Madison v. Canada, 2012 DTC 5072 [at 6935], 2012 FCA 80

Federal Court of Appeal

Cour d'appel fédérale

Date: 20120308

Docket: A-177-11

Citation: 2012 FCA 80

 

CORAM:       SHARLOW J.A.

                        DAWSON J.A.                      

                        TRUDEL J.A.

 

BETWEEN:

LEONA MADISON

Appellant

and

HER MAJESTY THE QUEEN

Respondent

 

 

 

Heard at Edmonton, Alberta, on February 14, 2012.

Judgment delivered at Ottawa, Ontario, on March 8, 2012.

 

REASONS FOR JUDGMENT BY:                                                                          SHARLOW J.A.

CONCURRED IN BY:                                                                                               DAWSON J.A.

                                                                                                                                      TRUDEL J.A.

 

Federal Court of Appeal

Cour d'appel fédérale

Date: 20120308

Docket: A-177-11

Citation: 2012 FCA 80

 

CORAM:       SHARLOW J.A.

                        DAWSON J.A.                      

                        TRUDEL J.A.

 

BETWEEN:

 

LEONA MADISON

Appellant

and

 

 

HER MAJESTY THE QUEEN

Respondent

 

 

REASONS FOR JUDGMENT

SHARLOW J.A.

[1]               The appellant Leona Madison has been assessed under section 227.1(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5^th Supp.), for the unremitted employee source deductions of Canfleur Mining Inc., formerly named The Nugget Factory Inc. (referred to in these reasons as the “Corporation”). Ms. Madison appealed the assessment to the Tax Court of Canada without success (2011 TCC 201). She now appeals to this Court.

 

Statutory framework

[2]               Pursuant to subsection 227.1(1) of the Income Tax Act, the directors of a corporation may be held liable for, among other things, the corporation’s unremitted employee source deductions. Subsection 227.1(2) shields the directors of a corporation from liability until the Minister has met certain conditions that are intended to ensure that collection remedies against the corporation are exhausted before the directors are assessed (that provision is discussed in more detail below). A director may also avoid liability by establishing the due diligence defence set out in subsection 227.1(3), or by invoking subsection 227.1(4) which provides that a director cannot be assessed under subsection 227.1(1) more than two years after he or she last ceased to be a director. A director who is assessed under subsection 227.1(1) may assert a claim against the corporation and its other directors for any amounts paid to satisfy the assessment (subsections 227.1(6) and (7)).

 

Background

[3]               The Corporation was incorporated on November 1, 2000 under the Alberta Business Corporations Act, R.S.A. 2000, c. B-9. In 2001, 2002, and 2003, the Corporation operated a mining business. It failed to remit employee source deductions for those years. In documents issued by the office of the Registrar of Corporations for Alberta, Ms. Madison is named as a director of the Corporation from the date of its incorporation until May 2, 2007, when the Corporation was dissolved for failure to file annual corporate returns.

 

[4]               On March 26, 2009, the Federal Court issued a certificate for the Corporation’s indebtedness, which at that time was over $40,000 for unremitted source deductions and accrued interest. On April 15, 2009, execution for the amount of the liability was returned unsatisfied because the bailiff determined that the Corporation had no assets. On April 30, 2009, Ms. Madison was assessed for the same amount pursuant to subsection 227.1(1) of the Income Tax Act.

[5]               Ms. Madison argued in the Tax Court and in this Court that although she was named as a director in documents issued by the Registrar, in fact she was never permitted to exercise the powers of a director, and in particular she had no control or signing authority with respect to the Corporation’s money or bank accounts. She argued that, given her powerlessness, she should be held to have met the due diligence test in subsection 227.1(3) because she continually informed and reminded the active directors that the Corporation had unsatisfied source deduction liabilities, which was all she could have done.

 

[6]               Ms. Madison also argued that she ceased to be a director more than two years before the date of the assessment, so that the assessment was issued outside the statutory time limit in subsection 227.1(4) of the Income Tax Act. Ms. Madison argued further that she cannot be held liable because the precondition to liability in paragraph 227.1(2)(b) was not met.

