Chow v. The Queen, 2001 DTC 164 (TCC)

Date: 20011010

Docket: 98-2788-GST-G

BETWEEN:

YUET NAM CHOW,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Margeson, J.T.C.C.

[1]            This appeal is from an assessment of the Minister of National Revenue ("Minister"), notice of which is numbered 20786 and dated November 20, 1996. The Minister assessed the Appellant in the amounts of $42,231.27 tax, $3,808.51 interest and $4,348.38 penalties, pursuant to subsection 323(1) of the Excise Tax Act ("Act"), with respect to unremitted net goods and services tax ("GST"), interest and penalties payable by 362900 B.C. Ltd. (the "Company"), pursuant to subsection 228(2) of the Act.

[2]            The Appellant filed a Notice of Objection on January 17, 1997, the Minister confirmed the assessment by notice dated July 20, 1998, the Appellant filed a Notice of Appeal on October 8, 1998 and served same on the Minister on November 3, 1998. The Appellant was one of the two directors of the Company.

Evidence

[3]            The Appellant Yuet Nam Chow, also known as Freddie Chow was a restaurant owner and operator. He resides in Vancouver, British Columbia. At all material times the Appellant and Charles Edward Stewart (also known as Bud Stewart) were directors of the Company which was incorporated on April 4, 1989. The shareholders or records of the Company were the following:

                                                Ming Wah Gin                       10%

                                                Wah Quan Lee                      5%

                                                Barry Tsang                                           10%

                                                Tommy Tsang                       10%

                                                Harvey Tsang                        10%

                                                Austin Hui                                             5%

                                                Yuet Nam Chow                    25%

                                                Bud Stewart                                           25%

[4]            The Company owned and operated a restaurant business known as Mustard's Restaurant in Burnaby, British Columbia. This Company was registered for GST purposes effective January 1, 1991. The restaurant business was managed by Bud Stewart pursuant to a written management contract dated April 5, 1989, responsibilities and duties of which included the day-to-day management of the business and payment of the business accounts from time to time. He was paid a monthly wage of $1,000. Freddie Chow managed the kitchen and received no wages. The only shareholders who were paid employees of the business were Barry Tsang, Tommy Tsang and Harvey Tsang. The Company retained the professional services of the accounting firm of Steven D. Pettigrew Ltd. and the law firm of Epstein Wood Logie Wexler & Maerov. The business ceased to operate on July 23, 1994.

[5]            The Company was dissolved pursuant to the B.C. Company Act on December 2, 1994. The receiving order was made on January 13, 1995 judging the corporation bankrupt and Campbell Saunders Ltd. was named Trustee. The Minister filed proof of claim on June 8, 1995, in the amount of $51,385.03. The Minister was advised by the Trustee on September 15, 1995 that the administration of the Company's bankruptcy was complete. The Minister did not receive any dividends as a result of the administration of the bankruptcy.

[6]            The Minister assessed the Appellant by Third Party Notice of Assessment No. 20786 dated November 20, 1996 in the amount of $42,231.27 tax, $3,808.51 interest, and $4,348.38 penalties, pursuant to subsection 323(1) of the Act.

[7]            The Appellant, through an interpreter, told the Court that Bud Stewart ran a restaurant in Coquitlam in the Coquitlam Mall and he ran one in the Lansdowne Mall. He hired an English manager. He was a friend of Bud Stewart. They discussed business. The Appellant was told that there was a restaurant that they could acquire at the Eaton Centre if he could come up with a substantial investment. He was advised that a restaurant similar to the one that Bud Stewart ran in Coquitlam could be set up and that is how he became a shareholder in this Company with 25% of the shares.

[8]            He identified Exhibit A-2 at Tab 38 as the Management Contract between Charles Stewart and the Company but he said that he did not see it. He did not know how it came about. He indicated that Bud Stewart was the only salaried person in the restaurant. He oversaw everything. He issued all cheques, made all deposits and obtained the lawyers and accountants.

[9]            The Appellant had his own restaurant. One year after opening the business went down, no one was working so three of the shareholders were hired to work there until they closed out. The Appellant was a manager of the kitchen and a cook in his own restaurant. His GST matters were taken care of by his accountant for his restaurant. He had to set up a different account for GST. He turned all matters over to his accountant but they were presented to him for signature before being sent to Revenue Canada. As a result of that procedure, he was under the impression that the new business would treat GST the same way.

[10]          He had another business from 1970 to 1995, which was also a restaurant. He had two partners. The other partner looked after the bookkeeping and the Appellant was a kitchen manager. He experienced no problems with that business.

[11]          His education consisted of junior high school in China.

[12]          He was asked whether or not the Company in question had any regular meetings with the shareholders and he said they did not but they met if there were any problems. The main problem was money. Then there would be a meeting at the restaurant and they would talk it over while they were having coffee. There were no meetings at the lawyer's office or the accountant's office. There were no more than 10 meetings from the beginning to the end.

[13]          These money discussions centered around the business not having enough money to pay the rent and the other payables. The partners were asked for more money and they came up with it. They were asked for the money by Bud Stewart because he looked after the books. The money was for everyday expenses, taxes, supplies and wages. The Appellant was told that someone was going to buy the business and that the partners would get their money back. That is why he gave the money to the operation. One of the partners mortgaged his house for $110,000 to help pay the bills. The Appellant wanted to sell the business. He was losing money from this business whereas he never lost money from his other businesses. His accountant always looked after his bills. After the business closed the Appellant was told that the business owed money and the partners still paid the bills. Each shareholder paid $300 a month in this regard. Bud Stewart told him to provide the money and he would take it to the lawyer and everything would be okay.

[14]          The Appellant had no problem with paying the government but he asked the question: "Why should I pay all the tax? I never touched the money from the business and I did not have any signing authority. I know I am wrong. Bud Stewart paid everything before the taxes."

[15]          Two months later he received a letter from Revenue Canada concerning GST and he did not know what happened. The sum of $11,000 was paid by the shareholders. He referred to Tab 62 of Exhibit A-2, which were cheques signed by him to the restaurant. He did not see the financial statements each month. He was told that the business had a monthly statement but he did not see anything. He may have seen the material in Exhibit A-2 at Tab 39 or he may not have. Even if he received them, he would not have understood them. He reiterated that in his other businesses his accountant would have explained all of this to him.

[16]          The mall shut the business down according to Bud Stewart and someone from the United States was trying to make a deal for the business.

[17]          After he received the notice he went to the GST people and explained how it was. He was told to wait. He did not talk to Bud Stewart about this problem because he was no longer his friend or partner. Bud Stewart told him that when the bills were paid out there would be no problem. The payments of $500 per month by the partners for the bills of the business were in the lawyer's name.

[18]          In cross-examination he said that he ran a seafood restaurant between 1987 and 1994 in Coquitlam, B.C. He also ran Lee's Kitchen between 1986 and 1994. He sold Lee's Seafood Restaurant to his nephew. Lee's Kitchen was run by Chin and Chow's Enterprises Ltd. He was a shareholder but he was not sure if he was a director. There were two other shareholders. Each of the shareholders had 33% of the shares. Lee's Seafood Restaurant was not incorporated. He was the sole owner since 1989.

[19]          It was suggested to him that as an owner and shareholder he was aware that he had to remit payments for his employees. He said that he was but his accountant was a Chinese person and could talk to him about these matters.

[20]          In 1991 both businesses were registered for GST and he was familiar with the requirements to remit GST on food sales. He set up a separate account for GST for his other businesses but not for Chin and Chow's Enterprises Ltd. He did not know how they did it. He knew Bud Stewart socially. He had come to his restaurant twice and the Appellant went to Bud Stewart's restaurant twice as well. That is how they met. His manager also knew Bud Stewart. He knew that Bud Stewart was born and raised in Hong Kong and said that he obtained that knowledge after they met and that is why they went into business. He spoke about one third of the time in Cantonese.

[21]          It was suggested to him that when he was appointed a director of the Company, he sought advice as to his duties from Jack Lee, his solicitor. He said that he did not. He was referred to Exhibit A-2 at Tab 45 of page 4, which was a questionnaire. It contained his signature. His nephew helped him complete it. At question 6 on page 3, he answered yes and said that he understood the responsibility. It was suggested to him that according to his answers in the questionnaire, he had indicated that he had sought advice from Jack Lee when he was appointed. When the questionnaire was filled out for him it was not put to him in the same way. He said: "It has been too long anyway. Perhaps I did." Then he said that he may have sought advice from Jack Lee about being involved.

[22]          He was not sure when he first became aware of the problems. He was dealing with Bud Stewart. The three Tsangs were brothers and they were his brothers-in-law at the time. All of the other persons except Bud Stewart were friends or relatives and it was the Appellant who interested them in this business as investors. He admitted that he was appointed a director to represent the interests of six investors or at least some of them. He met with Bud Stewart to get the liquor licence. He was required to sign and he did so. He signed the application for the licence with Bud Stewart.

