Citation: 2013 TCC 29
Date: 20130128
Dockets: 2010-1632(GST)G
2010-1633(IT)G
2010-1634(IT)G
BETWEEN:
ALLAN A. CHELL,
appellant,
and
HER MAJESTY THE QUEEN,
respondent.
REASONS FOR JUDGMENT
Hogan J.
[1]
The appellant, Allan A.
Chell, is appealing three director’s liability assessments issued against him
on May 5, 2008. One assessment pertains to the failure of cDemo Inc.’s
(“cDemo”) to remit payroll source deductions (“source deductions”) for its
2003, 2004 and 2005 taxation years. The assessed amount is $53,768.95. Another
assessment relates to cDemo’s failure to remit goods and services tax (“GST”)
amounts in 2005. The assessed amount is $3,289.39. The third assessment
pertains to the failure of Global Autolink Corp. (“Global”) to remit payroll source
deductions. The assessed amount is $239,838.42. These appeals were heard on
common evidence.
Background
[2]
The appellant is a
consultant in the automobile industry. In 2001, he became a director of cDemo,
a software development company which he helped to found. That company developed
technology to facilitate inspections of automobiles through smart phone
applications.
[3]
In 2000, the appellant
became a director of Global, a company of which he was a founder. Originally,
the company was in the business of purchasing automobiles in Canada for resale internationally. In approximately 2003, as a result of a strengthening
Canadian dollar, Global changed its business model, focusing instead on
providing technological solutions to clients wishing to sell automobiles
online. It did so by licensing technology from cDemo. Generally speaking,
Global’s clients included automobile manufacturers, fleet-leasing and rental
companies, and automobile auction companies.
[4]
The appellant was
responsible for business development at both companies.
[5]
In the mid-2000s, both
cDemo and Global became insolvent. At that time, both companies were behind on
their remittances to the Canada Revenue Agency (“CRA”).
[6]
Following the
resignation of all of the other directors, the appellant found himself as the
sole director of both cDemo and Global. The evidence shows that, in January
2006, the appellant posted a letter at the offices of cDemo and Global,
indicating his intention to resign as a director and officer of each of those
companies. Four to six weeks later, the appellant delivered a copy of the
letter to the lawyer who had been acting for the two companies. Apparently,
because cDemo and Global had unpaid bills with the lawyer, the latter took no
action in respect of the letter. No changes were made to the Alberta Corporate
Registry to indicate that the appellant was no longer a director of either
company.
[7]
Despite his resignation
letter, the appellant remained actively involved in both cDemo and Global. He
continued to meet with the CRA to discuss, inter alia, cDemo’s and
Golbal’s outstanding liabilities for source deductions and GST. These meetings
occurred approximately every few weeks throughout 2006 and into 2007.
[8]
In February 2007, the
appellant informed the CRA that a former employee of cDemo might be interested
in purchasing assets of cDemo. Days later, the appellant told the CRA that an
agreement had been reached whereby that employee would purchase certain tools
owned by cDemo. The appellant subsequently turned over the proceeds of the sale
to the CRA along with the corresponding bill of sale, which was signed by the
appellant. In February, April and May of 2007, the appellant spoke to the CRA of
the possibility of a group of investors purchasing other assets of cDemo. Such
a sale did not materialize.
[9]
The appellant also
effected a change on the Alberta Corporate Registry with respect to cDemo’s
directors. Following a request from Gord Roberts, who was a director of cDemo, the
appellant signed in June 2006, a statutory declaration removing Roberts as a
director from the Alberta Corporate Registry.
[10]
During the 2006 and
2007 time period, the appellant continued to pursue business development
activities for Global. In 2006, Global was pursuing a pilot project in the U.S. The purpose of that project was to showcase Global’s online technology for potential
U.S.-based users.
[11]
Between June and
September 2006, the appellant indicated to the CRA that he was in regular
contact with the U.S. client to discuss the results of the pilot project, as
well as the potential implementation of the technology and the pricing of
Global’s services. On July 11, 2006, the appellant indicated to the CRA
that he was hopeful that the U.S. client would enter into a contract with
Global which would provide sufficient revenue to allow Global to satisfy its
outstanding remittances.
[12]
In September 2006, the
appellant provided documentation to the CRA outlining the approximate amount of
revenue that Global would generate if the U.S. client were to purchase services
from Global. In that document, he identified himself as the president and CEO
of Global.
[13]
Despite these efforts,
in October 2006, the appellant informed the CRA that the pilot project had been
cancelled because the U.S. client did not wish to commit to a long-term
arrangement with Global.
[14]
The appellant acknowledged
that he never indicated to the CRA that he was no longer a director of either
cDemo or Global. According to the appellant, the CRA did not raise the matter
with him and he was under no obligation to advise the CRA thereof.
