Citation: 2012 TCC 414
Date: 20121205
Docket: 2011-4027(IT)I
BETWEEN:
GEORGIOS (GEORGE) PRIFTIS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1]
The appellant was
assessed on July 15, 2010 pursuant to section 227.1 and
subsection 227(10) of the Income Tax Act (the Act) with
regard to the liability of his corporation, Acrontech Inc. (the Corporation),
for unremitted Canada Pension Plan (CPP) deductions together with penalties and
interest, in respect of the 2001, 2002 and 2003 taxation years.
[2]
At all material times,
the appellant was a director of the Corporation as well as its president and secretary
treasurer. He was the decision-maker for the Corporation and the person
responsible for source deductions and corporate returns, although the Corporation
had an accountant until 1998. At that time, the Corporation was experiencing
financial difficulties and from then on, the appellant had to do everything
himself. He was aware at all times that a director was responsible for the
remittance of source deductions.
[3]
In 2001 and 2002, the
Corporation’s activities were conducted out of the appellant’s home and were
somewhat limited, involving the resale of certain computer programs. During
those two years, the Corporation paid money to the appellant which the
appellant considered to be repayments of shareholder loans he had made to the
Corporation and as such not subject to any source deductions, including CPP
deductions.
[4]
The Corporation was
later audited for unremitted CPP contributions for 2001, 2002 and 2003 and
assessed with respect to an approximate total of $100,000 in pensionable
earnings received from the Corporation. That assessment was appealed before
this Court on the basis that the amount in question represented shareholder
loan repayments to the appellant. The Corporation eventually settled its appeal
by consenting on March 2, 2007 to a judgment stating that the Corporation
actually paid pensionable earnings of $23,277 in 2001, $11,800 in 2002 and nil
in 2003. The appellant says it was a complicated case but he agreed to settle
on those terms. The Minister of National Revenue (the Minister) subsequently
issued a reassessment to the Corporation but was unable to collect any amount.
[5]
A certificate for the
amount of the Corporation’s liability for unremitted source deductions,
penalties and interest was registered in the Federal Court of Canada under
subsection 223(2) of the Act on October 2, 2009. Execution for
those amounts was returned unsatisfied.
[6]
The Corporation was
dissolved on July 15, 2008. On July 15, 2010, the Minister assessed
the appellant for director’s liability with respect to the failure by the
Corporation to remit the CPP deductions. The appellant filed a notice of objection
and the Minister later confirmed the assessment, hence this appeal. The
respondent filed the Reply to the Notice of Appeal after the time limit
prescribed in subsection 18.16(1) of the Tax Court of Canada Act.
[7]
This case raises the
following issues:
1 -
Was the appellant
assessed within the time prescribed in subsection 227.1(4) of the Act?
2 -
Did the appellant
exercise the degree of care, diligence and skill to prevent the failure by the
Corporation to remit CPP deductions that a reasonably prudent person would have
exercised in comparable circumstances?
3 -
In the context of the
due diligence defence of subsection 227.1(3) of the Act, what are
the consequences of the fact that the Crown filed its Reply to the Notice of
Appeal after the expiration of the time limit specified in
subsection 18.16(1) of the Tax Court of Canada Act?
[8]
The first issue was
raised in the appellant’s Notice of Appeal, in which he states that he was
personally assessed for the aforementioned unpaid deductions two years after
the Corporation had been dissolved and he had ceased to be a director. The
appellant is correct in saying that he ceased to be a director on the day that
the Corporation was dissolved (see Canada v. Aujla, 2008 FCA
304). The limitation period under subsection 227.1(4) is set out as
follows in that provision:
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.
[9]
Pursuant to
subsection 27(5) of the Interpretation Act (Canada), the two-year
limitation period referred to above does not include the day that the director
ceased to be a director. That question was considered in Larocque (R.L.) v.
