Citation: 2010TCC247
Date: 20100506
Dockets: 2008-2817(IT)G
2008-2877(GST)G
BETWEEN:
KEVIN RICHARD BUCKINGHAM,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb, J.
[1]
The
Appellant was assessed, pursuant to section 323 of the Excise Tax Act,
as a director of Mosaic Technologies Corporation (“Mosaic”) for the following
amounts of unremitted GST/HST and the penalties and interest related thereto:
|
Date of the Assessment of Mosaic
|
Period Covered
|
Payment Due Date
|
Unremitted GST/HST
|
Penalty and interest
|
Unremitted GST/HST, penalties and
interest
|
|
September 23, 2003
|
Jan. 1/03 to
Mar. 31/03
|
April 30, 2003
|
$86,614
|
$15,938
|
$102,552
|
|
September 3, 2004
|
Apr. 1/03 to June 30/03
|
July 30, 2003
|
$53,827
|
$8,523
|
$62,350
|
|
Total:
|
|
|
$140,441
|
$24,461
|
$164,902
|
[2]
The
Appellant was also assessed, pursuant to section 227.1 of the Income Tax Act,
the provisions of the applicable provincial income tax statutes, section 21.1
of the Canada Pension Plan and section 83 of the Employment Insurance
Act, as a director of each of the following companies, for unremitted
source deductions (federal income tax, provincial income tax, CPP premiums, and
EI premiums) and the penalties and interest related thereto:
Multimedia
Ventures (Alberta) Inc.
|
Date of Assessment
|
Period Covered
|
Federal Tax
|
Provincial Tax
|
CPP
|
EI
|
Penalty and Interest
|
Total
|
|
Oct. 16, 2002
|
Aug. 16/02 to Aug. 31/02
|
|
|
|
|
$14
|
$14
|
|
Nov. 19, 2002
|
Sept. 1/02 to Sept. 15/02
|
|
|
|
|
$1,018
|
$1,018
|
|
Dec. 6, 2002
|
Sept. 16/02 to Sept. 30/02
|
|
|
|
|
$1,044
|
$1,044
|
|
Jan. 14, 2003
|
Oct. 1/02 to Nov. 30/02
|
$10,319
|
|
|
|
$10,846
|
$21,165
|
|
Jan. 29,
2003
|
Dec. 1/02 to Dec. 31/02
|
$11,292
|
|
|
|
$3,748
|
$15,039
|
|
May 30, 2003
|
Jan. 1/03 to Feb. 28/03
|
$12,913
|
$7,877
|
$9,946
|
$5,632
|
$10,568
|
$46,934
|
|
May 30, 2003
|
Mar. 1/03 to Apr. 30/03
|
$21,068
|
$12,851
|
|
|
$9,634
|
$43,553
|
|
July 9, 2003
|
June 1/03 to June 15/03
|
|
|
|
|
$265
|
$265
|
|
Aug. 4, 2003
|
June 1/03 to June 15/03
|
$5,081
|
$3,099
|
|
|
$1,247
|
$9,427
|
|
Oct. 7, 2003
|
Jan. 1/02 to Dec. 31/02
|
|
|
$3,936
|
|
$1,131
|
$5,067
|
|
April 7, 2004
|
June 16/03 to June 30/03
|
$973
|
$1,851
|
$2,324
|
$1,093
|
$1,645
|
$7,886
|
|
Total
|
|
$61,646
|
$25,678
|
$16,206
|
$6,725
|
$41,160
|
$151,412
|
Multimedia Ventures Inc.