Issues
[15]
There are two issues in
these appeals:
1. First, was the
appellant either a de jure or de facto director of cDemo or
Global within the two years preceding the assessments?
2. If so, can the
appellant rely on the so-called due diligence defence under subsections
227.1(3) and 323(3) of the Income Tax Act (“ITA”) and Excise
Tax Act (“ETA”) respectively?
Positions of the Parties
[16]
The appellant argues
that he ceased to be a director of cDemo and Global on January 11, 2006,
the date on which he posted his letter of resignation at the offices of the two
corporations. The appellant submits that, consequently he is not liable for the
unremitted source deductions and GST because his resignation occurred more than
two years before the assessments. According to the appellant, his continued
involvement with cDemo and Global was solely in the capacity of creditor and
shareholder, and not as a director. Finally, in the event of a finding to the
contrary, the appellant claims that he exercised due diligence to prevent cDemo
and Global from failing to remit the source deductions and GST.
[17]
In response, the
Minister submits that the appellant did not cease to be a director of cDemo or
Global more than two years before the assessments. Further, the Minister
contends that the appellant did not exercise due diligence to prevent cDemo and
Global from failing to remit the source deductions and GST. Therefore, he is
liable for their payment.
Analysis
[18]
Under both the ITA
and ETA, a director may be liable for a corporation’s failure to remit
certain amounts collected on behalf of the Crown. Subsection 227.1(1) of the ITA
provides:
227.1(1) Where a corporation has failed to deduct or withhold an amount
as required by subsection 135(3) or 135.1(7) or section 153 or 215, has failed
to remit such an amount or has failed to pay an amount of tax for a taxation
year as required under Part VII or VIII, the directors of the corporation at
the time the corporation was required to deduct, withhold, remit or pay the
amount are jointly and severally, or solidarily, liable, together with the
corporation, to pay that amount and any interest or penalties relating to it.
The corresponding provision in the ETA is
subsection 323(1), which provides:
323(1) If a corporation fails to remit an amount of net tax as required
under subsection 228(2) or (2.3) or to pay an amount as required under section
230.1 that was paid to, or was applied to the liability of, the corporation as
a net tax refund, the directors of the corporation at the time the corporation
was required to remit or pay, as the case may be, the amount are jointly and
severally, or solidarily, liable, together with the corporation, to pay the
amount and any interest on, or penalties relating to, the amount.
[19]
Notwithstanding these
provisions, if an individual resigns as a director of a corporation that has
failed to remit the amounts referred to, the Minister may not assess that
individual for director’s liability more than two years after that individual’s
resignation. Subsection 227.1(4) of the ITA provides:
227.1(4) No action or proceedings to recover any amount payable by a
director of a corporation under subsection 227.1(1) shall be commenced more
than two years after the director last ceased to be a director of that
corporation.
The corresponding provision in the ETA is
subsection 323(5), which provides:
323(5) An assessment under subsection (4) of any amount payable by a
person who is a director of a corporation shall not be made more than two years
after the person last ceased to be a director of the corporation.
[20]
In the present appeals,
it is therefore necessary to determine whether the appellant was a director
within the two years preceding the assessments for director’s liability.
[21]
Neither the ITA
nor the ETA defines when an individual ceases to be a director for the
purpose of the director’s liability provisions. Rather, the corporate law of
the relevant jurisdiction is determinative: Aujla v. Canada, 2008 FCA 304, [2009] 3 F.C.R. 93, at paragraphs 23 to 25.
[22]
A director may be a de
jure director or a de facto director for the purpose of director’s
liability under the ITA and ETA: see Mosier v. R., [2001]
G.S.T.C. 124 (TCC), at paragraph 23. A de jure director is an individual
who has been appointed as such pursuant to the corporate law of the
jurisdiction in which the corporation was created or continued, as the case may
be. A de facto director can exist in two forms. As Bowman A.C.J., as he
then was, observed in Mosier, at paragraph 23, “de facto
directors can be those who are ostensibly duly elected but who may lack some
qualification under the relevant company law, and those who simply assume the
role of director without any pretence of legal qualification”. Either de
jure or de facto directorship can give rise to director’s
liability.
[23]
If the appellant was a de
jure or de facto director within the two years preceding the
assessments for director’s liability, then he is liable for the unremitted
source deductions and GST. This is so unless he can rely on the due diligence
defence available under both the ITA and ETA.
[24]
As stated above, the
date of each of the three assessments under appeal is May 5, 2008.
Therefore, it is first necessary to determine whether the appellant was a de
jure or de facto director on or after May 5, 2006, being two
years before the assessments.
Was the appellant a de jure director on or
after May 5, 2006?
