REASONS
FOR JUDGMENT
Campbell J.
[1]
The Appellant, Gerald Roitelman, is appealing a
director’s liability assessment made pursuant to subsection 227.1(1) of the Income
Tax Act (the “Act”) in respect to the 2006 and 2007 taxation years.
[2]
The Minister of National Revenue (the
“Minister”) issued seven assessments to Roy’s Electric Company (the
“Corporation”) for late-remitted or unremitted Federal and Provincial income
taxes, employment insurance premiums and Canada Pension Plan contributions plus
penalties and interest. On April 3, 2008, a certificate respecting this
corporate debt, in the amount of $143,916.11, plus interest, was registered
with the Federal Court of Canada.
[3]
The Appellant made a lump sum payment on January
14, 2009 in respect to the principal owing by the Corporation for the
outstanding source deductions debt.
[4]
On May 28, 2010, the Minister assessed the
Appellant, as director of the Corporation, for the amount of $50,241.39 (“the
debt”), which consisted of the balance remaining unpaid in respect to penalties
and interest that had been assessed.
[5]
The Corporation was incorporated in Manitoba on March 31, 2004 when the Appellant took over ownership of the business from his
father, who had operated it since 1968. The Corporation was an electrical
contracting firm that focussed primarily on commercial and industrial
contracting, installations and service work. Prior to becoming owner of the
business, the Appellant operated another company called CVA Systems as a sole
proprietorship.
[6]
The Appellant and his father were both directors
of the Corporation until 2006, when his father ceased to act as a director due
to ill health. Throughout the period under appeal, the Appellant had control of
the corporate operations and activities. The Appellant had experience operating
a business and he had obtained his trade designation from a community college.
The Appellant testified that he was familiar with business practices and aware
of corporate obligations to withhold and remit source deductions and to pay
federal and provincial taxes. He paid taxes and remitted source deductions in
operating his sole proprietorship, CVA Systems. No evidence was adduced
respecting any remittance problems with CVA Systems.
[7]
When the Appellant assumed the corporate
operations, he created a payroll account in November, 2004 for the employees of
the Corporation. At various times throughout the period under appeal, the Corporation
employed between 3 to 8 employees.
[8]
Initially, in 2004, the Appellant personally
completed payroll and GST obligations respecting the Corporation. However, in
March of 2005, the Appellant hired a bookkeeper and office manager. The
evidence suggests that this was the result of the Corporation’s involvement in
a province-wide service contract with a national corporation. This necessitated
the Appellant being absent from the office for periods of time as several of
the large construction projects were in various locations throughout the Province of Manitoba. An advertisement was posted seeking the services of a bookkeeper
and the Appellant eventually hired Kathy Shupena (“Shupena”), the operator of
Pioneer Consulting. She had completed a bookkeeping course and had some limited
experience in this area. She advised the Appellant that she was familiar with
the processes involved with source deduction remittances at both federal and
provincial levels. The Appellant described Shupena’s duties as “run[ning] the office” (Transcript, p. 7). Her tasks
included data entry, bookkeeping, administrative duties, opening mail, paying
bills and preparing, calculating and remitting the source deductions,
employment insurance premiums and CPP contributions.
[9]
When Shupena commenced her employment with the
Corporation, it was the Appellant who trained her and instructed her on how to
perform her assigned tasks. He also personally oversaw her work at the outset:
At the beginning there was [supervision] to ensure that things were
being done correctly and on time. And then when I saw that things were
progressing reasonably well, I stepped back to allow her to run the office as
necessary.
(Transcript, p. 21)
[10]
In this regard, he ensured that the corporate remittances
were completed in a timely fashion and eventually Shupena assumed those
responsibilities. The Corporation’s accountant also provided her with instructions
on how he wanted tasks completed. Subsequent to this initial hiring and
training period, the Appellant did not consistently or directly supervise her
work since the province‑wide contracts often took him out of town.
However, he did testify that when he hired this bookkeeper, she appeared
competent at completing her assigned tasks and he therefore placed reliance on
her without much direct supervision during those times when he had to be absent
from the office. On average, he was not in the office for approximately half
the time.
