Citation: 2007TCC718
Date: 20071205
Docket: 2004-3699(GST)G
BETWEEN:
JAMES NING LAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
McArthur J.
[1] The
Appellant, James Ning Lau, appeals a third party notice of assessment dated
July 30, 2002 made by the Minister of National Revenue (the “Minister”)
pursuant to subsection 323(1) of the Excise Tax Act (“Act”). The
Minister alleges that the Appellant, as sole shareholder of Golden Leaf Development
Company Ltd. (“GL Trust”), is liable in respect of unremitted net tax in the
amount of $998,100. GL Trust was assessed $1,095,270 for goods and services tax
on the self-supply of 78 condominium units.
[2] The issues
include:
(i) whether GL Trust was liable
to collect and remit $998,100 under the self-supply rules of the Act as
required by subsection 228(2); and
(ii) if yes, whether the
Appellant exercised the degree of care, diligence and skill to prevent failure
of GL Trust to remit net GST that a reasonably prudent person would have
exercised under comparable circumstances.
[3] I will
first deal with the primary issue. Was GL Trust liable to collect and remit
$998,100 under subsection 228(2) of the Act? The Appellant’s right to
challenge the liability of the corporation was not seriously disputed by the
Minister. The Appellant’s position includes that the Minister assessed the
wrong party in that GL Trust was a bare trustee for the joint venture
beneficiaries.
[4] The
Minister submits that by virtue of its registration for GST and its inclusion
in the joint venture agreement, GL Trust was an operator and participant in the
joint venture and as such, was required to remit tax for all members of the
joint venture pursuant to subsection 273(1) of the Act.
Facts
[5] The
Minister, in assessing the Appellant, relied on the following facts:
a) GL Trust was at all material times
a registrant for GST purposes with registration number 12497 3165 RT 0001;
b) In 1997, GL Trust built
a 128 unit residential complex consisting of two 14-storey buildings containing
124 condominium units and four adjoining townhouse units. (the “Project”);
c) By July 1999, 50 of the
units had been sold and by December 31, 1999, the remaining 78 units were
rented out;
d) From reporting periods
of December 1, 1997 to November 230 (sic), 2000, GL Trust filed GST
returns reporting GST on the sale of the condominium units and claiming ITC’s
for the Project;
e) GL Trust did not report
any GST in respect of the self-supply of the rental of the remaining 78 units;
f) The fair market value
of the remaining 78 units was $12,663,000.
g) GST on the self-supply
of the remaining 78 units was $886,410;
h) GL Trust was assessed
January 30, 2002 by Notice of Assessment numbered 11BU0601988 for the period of
December 1, 1997 to November 30, 2000 in respect of the GST on the self supply
of the remaining 78 units for the total amount of $1,095,270.19 consisting of
the following:
GST $886,410.00
Penalty $111,199.72
Interest $ 97,660.47
i) GL Trust did not object
to the assessment;
j) A certificate for the
amount of $1,104,417.33 (the “Certificate”) in respect of GL Trust’s unpaid
tax, penalty and interest was filed with the Federal Court of Canada on
February 21, 2002;
k) On May 13, 2002 a Writ
was issued in respect of the Certificate;
l) On July 18, 2002 the
Writ was returned unable to locate exigible assets;
m) The Appellant was a
director of GL Trust from December 13, 1989 to August 2, 2000.
[6] For the
most part these assumptions are accurate. However, paragraph (b) distorts
reality, in that GL Trust was a bare trustee. In fact, the beneficiaries of the
trust, Thompson & Redford Holdings Ltd. and Golden Leaf Trust, built the
complex with the expertise of MAA Management Company Ltd. Further, I note that
the Appellant was not a director of GL Trust when the Minister’s assessment was
issued. He had been released from his duties about one and a-half years
previously.
[7] The
Appellant testified on his own behalf and J. Leung, auditor, testified for the Minister.