[23]          When money was invested into the Company each of the 10% shareholders paid in $100,000 and each of the 5% shareholders paid in $50,000. He paid none and Bud Stewart paid none. A total of $500,000 was paid in.

[24]          The Appellant did not know that the Company had problems before it opened. The future looked good. He did know that they were over budget for the renovations. Other problems developed after that. The mall had placed a lien against the restaurant. Shortly after opening the Appellant signed a personal guarantee to keep the Company in business. Bud Stewart told him that if he did not it would be over. He was unaware that Bud Stewart had said that he had someone interested in purchasing the restaurant before it opened. In 1992 and 1993 while the business was operating he was aware that he was losing money. By mid-1992, Bud Stewart told him that GST, rent and supplies were behind. That is why one of the shareholders took out a mortgage for $110,000. It was suggested to him that he was told specifically that the Company was behind in GST remittances and he said that he did not fully understand it before the meeting.

[25]          He was referred to Exhibit A-2 at Tab 25, which were Company resolutions, and he said that he signed them. He was told by Bud Stewart that the Company needed money to pay expenses. Subsequently they had a meeting and decided to borrow $110,000 from Ming Wah Gin to cover the day-to-day operations. He was not told specifically that it was to be used for GST. He did not know that the GST returns were two to three months behind. He did not know that Steve Pettigrew was the Company's accountant. He personally guaranteed payment back to Ming Wah Gin. He was aware that the Company had an accountant but he did not know his name. He said that he saw financial statements.

[26]          The three Tsangs worked as cooks at Mustard's and he was in touch with them regularly. He visited the restaurant two to three times a month. There was an office located by the kitchen. He never went in there to look at the books and he did not verify cancelled cheques or bills.

[27]          Mr. Bud Stewart held meetings with the shareholders ten times from the beginning in 1989 till the closing in June or July 1994. They had other meetings over a cup of coffee, possibly 50 times. They were not talking about the business all the time.

[28]          Mr. Stewart provided monthly financial statements sometimes but not always. Mr. Stewart did not tell him that he could sign cheques. He did not believe that he went to the bank to sign any documents, even the signature card so that he could sign cheques if something happened to Bud Stewart. He did not ask Bud Stewart for the name of his accountant and he did not check with Revenue Canada to see if the GST was being remitted or not. He did not check bank statements or cancelled cheques to see if GST was being paid.

[29]          In re-direct he said that he spoke Chinese to Bud Stewart. After the problems arose he put in his 25% share. Renovations were over-budget and as soon as the restaurant opened, business was bad. There were no customers in the malls and the GST tax came in. People started shopping in the United States.

[30]          Meetings were held but not necessarily in the office. All shareholders were there. He did not contact Revenue Canada because Bud Stewart told him everything would be okay when it was sold.

[31]          In answer to a question put to him by the Court, he said that he knew that money was being used to pay taxes. He did not do anything to see that the money was being used to pay GST. He told his partners that he relied on Bud Stewart and others.

[32]          He did say that he knew that he was responsible to pay taxes but others were as well.

[33]          Following questions by the Court he said that money was given to Bud Stewart to give to the lawyer. He could not check to see if it was paid because Bud Stewart was looking after it. They trusted him.

[34]          Wah Quan Lee was a 5% shareholder in the Company. He was also a shareholder in Mustard's Restaurant. He was not employed there. He knew Bud Stewart and the Appellant. He knew that they were directors. The restaurant opened in 1989 and he was a shareholder. He could not remember when the restaurant closed.

[35]          He went to the restaurant several times and met Bud Stewart. He was not shown any financial statements and no one sent him any. He remembered Bud Stewart talking about selling the business. He agreed to sell. He did not know if a buyer was found or not. He knew that the business was in financial trouble and that GST was owing. He was asked to come up with money from time to time to pay for the inventory, to pay taxes and to pay other bills that were owing.

[36]          In cross-examination he said that he is the Appellant's brother-in-law. He met with Bud Stewart at meetings. He did not see financial statements at those meetings. He did not see much of anything. He gave the impression that financial statements might have been available but he did not look at them. They did not discuss the sale before the opening.

[37]          Ming Wah Gin testified that he was a shareholder of Mustard's Restaurant. He was one of 16 shareholders. He was not a director. He was not an employee. He knew Bud Stewart. He knew the Appellant. He had met Mr. Stewart and the Appellant to discuss business but not too much. He never saw any financial statements.

[38]          After the business started he never met with them at all. He never discussed the restaurant business with them after it opened. Bud Stewart called him if he needed money. They never talked to him about selling the business.

[39]          In cross-examination, he said that they loaned the Company $110,000 in 1992 to cover operating expenses. He mortgaged his house. He did not know if the business was losing money but it needed money. Everybody agreed to put up money and they signed guarantees at the lawyer's office. He would be entitled to go after them if he was not paid back. He was paid back by all of the persons except Bud Stewart.

[40]          He was asked if he was not concerned that the Company was losing money and he said that he had trust in them. He did not know how they handled the financing. He did not ask for an accounting. He asked to see the statements but they were not provided. He asked Bud Stewart because he was handling everything. None of the other shareholders handled anything either. Mr. Chow did not have the time to look after things, it was up to Bud Stewart. He did not know how they assigned the work or the responsibilities.

[41]          Barry Tsang said that he was a shareholder in Mustard's when the business in question opened. He was employed at that time. He was the Appellant's brother-in-law. He knew Bud Stewart. He was a cook at the restaurant. It closed in July 1994. Mr. Stewart was there every day. This witness did not deal with the administration of the restaurant. Mr. Stewart told him that they owed GST, they owed suppliers, they asked them to put up money and they put up money as well as the other shareholders except for Bud Stewart. He made a cheque payable to the Company after it was shut down and he made out the cheques to the lawyers, eight cheques for $500 each and gave them to Mr. Stewart. They discussed the sale of the business but not before its opening. He did agree to sell the business. Bud Stewart told him there was an offer but it was gone.

[42]          In cross-examination, he said that the business opened the year after the GST came in, January 1991. He started working there in April or May of 1993 and was there for over a year. There was an office there. He went into it from time to time. He did not look at the records. He knew the restaurant was in arrears. He did not know why it was closed.

[43]          He invested $50,000 in the business and then put more in while the businesses were operating. He may have put in a few cheques sometimes for $2,000 or $3,000. He did not check his bank account. After the closing he gave eight cheques of $500 each. He knew throughout that the Company was losing money but he hoped to make the money back some day. He never asked the accountant for information and he did not check any statements.

[44]          In re-direct he said that Mr. Stewart gave him some numbers written by himself but these were not numbers obtained from an accountant. He was referred to Exhibit A-2 at Tabs 19 and 39. He said that he saw one but not all of them. These were year-end statements. Bud Stewart never gave him any to take with him. He was referred to Exhibit A-1 at Tab I and he said that this was a handwritten statement given to him.

[45]          Tommy Tsang was a shareholder of Mustard's as well as being employed there as a cook. He knew Bud Stewart and the Appellant. He was the brother-in-law of the Appellant. The restaurant closed in 1994. He was not there daily at the beginning.

[46]          He very rarely met with Mr. Stewart to talk about business even though he saw him daily. He discussed problems at meetings with the others but not regularly. Mr. Stewart talked about the current situation and how the business was doing. He did not see a financial statement prepared by an accountant but Bud Stewart wrote out some approximate numbers for him. He was referred to Exhibit A-1 at Tab I and said that he would have seen it. He was referred to Exhibit A-2 at Tab 39 and he said he never saw them. Bud Stewart asked him for money. They were told that it was for the business. He knew the Company was to be sold. After it had been opened, Bud Stewart asked a real estate agent to come in and have a look at the business.

[47]          In cross-examination, he said that Mr. Stewart told him that the Company was losing money and they needed money from the shareholders. He did not know what it was for. He put in $60,000 to $65,000 in total. He asked Mr. Stewart for an accounting but he did not give him the financial statements in the exhibit. He gave him statements showing that the Company was owing this amount of money and that it needed more money to pay the bills.

[48]          Harvey Tsang said that he was a shareholder of Mustard's Restaurant from the time it opened. He was also a cook there later on. He knew Bud Stewart. He saw him almost every day. The Appellant is his ex-brother-in-law. Sometimes the Appellant came to the restaurant to talk. Bud Stewart did not talk about the business. Sometimes he talked about financial troubles and money owing for GST. He asked this witness for money. He paid it in. Bud Stewart said that it was to pay the debts and the GST. They thought they were paying off the debts in full. He gave money two or three times. He never received any financial statements from Bud Stewart. When referred to Exhibit A-2 at Tab 39, he said that he never saw them. He never knew who was the accountant.

[49]          In cross-examination, he said that he invested $50,000 initially in the business. After that, he put in about $20,000 more. He was concerned but he did not look at any financial statements to see what was the reason for the trouble. He did not try to find out who was the accountant and he did not check with Revenue Canada.