 

[7]               Ms. Madison asserted in this Court that she was the only person assessed as a director of the Corporation. It was not appropriate for her to make that assertion in these proceedings because the record contains no evidence on the point, and it is not relevant to the determination of her liability. Nevertheless, counsel for the Crown answered Ms. Madison’s assertion. He informed the Court that four other directors had been assessed, two for the same amount and two for a lesser amount.

 

 

Standard of review

[8]               As this is an appeal from a Tax Court judgment after a trial, the standard of review is correctness for questions of law. Findings of fact or mixed law and fact must stand absent palpable and overriding error, or an extricable error of law (Housen v. Nikolaisen, [2002] 2 S.C.R. 235).

 

Exclusion of evidence

[9]               Part of Ms. Madison’s appeal rests on her allegation that the judge wrongfully refused to admit a certain document as evidence. That document was described by Ms. Madison as follows (transcript of proceedings in the Tax Court, page 50-1):

 

(As the document was not admitted as evidence it is not included in the appeal book. However, for the purpose of this appeal I am prepared to assume that Ms. Madison’s description is accurate.)

 

[10]           Counsel for the Crown objected to the admission of the file notes. The transcript does not disclose the basis of his objection. However, the judge made the following comments about the file notes (transcript, pages 51-3):

 

 

 

[11]           It is an error of law to exclude evidence solely on the basis that it is hearsay without first considering whether it is necessary and reliable (see R. v. Khan, [1990] 2 S.C.R. 531 and R. v. Smith, [1992] 2 S.C.R. 915). More importantly in the present context, it is an error of law to exclude hearsay evidence in a Tax Court proceeding conducted under the informal procedure rules without first considering whether it is sufficiently reliable and probative to justify its admission, taking into account the need for a fair and expeditious hearing (Selmeci v. Canada, 2002 FCA 293, at paragraph 8).

 

[12]           This approach to evidence in informal proceedings in the Tax Court is mandated by subsection 18.15(3) of the Tax Court of Canada Act, R.S.C. 1985, c. T-2, which reads as follows:

 

 

 

[13]           Based on Ms. Madison’s description of the file notes, it appears to me that they could be relevant to the question of whether Ms. Madison resigned as a director more than two years before the assessment, which would be a complete defence to the assessment. In that regard, I note that Ms. Madison also gave oral evidence that she had resigned as a director.

 

[14]           The judge refused to admit the file notes as evidence, without looking at them, solely on the basis that they were hearsay. He did not consider whether they were “sufficiently reliable and probative to justify its admission, taking into account the need for a fair and expeditious hearing,” as required by Selmeci. I conclude that his refusal to admit this document was an error of law. That is a sufficient basis for setting aside the judgment of the Tax Court and returning this matter to the Tax Court for a new hearing before a different judge.

 

[15]           Before leaving the question of documentary evidence, I will comment on Ms. Madison’s argument that she was not permitted to present other documents that she says would have proved her resignation. Specifically, she says that she has a letter of resignation effective December 31, 2002, and a publicly available document prepared by the Corporation containing a list of directors as of 2005 or 2006, a list on which her name does not appear. Ms. Madison admits that she did not present these documents as evidence at the Tax Court hearing, but she explains that this was because she had been told by the judge that she could not do so. From a review of the transcript, it appears that the judge did not say that Ms. Madison could not present these documents as evidence. However, it is reasonable to infer that Ms. Madison could have reached that conclusion based on a misinterpretation of some of the judge’s comments, although the judge probably was not aware of her misunderstanding. I mention this point only to emphasize that at the new Tax Court hearing, Ms. Madison may present any documentary evidence that is not in the current record, including her letter of resignation and the Corporation’s 2005 or 2006 list of directors. The relevance and admissibility of such documents, if presented, will be determined by the judge at the new hearing.

 

Legal argument relating to subsection 227.1(2)

[16]           Most of Ms. Madison’s grounds of appeal will require a determination at the new hearing as to whether and when she ceased to be a director, and whether she has established her entitlement to the due diligence defence. However, Ms. Madison’s argument based on subsection 227.1(2) turns on a question of statutory interpretation and involves undisputed facts. Therefore, it is convenient to deal with that issue now so that it need not be considered at the new hearing.