[11]
Due to the Appellant’s absences from the office
and the bookkeeper’s irregular hours (Shupena eventually worked after hours to
avoid confrontation with other staff members during the day), the Corporation
did not have an established system for sending the remittances. Sometimes the
bookkeeper forwarded the cheques to the Receiver General, but at other times
the Appellant mailed the cheques himself and occasionally the mailman would
pick up the cheques at the office.
[12]
The Appellant was the only individual
authorized to sign cheques on behalf of the Corporation, although the bookkeeper
signed the occasional cheque for smaller amounts. When the Appellant was absent
while at worksites, he instructed Shupena to make the necessary remittances and
left her signed blank cheques to cover those remittances. He checked her work periodically
and he would enquire as to whether the remittances had been made. He relied on
her assurances that they had been completed and forwarded. He admitted that he
relied on “blind faith” that the remittances had been made
in a timely fashion. He stated that he did not do bank reconciliations every
month, however, he did personally verify that remittances had been made “as
often as I could” (Transcript, p. 23).
[13]
The exhibits show
that between August 2005 and March 2008, the Minister sent five letters to the Corporation
with respect to the failure to remit. Two of these were sent to the Appellant’s
home address in late 2007 and 2008, which was at the end of and subsequent to
the period in issue. Between October, 2006 and March, 2008, seven notices of assessment
were sent to the Corporation. The Appellant testified that he did not receive
nor was he personally aware of many of these notices and assessments because
Shupena kept them from him. She was responsible for opening the mail due to his
absences from the office and he stated that she did not forward some of this
correspondence to him, although he could not identify which items he had not
received. At some point, he became aware of the remittance failures but he
denied knowledge of the precise extent of the problem.
[14]
After the Appellant
became aware of the bookkeeper’s failure to remit, he testified that he
explained to her that it could not happen again and she assured him that she
would not repeat the same mistake. At this time, he temporarily increased the supervision
over her work:
After the first one and after it was paid and resolved, it was
explained to her that this cannot happen again and I was overseeing with more
detail as to ensuring that these things did not happen again. And as time went
on and, for lack of a better term, the trust grew back into her position, she
was proving her capabilities in – in achieving these remittances, I stepped
back and allowed her to continue with what she was doing.
(Transcript, pp. 9-10)
[15]
The Appellant testified that, after each
occasion when be became aware of a notice of failure to remit, he would again
oversee the bookkeeper’s work with more detail to ensure that future
remittances would be made on time. As time passed and all deductions were again
being remitted on time, the Appellant’s supervision would gradually diminish.
Despite being aware of a number of failures to remit, the Appellant each time
increased his supervision and review of her work until things stabilized. The
Appellant testified that he continued to employ Shupena, despite these problems,
because it allowed him to continue to work province-wide in the field. The
Appellant recalled the receipt of two letters in May, 2007 and, after these
letters, he stated that he lost confidence in Shupena’s work. After the
September 13, 2007 personal notice to him, he stated that the bookkeeper was
still responsible for the remittances but “[o]n a
diminished level.” (Transcript, p. 34). After a period of time, he began
to look for someone to replace her. Shupena eventually left her employment
after a physical altercation with another employee at a Christmas office party
in 2007. Following this, she made herself unavailable to the Appellant’s
efforts to contact her concerning the problems.
[16]
After the bookkeeper’s departure in late
2007, the Appellant discovered cheques and documents “hidden” in various
locations in the corporate office. He found two remittance cheques that should
have been forwarded to the Receiver General but, instead, were buried in an
office desk and filing cabinet by the bookkeeper (see copies of these cheques,
Exhibit A-1). These two cheques, totalling approximately $13,000, were signed
and addressed to the Receiver General in 2007 but had never been forwarded. He
described the location of these cheques as “tucked in
under some items” and hidden from view (Transcript, p. 16). Provincial sales
tax returns, that had been signed but not forwarded, were also found hidden in
filing cabinets. According to the Appellant’s evidence, Shupena also attempted
to delete financial records from the corporate computer prior to leaving her
employment.
[17]
The evidence before
me suggests that the bookkeeper’s actions and the resulting errors were not
simple oversights or mistakes. She acted fraudulently with an intention to
deceive by not sending signed cheques and documentation to both federal and
provincial tax authorities as the Appellant had instructed, by not bringing the
failure notices to the attention of the Appellant and by attempting to erase
sensitive financial information.
