Citation: 2011 TCC 369
Date: 20110727
Docket: 2010-1670(GST)I
BETWEEN:
RICHARD E. POWER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2010-1671(GST)I
AND BETWEEN:
HAROLD H. MacKAY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D'Arcy J.
[1]
The issue in this
appeal is whether the Appellants are jointly and severally liable, as
directors, for net tax that Keltic Brewing Company Limited (the "Corporation")
failed to remit in respect of its HST reporting periods ending on September 30,
2006 and December 31, 2006.
[2]
On February 24, 2009
the Minister of National Revenue (the “Minister”) assessed each of the
Appellants (Harold H. MacKay and Richard E.
Power), under section 323 of Part IX of the Excise Tax Act (the "HST
Act"), $34,584.84 in respect of the failure of the Corporation to
remit the net tax. The Minister also assessed each of the Appellants interest
of $6,676.81 and penalties of $1,094.19.
[3]
The Appellants filed
notices of objection to the assessments. On February 23, 2010,
the Minster confirmed the assessments. Each of the Appellants then appealed the
assessments to this Court. The two appeals were heard together on common
evidence.
[4]
It is the position of
each of the Appellants that he has satisfied the requirements for the due
diligence defence provided in subsection 323(3) of the HST Act.
[5]
I heard from six
witnesses. The Appellants’ counsel called each of the Appellants and Ms. Margaret
Wilkinson. The Respondent’s counsel called Mr. Sean O’Connor, Mr.
Lloyd Johnson, Mr. Tim Ferguson and Ms. Jennifer McKim.
[6]
I will address the
credibility of each of the Appellants in a subsequent part of my reasons for judgment.
I found Ms. Wilkinson to be a credible witness; however, I have not given
significant weight to her testimony, as she appeared to have a very difficult
time remembering when certain events occurred.
[7]
I found Mr. O’Connor,
Mr. Ferguson and Ms. McKim to be credible witnesses.
[8]
I have a concern with
respect to the testimony of Mr. Johnson. I do not believe he was completely
forthcoming. As a result, I have given little weight to his testimony.
Summary of Facts Relevant to Both Appeals
[9]
The net tax liability of
the Corporation arose from the operation of a restaurant and adjoining small
brewery facility (the “Restaurant”) owned by the Corporation.
[10]
Mr. MacKay testified
that he developed the plan to establish and operate the Restaurant. Mr. MacKay
based the plan on a concept he had developed with three other individuals: Mr.
Power, Mr. Luciano Radelich (who was the first general manager of the
Restaurant) and a Mr. John Graham (who was not involved in the operation of the
Restaurant and was not a director of the Corporation).
[11]
The Corporation was
incorporated in May 2003. Between May 2003 and the end of 2006 there were
five common shareholders of the Corporation (the two Appellants, Mr. Radelich,
Mr. Graham and a Mr. P. J. Power) and two preferred shareholders (Municipal
Enterprises [also known as Dexter Construction] and the Millbrook First Nation
[the “Band”]). The following individuals were directors during this period:
-
The two Appellants,
-
Mr. Radelich (who
resigned as director in either late 2005 or early 2006),
-
Mr. O’Connor (the
nominee of Dexter Construction),
-
Mr. Johnson (the
nominee of the Band).
[12]
During that same period,
Mr. MacKay was the president, chairman of the board and chief executive officer
of the Corporation.
[13]
The Restaurant was the
Corporation’s only asset. It opened in December of 2003 in a building the
Corporation leased from the Band. The building was on the Band’s reserve, which
is located just outside of Truro, Nova Scotia.
[14]
Mr. MacKay testified
that business was good when the Restaurant opened and remained good for a year
or so. Mr. O’Connor testified that the Restaurant was never in great financial
condition. Mr. Radelich was the general manager of the Restaurant from the time
it opened until late 2005 or early 2006. There were also three managers,
including Ms. Wilkinson.
[15]
Mr. MacKay testified
that by late 2005, the Restaurant was not doing well. He noted that the
Corporation was behind in its rent payments to the Band and was looking for
“solutions”. One of the solutions was to bring in a company called Boomerang to
manage the Restaurant. Mr. MacKay introduced Boomerang to the Band in early
2006.