 

[17]           Subsection 227.1(2) shields a director from liability under subsection 227.1(1) unless one of conditions in paragraph 227.1(2)(a), (b) or (c) is met. That provision reads as follows:

 

 

 

[18]           Subsection 227.1(2) is intended to ensure that a director is not held liable for a tax debt of the corporation unless the Crown has taken specified steps on a timely basis to satisfy the debt from the assets of the corporation. In this regard, there are three alternatives – paragraph 227.1(2)(a), (b) or (c). Only one of these can apply in a given case. Which one applies depends on the particular facts: see Kennedy v. Canada, [1992] 2 C.T.C. 59 #1, 92 D.T.C. 6380 (F.C.A.), confirming Kennedy v. Minister of National Revenue, [1991] 2 C.T.C. 2333, 91 D.T.C. 1037 (T.C.C.). In this case, there is a debate between the parties as to whether the applicable provision is paragraph 227.1(2)(a) or paragraph 227.1(2)(b).

 

[19]           Ms. Madison argues that paragraph 227.1(2)(b) applies because the Corporation was dissolved.  As no proof of claim was filed within the permitted six month period for the Corporation’s liability for unpaid source deductions, the requirements of paragraph 227.1(2)(b) have not been met. The Crown argues that paragraph 227.1(2)(a) applies because a Federal Court certificate was issued for the Corporation’s liability for unpaid source deductions, and execution for that amount was returned unsatisfied when the bailiff determined that the Corporation had no assets.

 

[20]           This debate was settled in the Kennedy case, cited above. In that case, this Court adopted the decision of Associate Chief Judge Christie that paragraph 227.1(2)(b) does not apply where a corporation is dissolved under a procedure that does not require the appointment of a liquidator or the submission of proofs of claim. In my view, Kennedy was correctly decided. It follows that Ms. Madison’s legal argument based on paragraph 227.1(2)(b) cannot succeed.

 

[21]           Ms. Madison placed significant reliance on Savoy v. Canada, 2011 TCC 35. The judge in that case was of the view that, despite the decision of this Court in Kennedy, it does not matter that no liquidator is appointed in respect of a dissolution by the Registrar because the Crown may prove its claim, as it did in that case, by the registration of a certificate with the Federal Court. In my respectful view, Savoy was incorrectly decided on this point and should not be followed. Given the statutory context, the phrase “proof of claim” as used in paragraph 227.1(2)(b) refers to a proof of claim in liquidation or dissolution proceedings.

 

Conclusion

[22]           For these reasons, I would allow the appeal with costs, set aside the judgment of the Tax Court, and return this matter to the Tax Court for a new hearing by a different judge. The new hearing is to be conducted under the informal procedure on the basis of the existing record, augmented by such further oral and documentary evidence as the parties may wish to present and the new judge may allow on the basis of the applicable legal principles.

 

 

“K. Sharlow”

“I agree

          Eleanor R. Dawson J.A.”

 

“I agree

          Johanne Trudel J.A.”

 

 

FEDERAL COURT OF APPEAL

 

NAMES OF COUNSEL AND SOLICITORS OF RECORD

 

 

 

DOCKET:                                                                              A-177-11

 

(APPEAL FROM AN ORDER OF JUSTICE MARGESON OF THE TAX COURT OF CANADA  DATED APRIL 6, 2011 (2011 TCC 201))

 

STYLE OF CAUSE:                                                              LEONA MADISON v. HER MAJESTY THE QUEEN

 

PLACE OF HEARING:                                                        Edmonton, Alberta

 

DATE OF HEARING:                                                          February 14, 2012

 

REASONS FOR JUDGMENT BY:                                     SHARLOW J.A.

 

CONCURRED IN BY:                                                         DAWSON J.A.

                                                                                                TRUDEL J.A.

                                                                                               

DATED:                                                                                 March 8, 2012

 

 

APPEARANCES:

 

Leona Madison	FOR THE APPELLANT (SELF-REPRESENTED)
Adam Gotfried  Michael J. Lema	FOR THE RESPONDENT

 

SOLICITORS OF RECORD:

 

N/A	FOR THE APPELLANT (SELF-REPRESENTED)
Myles J. Kirvan Deputy Attorney General of Canada	FOR THE RESPONDENT