M.N.R., [1991] 2 C.T.C. 2151 at page 255:
The
issue of this assessment being launched after the two‑year limit defined
in subsection 227.1(4) of the Act is quickly settled by reference to the time
period involved. The resignation of the directors was accepted as being January
26, 1987, while the assessment to recover amounts owing was on January 26,
1989. While the appellants' argument that there cannot be three January 26ths
in a two-year period may seem correct in order to determine a legal period of
time reference may be made to the Interpretation Act, R.S.C. 1985,
c. I‑21. There subsection 27(5) provides:
Where
anything is to be done within a time after, from, of or before a specified day,
the time does not include that day.
Hence
in this case by discarding the one January 26, the time limitation in the
statute has not been breached.
[10]
The Minister therefore
had until July 15, 2010 to assess the appellant, which is the day that the
appellant was in fact assessed.
[11]
The second issue is
whether the appellant exercised the degree of care, diligence and skill to
prevent the failure to remit the CPP deductions that a reasonably prudent
person would have exercised in comparable circumstances.
[12]
In two recent decisions
of the Federal Court of Appeal (Balthazard v. Canada,
2011 FCA 331, and Canada v. Buckingham, 2011 FCA 142),
Justice Mainville dealt with the legal framework applicable to the care,
diligence and skill defence. In Balthazard, he summarized that framework
as follows at paragraph 32:
a.
The standard of care, skill and diligence
required under subsection 323(3) of the Excise Tax Act is an objective
standard as set out by the Supreme Court of Canada in Peoples Department
Stores Inc.(Trustee of) v. Wise, 2004 SCC 68, [2004] 3 S.C.R. 461. This
objective standard has set aside the common law principle that a director's
management of a corporation is to be judged according to his or her own
personal skills, knowledge, abilities and capacities. However, an objective
standard does not mean that a director's particular circumstances are to be
ignored. These circumstances must be taken into account, but must be considered
against an objective "reasonably prudent person" standard.
b.
The assessment of the director's conduct, for
the purposes of this objective standard, begins when it becomes apparent to the
director, acting reasonably and with due care, diligence and skill, that the
corporation is entering a period of financial difficulties.
c.
In circumstances where a corporation is facing
financial difficulties, it may be tempting to divert these Crown remittances in
order to pay other creditors and thus ensure the continuity of the operations
of the corporation. That is precisely the situation which section 323 of the Excise
Tax Act seeks to avoid. The defence under subsection 323(3) of the Excise
Tax Act must not be used to encourage such failures by allowing a care,
diligence and skill defence for directors who finance the activities of their
corporation with Crown monies, whether or not they expect to make good on these
failures to remit at a later date.
d.
Since the liability of directors in these
respects is not absolute, it is possible for a corporation to fail to make
remissions [sic] to the Crown without the joint and several, or
solidary, liability of its directors being engaged.
e.
What is required is that the directors establish
that they were specifically concerned with the tax remittances and that they
exercised their duty of care, diligence and skill with a view to preventing a
failure by the corporation to remit the amounts at issue.
[13]
The same standard
applies under subsection 227.1(3) of the Act.
[14]
The issue of when the
standard must be applied to the failure to remit was raised at trial by the
respondent. The question was whether it should apply to the Corporation’s
initial failure to remit CPP contributions as required in 2001 and 2002 or
whether it should apply to the Corporation’s failure to remit after it was
assessed for those contributions and after it consented to judgment in 2007.
The respondent’s Reply to the Notice of Appeal indicates that the appellant is
liable in respect of the Corporation’s initial failure to remit CPP contributions
as required in 2001 and 2002 and no other. I will leave the matter as it stands
in the pleadings.
[15]
Subsection 21.1(1) of
the Canada Pension Plan (CPP) renders a director liable for a
corporation’s failure to deduct or remit an amount at the time the failure
occurred. Subsections 21.1(1) and (2) read as follows:
21.1
(1) If an employer who fails to deduct or remit an amount as and when required
under subsection 21(1) is a corporation, the persons who were the directors of
the corporation at the time when the failure occurred are jointly and severally
or solidarily liable, together with the corporation, to pay to Her Majesty that
amount and any interest or penalties relating to it.
(2)
Subsections 227.1(2) to (7) of the Income Tax Act apply, with such
modifications as the circumstances require, in respect of a director of a
corporation referred to in subsection (1).