[16]
Mr. Radelich ceased working
at the Restaurant once Boomerang began to manage it. Ms. Wilkinson testified
that Mr. Radelich was fired. Although Mr. Radelich remained a shareholder
of the Corporation, he appears to have resigned as a director of the Corporation.
[17]
At the time it became
involved with the Restaurant, Boomerang operated successful restaurants in Moncton and Dartmouth. Mr. MacKay testified that the Corporation
required the Band’s approval before Boomerang could manage the Restaurant. This
was due to the fact that the Corporation was behind in its rent and “some other
things.”
[18]
Boomerang appears to
have managed the Restaurant from early 2006 until approximately November 2006.
There appears to have been no formal agreement between Boomerang and the Corporation.
[19]
Mr. O’Connor testified
that the Appellants brought Boomerang into the Restaurant to assist in running it
and to allow Boomerang time to determine if it wished to acquire the business.
[20]
It appears that no
agreement between the Corporation and Boomerang for the sale of the Restaurant
could be completed without the approval of the landlord, that is, the Band.
Boomerang made some form of proposal in November of 2006; however, the Band did
not accept it.
[21]
A board meeting was
then called in November of 2006. It is not clear from the evidence who called
the meeting. However, at the meeting, the Band presented the directors with a
proposal to put the Restaurant into bankruptcy. Mr. MacKay testified that he
and Mr. Power were shocked by the proposal. They did not realize that the
business was doing so poorly. They asked for time to develop a recovery plan
and attempt to save the business.
[22]
Mr. O’Connor and Mr.
Johnson resigned as directors in November of 2006.
[23]
Subsequent to the
November 2006 board meeting, the Appellants made frequent trips to the
Restaurant and worked with Boomerang to develop a recovery plan. The Appellants
presented their recovery plan to the various stakeholders on December 11, 2006.
[24]
The parties did not
implement the recovery plan. Instead, the shareholders of the Corporation
agreed to sell their shares to Ms. Wilkinson. This agreement appears to have
been made on January 20, 2007 (the “First Agreement”). The parties did not
provide the Court with a copy of the First Agreement or any details of that agreement.
[25]
The Appellants resigned
as directors in February of 2007.
[26]
Ms. Wilkinson, Mr.
Power and Mr. MacKay then entered into an agreement on May 22, 2007 (the
“Second Agreement”).
[27]
The Second Agreement
provided for the immediate transfer to Ms. Wilkinson of the shares held by
Mr. Radelich, Mr. P. J. Power and Mr. Graham. These shares
represented 33% of the issued and outstanding common shares of the Corporation.
[28]
Under the Second
Agreement, the Appellants agreed to transfer their common shares to Ms.
Wilkinson once she satisfied certain obligations contained in the Second Agreement.
The obligations included payments of $3,000 per month to each of the Appellants
commencing on June 20, 2007 and ending on March 20, 2008. The
Corporation made payments totalling $25,000 to each of the Appellants. Another
obligation was the payment by Ms. Wilkinson, by August 31, 2007, of
all statutory obligations of all previous directors. This did not occur.
[29]
Ms. Wilkinson closed
the Restaurant in November 2007. She never acquired the shares held by the
Appellants.
[30]
A number of the
witnesses provided testimony (some conflicting) with respect to who paid the
Restaurant’s bills during the relevant periods. Based upon the testimony of Mr.
MacKay and Ms. Wilkinson, it appears that, during the period that Mr. Radelich
was the general manager of the Restaurant, he and Mr. MacKay paid the bills.
Cheques issued by the Corporation required two signatures, Mr. MacKay’s
and Mr. Radelich’s. Mr. MacKay testified that he would sign blank cheques and
then send the cheques to Mr. Radelich. Mr. Radelich would add his signature and
payment details to the cheque and then send it to the supplier. Mr. MacKay
testified that he went to the Restaurant on a monthly basis to review the cheques
issued by Mr. Radelich.