The facts as agreed to and as I find them include the following. GL Trust was
founded by Dr. Moh, a
businessman residing in Taipei, Republic of China. It entered into a joint venture
and project management agreement (the “Agreement”) with:
(i) Thompson and Redford
Holdings Ltd., a BC corporation, (“Thompson”);
(ii) Golden Leaf Development Trust (“Golden
Leaf”);
and
(iii) MAA Management Co. Ltd., a BC corporation
(“MAA”).
for
the purpose of purchasing and developing land on behalf of Thompson and Golden
Leaf (the “Joint Venturers).
[8] Dr. Moh
hired the Appellant and had him appointed the sole shareholder and director of
GL Trust. Upon request of Dr. Moh, Thompson was organized by the Appellant,
and the Appellant held no beneficial interest in the joint venture or in
Thompson.
[9] Exhibit
A-1, Tab 1 is a copy of the Agreement dated December 29, 1989, which sets out
the working arrangements of the joint venture. The preamble of the agreement
reads in part as follows:
A. Golden Leaf and Thompson & Redford, as
the Joint Venturers, have agreed to purchase the Lands described herein,
through the Trustee [GL Trust], as bare trustee, for the purpose of
constructing thereon the Project described herein;
B. The Trustee will be the registered owner of
the Lands and as such will hold undivided beneficial interests in the Lands in
trust for the respective Joint Venturers pursuant to the trust declaration
provided for herein;
C. The Joint Venturers will, on and subject to
the terms of this Agreement, have the respective Proportionate Interests herein
described, as tenants in common.
D. MAA has represented to the Joint Venturers
that MAA has the skill and expertise necessary to supervise the planning,
development, construction, marketing and sale of the Project;
Again,
GL Trust, as a bare trustee for beneficiaries of the joint venture, Golden Leaf
90% and Thompson 10%, had no beneficial interest in the real estate project.
[10] In 1997 and
1998, the Joint Venturers caused to be constructed Golden Leaf Towers
consisting of two 15-storey towers (124 condominium units) and four townhouses
on Granville Avenue, Richmond,
British Columbia. Only 50 units
were sold by November 30, 1998 and the beneficiaries were disappointed with not
only the lack of return on their investment, but also with the many requests
for cash they received over the years since 1989.
[11] A reverse
takeover was completed on May 18, 1999 wherein Total Global Venturers
(“Global”) acquired all the beneficiary interest in the remaining 74 units and
four townhouses for $1.00, and the beneficial investors were issued shares in
Global. The reverse takeover was intended to provide the investors with
flexibility because their shares could be traded in the public market. Apparently,
this maneuver did not work as anticipated. The reverse takeover is described in
Tab 19 of the joint book of documents.
[12] Commencing
May 18, 1999, Rancho Management Services, a property management company, was
engaged to rent the remaining 78 units of the Project. The real estate market
for residential condominiums in 1999 had collapsed and all units were rented
before December 31, 1999 to provide some income for the operating of the joint
venture. No GST was paid as required by subsection 228(2) of the Act.
[13] At the
request of the majority beneficiaries, the Appellant resigned from GL Trust in
August 2000, after which he was “no longer in the loop.” By 2002, all the units
were sold and GL Trust no longer held any assets either in trust or on its own
behalf.
[14] Strangely, the
Minister was conducting an audit at the time GL Trust was selling and did not issue
an assessment until GL Trust no longer held any units. It was assessed January
30, 2002 for the total amount of $1,095,270 for the self‑supply of 78
units as of December 31, 1999, pursuant to subsection 191(1) of the Act.
It had no way of paying this liability and the Minister assessed the Appellant
and not the beneficiaries of GL Trust.
[15] The
Appellant, who had been a director from December 13, 1989 to August 2, 2000,
objected to the third party notice of assessment dated July 30, 2002.
[16] The
Minister’s position as taken from the Reply to the Notice of Appeal is as
follows:
(i) The GL Trust was liable
to collect and remit net GST in respect of the self-supply of the remaining 78
condominium units. The GL Trust was a participant in the Agreement, which was a
joint venture agreement made prior to 1990. The GL Trust was a GST registrant
and was the operator for purposes of the Excise Tax Act. In filing the
GST returns for its first reporting period after 1990 and reporting net GST in
respect of the Project, GL Trust is deemed to have jointly made an election
together with the other joint venturers under section 273 and is therefore liable
for the collection and remittance of GST in respect of the Project, and in
particular on the self supply of the remaining 78 units when they were rented.