[16]
The appellant has been
the director of the Corporation since 1987. He attended Ryerson University for two years and was the decision‑maker for the Corporation. Up until it
began to experience financial difficulties in 1998, the Corporation had an
accountant and the appellant was assisted by a bookkeeper in preparing
corporate returns.
[17]
In 2001 and 2002, he
managed the Corporation’s business out of his home. The appellant believed that
the amounts of money taken out of the Corporation were not salary but rather
were shareholder’s loan repayments and that, consequently, the Corporation did
not need to remit CPP deductions on those amounts.
[18]
When the Corporation
settled out of court in 2007, the appellant was not aware that the Corporation
would have to pay anything as a result of the consent. He was aware, though,
that by virtue of his consenting to judgment the amounts agreed to became
income in his hands. He did not understand that this would make him an employee
and that the Corporation would have to remit CPP deductions.
[19]
In order for a director
to become jointly and severally liable with an employer corporation, to pay an
amount of CPP deductions under subsection 21(1) of the CPP, the employer corporation
must have failed to deduct or remit such an amount. In our fact situation, the
appellant’s credibility is not at issue. In 2001 and 2002, the Corporation was
indeed paying back shareholder’s loans to the appellant and, as a consequence,
it did not have to deduct or remit CPP contributions as no salaries were paid
in either of those years. The Corporation therefore did not fail to remit CPP deductions
as and when required in those years and, in my opinion, subsection 21.1(1)
of the CPP has no application in that the appellant director cannot be
held jointly and severally liable with the Corporation as no failure occurred.
[20]
The out-of-court
settlement reached in 2007 was a compromise or an amicable solution to a
complex problem for the Corporation and it chose to settle on those terms. I do
not consider the out-of-court settlement as an admission of any failure by the
Corporation to remit or deduct amounts that should have been remitted or
deducted in 2001 and 2002. The appellant only understood that the consequence
of the out-of-court settlement was to make him liable to pay income tax on the
agreed amounts. What the appellant did not understand was that the settlement
made the Corporation liable for the remittance of the CPP deductions for 2001
and 2002. Indeed, his belief at that time was that the Corporation was not
liable to deduct or remit anything. Such a situation makes it impossible for a
director to avail himself of the defence of due diligence, for how could the
appellant have been diligent in preventing a failure by the Corporation when
the Corporation firmly believed that it did not fail to deduct and remit CPP contributions?
[21]
I repeat that the
appellant’s credibility is not in issue. I do agree that his business
experience dictates that he would have had knowledge of the Corporation’s
obligations to deduct CPP contributions from its employee’s salary and to remit
those contributions and of a director’s obligation to make sure that the
remittances are made by the Corporation, and it appears that the Corporation met
this legal obligation prior to 2001 and 2002. If the Corporation and its
director were of the belief that no salary was paid in 2001 and 2002, there was
no failure to deduct or remit and no reason to be diligent in ensuring that
deductions and remittances were made.
[22]
I accept the
appellant’s explanation that he thought the amounts he received were
shareholder’s loan repayments so that the Corporation had no CPP deductions to
remit, and that he, as a director, had no reason to be diligent or to exercise the
requisite degree of care when, to his mind, no obligation of the Corporation to
remit existed.
[23]
That being said, I will
still deal with the issue of the consequences, in this case, of the fact that
the Reply to the Notice of Appeal was filed after the deadline imposed by
subsection 18.16(1) of the Tax Court of Canada Act. In the present
case, the appellant did not consent to an extension of time nor did the
respondent apply to this Court for permission to file the Reply beyond the prescribed
60-day time limit. On the other hand, subsection 18.16(4) does not prevent
the Minister from filing a Reply late, but it does spell out the consequences
of doing so. The relevant subsections read as follows:
18.16
(1) The Minister of National Revenue shall file a reply to a notice of appeal
within sixty days after the day on which the Registry of the Court transmits to
that Minister the notice of appeal unless the appellant consents, before or
after the expiration of the sixty day period, to the filing of that reply after
the sixty day period or the Court allows the Minister, on application made
before or after the expiration of the sixty day period, to file the reply after
that period.