[31]
Ms. Wilkinson testified
that, after Mr. Radelich stopped working at the Restaurant, she was provided
with blank cheques signed by Mr. MacKay. It appears, based upon the
testimony of Ms. Wilkinson and Mr. MacKay, that Ms. Wilkinson replaced Mr.
Radelich as the second signing officer for the Corporation’s bank account. Ms.
Wilkinson and Mr. MacKay also testified that the Corporation delegated to
Boomerang the authority to determine which bills were to be paid. It is not clear
from the evidence before me who was responsible for the payment of bills after
Boomerang stopped managing the Restaurant. However, Mr. MacKay and Ms.
Wilkinson were, during that period, the persons with signing authority with
respect to the bank account.
[32]
Based upon the
testimony of Mr. MacKay and Mr. O’Connor, it appears that, until Boomerang
began managing the Restaurant, Mr. Radelich and an accounting clerk maintained
the financial records of the Restaurant. After Mr. Radelich left the
Restaurant, an accounting firm retained by the Band maintained the Restaurant’s
financial records. Mr. O’Connor testified that the Band’s accountant assumed
responsibility for the Restaurant’s books because the Band and Mr. O’Connor
were concerned that the financial information provided by Mr. MacKay and the
manager of the Restaurant was not accurate.
[33]
I was not provided with
any financial statements for the Corporation. It is not clear to me if such
financial statements were ever prepared.
[34]
Mr. O’Connor testified
that the Corporation did not have formal board meetings. Rather, meetings were
held with the stakeholders. It appears that most of the directors, the persons
operating the Restaurant and different members of the Band attended the
meetings.
[35]
Mr. O’Connor testified
that either Mr. McKay or the manager of the Restaurant provided financial data
at these meetings. During 2006, the Band’s accountant provided the financial
information at the meetings. The Appellants filed with the Court an example of
the data so provided. Exhibit A-1 is a computer printout entitled “Keltic
Brewing Company Limited Balance Sheet As at 05/31/2006”. The document did not
contain an income statement and was not in a form one would expect for a formal
balance sheet. It appears to me that the document was a computer-generated trial
balance. It was not clear to me who prepared the document.
The Law
[36]
Subsection 323(3) of
the HST Act provides as follows:
A director of a corporation 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.
[37]
This Court and the
Federal Court of Appeal have set out a number of principles that should be
followed when considering the due diligence defence under subsection 323(3) of
the HST Act or under subsection 227.1(3) of the Income Tax Act.
The following are the relevant principles for the purposes of this appeal:
a)
The burden is on the Appellant
to produce evidence of due diligence and to persuade the Court, on a balance of
probabilities, that she or he has satisfied the requirements of subsection
323(3) of the HST Act.
b)
The due diligence
required of directors is to prevent the failure to remit. The directors must
establish that they exercised the requisite degree of care, diligence and skill
to prevent the failure to remit. As a result, if directors become prima
facie liable under subsections 323(1) and (2) of the HST Act for a
company’s failure to remit, they normally cannot claim the benefit of
subsection 323(3) if their efforts were capable only of enabling them to remedy
defaults after they had occurred.
c)
Due diligence normally
requires that when a director becomes aware, or ought to have become aware, that
the company is falling behind with its remittances, he or she should take some
positive steps to prevent the default. In addition, the fact that a company 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. However, the standard is reasonableness not perfection.
d)
While it may be
important for a director to delegate his administrative duties in order to
facilitate the sound management of a corporation and keep it running
efficiently, such a delegation is not an abdication and does not exonerate the
delegator from liability. Further, a director cannot base a due diligence
defence on his or her reliance on delegates to perform the tasks honestly and
correctly if the director had reason for suspicion, if the corporation was in
financial difficulty or if the director had received an indication that
“something” was wrong.
e)
It may be appropriate
to impose a higher standard on an inside director than an outside
director. This 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. Inside directors
are those who are “involved in the day-to-day management of the company and who
influence the conduct of its business affairs.”
Application of the Law to the Facts
[38]
I will deal with each
Appellant separately.