(ii) Alternatively, GL Trust
was a participant in the Agreement and the joint venture by having GL Trust
apply for a Business Number for GST elected under section 273 to have GL Trust
assume liability for the properties and services supplied and acquired under
the agreement by GL Trust for the joint venturers. The Appellant was the
director of GL Trust, a member of the Committee under the Agreement with the
authority to make decisions binding on the joint venturers, and an employee of
MAA Management Co. Ltd. charged with the management and operation of the
Project and as such had knowledge of all the circumstances at the time GL Trust
became the registrant. The Minister relied on GL Trust’s registration that it
was the person liable for the GST.
(iii) The Appellant is
jointly and severally liable together with GL Trust for the unpaid GST, since
he was a director of GL Trust at the time GL Trust was required to remit the
GST. The remaining 78 units were rented by December 31, 1999. The trustee
company was required to remit the GST calculated on the fair market value of
the units on or before January 31, 2000. The Appellant was a director of GL
Trust from December 13, 1989 to August 2, 2000; consequently, he was a director
at the time GL Trust was required to make the remittance. All pre-requisites
for assessing the Appellant under subsection 323(1) have been met.
(iv) To date the Appellant
has not demonstrated that he exercised the degree of care diligence and skill
to prevent the failure of GL Trust to collect and remit net GST on the self
supply of the 78 units that a reasonably prudent person would have exercised in
comparable circumstances.
[17] The most relevant legislation includes the following:
273(1) There a registrant (in this
section referred to as the “operator”) is a participant in a joint venture
(other than a partnership) under an agreement, evidenced in writing, with
another person (in this section referred to as the “co-venturer”) for the
exploration or exploitation of mineral deposits or for a prescribed activity,
and the operator and the co-venturer jointly make an election under this
subsection,
(a) all
properties and services that are, during the period the election is in effect,
supplied, acquired, imported or brought into a participating province under the
agreement by the operator on behalf of the co-venturer in the course of the
activities for which the agreement was entered into shall, for the purposes of
this Part, be deemed to be supplied, acquired, imported or brought into the
province, as the case may be, by the operator and not by the co-venturer;
(b) section
177 does not apply in respect of a supply referred to in paragraph (a);
and
(c) all
supplies of property or services made, during the period the election is in
effect, under the agreement by the operator to the co-venturer shall, for the
purposes of this Part, be deemed not to be supplies to the extent that the
property or services are, but for this section, acquired by the co-venturer for
consumption, use or supply in the course of commercial activities for which the
agreement was entered into.
…
273(3) An operator and a
co-venturer who have jointly made an election under this section may jointly
revoke the election.
273(4) An election or revocation under this section made
jointly by an operator and a co-venturer is not a valid election or revocation
unless it is made in prescribed form containing prescribed information and
specifies the effective date of the election or revocation.
…
273(6) Where an operator who is a
participant in a joint venture (other than a partnership) under an agreement
referred to in subsection (1) entered into before 1991 with a co-venturer files
a return for the operator’s first reporting period beginning after 1990 in
which all properties and services supplied, acquired or imported by the
operator on behalf of the co-venturer in the course of the activities for which
the agreement was entered into are reported as having been supplied, acquired
or imported, as the case may be, by the operator and not by the co-venturer,
the operator shall be deemed to have made jointly with the co-venturer an
election under this section in accordance with subsection (4).
273(7) Subsection (6) applies as between
an operator and a co-venturer, in respect of an agreement, only where
(a) the
operator sends a notice in writing to the co-venturer not later than December
31, 1990 of the operator’s intention to file a return for the operator’s first
reporting period beginning after 1990 reporting on the basis provided in
subsection (6) with respect to all property and services supplied, acquired or
imported by the operator on behalf of the co-venturer in the course of the
activities for which the agreement was entered into; and
(b) the
co-venturer has not, on or before the day that is the earlier of February 1,
1991 and the day that is 30 days after receipt of the notice from the operator,
advised the operator in writing that all property and services supplied,
acquired or imported by the operator on the co-venturer’s behalf in the course
of the activities for which the agreement was entered into are not to be
treated as having been supplied, acquired or imported by the operator.