The Issue
[18]
The Appellant is
not disputing the liability of the Corporation nor the amount of the assessment
against the Corporation. The only issue is whether the Appellant is liable for
the payment of the personal assessments against him for the penalties and
interest or whether he can avoid liability by arguing that he exercised the
degree of care, diligence and skill to prevent the failure that a reasonably
prudent person would have exercised in comparable circumstances. Essentially, I
must determine whether the Appellant is entitled to rely upon the director’s
due diligence defence pursuant to subsection 227.1(3) of the Act. The
Appellant has the burden of establishing a due diligence defence. Although
there is an abundance of jurisprudence on the issue of a director’s liability,
each case will be decided on its own set of facts.
Analysis
[19]
The leading case on this issue is the Supreme
Court of Canada decision in Peoples Department Stores Ltd v Wise, 2004
SCC 68, [2004] 3 S.C.R. 461. It overruled the Federal Court of Appeal’s prior
“objective-subjective” test used to evaluate a director’s due diligence defence,
originally established in Soper v The Queen, 97 DTC 5407. The
Supreme Court replaced the objective-subjective test with an objective test as
the appropriate standard in reviewing this defence.
[20]
The Federal Court of Appeal confirmed the
objective test in the case of The Queen v Buckingham, 2011 FCA 142, 2011
DTC 5078, where the Court, at paragraph 38, explained its underlying rationale
and application:
[38] This objective standard has set aside the common law
principle that a director’s management of a corporation is to be judged
according to his own personal skills, knowledge, abilities and capacities: Peoples
Department Stores at paras. 59 to 62. To say that the standard is objective
makes it clear that the factual aspects of the circumstances surrounding the
actions of the director are important as opposed to the subjective motivations
of the director: Peoples Department Stores at para. 63. The emergence of
stricter standards puts pressure on corporations to improve the quality of
board decisions through the establishment of good corporate governance rules: Peoples
Department Stores at para. 64. Stricter standards also discourage the
appointment of inactive directors chosen for show or who fail to discharge
their duties as director by leaving decisions to the active directors.
Consequently, a person who is appointed as a director must carry out the duties
of that function on an active basis and will not be allowed to defend a claim
for malfeasance in the discharge of his or her duties by relying on his or her
own inaction: Kevin P. McGuinness, Canadian Business Corporations Law,
2nd ed. (Markham, Ontario: LexisNexis Canada, 2007) at 11.9.
[21]
The Court, at paragraph 52 in Buckingham,
summarized how a director may establish a due diligence defence:
[52] Parliament did not require that directors be subject to an
absolute liability for the remittances of their corporations. Consequently,
Parliament has accepted that a corporation may, in certain circumstances, fail
to effect remittances without its directors incurring liability. What is
required is that the directors establish that they were specifically concerned
with the tax remittances and that they exercised their duty of care, diligence
and skill with a view to preventing a failure by the corporation to remit the
concerned amounts.
(Emphasis added)
[22]
The Federal Court of Appeal in Buckingham,
in addition to confirming the objective test, also clarified that, in order for
directors to successfully rely on a due diligence defence, they must have taken
active steps to prevent a failure to remit and not merely to have taken
steps to remedy the failure after its occurrence.
[23]
Since Buckingham, the Federal Court of
Appeal illustrated in Balthazard v The Queen, 2011 FCA 331, how
after-the-fact behaviour and corrective measures can be relevant in certain
circumstances. In that case, the Court looked at after‑the-fact
behaviour, payment schedules and corrective measures adopted by the taxpayer in
concluding that he had performed the required due diligence. The focus of the
due diligence analysis remains, however, on the degree of care, diligence and
skill exercised in preventing a failure to remit. Further, as Justice
Hogan commented in Kaur v The Queen, 2013 TCC 227, [2013] TCJ
No. 195, at paragraph 18:
[18] … The director’s oversight duties with respect to the GST
cannot be delegated in their entirety to a subordinate, as was done in the
present case.