Mr. MacKay
[39]
Counsel for the
Appellants acknowledged that Mr. MacKay was a signing officer of the
Corporation and that, because of his contact with Canada Revenue Agency (“CRA”)
officials in 2004 and 2005, he was “put on notice that up until June of 2005,
there was a problem with the GST remittances.”
[40]
However, counsel argued
that, with respect to the HST reporting periods ending on September 30, 2006
and December 31, 2006, Mr. MacKay relied on the assurances given by the persons
managing the Restaurant
that everything was under control. He also argued that such assurances were consistent
with the actions of the CRA, which had not contacted the Corporation in the
fourteen months prior to September 2006.
[41]
He also argued that
once Mr. MacKay became aware, in late November of 2006, that the
situation was much worse than he had thought, he took steps to bring the
business back onto a solid footing. Counsel also focused on Ms. Wilkinson’s
agreement to pay all outstanding statutory liabilities of the Corporation.
[42]
He argued that, based
upon the information Mr. MacKay received, his geographic location (in relation
to the location of the Restaurant) and the fact that he was not involved in the
day-to-day management of the business, it was diligent of him to hire
professional managers to manage the Restaurant and make the required
remittances.
[43]
I do not agree with
these submissions.
[44]
The burden was on Mr.
MacKay to persuade the Court, on a balance of probabilities, that he satisfied
the requirements of subsection 323(3) of the HST Act. In particular, Mr.
MacKay was required to establish that he exercised the required degree of care,
diligence and skill to prevent the failure by the Corporation to remit that
occurred on October 31, 2006 and January 31, 2007.
[45]
The Appellants did not
provide the Court with any evidence of actions taken by Mr. MacKay (or Mr.
Power) to prevent the failure by the Corporation to remit the HST.
[46]
Mr. MacKay influenced
the conduct of the Corporation’s business; he was the controlling force behind
the Corporation.
[47]
Further, Mr. MacKay was
involved in the day-to-day operations of the Restaurant. In 2004 and 2005, he
signed the cheques and visited the Restaurant on a regular basis to review the
payments made by Mr. Radelich.
[48]
Mr. MacKay (together
with Mr. Power) made the decision in late 2005 or early 2006 to have Boomerang
manage the Restaurant. In addition, when it became clear in November of 2006
that Boomerang would not be acquiring the business, it was Mr. MacKay and Mr.
Power who developed the recovery plan and negotiated the sale of the Restaurant
to Ms. Wilkinson.
[49]
As noted previously,
due diligence normally requires that, when a director becomes aware, or ought
to have become aware, that the company is falling behind with its remittances,
he or she should take some positive steps to prevent the default.
[50]
At numerous points
during his testimony, Mr. MacKay stated that he was not aware that the
Corporation had fallen behind in its HST remittances. For example, when asked
by counsel for the Respondent whether he knew that the Corporation was failing
to remit tax when required, he replied as follows:
I wasn’t aware of that. I mean, as far as I was concerned, at the
end of 2005, when I was actually working with the general manager on a regular
basis, the HST was... You know, he filed it and everything was cool. So after
that, I don't know. Other than as I mentioned, when it surfaced. I would just
call down to the general manager and see how things were going.
[51]
Mr. MacKay’s answer was
consistent with his other testimony; he was not aware of remittance difficulties
in 2004 and 2005, did not have access to the books in 2006 (kept by the Band’s
accounting firm) and relied on the managers to make the remittances. He
testified that he first became aware of the Corporation being significantly
behind in its HST remittances in November 2006.
[52]
Mr. MacKay relied on
Exhibit A-1, which, he stated, was financial information provided by the Band’s
accountant that showed that the HST remittances were current.
[53]
During his testimony,
Mr. MacKay at first denied having had conversations with CRA officials with
respect to the Corporation’s outstanding HST returns. He then clarified
his testimony as follows:
. . . I can’t recall, but I know I remember having one call. It
might have been two, it might have been three. If I received a call from the
Canada Revenue Agency, I would immediately say: “Here is the name and
number of the general manager that runs the place and files the returns and
sends you the cheques. Please call this person.”
[54]
I do not accept Mr.