[50]          The Appellant was recalled and was referred to Exhibit A-1 at Tabs C and D. With respect to C, he identified the Company lawyer and said that page 3 was correct. With respect to D, he recognized them and that they were told that they owed GST.

[51]          In cross-examination he said that after the restaurant closed they made cash payments to pay liabilities. As far as he knew these documents show how those cash infusions were spent. He never contacted the lawyer personally. He suggested that the money was given to pay all bills and that he expected that that would be done.

[52]          The Respondent called Charles E. Stewart, also known as "Bud Stewart". He grew up in Hong Kong and studied there till grade 10. He came to Canada in 1954. He speaks Cantonese. In the 1950s, he enlisted with the Royal Canadian Navy for three years and then worked for a company called High Grade Containers in Toronto and returned to the West, as his mother was moving here from Hong Kong. He worked for the Royal Bank of Canada at night and for Rainbird Sprinklers during the day. He was involved in the restaurant industry since 1976. He was involved in Trolls' Pub in Horseshoe Bay, then the Troll's Restaurant in North Vancouver as manager. Then he was involved in the Troll's Restaurant in Coquitlam Centre for 10 years. All of these businesses were successful. They went to Metrotown in Burnaby for the business in issue. This is the largest mall in British Columbia.

[53]          Mustard's Restaurant was opened in 1991 and it was owned by 362900 B.C. Ltd. He hired the lawyer, Byron Woods who registered the Company. The Company also had an accountant. The witness was not a shareholder. His wife had 25 shares. Then he said that he may have been a shareholder initially. He was a director with the Appellant. He was President and Mr. Chow was Secretary. The witness was the manager and overseer, then he hired another manager. He tried to get the restaurant started. The kitchen ordered the supplies. They provided a general line of food and primarily tried to get the lunch crowd.

[54]          He met with Mr. Chow at his restaurant and Mr. Chow came to Mustard's when he was in the mall shopping. He talked to the Appellant about it being a good opportunity. The landlord put up money for the leasehold improvements. When he talked to Mr. Chow, he spoke mostly in English.

[55]          Mustard's Restaurant was registered for GST. The accountant was Steven Pettigrew. He was hired by this witness. Books were kept in a cubicle off the kitchen. Monthly sales slips were available there. He locked the sliding doors at night but the cubicle was open during the day.

[56]          There was a dispute about the renovations. The landlord held back $90,000 to $95,000 before the opening. The impact on the restaurant start-up was terrible. The builder put a lien on it. It was removed when they both signed personal guarantees. The lunches were okay but the dinners were "terrible". Mall hours impacted on their business and traffic flows also created a problem. Business was bypassed because of the traffic flow. The cash flow was short. Sales were not up to par. "They were behind the eight ball". All shareholders were aware of this. Several of the shareholders worked at the restaurant as well. They had monthly statements as well as monthly meetings.

[57]          In 1991 and 1992 the income would not allow them to pay suppliers and the rest of the bills on a timely basis. They needed cash from the investors all along. They had a meeting and all of the creditors were listed as well as how much money was needed. He did not ask for any specific amount. Mr. Gin put up the money and all the others signed guarantees. The money was paid out to the creditors who were pressing the hardest. These were the landlord and B.C. Hydro. It was his decision to pay these accounts.

[58]          The Appellant did not tell him to pay the GST first. Mr. Chow was there twice a week. Other shareholders started working there to set it up for the opening. The shareholders were employees from day one. The three Tsang brothers were employees. They were Mr. Chow's brothers-in-law.

[59]          Mrs. Chow worked in the restaurant when it was open. The restaurant closed in 1994. Mr. Chow had access to financial statements, copies of statements were given to each shareholder. They reviewed the statements at the office and left them there. They had meetings once a month.

[60]          He was referred to Exhibit A-2 at Tab 61 and said that he was familiar with them. They were the financial statements that he brought to the shareholders' meetings. They were prepared by Mr. Pettigrew. Page 3 indicated that there was a loss of $31,799.49 over a period of two months. Page 9 showed that for the three months ending June 30, 1991 there was a $51,801.73 loss. At page 15, the statement showed that for the four months ending July 31, 1991 the loss was $76,395.00 and this was accurate. At page 21, for the period ending August 31, 1991 for five months, the loss was $91,656.14 and this was accurate. The Company filed tax returns. These were admitted into evidence as Exhibit A-2 Tab 59. They contained the tax returns for the Company for the period from April 1, 1991 to March 31, 1992. Page 13 showed a loss of $162,223. Tab 60 was also a tax return. This was for the year 1993 and it showed a loss of $309,915.

[61]          The witness said that all shareholders had access to these documents. They had monthly meetings and this return was there for all to look at. Mr. Chow, the Appellant, was an officer and his name was on the documents for signing. He did not know whether Mr. Chow perused the documents but they were always available.

[62]          Attempts were made to sell the business in 1992 and 1993. People came and looked at it towards the end. They received an offer and the mall served them notice. GST was collected. This was shown on the monthly statements.

[63]          He was asked what system was in place for paying GST and he said there was no separate account kept for GST and the money went into the operating account.

[64]          Revenue Canada came twice and he told them that once they sold the business they would be able to pay the account. They accepted that. That was in 1992 or 1993. Mr. Chow was there. The GST people wanted to meet with the directors. The witness said that Mr. Chow met with Revenue Canada's agent. It was his position that Mr. Chow had 75% of the shares, not in his name but on the side. The 50% was spread out amongst six people. They were official shareholders.

[65]          He identified Tab 53, the Shareholders Loan Accounts, which was prepared by Steve Pettigrew. Tab 34 was a document showing that the Company was forced into bankruptcy by the mall. Nothing was paid to anyone. After the business closed, the Appellant paid some creditors. He was running Mulvaney's Restaurant at the time. He paid creditors out of his own pocket. The other shareholders did not contribute anything. He was referred to Exhibit A-1 at Tab C which showed deposits to pay creditors and lawyers accounts but the GST was not one of the accounts that was paid. Mr. Chow did not tell him to pay GST.

[66]          In cross-examination he said that Mr. Chow knew that the shares were in his wife's name. Mr. Chow told him that he was going to bring in some money and that they should each have 25% shares for starting the business. He was very enthusiastic about getting investors. The lawyer registered for GST on his instructions. The mall held back funds without telling him about it. Every one of the shareholders had a copy of the statements. The financial statements at Tab 39 did not include GST but he did not know why. Things were bad. He filed some returns and did not ask the accountant as to why GST was not included. He hired a lawyer, Byron Woods to do work with the accountant in paying off the debts of the Company. He paid out the account for neon signs. He was a guarantor as well as Mr. Chow. He did not go after Mr. Chow for this payment.

[67]          Exhibit A-1, Tabs F and G were accepted into evidence. Tab F was referable to one of the suppliers. This account was settled. The letter of November 17, 1994 was also admitted into evidence. Tab H was accepted into evidence with the exception of the last page. With respect to Tab I, the witness said that he wrote it out, it was for the shareholders meetings, it identified the creditors. For most of the meetings, the accountant's statements were there. Tab I was accepted into evidence as well as Tab J.

[68]          The witness was asked why they did not pay GST. He said that it was because GST was not pressing them at that time and were making no threats.

[69]          He was referred to Tab F of Exhibit A-1 and said that everyone was aware that GST was owing. However, they just paid those who were pushing them at that time. He turned the GST demand over to Thorsteinssons'. He referred to Tab D of the exhibit and said that he was familiar with these documents. These were bills for work done by his lawyer Byron Woods. He could not recall the instructions.

[70]          He was responsible for the Company's start-up. It did not go well. They were short of money. He was to write the cheques, pay the wages, do the banking and look after all financial matters. There was a management contract. Tab D was admitted into evidence by consent.

[71]          He identified the Management Contract in Exhibit A-2 at Tab 38. It was suggested by Byron Woods that this be completed. The shareholders knew about it. They were talking weekly. He was to pay the income tax and file the returns.

[72]          This witness hired the accountant Mr. Pettigrew. He told him about GST and that they were in arrears. He said that they should meet with the GST people. Statements were provided monthly and then bi-monthly. He gave these statements to the shareholders at the meetings every two to three months. They talked about the problems everyday. He talked to the shareholders and Mr. Gin and Mr. Chow several times a week. He had seen Exhibit A-2, Tab 39, the financial statements. They received them. There was no mention of GST in the statements, he said, but they talked about it many times. Exhibit A-2, Tab 39 was accepted into evidence. He was referred to Exhibit A-2 at Tab 61 and it was pointed out that none of these documents showed GST but he said that they talked about it. This was received into evidence. There were other statements that were available at the meetings as well. He paid the accounts afterwards because he had personal guarantees. When accounts were behind, he gave a list of the creditors to the shareholders and they paid what they could. They paid enough to keep the creditors at bay. All big suppliers were guaranteed by the shareholders.