[24]
The Respondent argued that the Appellant did
not take positive steps or actions that would prevent the failure to remit and
thus he cannot avail himself of the due diligence defence. The Respondent
contended that the steps taken by the Appellant occurred after the fact in
order to cure the failures.
[25]
With respect to the Appellant’s testimony, he
provided his evidence in a straightforward and honest manner. I found him to be
a credible witness who was forthcoming about his knowledge of remittance
obligations and the mistakes he made in trusting his bookkeeper. I accept his
testimony in respect to his limited/delayed receipt of knowledge concerning
late remittances, as well as the notices and assessments, which were due to the
bookkeeper’s purposeful actions. I accept that she engaged in misleading and
deceitful behaviour regarding the remittances and that the Appellant mistakenly
thought the cheques he was signing for those remittances were being forwarded
to the Receiver General when, in fact, they were not.
[26]
When I look at the overall factual circumstances
before me and the Appellant’s actions, I conclude that the Appellant must be
successful in his appeal based on the application of the objective test.
Contrary to the Respondent’s contention, the Appellant engaged in proactive
steps designed to prevent the failure to remit and I consider those steps to be
sufficiently reasonable in the circumstances of this case.
[27]
The Appellant has experience in business and
with remittance obligations. Consequently, when the business demanded that he
travel to out-of-town worksites on a periodic basis, he placed an advertisement
and hired a bookkeeper. Although she had a bookkeeping course and a little
experience, he personally provided training to her in respect to the duties for
which she was hired. In conjunction with this, his accountant provided
additional instructions. He continued to supervise her work, including the
remittance obligations, until he had a level of comfort in her competence. When
he first became aware that she had failed in making remittances, he instructed
her not to make such mistakes and provided increased supervision again over her
work until he felt she could carry out those duties on her own. These actions
constitute proactive steps to prevent future failures to remit and to ensure
compliance. His attempts were frustrated, however, by this bookkeeper’s
fraudulent and deceitful behaviour.
[28]
The test does not dictate that the positive
steps taken must be effective in ensuring future compliance but only that a
director takes those steps and that those steps would be the proactive steps
that a reasonably prudent person would have exercised in comparable
circumstances. The Federal Court of Appeal in Buckingham confirmed that,
although an objective test does not take into account a director’s personal
skills, experience, education or abilities, it does not mean that the personal
circumstances of a director are irrelevant to the analysis. Instead, they will
be compared to the actions of the reasonably prudent person in similar
circumstances.
[29]
Can the Appellant’s actions in these
circumstances be considered to be those that a reasonably prudent person would
engage in if placed in this situation? I conclude that they are. The backdrop
to the Appellant’s choices and actions is the fact that he was required to be
away from the office part of the time at out‑of‑town worksites. He
initially completed remittances himself before he acquired the large provincial
construction project. The evidence supports that he hired a bookkeeper to
attend to administrative tasks in his absence. It was also reasonable and
prudent that one of the bookkeeper’s tasks was to open the mail and reasonable
to expect that she would bring essential correspondence to the Appellant’s
attention.
[30]
The Appellant personally provided training in
the bookkeeper’s duties, including calculation and sending of remittances. It
was reasonable for him to expect that, when he signed cheques for those
remittances, the bookkeeper would mail them in his absence from the office.
Upon his return to the office, it was reasonable for him to assume that, in the
absence of cheques sitting in the office, they had been forwarded to the
Receiver General. This is particularly so when the bookkeeper was giving verbal
confirmation that her duties were being fulfilled. While absence from an office
is not an excuse for failures to remit, the decision in Buckingham makes
it clear that an objective standard does not allow the Court to ignore the
particular circumstances of the director. Instead, such circumstances must be
taken into account and analyzed objectively. I accept that the bookkeeper’s
deceitful actions, rather than her incompetence, prevented the Appellant from
reasonably being able to ascertain the extent of the remittance failures. This
impacts upon the analysis of the due diligence defence because an analysis must
take into consideration what the director reasonably had knowledge of in the
particular circumstances. In these appeals, the Appellant’s knowledge was
clearly frustrated by the bookkeeper’s misleading actions.
