examination.
[36] The Appellant
said it was normally his practice to follow Mr. Raper’s advice, evidence that
is consistent with his having acted on Mr. Raper’s suggestions for improving the
company’s financial outlook. One exception, however, was his handling of the
resignation letter. Because he had never had the company’s Minute Book in his
possession, it would make sense for the Appellant simply to put the letter with
the company’s other records in the home business office, especially since, by
that time, the company itself was defunct. In these circumstances, the
Appellant would have been less credible if he had insisted that he had a clear
memory of placing the letter neatly in the Minute Book as instructed.
[37] The second prong
of the Crown’s argument is that, even if the Appellant signed the letter, that
does not amount to a written resignation having been “sent to the corporation”
as contemplated by subsection 66(2) of the New
Brunswick Business Corporations Act.
While acknowledging the practical difficulties of resigning as a director of a
solely owned corporation, counsel for the Respondent argued that a director
must do something more than “resign in his own mind”[24]. In my view, this characterization of the Appellant’s
actions does not accurately describe what he, in fact, did.
[38] There is no
statutory requirement in the New
Brunswick Business Corporations Act that,
to be effective, the written resignation must be placed in the company’s Minute
Book. The key to provisions like subsection 66(2) is that there be “meaningful
communication with the corporation”[25]
of a director’s decision to resign.
[39] In Perricelli
v. R.[26], even though the relevant provincial legislation
contemplated a written resignation, the Court held on the facts of that case
that a director had effectively resigned when he announced his intentions to
the two remaining directors:
I am satisfied Mr. Perricelli resigned in the summer of 1990. He did so
when the three directors and shareholders were all together. It is a matter of
whether this resignation was effective in accordance with the laws of Ontario.
Did any one of the three men utter the words: “Notice of this meeting is
waived?” Unlikely. Did Mr. Cuthbert and Mr. Lishman say: “We accept Mr.
Perricelli’s resignation and hereby elect the two of us as ongoing directors?”
Again, unlikely. But did all three leave the meeting with an understanding that
Mr. Perricelli would no longer serve in his capacity as director? Absolutely.[27]
[40] The facts in the
present case are even more compelling. Here, there was a written resignation
signed by the company’s only director in the presence of the corroborating
witness who had drafted it. The letter was then taken to the company’s business
office.
[41] In these
circumstances, I am satisfied that there was “meaningful communication” to JSL of
the Appellant’s resignation effective May 31, 2002; thus, the Appellant
ceased to be a de jure director as of that date.
B. Was
the Appellant a de facto director of JSL?
[42] The Respondent’s
alternative position is that, even if the Appellant’s resignation was
effective, he remained a de facto director of JSL and as such, is liable
for the company’s unremitted source deductions.[28] While acknowledging that there had not been much for
the Appellant to do once the company ceased operations, counsel for the
Respondent argued that the little he had done warranted a finding that he
remained in control of JSL. Counsel relied, in particular, on the Appellant’s
having forwarded JSL cheques and correspondence to Mr. Raper and having authorized
him to carry on discussions with CRA officials. Counsel submitted that the
Appellant’s actions went beyond mere holding out, as in Hartrell v. R.; here, the Appellant actually maintained control of JSL at all times
relevant to this appeal.
[43] In my view, the
Appellant’s actions do not support such a conclusion. It must be remembered
that although the Appellant resigned as a director on May 31, 2002, he
continued to be a shareholder of JSL and had to comply with the CRA’s request
for company’s records. As a practical matter, JSL’s mail was being sent to the
Appellant’s home only because its business office had had to be relocated there
when JSL began to encounter financial difficulties; but for this, given the
Appellant’s lack of involvement after May 31, 2002, he might not even have been
aware of the correspondence. Had the Appellant been acting as a director, it
would have made sense for him to deposit the cheques in the company’s bank
account which remained open. Instead, he simply passed them on to the company’s
accountant for his attention, along with any letters to the company from the
CRA which had accumulated.
[44] The Appellant did
much less than the taxpayers in Netupsky v. R.[30] or Scavuzzo v. R.. In Netupsky, the appellant was held not to be a de facto
director, even though after his resignation, he had signed a series of detailed
letters to third parties and taken out a bank loan on behalf of the
corporation. In Scavuzzo, Bowman, C.J. distinguished between actions
taken by the appellant in his role as general manager from those in his
capacity as director of the company to find that, even though the appellant had
signed “many contracts” on its behalf after his resignation, he was not a de
facto director of the corporation. In the present case, Mr. Anderson
confirmed on cross-examination that the CRA had no documentation signed by the
Appellant on behalf of JSL after he resigned on May 31, 2002.