MacKay’s testimony with respect to his knowledge of the failure of the
Corporation to file its HST returns and remit its net tax when required by the HST
Act. Based upon the evidence before me, it is clear that the Corporation
was substantially behind in its HST remittances from early 2004 until Ms.
Wilkinson closed it in 2007. It is also clear from the evidence that Mr. MacKay
was aware of the Corporation’s failure to remit its net tax on the statutory
filing dates.
[55]
Exhibit R-4 is a
one-page document that summarizes the Corporation’s filing history with respect
to its HST returns. The exhibit shows the following:
-
The first HST
return of the Corporation that recorded a positive net tax was due on April 30,
2004; it was filed over 5 months late.
-
All subsequent
HST returns were filed late. The majority of the returns were filed 2 to 3
months after their due date.
-
Of the 12 HST
returns filed late between October 7, 2004 and July 23, 2007, only two
included payment of the full net tax reported on the returns.
-
All of the returns
filed for reporting periods ending between June 30, 2005 and December
31, 2006 were filed late with either no payment of the net tax owing or a
minimal payment.
[56]
Mr. Ferguson testified
for the Respondent. Mr. Ferguson is a CRA official who was involved with the
Corporation’s file from October 2004 to June 2005. Mr. Ferguson described
numerous conversations he had with Mr. MacKay between October 4, 2004 and June
22, 2005 with respect to the Corporation’s late-filed HST returns.
[57]
The first conversation,
on October 4, 2004, dealt with three reporting periods, namely, those ending on
December 31, 2003, March 31, 2004 and June 30, 2004. During the
conversation, Mr. MacKay provided Mr. Ferguson with information regarding the
mailing date for the HST returns for the December 31, 2003 and March
31, 2004 reporting periods and informed Mr. Ferguson that the return for
the June 30, 2004 reporting period would be mailed shortly.
[58]
On November 19, 2004,
Mr. MacKay returned Mr. Ferguson’s call made the previous day and informed him
that the HST return for the period ending on September 30, 2004 would be filed
shortly.
[59]
On February 8, 2005,
Mr. Ferguson called Mr. MacKay and informed him that the Corporation had an
outstanding balance in its HST account of $32,073. Mr. MacKay informed Mr.
Ferguson that he would speak with his accountant and call back by February 14,
2005 regarding payment in full of that balance.
[60]
On March 3, 2005, Mr.
Ferguson called Mr. MacKay to inform him that the Corporation’s return for December
31, 2004 was outstanding. Mr. MacKay stated that the Corporation filed the
return on February 28, 2005 (one month late) with payment of the amount
owing.
[61]
On June 22, 2005, Mr.
MacKay called Mr. Ferguson (returning Mr. Ferguson’s call) to inform him
that he would look into the outstanding return for the March 31, 2005 reporting
period and would call Mr. Ferguson back. Mr. Ferguson did not receive a
subsequent call from Mr. MacKay.
[62]
The fact that Mr.
MacKay was not forthcoming with respect to his knowledge of the remittance
history of the Corporation and his conversations with the CRA seriously damaged
his credibility. I have given no weight to his testimony with respect to his
knowledge of the Corporation’s late-filed HST returns and late remittances. As
noted previously, it is clear from the evidence before me that Mr. MacKay
was aware of the Corporation’s failure to remit its net tax on the statutory
filing dates.
[63]
Mr. MacKay’s primary
defence with respect to the remittance due on October 31, 2006 is that he had
delegated responsibility to Boomerang, a professional manager that he
trusted to run the Restaurant.
[64]
The comment by the
Federal Court of Appeal regarding the appellant in Borduas, supra,
applies here: while it may have been important for Mr. MacKay to delegate his
administrative duties to Boomerang to facilitate the sound management of the
Corporation and keep it running efficiently, such a delegation is not an
abdication and does not exonerate Mr. MacKay from liability. Further, Mr. MacKay
cannot, in the present appeal, base a due diligence defence on his reliance on
Boomerang to make the remittances. The Corporation was in financial difficulty.
This was, in fact, the reason he and Mr. Power brought in Boomerang (in an
attempt to make the Restaurant saleable). Further, Mr. MacKay was aware that
the Corporation was behind in filing its HST returns and making its HST
remittances.