[25]
An individual becomes
and ceases to be a de jure director according to the corporate law of
the jurisdiction in which the corporation was created or subsequently
continued. The cDemo company was incorporated in Delaware. Global was
incorporated in Alberta.
[26]
Directors may resign in
a similar fashion under both the Delaware Code and Alberta’s Business
Corporations Act (the “ABCA”). Title 8, Chapter 1, Subchapter IV, § 141(b)
of the Delaware Code provides:
. . .
Any director may resign at any time upon notice given in writing or by
electronic transmission to the corporation. A resignation is effective when the
resignation is delivered unless the resignation specifies a later effective date
or an effective date determined upon the happening of an event or events. . . .
Similarly, section 108 of the ABCA provides:
(1) A director of a corporation ceases to hold office when
(a) the director dies or resigns,
(b) the director is removed in accordance with section 109, or
(c) the director becomes disqualified under section 105(1).
(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.
Under each provision, a director may resign by
providing to the corporation notice of his or her intention to resign.
[27]
By posting his letter
of resignation at the offices of cDemo and Global on January 11, 2006, the
appellant provided to the corporation’s proper notice of resign action under
both Delaware and Alberta corporate law. Since he ceased to be a de jure
director more than two years before the assessments, it is necessary to
determine whether the appellant was a de facto director of cDemo and
Global despite his legal resignation.
Was the appellant a de facto director on or
after May 5, 2006?
[28]
Following his legal
resignation as a director of cDemo, the appellant continued to be actively
involved with that company. As discussed above, the appellant negotiated the
sale of certain assets of cDemo, signing his name on the corresponding bill of
sale. Only a director of cDemo could have authorized the sale of cDemo’s
assets. Although this sale occurred May 16, 2007, de facto directorship “must
be considered to endure at least as long as [the] person manages or supervises
the management of the business and affairs of the corporation in question”: see
Bremner v. The Queen, 2009 FCA 146, at paragraph 8.
[29]
The appellant continued
to act as a de facto director of cDemo until at least June 2006. As
noted above, the appellant signed in that month a statutory declaration
removing a fellow director from the Alberta Corporate Registry. Such a
declaration is effective only if signed by a director. Although the appellant
claimed at trial that he was unaware that he was signing in the capacity of director,
it is difficult to accept that he thought he could have made that change in the
capacity of creditor or shareholder. This evidence suggests that the appellant
was a de facto director of cDemo until at least June 2006.
[30]
The appellant also
continued to be actively involved with Global’s following his legal
resignation. He met with a prospective client of Global is in the hope of
entering into a long-term contract for Global’s services. In this regard, the
appellant appeared to be acting as a director of Global. The evidence shows
that he discussed pricing and the implementation of Global’s technology with
this prospective client. The appellant also provided documentation to the CRA indicating
approximately how much revenue Global could generate if it entered into a
long-term agreement with this client. Such actions are not, contrary to the
appellant’s contention, consistent with the role of creditor and shareholder.
Rather, these actions would suggest to a third party that the appellant was
still a director of Global.
[31]
The fact that the
appellant’s functions with Global never changed following his legal resignation
also suggests that the appellant continued to act as a director of Global.
Despite his legal resignation, he continued to attempt to fulfil those functions
by meeting with clients. Because the appellant’s behaviour remained the same
following his legal resignation, a third party would not suspect that his
status had changed.
[32]
By continuing to act on
behalf of Global, the appellant created the impression that he was still a
director of the corporation. In my view, the evidence demonstrates that the
appellant was a de facto director of Global until at least October 2006,
at which time he ceased attempting to conclude a long‑term contract with
a prospective client of Global’s.
[33]
The appellant’s
behaviour towards the CRA following his legal resignation reinforces my view
that he continued to act as a de facto director until at least October
2006. When he first met with the CRA to discuss the unremitted source
deductions and GST owed by cDemo and Global, the appellant had not yet resigned
as a director of either corporation. Following his legal resignation, he
continued to meet with the CRA to discuss these liabilities. In no way did the
appellant’s behaviour towards the CRA change following his legal resignation.
Further, from January 2006 to approximately August 2007, the appellant never
indicated to the CRA that he was no longer a director of either corporation.
The appellant resigned occultly, yet he continued to cooperate with the CRA as
if his status had not changed. In my view, the appellant’s actions created the
impression that he was still an active director of both corporations.
[34]
On the basis of the
foregoing reasons, I conclude that the appellant was a de facto
director of both cDemo and Global on or after May 5, 2006, which is within the
two years preceding the three assessments under appeal. Accordingly, the
appellant is prima facie liable unless he can establish that he acted
diligently to prevent the failures to remit.
Did the appellant exercise due diligence to prevent
the failures?
[35]
Subsection 227.1(3) of
the ITA provides for a due diligence defence to director’s liability, as
follows:
(3)
A director is not liable for a failure under subsection 227.1(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.