[45] As for the discussions
between the Appellant and/or Mr. Raper and CRA officials after May 31, 2002, Mr.
Raper was acting for both JSL and the Appellant in his personal capacity.
Further muddying the waters was the fact that the CRA also had active files for
both taxpayers: JSL’s payroll audit assessment and the Appellant’s director’s liability
assessment. As often happens with solely owned corporations, a clear
distinction was not always maintained between the company and its directing
mind. Even the CRA officials seem to have had problems keeping the players
straight: their notes reveal that, at times, it was difficult to determine what
was being discussed with whom on whose behalf. For example, although the
heading of Mr. Anderson’s diary entries[33]
is shown as “Jardine Security Ltd.”, he testified that, in his mind, the
“client” referred to in those notes was the Appellant personally.
[46] Much of the
confusion seems to have arisen from the fact that, for reasons unknown, no
change of directors was ever filed for JSL with the New Brunswick corporate
registry. Mr. Anderson’s evidence was that, by the time of the payroll
audit in September 2003, the CRA official who took over the file, Phyllis
Koval, had discovered that the former owner, Douglas Jardine, was shown,
incorrectly, as the director of JSL in the New
Brunswick corporate registry. Based on
her notes, Mr. Anderson confirmed that one “Trinda Blackmore”, described in the
notes as the “accountant for Mr. Jardine’s business”, had told Ms. Koval that Douglas Jardine had ceased to be a
director when the company was sold. While there is no clear evidence of Trinda
Blackmore’s identity or role in these matters, Mr. Anderson’s
understanding was that she was affiliated with Grant Thornton, the same
accounting firm as Mr. Raper. More importantly, however, there is nothing in
Ms. Koval’s notes to show that either the Appellant or Mr. Raper were ever
involved in these discussions or asked about the Appellant’s status. Mr.
Anderson testified that he never raised the matter of the directorship with the
Appellant or Mr. Raper because what he was interested in was that JSL had
ceased operations. While he could not remember if the Appellant had ever
identified himself as a director, Mr. Anderson added that as a CRA
official, he has
“… never had, in 20 years, anybody that named themselves as director of the
company.” Thus, the description in Mr. Anderson’s notes of the
Appellant as the “director of this non-operating business [JSL]”[37] was based on his own assumption rather than
information received from the Appellant or Mr. Raper.
[47] Both the Appellant and Mr. Raper testified that he had never advised the Appellant not to
disclose that he had resigned as the director of JSL. On the evidence presented,
it seems that no one from the CRA ever sought confirmation of this fact from the
Appellant or his representative. The CRA notes are not precise enough to
conclude that the Appellant was a de facto director of JSL, as
counsel for the Respondent urged me to do, simply because someone, (apparently)
an accountant, at Grant Thornton acting for Mr. Jardine, undertook to remove
Mr. Jardine’s name from the New Brunswick corporate registry, after the
Appellant had resigned and when the CRA was discussing his potential tax
liability.
[48] As mentioned above, subsection 227(10) authorizes the
Minister to assess “at any time”. He may
do so on assumed facts. On Mr. Anderson’s interpretation of Ms. Koval’s
notes, as early as the fall of 2003, the CRA was aware that Mr. Jardine
was not a director of JSL and was, at the very least, forming the view that the
Appellant might be. For reasons known only to the Minister, rather than acting
on his officials’ assumptions, he chose to wait to assess the Appellant until
February 2, 2005. The upshot is that his right to recover the amounts assessed under
subsection 227.1(1) is now barred by subsection 227.1(4) of the Act.
[49] For
the reasons set out above, the appeal is allowed, with costs, and the
assessment is vacated on the basis that the Appellant ceased to be either a de
jure or de facto director of Jardine Security Ltd. on May 31, 2002.
3. Did
the Appellant exercise due diligence?
[50] In view of my
conclusions above, it is not necessary for me to consider the issue of whether
the Appellant exercised due diligence under subsection 227.1(3) of the Act.
Signed at Ottawa, Canada, this 4th day of November, 2009.
“G. A. Sheridan”
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