[73]          He was referred to the Notice of Assessment at Tab 2, which was a quarterly assessment for $8,000 to $10,000. He discussed the financial statements with all the shareholders. He was referred to Tab 53, which was the shareholders loan accounts and he said that he was not a shareholder but that his name was there since he worked for the Company.

[74]          Before opening the restaurant they had an offer to sell and it was turned down by some of the shareholders. Subsequently they were asking too much for the business. The offer was passed on to the shareholders. He and the Appellant took a drive out to Horseshoe Bay and talked about this offer. The offer was for $600,000 to $700,000 put in by a Chinese gentleman. It was far more than they had put out. It was rejected because they all thought that the business would succeed. There were no offers made to purchase the business after the opening.

[75]          The borrowing of the $110,000 from Mr. Gin was not asked for by him. It was to pay off the creditors. It went in to the company to pay the bills. He was referred to Exhibit A-2 at Tab 13 and he said that he paid his proportionate share to Mr. Gin. He has cancelled cheques to substantiate that. All the cheques of Mustard's Restaurant were signed by him. No one was repaid the shareholders' loans. Mr. Chow was there when they discussed the offer to purchase. The three brothers were against the offer. The restaurant was listed with different agents six months to one year after the opening. An acquaintance of his wrote down a figure on a piece of paper, which was an offer to buy. He believed that "he was just fishing". He was not aware that Mr. Hui had transferred his shares.

[76]          Again he said that they lumped the GST money into the general account and spent it. There was never enough money to pay the accounts out and all they could do was keep the creditors at bay. If the GST people had threatened them they probably would have paid out the account. They intended to pay the GST when the business was sold. They told that to the GST people.

[77]          This witness said that all shareholders had access to cancelled cheques and statements. These were never locked up. All the shareholders had keys to the business and had access to the room where the records were kept. All the shareholders knew that the GST was owing. They talked about who the creditors were all of the time. They knew who the urgent creditors were. Mr. Chow was there when the GST person came down. It was never discussed that they would not pay the GST until after the sale.

[78]          In re-direct the witness referred to Exhibit A-2 at Tab 17. This was on Mr. Pettigrew's letterhead. He made arrangements to pay some money to Revenue Canada. Exhibit A-2, Tab 35 referred to the final GST returns. This witness said that he did not recall the date that they were sent out to him.

Rebuttal

[79]          In rebuttal, the Appellant said that he did not receive the statements all of the time. He did not always go to the meetings. Sometimes he went once or twice a month. The other three shareholders were not there. They were up in MacKenzie so they were not told about the offer of $650,000.

Argument on behalf of the Appellant

[80]          In argument, counsel for the Appellant referred to section 227.1 of the Income Tax Act indicating that this imposes strict liability on the directors for non-remittance but subsection 227.1(3) provides a due diligence defense. "In essence, this defense allows the director to escape liability if he or she exercises the degree of care, diligence and skill to prevent the failure (to deduct or remit) that a reasonably prudent person would have exercised in comparable circumstances".

[81]          Counsel referred to the case of Soper v The Queen, 97 DTC 5407 and took the position that four principles were established by that case: 1) directors are not to be equated with trustees; 2) a director need not exhibit in the performance of his or her duties a greater degree of skill and care than may be reasonably expected from a person of his or her knowledge and experience; 3) a director is not obligated to give continuous attention to the affairs of the company, nor is he or she even bound to attend all meetings of the board. In the absence of grounds for suspicion, it is not improper for a director to rely on company officials to perform honestly, duties that have been properly delegated to them.

[82]          Counsel submitted that the standard of care laid down under subsection 227.1(3) is inherently flexible. It adjusts to the circumstances. This standard of care is not necessarily a professional one.

[83]          In order to satisfy the due diligence provision, it is permissible for a director to rely on the day-to-day manager to be responsible for payment of the debt obligations. A positive duty arises where a director obtains information or becomes aware of facts that there is a potential problem of remittance. In the case at bar the Appellant only became aware that the Company had debts including GST when Mr. Stewart called a meeting to obtain more money. The Appellant raised money amongst the shareholders and was assured by Mr. Stewart that the money would be used to pay the Company debts including GST. The Appellant placed his complete trust in Mr. Stewart, which turned out to be an error in judgment. However, a director should not be held liable for mere errors of judgment as in Soper, supra, referring to the case of Lagunas Nitrate Co. v. Lagunas Syndicate, cited at page 5412.

[84]          Counsel also referred to Davies et al. v. M.N.R., 94 DTC 1716, at page 5419 of Soper, supra, where the director was relieved of liability on the following facts: none of the directors possessed experience in relation to daily finance management of the company. The directors relied on the in-house finance officers who were competent; there was no reason to suspect that there might be a source deduction problem.

[85]          In the case at bar, counsel proposes that the Appellant had no business or financial experience to speak of and had an English language problem. He relied on Mr. Stewart as he had complete trust in him. There was no reason to suspect the source deduction problem, as he was able to raise money each and every time he was called upon to do so and was assured each and every time by Mr. Stewart that the debts including GST would be paid.

[86]          He relied upon the case of Golfman v. M.N.R., 90 DTC 1863 (T.C.C.) where the director was a lawyer and legal advisor, had reviewed financial statements from time to time and was told by other directors that all was in order. In the case at bar the Appellant was merely a kitchen manager with limited business or financial experience. He admitted that he had received and looked at statements from time to time but with his limited English he did not understand the statements. In any event, these statements did not disclose any information regarding the GST even though Mr. Stewart said that the GST was included in the general account and that the Appellant and all the shareholders were aware of this. It was argued that Mr. Stewart was the only person aware of this and there is no evidence that this information was conveyed to the Appellant or to the shareholders apart from Mr. Stewart's testimony.

[87]          He stated that the Appellant was very candid in his testimony throughout and was not trying to hide anything. However, in answering yes to a question posed by the Court as to whether or not he felt that other shareholders should share the responsibility, counsel opined that what he was really talking about was not a director's liability to the Minister but rather the other shareholders' responsibility for coming up with their share of the shortfall. Further, counsel attributed some of the problem to the state of mind of the Appellant throughout because of his limited English knowledge and business experience and the heavy trust that he placed upon Mr. Stewart. This was not a blind trust to avoid responsibility but he was entitled to rely upon Mr. Stewart as he had done in the past when he was assured that by giving money to the Company that the other debts as well as GST would be paid.

[88]          Further, counsel argued that it was reasonable for the Appellant to expect that the debts were being paid regularly including the GST. His evidence was that he did not know that GST was owing until he received the third party notice and he then checked with the GST office and was told to wait and keep in touch. They were then assured it was not urgent because the debt was going to be paid when the business was sold and it did not appear otherwise until the GST office was notified by the trustee in bankruptcy that no monies would be forthcoming.

[89]          Counsel took the position that the evidence of Bud Stewart was not candid or truthful and that he had a selective memory. He questioned Mr. Stewart's testimony that everybody knew what was going on all of the time. This was denied by the Appellant as well as the other shareholders who admitted only that they knew that the Company was in financial trouble. Yet they were assured by Mr. Stewart that monies raised were being used to pay the Company debts including GST.

[90]          Why did Mr. Stewart not ask the accountant why particulars of the GST were not included in the financial statements? How could the Appellant and the other shareholders know about the outstanding GST when it was not specifically set out in the financial statements? He questioned Mr. Stewart's testimony with respect to the financial statements being available at all of the meetings and suggested that the only financial statements produced at the meetings were written notes of which Exhibit A-1, Tab 1 was one.

[91]          The Appellant had some business experience and was aware of GST and how it should be handled. He handled it correctly in his other business where he had a separate GST account. He expected Mr. Stewart to run the business and handle the GST account in the same way here.

[92]          The Appellant indicated that he made no effort to ensure that taxes were paid nor did he inquire of Revenue Canada because he did not know anything about accounting or banking and simply relied on Mr. Stewart to look after everything. The evidence of Mr. Stewart is disputed by the Appellant and the other shareholders with respect to shareholders' meetings, the purpose of the monies raised, the financial statements and the sale of the business. These inconsistencies, according to counsel, are made manifest in certain portions of the transcript of proceedings, which he referred to by page numbers.

[93]          In conclusion counsel argued that applying the analysis of the law in Soper, supra, the Appellant has shown that he exercised the degree of care, diligence and skill to prevent the failure of the Company to remit net tax, as required by subsection 228 of the Act that a reasonably prudent person would have exercised in comparable circumstances within the meaning of subsection 323(3) of the Act. When one considers the four principles set out in the Soper case, and the Court considers that this is not a professional standard that the Appellant must meet, he was entitled to put his trust in Mr. Stewart and in his representation that the debts would be paid including the GST.

[94]          The appeal should be allowed with costs.