Subsection 323(3) of the ETA provides for a
similar due diligence defence:
(3)
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.
[36]
In The Queen v.
Buckingham, 2011 FCA 142, the Federal Court of Appeal confirmed that an
objective standard must be used to determine whether a director has satisfied
the conditions of the due diligence defence under subsections 227.1(3) of
the ITA and 323(3) of the ETA. Mainville J.A. stated:
37 . . . I
conclude that the standard of care, skill and diligence required under
subsection 227.1(3) of the Income Tax Act and subsection 323(3) of the Excise
Tax Act is an objective standard . . . .
38 . . .
Consequently, a person who is appointed as a director must carry out the duties
of that function on an active basis and will not be allowed to defend a claim
for malfeasance in the discharge of his or her duties by relying on his or
her own inaction . . . .
39 An
objective standard does not however entail that the particular circumstances of
a director are to be ignored. These circumstances must be taken into account,
but must be considered against an objective “reasonably prudent person”
standard. . . .
[Emphasis added.]
Clearly, subsections 227.1(3) of the ITA and
323(3) of the ETA entail a modified objective analysis which involves
considering what a reasonable person would have done in the circumstances of
the individual under assessment.
[37]
To establish the
defence, the director or former director must show that he or she took positive
actions to prevent the corporation’s failure to remit the amounts in question.
In Buckingham, the Federal Court of Appeal compared the aforementioned
provisions with paragraph 122(1)(b) of the Canada Business
Corporations Act, which requires directors and officers to “exercise the
care, diligence and skill that a reasonably prudent person would exercise in
comparable circumstances”. Mainville J.A. wrote:
40 The
focus of the inquiry under subsections 227.1(3) of the Income Tax Act
and 323(3) of the Excise Tax Act will however be different than that
under 122(1)(b) of the CBCA, since the former require that the
director’s duty of care, diligence and skill be exercised to prevent failures
to remit. In order to rely on these defences, a director must thus establish
that he turned his attention to the required remittances and that he exercised
his duty of care, diligence and skill with a view to preventing a failure by
the corporation to remit the concerned amounts.
[Emphasis added.]
[38]
At trial, the appellant
agreed that he was an inside director who was very familiar with the businesses
of both cDemo and Global. The appellant also described his function with the
two corporations as being to find new clients in order to develop new business.
A reasonably prudent director with that level of familiarity with the
businesses of cDemo and Global would have been aware of the significant
financial difficulties facing the two corporations. The evidence shows that the
appellant did not take any positive steps to ensure that the corporations
continued to meet their remittance obligations. Instead, the source deductions
and GST were diverted to fund the corporations’ failing businesses.
[39]
Parliament has mandated
that a director of a corporation must take reasonable steps to prevent the
corporation from failing to fulfil its remittance obligations under the ITA
and ETA. According to the appellant, he never reviewed the books of
cDemo or Global, and was unaware of the remittance patterns of the companies.
The appellant asserted that he had delegated cDemo’s and Global’s tax function
to key employees who were responsible for managing the remittance obligations
of the two corporations. The appellant cannot discharge his statutory
obligation by delegating the remittance function to an employee without any
oversight on his part.
[40]
The evidence shows that
the appellant did not exercise “the degree of care, diligence and skill to
prevent the failure that a reasonably prudent person would have exercised in
comparable circumstances”. A reasonable person in the appellant’s circumstances
would have anticipated that the corporations’ financial difficulties could affect
the remittance obligations of the two corporations and would have taken steps
to prevent failures to remit. The appellant’s lack of oversight and his inaction
cannot serve as the foundation of a due diligence defence.
[41]
At trial, I reserved
judgment on the admissibility of the following three items: (i) the
appellant’s entry in his personal journal, being Exhibit A-2,
(ii) Global’s T4 statements, being Exhibits R-4 and R-5, and
(iii) cDemo’s T4 statement.
[42]
None of these documents
influenced my disposition of these appeals. Therefore, the question of their
admissibility is moot. The appellant provided oral testimony, which I accepted,
that he resigned as a de jure director by posting a letter of resignation
at the offices of the two corporations. The notes in his personal journal
(Exhibit A-2) add nothing to this finding.
[43]
The other documents
show that the corporations had not met their remittance obligations. That fact
is not in dispute in these appeals. The appellant acknowledged that he was
unaware of the tax reporting and remittance actions of either corporation. He
admitted that he had delegated that function to other employees and that he
exercised no oversight. The above-mentioned exhibits add nothing to this
finding.
[44]
For all these reasons,
the appeals are dismissed, with one set of costs to the respondent.
Signed at Ottawa, Canada, this 28th day of January 2013.
"Robert J. Hogan"
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