Analysis
[18] The parties
agree that the first issue is determined by the provisions of section 273. Before
dealing with that section, a comment with respect to GL Trust and the legal
definition of “bare trust” is useful. The respected author, Vern Krishna
defined “bare trust” as:
A “bare” trust is one where the
trustee holds property for the benefit of another person but does not have any
duties to perform other than to hold the property and obey the instructions of
the beneficiary. Thus, a bare trustee does not perform any active duties in
respect of the trust…
[19] GL Trust
meets the definition of “bare” trust. Although Canada Revenue Agency provides
concessions for bare trusts in its policy document TIB B-068,
the application is limited to trusts that only hold legal title in the trust
property with no duties, responsibilities or powers to exercise as trustee
which was not the situation with GL Trust. Section 273 does not provide special
considerations to bare trusts and as such the provisions would apply
accordingly due to GL Trust’s registration under the Act.
[20] Section 273
requires that a registrant (referred to as the “operator”), who is a
participant in a joint venture under agreement, jointly elect with co-venturers to remit GST on behalf of the joint venture. Subsection 273(4) specifies
that such election must be in prescribed form, specifying the effective date.
Subsection 273(6) is a deeming provision which is based on the date in which
the joint venture agreement was entered. Application of subsection 273(6) is
limited by subsection 273(7) which requires the operator to send written notice
to the co-ventures of its intention of filing returns on their behalf. I agree
with the parties that the answers to the following questions are crucial to
their positions:
(a) whether GL Trust was a
“participant” in the joint venture in the context of section 273;
(b) whether GL Trust and the
co-venturers are deemed to have elected GL Trust as operator under subsection
273(6); or
(c) whether GL Trust and the
co-venturers made or purported to make an election under subsection 273(4).
[21] For section
273 to apply, it must be established that GL Trust was a “participant” in the
joint venture. While I agree that “participant” is not defined in the Act,
I do not accept the Appellant’s submission that the decision in Westcan
Malting Ltd. v. The Queen
defines “participant”. Referring to the definition as provided by the Appellant,
and as defined by Shorter Oxford English Dictionary, I conclude that GL
Trust was a participant of the joint venture, as the trust partook and shared
in the responsibilities of the joint venture through its management of the
lands. The Canadian Oxford English Dictionary, 5th Edition
defines “participant” as follows:
A person who participates in
something; a participator.
Also,
I agree with the following from the decision in Canada Trustco Mortgage Co.
v. The Queen:
The modern rule of statutory interpretation
requires that the words of the Act are to be read in their entire
context and in their grammatical and ordinary sense harmoniously with the
scheme of the Act, the object of the Act and the intention of
Parliament. When the words of a provision are precise and unequivocal, the
ordinary meaning of the words play a dominant role in the interpretive process.
Where the words can support more than one reasonable meaning, the ordinary
meaning of the words plays a lesser role. The relative effects of ordinary
meaning, context, and purpose on the interpretive process may vary, but in all
cases the court must seek to read the provisions of an Act as harmonious
whole.
[22] The
Minister submits that section 273 applies by virtue of the application of subsection
273(6) which deems the operator liable (in this instance, GL Trust) to remit
tax on behalf of the joint venture. The application of subsection 273(6) is
restricted by subsection 273(7) which specifically refers to “written” notice
being provided to the co-venturers by a specified date. Also, the Minister states
that that notice was satisfied by the Appellant signing the GST registration
application for GL Trust and, during the required intervals, GST returns were
filed by GL Trust claiming input tax credits and reporting net tax on a monthly
basis.
[23] Although
the Minister submits that the Appellant bares the onus of establishing that no
notice was sent to the co-venturers, I believe such onus has been met through
the Appellant’s testimony.
