Citation: 2010 TCC 495
Date: 20101006
Dockets: 2006-1659(IT)G
2006-1660(GST)G
BETWEEN:
LORNE SEIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
This appeal concerns director
liability assessments issued to Lorne Seier, a retired businessman.
[2]
The assessments relate to
remittance failures by 4236964 Manitoba Ltd. (the “Corporation”). At all
relevant times, the appellant was the sole director and shareholder (indirectly)
of the Corporation.
[3]
The remittance failures occurred
between January and October, 2001.
[4]
Assessments in the aggregate
amount of approximately $60,000 were issued to the appellant by notices dated
September 16, 2005. The amounts are not in dispute and relate to source
deductions under the federal and Manitoba Income Tax Acts, employer and employee
contributions under the Canada Pension Plan and the Employment
Insurance Act, and net tax under the Excise Tax Act.
[5]
The appellant has appealed to this
Court in respect of all of the assessments, including the assessment under the Manitoba Income
Tax Act. However, the Manitoba appeal was withdrawn by the appellant at the hearing
following my questioning the jurisdiction of this Court over the provincial
assessment.
[6]
The only issue to be decided with
respect to the other assessments is whether the appellant acted with
appropriate care as a director to prevent the remittance failures.
Overview
[7]
An overview of the events that led
to the remittance failures is set out below. It is based on the evidence
presented, which included the testimony of the appellant and Tom Standing, and
on certain of the Minister’s assumptions which were not disproven.
[8]
As mentioned earlier, the
appellant is a retired businessman. After pursuing a career as a technician in
the animal feed industry, the appellant in 1979 re-joined a family health food
business, Vita Health. Located in Winnipeg, Vita Health employed up to 250 individuals before
the corporation was sold in 1997. The appellant was the president of Vita
Health but he was not involved in the day to day operation. His
responsibilities were family succession, strategic planning and organization.
[9]
Upon the sale of Vita Health in
1997, the appellant retired and concentrated on managing his investments. From
time to time, investment opportunities were brought to the appellant by Tom
Standing, the president of Sigma Mortgage Services Inc. (“Sigma”).
[10]
Sigma’s business generally
consisted of arranging loans for small businesses. Sigma earned fees for
arranging the loans and for loan administration.
[11]
Through Sigma, the appellant
became involved with a truck repair company, Beverley Truck and Bus Repairs
(1993) Ltd. (“Beverley”), by providing financing to its manager, Frank Wall.
Mr. Wall required financing to buy out Beverley’s other shareholders.
[12]
In September 1999, financing in
the amount of $150,000 was advanced partly by way of an 18-month loan and
partly by the purchase of shares held by the departing shareholders. The shares
were to be repurchased over a three year period.
[13]
For approximately four months, Mr.
Wall regularly made the monthly loan payments. Problems then developed.
[14]
Around March 2000, not only did
the loan payments stop, but Mr. Wall abandoned the business, taking with him
whatever cash it had. It was suspected that Mr. Wall had personal difficulties
and that he had left the province.
[15]
Effectively, the appellant was
left in the lurch as a major creditor and shareholder of Beverley. It was
decided that the business should continue operating, if possible, until a buyer
for Beverley could be found.
[16]
In addition, the appellant had a
security interest in the shares of Beverley that were owned by Mr. Wall. The
security was realized and the appellant effectively became Beverley’s sole
shareholder.
[17]
Although Beverley’s owner/manager
was gone, the business was able operate on a short-term basis with its other
employees until a new manager could be found.
[18]
Very quickly after Mr. Wall’s
disappearance, Mr. Standing located a new manager by the name of Peter Park.
Mr. Park had managed a nearby trucking company that had gone out of business due
to financial difficulty. Accordingly, Mr. Park was immediately available and he
had experience and contacts in the trucking industry.
[19]
Mr. Park commenced to manage the
business with oversight from Mr. Standing, but he was given limited authority
over the finances. Mr. Standing’s signature was required on all of the cheques.
[20]
During this period, the appellant
divided his time between Winnipeg and British
Columbia and he had little contact with
Mr. Park. However, Mr. Standing kept in fairly close contact with Mr. Park and
provided the appellant with regular updates.
[21]
Shortly after these events, the
appellant decided to put Beverley into bankruptcy on the advice of a lawyer at
Aikens, MacAulay.
[22]
In May 2000, Beverley assigned its
assets to a trustee, Joel Lazer, for distribution to its creditors pursuant to
the Bankruptcy and Insolvency Act. The appellant agreed to fund the
operations of Beverley during the receivership through The Seier Group Inc., an
investment corporation wholly-owned by the appellant (Ex. A-12).
[23]
The receivership under Mr. Lazer
continued for several months, with Mr. Park continuing to manage the business.
During this period, Mr. Park expressed an interest in purchasing the business,
but he did not have the money to do so. In an effort to facilitate this, the
appellant agreed to purchase the business from the trustee, and he gave Mr.
Park an option to purchase without requiring a firm commitment to buy.