[31]
Although the standard to be applied is an
objective one, perfection on the part of a director is not required. This was
reflected in the comments from Justice Bowman (as he was then) in Cloutier v
MNR, 93 DTC 544, at paragraph 10:
[10] The question therefore becomes one of fact and the court
must to the extent possible attempt to determine what a reasonably prudent
person ought to have done and could have done at the time in comparable
circumstances. Attempts by courts to conjure up the hypothetical reasonable
person have not always been an unqualified success. Tests have been developed,
refined and repeated in order to give the process the appearance of rationality
and objectivity but ultimately the judge deciding the matter must apply his own
concepts of common sense and fairness. It is easy to be wise in retrospect and
the court must endeavour to avoid asking the question "What would I have
done, knowing what I know now?" It is not that sort of ex post facto judgement
that is required here. Many judgement calls that turn out in retrospect to have
been wrong would not have been made if the person making them had the benefit
of hindsight at the time.
[32]
The Appellant could not reasonably have known or
be expected to have known that the bookkeeper would engage in fraudulent and
misleading actions. He did not have knowledge of this until after the relevant
taxation years that are at issue in these appeals. The Appellant’s interaction
with the bookkeeper should not be analyzed with the present benefit of
hindsight but, rather, with a view to those circumstances as they existed
during the relevant period. Therefore, I reject the Respondent’s submission
that the Appellant acted imprudently and unreasonably by hiring the bookkeeper
in the first place. In retrospect, hiring this bookkeeper was a poor business
decision but it is not for this Court to make such an ex-post facto
conclusion.
[33]
In addition, the Appellant is not precluded from
relying on the due diligence defence where there is no evidence to suggest that
the Appellant condoned or encouraged the use of source remittances for other
purposes. The Appellant instructed the bookkeeper in making timely appropriate
remittances, supervised her work for a period initially, signed cheques and
left them with her to forward to the Receiver General and, when he became aware
of the problem, he again supervised her for a period to ensure remittances were
being properly made. There is no evidence to suggest that the Appellant
benefited or intended to benefit in any manner from the failure to remit, nor
any evidence that implicates the Appellant in the withholding of the signed
cheques, nor any evidence or suggestion that the cheques were not sent due to
insufficient funds in the company account.
[34]
In cross-examination, Respondent Counsel
suggested to the Appellant that the Corporation had a history of non-compliance
with remittances prior to hiring the bookkeeper. However, the Appellant
submitted that his remittances were made on time. The evidence would support
the Appellant’s testimony. In Exhibit R-1, at Tab 26, correspondence dated
August 5, 2005, from the Minister to the Appellant, states that there were
remittance problems in respect to the Corporation. This appears to be the first
letter forwarded to the Corporation regarding the problem. That correspondence
states that the Corporation had a “history of
non-compliance”, which the Respondent, in cross-examination, was referencing.
The corporate payroll account was established in November of 2004. The
non-compliance referred to in that August 5, 2005 correspondence, therefore,
occurred sometime between November, 2004 and August, 2005. The bookkeeper was
hired in March, 2005. There was no other evidence, oral or documentary,
concerning the timeline of the commencement of this history of non-compliance.
There is no evidence to establish that the failure first occurred prior to
March, 2005 when Shupena was hired. With no evidence before me, I reject the
Respondent’s suggestion that the Appellant was not properly submitting
corporate remittances during the period he attended to them personally prior to
hiring the bookkeeper. The August, 2005 correspondence came approximately a
half year subsequent to hiring her and did not reference non-compliance issues
prior to March, 2005. Consequently, there is no evidence that would allow me to
conclude that the Appellant had a history of non-compliance prior to hiring
Shupena.
[35]
The Appellant has
met the burden of establishing that he took proactive steps to prevent the
Corporation’s failure to remit and, therefore, he demonstrated the degree of
care, diligence and skill required to prevent the failures that a reasonably
prudent person would have exercised in comparable circumstances. Despite his
actions, he was thwarted in his attempts to ensure compliance by the actions of
the bookkeeper.
[36]
For these reasons,
the appeals for the 2006 and 2007 taxation years are allowed.
[37]
The parties shall each
bear their own costs.
Signed at Ottawa, Canada, this 7th day of May 2014.
“Diane
Campbell”
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