[24] Additionally,
the Minister submitted that the Appellant had professional advisors to
determine which company would be registered for GST. If it was the intention of
the parties to fall within the application of subsection 273(6) of the Act.
Would these advisors not ensure that the proper procedures be undertaken to
allow the application of this provision? Based on the foregoing, I do not
believe that subsection 273(6) of the Act applies to the current case.
[25] Conversely,
the Minister purports that if the deemed election does not apply, it should be
found that a joint election was made between the co-venturers and GL Trust
pursuant to subsection 273(4) of the Act. The Minister maintains that
the requirements of subsection 273(4) have been met, as the required prescribed
information is contained in the filed application for a business number and the
Joint Venture Agreement. The Act does not set out the prescribed
information or form in which such election is to be made. It does, however,
provide that the effective date of the election must be included.
[26] While not
binding on me, the Minister’s policy as set out in P‑187 is helpful.
The policy states that the prescribed information must be set out in a document.
The Minister also submitted that the prescribed information may be contained in
a joint venture agreement or an appendix thereto “provided it is set out in a
manner which ensures the co-venturers are aware of the obligation under section
273”.
This is common sense in that one should not have to guess or to join pieces of
a puzzle to find and connect the prescribed information. Here the Minister
wants it both ways. Usually he demands strict adherence to the form yet when it
suits his purpose as in the present circumstances, a more informal standard is
requested.
[27] I agree
with the Minister that the application of section 273 is meant to be a
relieving provision evidenced by the very restrictive means by which taxpayers
can avail themselves of this provision. Throughout that section, there is the overall
theme that all parities are to be aware of and in acceptance of the election,
evidenced by some type of written acknowledgement. I cannot alter statutory
provisions. If it was the intention of legislators that through the review of
various extraneous documents the requirement of section 273 would be met, they
would have said so. Otherwise, any taxpayer could rely on its application.
[28] The
requirements of subsection 273(4) are not met because based on the reasoning in
P-187, the information relied on by the Minister is not contained in one
document, and there is no mention of an effective date of the election in
either of the documents. Although the Minister believes that the only material
detriment to an election would be a missing effective date, I believe that
acknowledgement by all parties that the election is being made, is also a
significant requirement for a valid election.
[29] The
language used in the Agreement further evidences the intentions of the parties
that both the benefits and liabilities of the joint venture were to be vested
in the Joint Venturers and not GL Trust, and more specifically, the following:
2.4 This Agreement is not
intended to create, nor shall it be construed as creating any partnership or
agency whatsoever between the Joint Venturers. Nothing herein shall deem the
Project to be partnership property. No party shall by reason of any provision
herein contained be deemed to be the partner, agent or legal representative of
any other party or parties, whether for the purposes of this Agreement, the
Project or otherwise, nor shall any party have, nor represent itself to have,
any authority or power to act for, or to undertake any obligation or
responsibilities on behalf of, any other party or parties, for the Project or
otherwise, except as may herein be expressly provided.
2.5 The obligations of the
Joint Venturers with respect to the Project and all contracts and obligations
entered into by the Joint Venturers in connection therewith shall, in every
case, be several to the extent of each party’s Proportionate Interest, and not
joint or joint and several, unless expressly otherwise agreed to in writing by
both of the Joint Venturers.
2.6 Neither the trustee of
Golden Leaf nor any officer or employee of such trustee shall be held personal
liability under this agreement or otherwise in respect of the Project or the
Joint Venture except to the extent that such liability can be enforced against
or satisfied out of Golden Leaf’s Proportionate Interest Only.
8.3 All interest, profit and
advantage arising or accruing from the Lands and all costs incurred or accrued
in connection therewith shall be received, held or incurred by the Trustee [GL
Trust] for the use, benefit and advantage or cost of the Joint Venturers in the
respective proportions referred to in Section 8.2 above. The Trustee will
deposit all receipts of any manner from the Lands in an account with a Canadian
chartered bank and will deal with the money in such account as directed by the
Joint Venturers from time to time.