[24]
The arrangement was implemented in
the following manner. The Seier Group Inc. purchased the assets of the business
from the trustee for $153,333. It is not exactly clear when the purchase took
place, but it appears to be on or about October 24, 2000 when the receivership
ended (Ex. A-12). The assets were then transferred by The Seier Group Inc. to
the Corporation, which was a new corporation also wholly-owned by the
appellant.
[25]
After this acquisition, the Corporation
continued to operate the business under Mr. Park’s management.
[26]
Difficulties with the business
continued after this time, with Mr. Park being diagnosed with cancer. He wished
to remain active in the business, but Mr. Park’s proposed acquisition of the
business was postponed.
[27]
Mr. Standing remained involved
with the business post-acquisition, but his involvement was less frequent. He
was attempting to extricate himself from the business, but Mr. Park preferred
to contact him rather than the appellant due to his past involvement. Another
factor was that the appellant was a client that had other investments with Mr.
Standing.
[28]
In March 2001, the appellant
received a call from the Canada Revenue Agency (the “CRA”) informing him that
the Corporation was late in submitting its remittances for one or two months.
[29]
The appellant immediately called
Mr. Standing who arranged a three-way meeting with Mr. Park.
[30]
At the meeting, Mr. Park indicated
that there were cash flow difficulties. With respect to payroll remittances,
the appellant requested that Mr. Park retain a payroll service, but Mr. Park
advised him that the Corporation did not have sufficient cash flow to fund the
source deductions. The appellant indicated that he would arrange a $25,000 line
of credit and he did so.
[31]
There is no evidence that Mr. Park,
or the appellant, took any follow up action on past or future remittances after
this meeting and the remittance problem persisted. It is not known what the
line of credit was used for.
[32]
The appellant heard nothing more
about the remittance problem until September, 2001 when he received another
call from the CRA indicating that withholdings had not been received.
[33]
An assumption in the reply refers
to a letter from the CRA to the appellant dated July 4, 2001, again advising of
the Corporation’s failure to remit. The appellant did not refer to this letter
in his testimony and he was not cross-examined concerning this assumption. I
have assumed that the appellant did not receive this communication.
[34]
Upon receiving the September 2001
call from the CRA, the appellant acted decisively. He went to the business
premises himself and took charge of the situation. Upon doing so, he discovered
for the first time that the Corporation’s financial records were inadequate and
he took action to have that resolved. As a result of this incident, the
appellant lost complete confidence in Mr. Park and Mr. Standing.
[35]
A short time after this, the
Corporation’s assets were distributed to The Seier Group and were sold to a
third party. The evidence does not reveal what the purchase price was.
[36]
The CRA subsequently took action
to recover the outstanding liabilities against the accounts receivable of the
Corporation. It appears that the assessments at issue in this appeal relate to
the balance owing after the proceeds from the receivables were taken into
account.
[37]
The assessed remittance failures
occurred between January and October 2001 when the business was operated by the
Corporation. However, the assessment under the Excise Tax Act is only
for the period from May to October 2001.
Discussion
[38]
The issue is whether the appellant
exercised appropriate care as a director to prevent the remittance failures.
Reproduced below is the relevant provision from the Income Tax Act,
which is representative of all the relevant statutes.
227.1(3) A director is not liable for a failure under subsection (1) where the
director exercised the degree of care, diligence and skill to prevent the
failure that a reasonably prudent person would have exercised in comparable
circumstances.
[39]
From time to time, judges have
observed that the obligation of the director is not in the nature of a
guarantee. Nevertheless, directors need to take reasonable steps to prevent remittance
failures.
[40]
The general principles to be
applied are summarized by Sharlow J.A. in the following excerpt from Smith
v. The Queen, 2001 FCA 84; 2001 DTC 5226:
[9] The Soper decision, supra,
established that the standard of care described in the statutory due diligence
defence is substantially the same as the common law standard of care in Re
City Equitable Fire Insurance Co., [1925] Ch. 407 (Eng. C.A.). It follows
that what may reasonably be expected of a director for the purposes of
subsection 227.1(1) of the Income Tax Act and subsection 323(1) of the Excise
Tax Act depends upon the facts of the case, and has both an objective and a
subjective aspect.
[10] The subjective aspect of the
standard of care applicable to a particular director will depend on the
director’s personal attributes, including knowledge and experience. Generally,
a person who is experienced in business and financial matters is likely to be
held to a higher standard than a person with no business acumen or experience
whose presence on the board of directors reflects nothing more, for example,
than a family connection. However, the due diligence defence probably will not
assist a director who is oblivious to the statutory obligations of directors,
or who ignores a problem that was apparent to the director or should have been
apparent to a reasonably prudent person in comparable circumstances (Hanson
v. Canada (2000) 260 N.R. 79, [2000] 4 C.T.C. 215, 2000 DTC 6564 (F.C.A.)).
[11] In assessing the objective
reasonableness of the conduct of a director, the factors to be taken into
account may include the size, nature and complexity of the business carried on
by the corporation, and its customs and practices. The larger and more complex
the business, the more reasonable it may be for directors to allocate
responsibilities among themselves, or to leave certain matters to corporate
staff and outside advisers, and to rely on them.