|
Date of Assessment
|
Period Covered
|
Federal Tax
|
Provincial Tax
|
CPP
|
EI
|
Penalty and Interest
|
Total
|
|
Dec. 6, 2002
|
Sept. 1, 2002 to Sept. 30, 2002
|
|
|
|
|
$547
|
$547
|
|
Jan. 17, 2003
|
Oct. 1, 2002 to Oct. 31, 2002
|
|
|
|
|
$497
|
$497
|
|
Mar. 26, 2003
|
Jan. 1, 2002 to Dec. 31, 2002
|
|
|
|
|
$3,234
|
$3,234
|
|
Mar. 26, 2003
|
Jan. 1, 2003 to Feb. 28, 2003
|
|
|
|
|
$2,986
|
$2,986
|
|
June 11, 2003
|
Mar. 1, 2003 to Apr. 30, 2003
|
$12,512
|
|
|
|
$4,775
|
$17,287
|
|
July 9, 2003
|
May 1, 2003 to May 31, 2003
|
|
|
|
|
$586
|
$586
|
|
Aug. 4, 2003
|
May 1, 2003 to May 31, 2003
|
$3,477
|
$2,121
|
|
|
$854
|
$6,452
|
|
Oct. 8, 2003
|
January 1, 2002 to December 31, 2002
|
|
|
$2,420
|
|
$674
|
$3,094
|
|
April 7, 2004
|
April 1, 2003 to June 30, 2003
|
$3,481
|
$2,123
|
$2,084
|
$182
|
$1,922
|
$9,792
|
|
Total
|
|
$19,470
|
$4,244
|
$4,504
|
$182
|
$16,075
|
$44,475
|
6678 British Columbia Ltd.
|
Date of Assessment
|
Period Covered
|
Federal Tax
|
Provincial Tax
|
CPP
|
EI
|
Penalty and Interest
|
Total
|
|
Oct. 16, 2002
|
Aug. 16/02 to Aug. 31/02
|
|
|
|
|
$6
|
$6
|
|
Nov. 19, 2002
|
Sept. 1/02 to Sept. 15/02
|
|
|
|
|
$1,070
|
$1,070
|
|
Dec. 6, 2002
|
Sept. 16/02 to Sept. 30/02
|
|
|
|
|
$1,062
|
$1,062
|
|
Dec. 20, 2002
|
Oct. 1/02 to Nov. 30/02
|
|
|
$7,696
|
|
$9,336
|
$17,032
|
|
Jan. 17, 2003
|
Oct. 1/02 to Oct. 15/02
|
|
|
|
|
$1,122
|
$1,122
|
|
Jan. 28, 2003
|
Dec. 1/02 to Dec. 31/02
|
|
|
$1,664
|
|
$1,606
|
$3,270
|
|
April 25, 2003
|
Jan. 1/03 to Feb. 28/03
|
$1,934
|
|
$5,284
|
$3,511
|
$8,734
|
$19,463
|
|
April 25, 2003
|
March 1/03 to March 15/03
|
$3,086
|
$1,883
|
$2,614
|
$1,478
|
$2,570
|
$11,632
|
|
June 2, 2003
|
March 16,/03 to April 15/03
|
$9,373
|
$5,718
|
|
|
$4,124
|
$19,216
|
|
June 4, 2003
|
April 16/03 to April 30/03
|
$4,564
|
$2,784
|
|
|
$1,991
|
$9,339
|
|
Aug. 1, 2003
|
June 1/03 to June 15/03
|
$4,808
|
$2,933
|
|
|
$1,988
|
$9,729
|
|
Aug. 27, 2003
|
Jan. 1/02 to Dec. 31/02
|
|
|
$2,303
|
|
$1,179
|
$3,481
|
|
April 7, 2004
|
Jan. 1/03 to June 30/03
|
$2,555
|
$1,558
|
$2,289
|
$805
|
$1,805
|
$9,012
|
|
Total
|
|
$26,320
|
$14,876
|
$21,850
|
$5,794
|
$36,593
|
$105,434
|
Mosaic
|
Date of Assessment
|
Period Covered
|
Federal Tax
|
Provincial Tax
|
CPP
|
EI
|
Penalty and Interest
|
Total
|
|
Dec. 6, 2002
|
Sept. 16/02 to Sept. 30/02
|
|
|
|
|
$1,122
|
$1,122
|
|
Feb. 20, 2003
|
Oct. 1/02 to Dec. 31/02
|
$30,192
|
|
|
|
$13,463
|
$43,655
|
|
Feb. 26, 2003
|
Jan. 16/03 to Jan. 31/03
|
|
|
|
|
$1,428
|
$1,428
|
|
March 12, 2003
|
Jan. 16/03 to Jan. 31/03
|
$7,943
|
$4,845
|
|
|
$2,092
|
$14,879
|
|
March 26, 2003
|
Jan. 1/03 to Feb. 28/03
|
$16,252
|
$9,914
|
$9,969
|
$5,509
|
$11,397
|
$53,041
|
|
June 11, 2003
|
March 1/03 to April 30/03
|
$37,626
|
$22,952
|
|
|
$16,022
|
$76,600
|
|
July 9, 2003
|
June 1/03 to June 15/03
|
|
|
|
|
$125
|
$125
|
|
Oct. 8, 2003
|
Jan. 1/02 to Dec. 31/02
|
|
|
$3,558
|
|
$949
|
$4,508
|
|
April 7, 2004
|
June 1/03 to Aug. 31/03
|
$4,102
|
$2,502
|
$2,751
|
$1,540
|
$2,292
|
$13,187
|
|
Total
|
|
$96,115
|
$40,213
|
$16,278
|
$7,049
|
$48,890
|
$208,545
|
[3]
There
are some assessments that cover the same period or periods of time as others.