. .
.
(4)
The Minister of National Revenue may file a reply to a notice of appeal after
the period limited under subsection (1) or (3), as the case may be, and where
that Minister files the reply after that period or after the extension of time
consented to by the appellant or granted by the Court, the allegations of fact
contained in the notice of appeal are presumed to be true for the purposes of
the appeal.
[24]
What subsection (4) basically
does is shift the onus of proof to the respondent, who must then prove her case
against the appellant, and the facts alleged in the Notice of Appeal are
presumed to be true.
[25]
In Hartrell v. Canada,
2008 FCA 59, at paragraph 3, the Federal Court of Appeal held
that the existence of a due diligence defence is a question of mixed fact and
law. In order for a finding to be made that a due diligence defence has been established,
the application of a legal standard to a set of facts is required. Thus, facts
that are presumed to be true and are not rebutted may assist a taxpayer in
making out a defence of due diligence. It may be, though, that in certain
circumstances the existence of a factual presumption may not be sufficient and
that the ultimate persuasive burden may rest on the taxpayer, who must prove
due diligence.
[26]
In Buckingham, supra,
at paragraph 33, the Federal Court of Appeal held that the burden is on the
director to prove the existence of the required diligence:
[33]
. . . Subsection 227.1(3) of the Income Tax Act and subsection 323(3) of
the Excise Tax Act do not set out a general duty of care, but rather
provide for a defence to the specific liability set out in subsections 227.1(1)
and 323(1) of these respective Acts, and the burden is on the directors to
prove that the conditions required to successfully plead such a defence have
been met. The duty of care in subsection 227.1(3) of the Income Tax Act also
specifically targets the prevention of the failure by the corporation to remit
identified tax withholdings, including notably employee source deductions.
Subsection 323(3) of the Excise Tax Act has a similarly [sic] focus.
The directors must thus establish that they exercised the degree of care,
diligence and skill required "to prevent the failure". The focus of
these provisions is clearly on the prevention of failures to remit.
[Emphasis added.]
[27]
In his Notice of
Appeal, the appellant alleges certain facts relating to his diligence in
preventing the failure of the Corporation to remit CPP contributions. In the fifth,
sixth and seventh unnumbered paragraphs, the appellant alleges the following:
Under
the Income Tax Act 227.1(3) and because the original 2004 assessments were not
in respect of straight salary, the shareholders had thought the amount[s] taken
out of Acrontech Inc. (the subject corporation) were something other than
salaries. We thought that they were loan repayments to shareholders. This was a
complex matter especially when we (the two related shareholders) had lent funds
to Acrontech Inc. and I was simultaneously operating two related corporations
with funds flowing in and out of them. As a result, the corporation didn’t pay
CPP on these amounts.
The
fact that CRA disagreed and I eventually settled doesn’t mean that I was not
diligent. As a layperson I understood that these amounts were not “CPPable” and
so the corporation didn’t take any deductions. When I settled the matter with
CRA and confirmed that only some part was CPPable, this at least justified my
initial position and shows that I was diligent.
I
therefore feel that I have acted responsibly, diligently and under these
circumstances I (as a director) could not have prevented the corporation’s
failure to remit. Hence, I don’t think that I am personally liable for this
amount.
[28]
What the appellant is
saying is that he is a layperson, that he did not believe in 2001 and 2002 that
certain payments to shareholders were pensionable earnings for CPP purposes,
that the Corporation settled on the basis that only some of them were a dispute
with the Canada Revenue Agency with respect to whether those payments were
pensionable earnings, and that the settlement justifies his initial belief that
the payments were not pensionable earnings.
[29]
Not only must I presume
that these facts are true but they were also repeated by the appellant under
oath. I do not find that the respondent has met her burden in this case. I
therefore conclude that, if the defence of due diligence were applicable, the appellant’s
presumed facts and his evidence at trial would support that defence.
[30]
The appeal is allowed.
Signed at Ottawa, Canada, this 5th day of December 2012.
"François Angers"
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