[12] The inherent flexibility of
the due diligence defence may result in a situation where a higher standard of
care is imposed on some directors of a corporation than on others. For example,
it may be appropriate to impose a higher standard on an “inside director” (for
example, a director with a practice of hands-on management) than an “outside
director” (such as a director who has only superficial knowledge of and
involvement in the affairs of the corporation).
[13] That is particularly so if it
is established that the outside director reasonably relied on assurances from
the inside directors that the corporation’s tax remittance obligations were
being met. See, for example, Cadrin v. Canada (1998), 240 N.R. 354, [1999]
3 C.T.C. 366, 99 DTC 5079 (F.C.A.).
[14] In certain circumstances, the fact that a
corporation is in financial difficulty, and thus may be subject to a greater
risk of default in tax remittances than other corporations, may be a factor
that raises the standard of care. For example, a director who is aware of the
corporation’s financial difficulty and who deliberately decides to finance the
corporation’s operations with unremitted source deductions may be unable to
rely on the due diligence defence (Ruffo v. Canada, 2000 DTC 6317
(F.C.A.)). In every case, however, it is important to bear in mind that the
standard is reasonableness, not perfection.
[41]
The appellant testified that no
one informed him about directors’ obligations, notwithstanding that he had received
legal advice regarding this investment from Aikens MacAulay, a respected law
firm.
[42]
Unless there is satisfactory evidence
that a director sought advice as to his legal obligations as a director,
ignorance is not sufficient to bring the director within the so-called due
diligence defence. I am not satisfied from the evidence in this case that this
was part of the law firm’s mandate. The fact that no advice was given suggests
that it was not.
[43]
The appellant submits that he
exercised appropriate due diligence by putting in place an experienced manager,
Mr. Park, and by relying on Mr. Standing for oversight. It was Mr. Standing’s
obligation to look after the administration of the financing, it was suggested.
[44]
In order to properly consider this
argument, one must look at the circumstances in which the appellant decided to
rely on others. Having done that, one must conclude that the appellant should
not have presumed that Mr. Park and Mr. Standing were properly taking care of the
Corporation’s obligations in regards to statutory remittances.
[45]
First, the appellant had very
little first-hand knowledge of how Beverley was being operated while Mr. Park
was in charge. He was not actively involved and generally relied on information
from Mr. Standing. My impression from the testimony was that Mr. Standing’s
reports focused on business prospects and not day to day administrative matters.
Had the appellant had been more involved, he would have realized that proper
financial records were not being kept under the watch of Mr. Park and Mr.
Standing.
[46]
Second, the appellant should have
realized that the Corporation had potential problems with statutory remittances
based on a report from the trustee to The Seier Group Inc. dated December 15,
2000 (Ex. A-12).
[47]
An attachment to the report raises
red flags in two areas. First, the appellant was put on notice of substantial prior
source deduction failures which occurred both before and after the date of
bankruptcy. The report also refers to source deduction assessments for the
period to August 31, 2000 and it indicates that the trustee paid the source
deductions for September.
[48]
The second problem suggested by
the report is that the business may not have been generating sufficient cash
flow to pay its obligations. The information in the report is not conclusive,
but it suggests that the business did not have sufficient cash flow because the
trustee planned to fund the remittance arrears out of the $150,000 purchase
price that The Seier Group agreed to pay when it purchased the business from
the trustee.
[49]
A prudent director would not
ignore the warning signs that were evident in this report. The appellant
suggested in his testimony that he had no reason to think there was a problem
but this letter suggests otherwise.
[50]
Since the trustee’s report was
sent in December, it was received in sufficient time for the appellant to take
action with respect to remittances due in January. The assessment issued to the
appellant does not relate to a period prior to this.
[51]
Further, the appellant submits
that he took appropriate action when he learned of the remittance problem from
the CRA in March. I disagree. The appellant acted quickly after the CRA
contacted him by setting up a meeting with Mr. Standing and Mr. Park, but the appellant
failed to take proper follow up action after that meeting to ensure that the
remittance problem had been resolved.
[52]
Finally, the appellant suggests
that he properly relied on Mr. Standing to provide oversight since it was his
job to administer the financing.
[53]
I am not satisfied that this was a
reasonable course of action.
[54]
Mr. Standing and the appellant
appear to have differing views as to Mr. Standing’s role after the Corporation
acquired the assets. Mr. Standing thought that his formal role ended when the
assets were transferred to the Corporation and he testified that the appellant
should have been aware of this. The appellant, on the other hand, saw Mr.
Standing’s obligations as continuing.
[55]
I do not think it really matters
whose understanding is correct. The important point is that the appellant had
clear notice in December 2000 that there were potential problems with statutory
remittances. It was not sufficient at that point to be passive and to rely on
Mr. Standing.
[56]
The appeal will therefore be
dismissed. The respondent is entitled to costs, but only in respect of appeals
under the Income Tax Act and the Excise Tax Act.
Signed at Ottawa,
Canada this 6th day of October 2010.
“J. M. Woods”
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