Argument on behalf of the Respondent

[95]          Counsel for the Respondent argued that section 323 of the Act, imposes personal liability on a director for the debts of a Company that fails to remit net GST as and when required by that Act. Liability is relieved when the director can demonstrate that he exercised due diligence in his attempts to prevent the Company's failure to remit.

[96]          In the case at bar the Appellant did not demonstrate that he exercised the requisite due diligence of a director with his background and experience in the circumstances. The Respondent submitted that the Appellant, as an inside director, knew or ought to have known that the Company was failing to make its required GST remittances and did nothing to prevent the failure.

[97]          Counsel argued that if the Court finds that the Appellant was an outside director, as is argued by the Appellant, and given the financial circumstances of the Company, the Appellant ought to have been alerted to the fact that there was a potential shortfall in GST remittances and ought to have made appropriate inquiries to assure himself whether this was the case and should have taken decisive action to remedy the situation.

[98]          Counsel took very little exception to the statement of facts as set out by the Appellant with the exception that Charles Stewart's 25% of the shares were transferred to his spouse Marlene Stewart. Nothing of substance turns on that fact.

[99]          Counsel relied upon the facts set out in the Reply in paragraph 10 and in Schedule A, which she said were unrebutted by the Appellant. She disputed the argument of counsel for the Appellant that Mr. Chow was a person with no business or financial experience to speak of. She considered him to be an experienced businessman and restaurant owner. In spite of the fact that the Appellant relied upon assistance from professionals with respect to the financial aspect of his business, he was familiar with the requirement to remit both payroll deductions and GST as a result of his business experience with several enterprises. He testified himself that he maintained a separate account for GST monies for these businesses. Contrary to the allegation at page 6 of the Appellant's submission that GST accounts were handled by the Appellant's business partner, the Appellant himself testified that it was he who handled the tax matters for his proprietorship as can be seen from the Respondent's Excerpts from Transcript of Proceedings at Tab 2, page 40, lines 24 and 25 and page 42, lines 12 to 14.

[100]        Counsel also took the position that according to the questionnaire in Exhibit A-2 at Tab 45 in question 6, the Appellant had also sought legal advice from a solicitor Jack Lee as to his duties and responsibilities as a director prior to becoming director of the Company. Further, it is clear from his evidence that he understood his responsibilities as a director.

[101]        The Appellant was responsible for coming up with the investors to obtain an amount of $500,000 as start-up capital; the Appellant was appointed director of the Company to represent the interest of five of the other shareholders, along with himself and they held 75% of the shares of the Company; the Appellant applied, along with Mr. Stewart, for a liquor licence for the Company; the Appellant attended at the restaurant at least once or twice a week according to the evidence of Mr. Stewart although this was disputed by the Appellant himself; he was in touch with the three Tsang brothers who started working at the restaurant in 1992 on a regular basis; he signed a personal guarantee to have a builder's lien in respect of leasehold improvements removed; he was authorized to be a signatory on the Company's bank accounts although he did not attend at the bank to sign the signature cards; he attended meetings at the office of Revenue Canada, as he represented the interest of shareholders, who, (with the Appellant), held 75% of the shares of the Company.

[102]        The Appellant appears to have negotiated a sum with at least one of the Company's creditors according to the letter at Exhibit A-1, Tab F dated November 17, 1994. The Appellant was aware that the Company was losing money in 1992 and 1993 and by mid-1992 the Appellant's co-director Mr. Stewart had advised the Appellant that the Company was behind on its payments, including rent, supplies and GST. As a result of the Company's financial problems, known to the Appellant, the directors and shareholders agreed that the Company would borrow $110,000 from one shareholder, Ming Wah Gin, to finance the day-to-day activities of the restaurant. The Appellant did not direct Mr. Stewart to ensure that any portion of these funds be put towards outstanding GST.

[103]        The Appellant admitted having seen the Company's financial statements and having had access to them. All of the Company's financial statements in evidence clearly demonstrated that the Company was progressively losing money. Although the Company's annual financial statements did not indicate that GST was owing and it was Mr. Stewart's evidence that this amount was included in the accounts payable which did not itemize the amounts, the monthly financial statements at Exhibit A-2, Tab 61 did, in fact, indicate under current liabilities, GST payable increasing monthly from $14,602.39 on May 31, 1991 to $47,250.22 to January 31, 1992.

[104]        The Appellant's ability to read and understand English was somewhat limited but at the same time the evidence indicated that he was not completely incapable of understanding the documents with figures in English. In any event, the Appellant was free to take copies of the monthly financial statements to a professional of his choice to review them. He also could have requested that one of his English-speaking brothers-in-law translate the documents for him.

[105]        The Appellant was able to identify in Court at least one document at Exhibit A-1, Tab I which indicated clearly that GST was owing. The Appellant met with Mr. Stewart either socially or for business purposes some fifty times between 1989 and June and July of 1994. On these occasions, they would talk about the Company's business, at least according to the evidence of Mr. Stewart.

[106]        The Appellant had no difficulty communicating with Mr. Stewart because he spoke Chinese. He was raised and educated in Hong Kong, spoke Cantonese and according to the Appellant's testimony, there were at least 10 formal meetings with Mr. Stewart and the other shareholders at which Mr. Stewart would sometimes provide copies of monthly financial statements. If the evidence of Mr. Stewart is accepted, these meetings were held every two to three months.

[107]        All of these points substantiate the Respondent's position that the Appellant was indeed an inside director.

[108]        With respect to the question of due diligence, the Appellant's evidence was that he never went into the office located on the restaurant premises to check the books and records of the Company, the bank statements or cancelled cheques of the Company. He did not ask Mr. Stewart who the Company's accountant was, which could have facilitated further inquiries. He did not contact Revenue Canada to make sure that the Company was remitting the GST even if Mr. Stewart promised him that it was. It is clear from the questions put to the Appellant when he was on the stand that he was aware that the Company was behind on all payments, including GST but yet did nothing to ensure that the capital infusion from the shareholders of the Company was directed to payment of GST.

[109]        It was clear from the evidence of Mr. Stewart that all of the shareholders knew that the monies that were being invested into the Company would go to those of the creditors who were pressing the hardest for payment. These suppliers were starting to close down the business. The shareholders and Bud Stewart did not regard GST as one of those accounts.

[110]        His evidence shows clearly that the Appellant did not act with due diligence and does not meet the due diligence test.

[111]        With respect to the credibility of the Appellant and Bud Stewart, counsel agreed that there was some contradiction in the evidence but presumably did not consider that anything turned on these inconsistencies. If anything does turn on these inconsistencies, counsel requested the Court to prefer the evidence of Mr. Stewart to that of the Appellant as Mr. Stewart was a far more credible witness.

[112]        On this issue counsel referred to various parts of the transcript where she concluded that the Appellant did not answer several questions put to him in cross-examination in a straightforward manner and often the questions had to be repeated. However, Mr. Stewart gave his evidence in a clear and forthright manner. He candidly testified that it was he who was responsible for making remittances.

[113]        Mr. Stewart's evidence contained such hallmarks of credibility as his ability to recall aesthetic details. Overall, Mr. Stewart's ability to recall the events, considering that at the time of the trial it occurred some six to ten years previous, was impressive. Mr. Stewart did not, as was alleged at page 6 of the Appellant's submission, testify that he was very "foggy" about matters dealing with the GST account generally. He answered that he was "pretty fogged up" with respect to a specific question of whether the accountant, Mr. Pettigrew made arrangements to have funds transferred to pay the GST subsequent to the closing of the business. Otherwise, there was nothing to suggest that he had a selective memory or that he was unable to remember significant events. Such allegations were unfounded.

[114]        Further, there was nothing to suggest that Mr. Stewart's testimony was embellished or fabricated to ensure that the Appellant would be unsuccessful in this case. No suggestion was ever put to Mr. Stewart during the cross-examination by counsel for the Appellant that it would be in his interest to give inaccurate or untruthful evidence and there was nothing in the evidence to suggest that he would benefit if the Appellant were unsuccessful in any event. The allegation in the Appellant's submission at page 6 that Mr. Stewart was untruthful for the purpose of having the Appellant and the other shareholders shoulder the liability to the Minister is wholly unsupported in fact.

[115]        Counsel argued that the evidence of at least four of the five shareholders who testified, who were all friends and relatives of the Appellant, corroborated the evidence of Mr. Stewart with respect to shareholders' meetings, that the shareholders were informed that the Company was losing money and was behind in various payments, including GST. Even though these witnesses testified that they did not see any of the annual financial statements in Exhibit A-2 at Tab 39, they indicated that Mr. Stewart did provide some documentation setting out the financial position of the Company.

[116]        The evidence of Wah Quan Lee indicates that he went to the restaurant several times and then met with Mr. Stewart and the other shareholders. His testimony appears to indicate that financial statements were available, though he did not review them.