[65]
In such a situation,
Mr. MacKay could not escape his responsibility as a director of the Corporation
by delegating responsibility for the HST remittances to Boomerang and then
taking a hands-off approach. On the contrary, he should have taken some
positive steps to ensure that the Corporation made the HST remittances in a
timely fashion. There is no evidence before me that he took any such steps.
Further, there is no evidence before me that he took even the basic step of
making inquiries to determine if the HST was being remitted.
[66]
Mr. MacKay’s position
with respect to the HST remittance due on January 31, 2007 was that he was
working to put the Restaurant’s business on a solid footing, which included negotiating
the agreement with Ms. Wilkinson.
[67]
Neither of these
actions constituted steps to prevent the failure by the Corporation to remit
the HST.
[68]
Any action taken by Mr.
MacKay to remedy the defaults after they occurred is irrelevant for the purposes
of the subsection 323(3) due diligence defence. This would include the
agreement with Ms. Wilkinson pursuant to which she agreed to pay “all statutory
obligations for all previous Directors”.
[69]
The recovery plan
prepared by Mr. MacKay and Mr. Power in December of 2006 reflects the
steps taken to put the Restaurant’s business on a solid footing. This plan
contains only general comments. There is no specific financial plan. More
importantly, it does not refer to the Corporation’s HST remittances.
[70]
As noted previously,
there is no evidence before me that Mr. MacKay took any steps to prevent the
Corporation’s failure to remit its net tax that was due on January 31, 2007.
[71]
In summary, I find that
Mr. MacKay has not established, on a balance of probabilities, that he
exercised the required degree of care, diligence and skill to prevent the
failure to remit.
Mr. Power
[72]
The Appellants’ counsel
argued that Mr. Power acted diligently. He argued that Mr. Power lived in a
separate community an hour’s drive from the Restaurant, was not responsible for
the day-to-day management of the Restaurant and exercised the same diligence as
the chartered accountant who was a director of the Corporation.
[73]
I do not believe that
Mr. Power was completely forthcoming with respect to his involvement with the
Corporation or his knowledge of its financial position.
[74]
It is clear from his
testimony and Mr. MacKay’s that Mr. Power was aware that the Corporation was
suffering financial difficulties at the end of 2005. He knew that the
Corporation fired Mr. Radelich in late 2005. Mr. Power testified that the
Corporation turned to Boomerang in late 2005 to “fix the problem” at the
Restaurant.
[75]
Mr. Power attended the
November 2006 board meeting at which the Band proposed that the Restaurant be put
into bankruptcy. He was one of the authors (together with Mr. MacKay) of the
recovery plan.
[76]
Once Mr. Power became
aware of the financial problems of the Corporation, he should have taken some
positive steps to assure himself that the Corporation was remitting the HST.
[77]
Mr. Power testified
that he did not keep track of the Corporation’s finances and made no effort to
determine if the Corporation was satisfying its HST remittance obligations. In
short, he took no positive steps to assure himself that the Corporation was
remitting the HST.
[78]
In such a situation, Mr.
Power cannot avail himself of the due diligence defence provided in subsection
323(3) of the HST Act.
[79]
I share with counsel
for the Appellants his concerns with respect to the failure of the CRA to
assess Mr. O’Connor and Mr. Johnson. They each resigned as directors of the
Corporation in November 2006 and thus could not have been liable for the net
tax the Corporation failed to remit on January 31, 2007. However, based upon
their testimony, it is not clear to me why they were not assessed for the
Corporation’s failure to remit its net tax on October 31, 2006. I can only
assume that the CRA has information in its possession that was not before the
Court.
[80]
Regardless, the fact
that Mr. O’Connor and Mr. Johnson were not assessed is irrelevant for the purposes
of this appeal. The directors are jointly and severally, or solidarily, liable
under subsection 323(1) of the HST Act for the Corporation’s failure to
satisfy its remittance obligations under the HST Act.
[81]
For the foregoing
reasons, each of the appeals is dismissed, without costs.
Signed at Antigonish, Nova Scotia, this 27th day of July 2011.
“S. D’Arcy”
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