[30] In
conclusion, I agree with the Appellant that subsection 273(4) does not apply as
there was no election made between the parties as required under that
provision. Based on my findings that section 273 does not apply to the current
case, GL Trust was not liable to collect and remit tax on behalf of the Joint
Venturers and as such, the third party assessment of the Appellant must fail on
these grounds.
[31] Having
found that GL Trust had no tax liability there is no need to go further but to
be thorough I will deal briefly with the Appellant’s secondary issue. Had GL
Trust been liable for tax, did the Appellant exercise due diligence within the
meaning of subsection 323(3) of the Act?
[32] Subsection 323(3) provides that a director
will not be liable for a failure to remit where the director has exercised the
degree of care, diligence and skill to prevent the failure to remit that a
reasonably prudent person would have exercised in comparable circumstances.
[33] The essence of a successful due diligence defence is prevention and it
must be determined if the Appellant diligently exercised his authority to
prevent the failure to remit tax. The Minister maintains that due to the
Appellant’s status as an inside director, he has a greater onus in establishing
due diligence. However, I agree with the Appellant that the test is whether the
director acted reasonably in the circumstances.
[34] There is much
debate as to whether the standard of care is based on a subjective/objective
test as established in Soper v. The Queen, or an objective
test as established by the Supreme Court of Canada in Peoples Department
Stores Inc. (Trustee of) v. Wise.
Likely, the test may best be ‘described’ as being objective, having regard to
the specific circumstances and abilities of the director in question, creating
a subjective-like element.
[35] The Appellant submits that he did what he
could reasonably be expected to do, which included: seeking professional advice
regarding the possibility that there may be a GST liability resulting from the
rental of the units; attempting to raise funds from investors/bank; all
investors were made aware of the impending GST liability due to its inclusion
in the 1999 financial statements of Global; prior to his departure from Global
he ensured that both his successor and the board of directors were made aware
of the outstanding GST liability; and at the time of his departure Global had
sufficient assets to pay the GST liability. As stated by Sharlow J. of the Federal
Court of Appeal in Gordon E. Smith v. The Queen:
A director is required only to act reasonably in the
circumstances. The fact that his efforts are unsuccessful does not establish
that he failed to act reasonably.
[36] As
evidenced by the various correspondence submitted by the Appellant, and the very
restrictive language found in the Agreement, it is evident that the Appellant
was required to obtain approval of all activities from the Joint Venturers.
Decisions that impacted the joint venture had to be approved unanimously by the
Committee which consisted of both Dr. Moh and the Appellant.
[37] The
Appellant did not have the authority to make payments to CRA without the
authorization and acceptance by Dr. Moh, so his only recourse was to ensure that
all parties were informed of the outstanding GST liability and advocate for its
payment.
[38] Although we
were informed the Appellant was a civil engineer by trade, regardless of his
business expertise, nothing could have been done without the consent and
authority of Dr. Moh. And although Dr. Moh was made aware of the GST liability,
he did not provide his authorization to resolve the issue through payment. It
was his authority to do so not the Appellant’s.
[39] Furthermore,
during two board meetings held in August and September, 2000, both of which the
Appellant attended, Mr. Tai Chen, the Appellant’s successor, assured all
parties that a plan was in place to remit the outstanding tax, and that with
his expertise in similar situations the matter would be resolved.
[40] The
Minister’s audit commenced in March 2001, and the CRA auditor had no contact
with the Appellant. Seventy-seven units were sold between March and August 2001
the audit period, for total proceeds of $11,845,200. However, various negotiations
were undergone during that period between the auditor and Mr. Chen, the new
manager. With the sale of the units and the threat of bankruptcy as purported
by Mr. Chen, the only recourse was to assess the Appellant.
[41] Given the very restrictive circumstances under which
the Appellant was able to perform his duties as director of GL Trust, and the
steps undertaken to ensure the outstanding GST liability was addressed and at
the forefront of the Joint Venturers agenda, I believe the Appellant acted diligently
and in a manner in which a reasonably
prudent person would have in comparable circumstances.
[42] The appeal is allowed, with costs, and the assessment
is vacated.
Signed at Ottawa, Canada, this 5th
day of December, 2007.
“C.H. McArthur”
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