[117]        Barry Tsang testified that Mr. Stewart told him that the Company was in financial difficulty and owed GST and money to suppliers. Though he could not recall the amount of his investment, he did recall that meetings were held at the restaurant and testified that he may have seen one of the financial statements.

[118]        Tommy Tsang confirmed that shareholders' meetings were held, although he said they were not on a regular basis. Again he claimed not to have seen a financial statement even though he was not asked whether or not he had. This detracts from the general credibility of this witness and would appear to indicate that his evidence was rehearsed. However, even he acknowledged that Mr. Stewart provided written reports about the Company's financial situation at meetings although he did not see the Company's annual financial statements.

[119]        Harvey Tsang also acknowledged that the Appellant attended the restaurant and talked to him. He further acknowledged that Mr. Stewart discussed the business with him, advised him that the Company had financial difficulties and that it owed GST. His evidence with respect to the financial statements was not credible. He said that he had never seen the Company's annual financial statements although he said that he was concerned about the Company's financial situation. Mr. Stewart did not let him see the financial statements. He testified that he did nothing further to obtain the financial statements, despite having invested some $70,000 in the Company. Mr. Tsang worked at the restaurant and would have had ready access to the Company's office located on the premises. Considering this considerable investment and access to the office, Mr. Tsang's allegations about Mr. Stewart preventing him from seeing the financial statements simply do not ring true.

[120]        Ming Wah Gin answered questions in cross-examination in a way that was evasive and unresponsive. For instance he was questioned about the $110,000 loan but substantially denied any knowledge of why the Company required that significant amount of capital or what it was used for. This seems unbelievable for a person who had placed a substantial mortgage on his home to support a business investment run by someone he allegedly barely knew. This person even referred familiarly to him as "Bud".

[121]        The credibility of this witness should be further questioned in light of the fact that when it was pointed out to him that the Appellant was appointed as a director to represent his interests he said that he did not have time to do so. He had no knowledge about the distribution of responsibilities in the Company. Mr. Stewart did not provide financial statements that he had requested. This was contradicted by the evidence of other shareholders who at least indicated that Mr. Stewart provided some form of financial accounting and the Appellant himself indicated that he saw financial statements.

[122]        This witness was intent upon holding Mr. Stewart accountable for everything. Counsel took the position that this witness appeared to hold a grudge against Mr. Stewart who he said was the only guarantor of his loan who had not paid back his share of the loan.

[123]        The evidence of this witness overall, lacks credibility. Given the witness's close relationship to the Appellant, there is obvious animosity to the Respondent's witness. It is unconvincing and this evidence should be afforded little or no weight.

[124]        In discussing Soper, supra, counsel took the position that the standard of a director's care is neither purely objective nor purely subjective, but is a combination of the two: the "reasonable" person with comparable skill and experience.

[125]        The inside director who influences the day-to-day management of the Company and who influences the conduct of the business affairs has a higher burden to meet. The Appellant in this case was an inside director. Although he was not physically present at the business site on a daily basis, he attended there once or twice a week and often spoke to his brothers-in-law who worked in the kitchen about the business. Participation in and ability to influence a business was significant as indicated earlier and he should be found to have been an inside director.

[126]        Counsel referred to Stein v. The Queen, [1999] GSTC 64 (TCC) where the Court found that the director was an inside director although she was not involved in the day-to-day management of the business, but because she guaranteed the business's line of credit and was the only other director authorized to sign cheques. The Court concluded that she influenced the conduct of the Company's business affairs. Likewise, the Appellant should be found to be an inside director because of his participation in and his influence over the conduct of the Company's affairs.

[127]        If the Court should find that the Appellant was not an inside "director", in any event, the Appellant became aware of facts that should have spurred him to action to prevent the Company's failure to remit GST at an early time in the operation of the Company. Clearly this brings him within the reference in Soper, supra, at page 5418. The facts that he became aware of would have led a reasonable person to conclude that there was or could reasonably be a potential problem with remittances. This was clearly a case where the Company was experiencing financial difficulty and is the situation which Soper, supra, is referring to.

[128]        At a bare minimum the Appellant knew that the Company was in financial difficulty by 1992, when the Company borrowed $110,000 from Ming Wah Gin. With this knowledge the Appellant was not entitled to turn a blind eye to the Company's financial situation from that point on nor was he entitled to rely on others to ensure that GST was being remitted as and when required.

[129]        The facts in the case at bar can be distinguished from the facts in Golfman, supra, because there the director could not reasonably be expected to conclude that there might be a problem with remittances. This is distinguishable from the factual situation here because not only were the circumstances indicative of potential problems with remittances, the Appellant actually knew there was a problem with remittances.

[130]        The case of Davies, supra, is also distinguishable from the present case. In Davies the directors had no experience respecting the daily financial management of the Company. However, the Appellant here had experience operating two restaurant businesses, one his own proprietorship and the other a Company of which he was one-third owner. In Davies,supra, the director was misled by financial reports showing a positive financial picture, whereas the Appellant in the present case was obviously aware that the Company was in grave financial difficulty and had access to financial statements showing its steadily increasing losses.

[131]        Counsel was prepared to concede that outside directors are entitled to rely on qualified professionals to run the Company and to ensure that source deductions and GST are being remitted to the Minister. However, once they have any reason to suspect that the Company is in financial difficulty, as did the Appellant here, they are required to take action. The Appellant's due diligence subsequent to becoming aware of the Company's financial remittance problems consisted of advancing shareholder loans to the Company. He admitted in cross-examination that he did not direct the director-manager, Mr. Stewart to ensure that his advances were used to pay the outstanding GST. Mr. Stewart testified that the Appellant understood the cash infusions were going to be used to finance the day-to-day operations of the business and would be paid towards those creditors who were most threatening.

[132]        Even if the Court accepts the Appellant's argument that he assumed that the shareholder loans were going to be used to pay GST arrears, he did nothing further to ensure that the GST remittances were, in fact, being made. He should not have merely trusted that the GST was being remitted without further inquiry, such as asking Mr. Stewart for an accounting, checking with the accountant, reviewing cancelled cheques and bank statements and contacting Revenue Canada directly. There were many things that the Appellant could have done, but he did nothing.

[133]        The same situation was considered by this Court in Bains v. The Queen, [1999] GSTC 75 (T.C.C.) where the director pressed the managing director to make the remittances and the Court found that he was not liable for the first period where he only learned of the Company's financial trouble and lapsed remittances after the fact and immediately advanced funds to pay the GST. However, the Court found that, once he was alerted to the problem of GST, he should have done more than simply assume that funds were being advanced to the Minister. He should have taken steps to ensure that an appropriate system was in place and that a supply of information by the person charged with GST remitting be made on a timely basis. In this case, this director did not do so.

[134]        The Appellant learned of the financial remittance problems long before the first period in issue which was the period ending September 30, 1992 due to be remitted on October 31, 1992. The Respondent submitted that the Appellant ought to have acted to prevent the failure to remit for the periods in issue, as he became aware of the financial remittance problems, at the latest, some months previous.

[135]        Finally, counsel submitted that the Appellant was not entitled to assume that the Company's GST liabilities would be satisfied from the sale of the restaurant and that this amounted to due diligence. The due diligence defence applies to those who have acted in an attempt to prevent the failure to make remittances. It is not available to those who merely attempt to cure the default after the fact.

[136]        Counsel submitted that the appeal should be dismissed with costs.

Appellant's rebuttal to the Respondent's submission

[137]        Counsel reiterated that the Appellant demonstrated the exercise of the requisite due diligence of a director. He did not know that the Company had failed to remit GST until he received the Notice of Assessment from Revenue Canada, as a director. Further, the Appellant had no reason to suspect that the GST was not remitted each and every time that a request was made by Mr. Stewart to raise funds. These funds were raised and the monies were paid over to Mr. Stewart.

[138]        The Appellant was alerted to the potential shortfall in GST remittances and payment of other debts subsequently and took decisive actions by raising funds. He was entitled to place trust in Mr. Stewart.

[139]        From the evidence, it can be seen that the Appellant was only a manager of the kitchen as well as a cook. The Appellant did not understand the financial records as he should have because in his earlier businesses he had relied upon his accountant to look after finances and to set up the GST account. He was entitled to believe that Mr. Stewart would also handle the GST account in the same manner.

[140]        The Appellant had some difficulty with the questionnaire but ultimately in his testimony he admitted that he did seek legal advice and was told of his responsibilities. He has always admitted his responsibilities as a director and is relying upon the Court to conclude that he demonstrated in his evidence that he exercised the requisite due diligence of a director under all the circumstances.

[141]        The Appellant was appointed as a director under the direction of Mr. Stewart for the purpose of applying for a liquor licence. He denied that he attended the restaurant as often as once or twice a week although he did attend regularly.

[142]        The Appellant should be considered an "outside director" from the point of view of the Company's finances and accounting and an "inside director" from the point of view of managing the kitchen and cooking.

