Citation: 2010 TCC 474
Date: 20100917
Dockets: 2008-389(GST)I
2008-945(IT)G
BETWEEN:
JUDI LEQUIER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] This appeal concerns directors’ liability assessments
issued to Judi Lequier as a consequence of remittance failures by Mayland
Instruments Ltd. (“Mayland”).
[2] An assessment under section 227.1 of the Income Tax
Act in the amount of $52,122.78 was issued as a result of Mayland’s failure
to remit payroll source deductions during the 2000, 2001 and 2002 calendar
years.
[3] An additional assessment under section 323 of the Excise
Tax Act in the amount of $32,531.09 was issued as a result of Mayland’s
failure to remit GST “net tax” for the quarter which ended March 31, 2002.
[4] The appellant’s husband received similar assessments,
which he is not disputing.
[5] The determinations to be made are: (1) Was the
appellant a director of Mayland during the period at issue? and (2) Did the
appellant exercise appropriate care to prevent the remittance failures?
Background
[6] Testimony at the hearing was provided by the
appellant, her son, Rolland Lequier, and a collections officer with the Canada
Revenue Agency (CRA), Chotu Rajwani.
[7] Mayland was incorporated in 1989 to operate the
equipment installation business that was managed by the appellant’s husband.
Shortly after its incorporation, the appellant and her husband became its sole
shareholders and directors.
[8] The appellant was not active in the day-to-day affairs
of Mayland. She was the manager of a government-owned liquour store until around
1994, when she incorporated a new company, Alberta Spirits and Suds Ltd. (“Spirits
and Suds”), to operate its own liquour store. A second store was opened by
Spirits and Suds in 2001.
[9] Sometime in the mid-1990s, it was decided that Spirits
and Suds and Mayland should “separate.” With the assistance of an accountant,
Mayland undertook a reorganization in which the appellant disposed of her shares
of Mayland. After the reorganization, the husband was the sole shareholder of
Mayland and the appellant was the sole shareholder of Spirits and Suds.[1]
[10] The appellant’s son was in law school at the time of
the reorganization and he provided advice to his parents about the proposal. Although
he did not speak to the accountant, he provided general advice to his parents that
the reorganization was a good idea. He recalled that the purposes of the
reorganization were to maximize the small business deduction under the Income
Tax Act, and to protect Mayland in case Spirits and Suds was not a
successful venture.
[11] The appellant and her husband separated in 2001 and
the husband is currently seeking a divorce. The break up was not amicable and
the appellant has had very little contact with her husband since the
separation.
[12] Mayland ceased operations in 2002.
Did the appellant cease to
be a director?
[13] The appellant submits that she was not a director of
Mayland during the relevant period. She acknowledges that she did not sign a
written resignation, but she submits that she believed that she was no longer a
director of Mayland after the reorganization.
[14] The respondent submits that the appellant did not cease to
be a director because she did not submit a resignation in writing. Counsel
referred to subsection 108(2) of the Business Corporations Act (Alberta), which
provides:
108(2)
A resignation of a director becomes effective at the time a written resignation
is sent to the corporation, or at the time specified in the resignation,
whichever is later.
[15] In this
appeal, I do not need to decide whether a resignation needs to be in writing. I
would note, though, that the respondent’s position
has not always been accepted by this Court: Perricelli v. The Queen,
[2002] GSTC 71 (TCC).
[16] Even if an oral resignation is considered to be effective, however,
the resignation must be communicated in some fashion to the corporation. I am
not satisfied that there was such communication in this case.
[17] The appellant testified that at some point she was
informed by her son that she was no longer a director or shareholder of
Mayland. That testimony by itself is not sufficient to establish that a
resignation had been communicated to, or even discussed with, the appellant’s
husband who was the other shareholder and director of Mayland.
[18] Furthermore,
I am not satisfied that the son advised the appellant that she was no longer a
director of Mayland.
[19] The son remembers
discussing with his mother the general concept of the reorganization but he
does not remember a specific discussion about her resigning as a director.
[20] Also,
there is no other evidence that suggests that the reorganization involved the
appellant’s resignation as a director. Neither the husband nor the accountant who implemented the reorganization testified,
and no corporate documentation was provided. The corporate annual returns
continued to show the appellant as a director.
[21] The appellant has not satisfactorily rebutted the
Minister’s assumption that she was a director of Mayland at all material times.
Was appropriate degree of
care exercised?
[22] The appellant also submits that she acted
appropriately in the circumstances and that the due diligence defences in s.
227.1(3) of the Income Tax Act and s. 323(3) of the Excise Tax Act are
applicable. The provisions are very similar, and therefore only the income tax
provision is reproduced.
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.
[23] The general principles to be applied are summarized by
Sharlow J.A. in 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.
[24] In this case, the appellant was an experienced
business person and she was aware that her husband had a history of ignoring
remittance obligations. Even though the appellant was not actively involved in
the day-to-day activities of Mayland, she had an obligation to take some action
to prevent the remittance failures.
[25] The appellant testified that on one occasion she did
the payroll accounting and her husband put it in the garbage. She testified
that she admonished her husband for this behaviour and that she then she
stopped doing the payroll. Essentially, the appellant turned her back and
ignored the problem. This is not sufficient to satisfy the due diligence
defence.
[26] According to the appellant’s testimony on discovery, there
was nothing that she could do.
Q. Just going back to Mayland Instruments, were you aware that the
corporation was required to remit taxes to the government?
A. Oh, of course.
Q. Did you take any steps to ensure such taxes were remitted?
A. No. I couldn’t sign a cheque. I mean, I’m not going to pay it
myself.
Q. To your knowledge, did anyone in the corporation take steps to
ensure taxes were remitted?
A. Only he, and he never paid taxes, so I would say no.
[27] The problem that
I have with the appellant’s submission that she was powerless concerning the
remittances is that it does not take into account that the appellant, directly
or through Spirits and Suds, owed Mayland a significant amount of money.
[28] According to the Minister’s assumptions, when Mayland
ceased operating in the spring of 2002, the appellant owed Mayland at least
$320,000. This assumption has not been satisfactorily rebutted by the
appellant.
[29] Very few details about the financing are known. An
accountant for the appellant wrote to the CRA and suggested that amounts were
advanced from Mayland to Spirits and Suds for store renovations. No financial
statements of Spirits and Suds were entered into evidence and the accountant
did not testify. The appellant’s own testimony was too brief and vague to be of
much assistance.
[30] I have
difficulty with the suggestion that, in
circumstances where a corporation wholly-owned by the appellant owed a
substantial amount of money to another company where the appellant was a
director, that the appellant’s actions were appropriate in regards to the known
tax remittance problems at the creditor company.
[31] Counsel for the appellant suggests that the appellant
could not be expected to take responsibility for directors’ obligations because
she thought she was no longer a director.
[32] The weakness with this submission is that it appears
from the evidence that the appellant essentially ignored her role as a director
of Mayland. At the very least, the appellant needed to act prudently to
determine whether or not she was a director. There is no evidence that she did
this.
[33] This is sufficient to dispose of this appeal in favour
of the respondent. However, I would also comment that the evidence did not
provide a clear picture of the appellant’s involvement in Mayland. In order to
succeed in this appeal, at the very least the appellant needed to provide a
much more cogent and detailed description of her entire involvement with the
corporation.
[34] The appeals of both assessments will be dismissed.
[35] The respondent seeks costs only with respect to the
appeal under the Income Tax Act since the appeal under the Excise Tax
Act is governed by the informal procedure. Such costs are appropriate.
Signed at Toronto, Ontario this
17th day of September 2010.
“J. M. Woods”
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