[143]        The Appellant took the initiative of meeting with officials of Revenue Canada not because he was asked to represent the interest of the shareholders but because he received a notice from Revenue Canada about the unremitted GST and became concerned. He was told by Revenue Canada not to worry. He did not negotiate a settlement or even meet with Barry Woods regarding a settlement of any of the Company's accounts. The Appellant had no reason to believe that the monies collected were not being used to pay GST. Even though he did not ask Mr. Stewart to ensure that the amounts were being paid he had no reason to suspect that Mr. Stewart would not look after the GST account in the same manner as he did in his other businesses. He trusted Mr. Stewart and consequently did not seek advice from other professionals regarding the statements.

[144]        Even though he met with the Appellant on numerous occasions he did not discuss the financial problems of the Company in detail at many of these meetings. These were casual meetings. He disagreed that there was clear evidence amongst the shareholders that the creditors who were pressing hardest for payment would be paid first.

[145]        Counsel admitted that the Appellant accepted his responsibilities as a director and wished to transfer that responsibility to Mr. Stewart by expecting him to set up a separate account for GST.

[146]        The Appellant's witnesses were credible and were simply responding to questions as truthfully as they could. The same thing could be said of Ming Wah Gin. It should not be said that he was holding a grudge against Mr. Stewart. Counsel also suggested that Mr. Stewart had a vested interest in giving him inaccurate or untruthful evidence because he was also liable for the tax.

[147]        Just because the other witnesses were friends or relatives of the Appellant is no reason to reject their evidence. There is no evidence to suggest that their testimony was fabricated or untrue.

[148]        Counsel for the Appellant distinguished the case at bar from that of Stein, supra, and suggested that as in Soper, supra, when considering the Appellant's state of mind, it should be concluded that he did not turn a blind eye to the Company's financial situation but made the arrangements to raise the monies as and when needed. Even though he had experience in operating two restaurant businesses there was no evidence that he was experienced in the daily financial management of a business.

[149]        Each time that the Appellant learned of the financial problems and the remittance problems of the Company he helped to raise money and there is no reason to believe that Mr. Stewart would not use the money to pay the GST. This action by the Appellant in attempting to prevent the failure to remit by raising monies as and when requested by Mr. Stewart and relying upon him to remit the GST was such an action. This was at least due diligence.

[150]        Counsel repeated the principals enunciated in Soper, supra, in taking the position that the Appellant has met the due diligence test and asked that the appeal be allowed, with costs.

Analysis and Decision

[151]        The Court has scrutinized not only the evidence given by all of the witnesses in this case but has also scrutinized the manner in which the evidence was given. Often times what a witness says is not so important as the way in which the witness gives the testimony. In this case there can be no doubt that all of the witnesses other than Bud Stewart, obviously preferred the position of the Appellant to that of Mr. Stewart. This was clear from the way in which they gave their testimony, the way in which they responded to questions, as well as the reluctance on the part of some witnesses to testify as forthrightly as they might have and in their reluctance to admit facts which might have corroborated the position taken by Bud Stewart.

[152]        However, the Court is satisfied that in spite of this preference, no witness deliberately attempted to mislead the Court nor did any witness deliberately testify to something which was apparently false. That is not to say that there were not discrepancies in the testimony as given by Bud Stewart and the testimony given by the other witnesses. However, by and large, these discrepancies were not major and the Court is satisfied that nothing of major importance was affected to any extent by these discrepancies.

[153]        Counsel for the Appellant took the position that the Court should not believe the evidence of Mr. Stewart because it "was not candid or truthful and that he had a selective memory". Further, he asked, "why did Mr. Stewart not ask the accountant why particulars of the GST were not included in the financial statements? How could the Appellant and the other shareholders know about the outstanding GST when it was not specifically set out in the financial statement"? He further questioned Mr. Stewart's testimony with respect to the availability of the financial statements at the various meetings.

[154]        The only matter which gave the Court some concern was the fact that there was no real explanation as to why the outstanding GST was not specifically set out in the financial statements. One would have thought that a professional accountant preparing the statements would have segregated such amounts from other parts of the statements and that any clear reading of the statements would show the outstanding GST amounts. That fact has given this Court some concern and has required the Court to look to other areas of the evidence so that in considering the evidence cumulatively this apparent anomaly may be resolved.

[155]        Mr. Stewart did testify that this amount was included in the accounts payable which did not itemize the amounts and that the amounts for GST were set out in the financial statements at Exhibit A-2, Tab 61 and that GST remittances were indicated under current liabilities. It is also obvious from this evidence that the GST payable amount was increasing monthly from $14,602.39 on May 31, 1991 to $47,250.22 up to January 31, 1992.

[156]        After considering all of the evidence, the Court is satisfied that all of the shareholders, including the Appellant were aware from a very early date that the GST remittances were behind, that they were not being made regularly and that none of these parties including the Appellant made any inquiry as to why these remittances were in arrears and why they were not being brought up-to-date.

[157]        The Court is satisfied that the evidence of Mr. Stewart was credible and indeed, to a large extent, was corroborated by the evidence of the other witnesses in material respects. In spite of the attitudinal problem that the witness displayed in this case, the Court is satisfied that all of them were aware of the difficulties that existed with respect to the GST account, none of them inquired about it, none of them did anything about it and either merely hoped that it would go away or that the business would be sold in due course and the GST would be paid off. None of them made any conscious effort to insist that monies be paid on the GST account at any point in time even though various and sundry efforts were made to obtain more funds which were used at the end of the day to pay the accounts which were considered to be more pressing.

[158]        In spite of modest discrepancies in the evidence of the various witnesses with respect to the presentation of financial statements at the various informal meetings that were held, the frequency of these meetings, the availability of the statements in the office at the restaurant and the use to which the funds were going to be made, the Court is satisfied that all of the shareholders and directors were aware of the GST problem. They were aware of the fact that monies were being borrowed to pay off some of the accounts of the Company. They all made investments into the Company for such purposes, they did not specify to Mr. Stewart as to what accounts were to be paid first, they did not insist that the amounts be made to pay the GST arrears or indeed did they even suggest that this account be brought up-to-date. The Court is satisfied that the Appellant as well as all of the other shareholders were content to rely upon the decision of Mr. Stewart to pay the accounts that he did. On the basis of Mr. Stewart's evidence the Court is satisfied that he and the other directors and shareholders were intent upon paying those creditors who were pressing the hardest. This action of Mr. Stewart was consented to by the Appellant and all of the other shareholders and directors either specifically or impliedly and in acting as he did he was acting with specific or implied consent.

[159]        In the end result, whether there is a discrepancy in the evidence of Mr. Stewart as opposed to the other witnesses, including the Appellant, the Court prefers the evidence of Mr. Stewart to that of the Appellant and the other witnesses, where the evidence is crucial to this decision.

[160]        With respect to the issue of "inside director" or "outside director", on the basis of all of the evidence the Court finds as a fact that the Appellant was an inside director and he meets all the attributes of that position as referred to in the cases cited, particularly, Soper, supra.

[161]        Counsel for the Appellant has admitted, tacitly, in his argument, that the Appellant was at least an "inside director" from the point of view of managing the kitchen and cooking. Counsel for the Appellant argued that he should be considered an "outside director" from the point of view of the Company's finances and accounting. This Court is not certain as to whether or not Robertson J. in Soper, supra, contemplated that a person might be at one at the same time an "inside director" of the same company for certain purposes and an "outside director" for other purposes. However, even if that was possible Robertson J. made it clear in Soper, supra, at page 5417 that:

        At the outset, I wish to emphasize that in adopting this analytical approach I am not suggesting that liability is dependent simply upon whether a person is classified as an inside as opposed to an outside director. Rather, that characterization is simply the starting point of my analysis. At the same time, however, it is difficult to deny that inside directors, meaning those involved in the day-to-day management of the company and who influence the conduct of its business affairs, will have the most difficulty in establishing the due diligence defence. For such individuals, it will be a challenge to argue convincingly that, despite their daily role in corporate management, they lacked business acumen to the extent that that factor should overtake the assumption that they did know, or ought to have known, of both remittance requirements and any problem in this regard. In short, inside directors will face a significant hurdle when arguing that the subjective element of the standard of care should predominate over its objective aspect.

The Court went on further to discuss various cases where even "inside directors" have not been held liable. Such cases are where the director may be an innocent party or may be a director who has been misled or deceived by co-directors and the Court can foresee other situations where even inside directors may not be liable for the failure to remit. In reaching a decision in each case the Court must consider all of the factors and the answer will not be found in merely deciding whether or not the director is an inside director or an outside director but consequently, as pointed out by Robertson J. at page 5418:

In my view, the positive duty to act arises where a director obtains information, or becomes aware of facts, which might lead one to conclude that there is, or could reasonably be, a potential problem with remittances. Put differently, it is indeed incumbent upon an outside director to take positive steps if he or she knew, or ought to have known, that the corporation could be experiencing a remittance problem. The typical situation in which a director is, or ought to have been, apprised of the possibility of such a problem is where the company is having financial difficulties. For example, in Byrt v. M.N.R., 91 DTC 923 (T.C.C.), an outside director signed financial statements revealing a corporate deficit and thus he knew, or ought to have known, that the company was in financial trouble. The same director also knew that the business integrity of one of his co-directors, who was the president of the corporation too, was questionable. In these circumstances, having made no efforts to ensure that remittances to the Crown were made, the outside director was held personally liable for amounts owing by the corporation to Revenue Canada. According to the Tax Court Judge the outside director had, in contravention of the statutory standard of care, failed to "heed what is transpiring within the corporation and his experience with the people who are responsible for the day-to-day affairs of the corporation" (supra at 930, per Rip, J.T.C.C.).

[162]        The argument of counsel for the Respondent is well taken where she indicated that if the Court should find that the Appellant was an outside director, then even in that case, given the financial circumstances of the Company, the Appellant ought to have been alerted to the fact that there was a potential shortfall in GST remittances and ought to have made appropriate inquiries to ensure himself whether this was the case and should have taken decisive action to remedy the situation.

[163]        The Court is satisfied that the Appellant as well as everyone else involved in this Company was well aware of the shortfall of remittances. The Court is further satisfied that neither the Appellant nor any of the other officers or directors took any steps to do anything except raise funds for the payment of bills of the Company although none of these funds were directed towards the payment of the outstanding GST account which they knew existed. It was not enough for the Appellant to say that he trusted Bud Stewart and that he believed that Mr. Stewart would use the funds to pay the GST account. He blindly relied upon him to do so even though there was no indication from Mr. Stewart that he would. Neither was there any discussion amongst the directors as to how these advances to the Company were to be expended.

[164]        The only conclusion the Court can come to is that the Appellant, as well as the other directors and shareholders were content to allow Mr. Stewart to decide how these amounts should be expended, what bills should be paid and at the end of the day they obviously must have hoped that things would turn around so that the GST account might ultimately be paid when the business was sold.

[165]        This is not a situation where the Appellant was entitled to conclude that Mr. Stewart was going to use the advances to pay the outstanding GST account rather than other accounts payable. This is not a case where the Appellant had any reason to believe that this would be done. There was not in place any system for paying the GST account which in the past had worked and which would entitle the Appellant to be reasonably certain that the account would be paid in the future and neither the Appellant nor any other person took any steps to ensure that any system would be put in place which would ensure that this account would be brought up-to-date and kept up-to-date in the future.

[166]        This is not a case where the Appellant was entitled to rely on qualified professionals to run the Company and to ensure that source deductions of GST were being remitted because no such system had heretofore existed. There can be no doubt that the Appellant and the other shareholders should have reasonably been alerted, should have reasonably suspected that the Company was in financial difficulty and they were required to take action.

[167]        As indicated by counsel for the Respondent, after the Appellant became aware of the Company's financial remittance problem he did nothing more than advance shareholder loans to the Company but did not direct the manager or directors to ensure that these advances were used to pay the outstanding GST.

[168]        The Court finds that Mr. Stewart's testimony was truthful when he said that he understood that the cash infusions were going to be used to finance the day-to-day operations of the business and would be paid towards those creditors who were most threatening. Such a belief is consistent with the actions of the Company after the infusions were made. The Court is satisfied that his position was well known to the Appellant and the other shareholders and directors of the Company and in failing to make the remittances to Revenue Canada, Mr. Stewart was not acting contrary to the wishes of the Appellant and the other directors but in accordance with their wishes and their direction.

[169]        Further, even if the Appellant assumed that the shareholder loans were going to be used to pay GST arrears, he did nothing to ensure that such remittances were made. Again, it was not sufficient for him to have blind trust that Mr. Stewart would so direct these payments and, as counsel for the Respondent suggested, he should have at least asked for an accounting, he should have checked with the accountant, he should have reviewed cancelled cheques or bank statements or he should have contacted Revenue Canada directly about the status of the account. This he did not do because the Court is satisfied Mr. Stewart was acting in accordance with his understanding and not contrary to the purpose for which the loans were advanced.

[170]        The Court does not accept that the Appellant was only a manager of the kitchen and a cook. The Court is satisfied he did understand financial records, he had business acumen and experience from his other businesses as well as from this business. He had employed accountants to look after finances before and to pay the GST account and he was not entitled to presume because somebody that he relied upon in the other business to pay his GST accounts did so that Mr. Stewart would do so in this case. He was not entitled to conclude that Mr. Stewart would handle the GST account in the same manner as he did or others in his earlier businesses had done.

[171]        The Appellant did seek legal advice with respect to his responsibilities and was told what those responsibilities were. The Court is satisfied that the Appellant knew his responsibilities as a director.

[172]        The Court rejects the argument that the Appellant had no reason to believe that the monies collected were not being used to pay GST and the Court is satisfied that he was well aware of that fact.

[173]        The Court finds that in spite of the fact that the Appellant did not seek further professional advice regarding the statements, he was sufficiently aware of what the statements meant. The statements were sufficiently informative as to the dire financial situation of the Company and the financial records of the Company were readily available to him so that the Appellant should have acted otherwise then as he did to prevent the default.

[174]        The Court concludes that the Appellant did meet on numerous occasions with Mr. Stewart and the other members of the Company and did discuss the financial problems of the Company in detail at many of these meetings. Despite the fact that they may have been casual meetings, they were quite informative of the dire financial situation of the Company and that it was clear or should have been clear to all of them that the account was not up-to-date, that more money was needed to pay the outstanding accounts of the Company and that the creditors who were pressing the hardest for payment would be paid first.

[175]        In the final submission of counsel for the Appellant, there is a tacit admission that the Appellant accepted his full responsibilities as director but wished to transfer that responsibility to Mr. Stewart by expecting him to set up an account for GST purposes. There was no reason for the Appellant to believe that Mr. Stewart would act in such a way, to set up a separate account. Indeed, the Appellant knew that there was no such account and that the monies that were being collected for GST were going into the general revenues of the Company and being used for other purposes.

[176]        The cases which counsel for the Appellant cited in support of his position can be distinguished in many material particulars from the facts in the case at bar. The Court can only conclude that the Appellant, at the end of the day, turned a blind eye to the Company's financial situation. Even though he made many arrangements to raise monies when the Company needed them he took no steps whatsoever to direct that those monies be forwarded to Revenue Canada for the payment of the outstanding GST arrears.

[177]        The Court utterly rejects the argument that there was no reason to believe that Mr. Stewart would not use the money to pay the GST. All of the evidence points to the contrary and to the fact that all of the directors and shareholders were aware of the fact that the monies were going to be used to pay the creditors who were most pressing or if they did not know this they allowed Mr. Stewart to have complete leeway as to how the monies were to be expended and there was no reason for them to believe that the monies would be used to pay the GST.

[178]        The Appellant learned of the financial remittance problems long before the first period in issue, that he should have acted to prevent the failure to remit for the periods in issue and he did not.

[179]        The due diligence defence fails in this case as the Appellant did nothing to prevent the failure to make remittances. At the end of the day the Court is not even satisfied that any actions the Appellant took even amounted to an attempt to cure the default after the fact. The Court has already indicated that the destination of the funds was to anybody other than Revenue Canada to pay up the GST arrears.

[180]        The appeal is dismissed with costs.

Signed at Ottawa, Canada, this 10th day of October 2001.

"T.E. Margeson"

J.T.C.C.

COURT FILE NO.:                                                 98-2788(GST)G

STYLE OF CAUSE:                                                               Yuet Nam Chow

and Her Majesty the Queen

PLACE OF HEARING:                                         Vancouver, British Columbia

DATE OF HEARING:                                           January 16, 2001

REASONS FOR JUDGMENT BY:      the Honourable Judge T.E. Margeson

DATE OF JUDGMENT:                                       October 10, 2001

APPEARANCES:

Counsel for the Appellant: Jack L. Lee

Counsel for the Respondent:              Lisa Macdonell

COUNSEL OF RECORD:

For the Appellant:

Name:                              Jack L. Lee

                                        Firm:                                Barrister & Solicitor

                                                                                3rd Floor, 127 East Pender Street

                                                                                Vancouver, B.C. V6A 1T6

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

98-2788(GST)G

BETWEEN:

YUET NAM CHOW,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on January 16, 2001, at Vancouver, British Columbia, by

the Honourable Judge T.E. Margeson

Appearances

Counsel for the Appellant:                             Jack L. Lee

Counsel for the Respondent:                         Lisa Macdonell

JUDGMENT

          The appeal from the assessment made under Part IX of the Excise Tax Act, notice of which is dated November 20, 1996 and bears number 20786, is dismissed.

Signed at Ottawa, Canada, this 10th day of October 2001.

"T.E. Margeson"

J.T.C.C.