However since these assessments are assessments of income tax amounts and CPP
and EI premiums that should have been remitted in relation to salaries or wages
paid to employees, the additional assessments for a period for which an
assessment was already issued presumably simply reflect additional amounts that
should have been remitted for that period. Such assessments would therefore not
be intended to reflect the entire amounts that should have been remitted for
that period. This would not be the same as an assessment of income tax
liability for a taxation year which reflects the total tax liability for a
taxation year. The Appellant did not contest that any of the amounts in
relation to which he was assessed as a director were not payable by Mosaic or
any of its subsidiaries. The only basis for the Appellant’s appeal was that he
was not liable for such amounts as a result of the provisions of subsection
227.1(3) of the Income Tax Act and subsection 323(3) of the Excise
Tax Act.
[4]
The
assessed amounts also include amounts for provincial income taxes. In the
Notice of Appeal filed by the Appellant, there is a reference to the Income
Tax Act, the Canada Pension Plan and the Employment Insurance Act.
Counsel for the Appellant confirmed in writing following the hearing that the
Appellant was not appealing that part of the assessment that was based on
provincial income taxes that should have been remitted (which would include the
interest and penalties related to these amounts). If the Appellant would have
been appealing the assessment of these amounts, then the issue would have been
whether this Court has jurisdiction to hear that appeal.
[5]
This Court was formed by an Act of
Parliament, the Tax Court of Canada Act. The jurisdiction of this Court is
set out in section 12 of that Act and in particular subsection 12(1) of this Act
provides as follows:
12. (1) The
Court has exclusive original jurisdiction to hear and determine references and
appeals to the Court on matters arising under the Air Travellers
Security Charge Act, the Canada Pension Plan, the Cultural
Property Export and Import Act, Part V.1 of the Customs Act, the
Employment Insurance Act, the Excise Act, 2001, Part
IX of the Excise Tax Act, the Income Tax Act, the Old Age Security
Act, the Petroleum and Gas Revenue Tax Act and the Softwood
Lumber Products Export Charge Act, 2006 when references or appeals to the
Court are provided for in those Acts.
(emphasis added)
[6]
Under
the statute by which this Court was formed, the jurisdiction is limited to
appeals under the statutes named in subsection 12(1) and some other statutes
and other matters listed in the other subsections of section 12. No
jurisdiction is granted to this Court under the Tax Court of Canada Act
to hear appeals on matters arising under any provincial income tax statute.
[7]
Subsection
84(2) of the New Brunswick Income Tax Act (which is the province where the head office of
Mosaic was located and where it appears that a significant part of the
operations of the companies was located) provides as follows:
84(2) Subject
to subsection (4), an appeal from an assessment under this Act lies to the
Court in respect of any question relating,
(a) in the case of an individual, to the determination
of
…
(v) the liability of a director to pay an amount
under section 227.1 of the Federal Act as that section applies for the purposes
of this Act because of section 109…
[8]
Section
109 of the New
Brunswick Income
Tax Act provides as follows:
109 Section 227.1 of the Federal Act applies for the
purposes of this Act.
[9]
Court
is defined in section 1 of this Act as follows:
“Court” means The Court of Queen’s Bench
of New Brunswick;
[10] Therefore it is clear
that any appeal that the Appellant may wish to pursue in relation to the
assessment of the amounts that should have been remitted under the New
Brunswick Income Tax Act would have to be made to the Court of Queen’s
Bench of New
Brunswick.
[11] Multimedia Ventures (Alberta) Inc., Multimedia
Ventures Inc., and 6678 British Colombia Ltd. were subsidiaries of Mosaic.
Mosaic and its subsidiaries carried on an education business. The Appellant and
his family acquired control of Mosaic around 1997. At that time, Mosaic (then
named “Mosaic Recycle Paper”) was a Vancouver shell company that had been a publicly traded
company for several years. Following the acquisition of Mosaic, the Appellant
started looking for acquisitions to commence carrying on business. The company
acquired two schools (applied multimedia training centers), Pitman Business College (which was the oldest
secretarial school in Canada), and a small college in Regina.
[12] In addition to the
schools that were acquired, Mosaic also had a division that prepared online
courses for large corporations and governments. In the draft share exchange
offer (which is discussed further below) the company is described in early 2003
as follows:
Mosaic Technologies Corporation is a
publicly listed, Fredericton New Brunswick based e-learning
educational technologies company which designs and develops world-class
products and services for its customers and clients by integrating traditional
teaching methodologies and technology enhanced interactive learning activities
through its facilities across Canada.
[13] The Appellant was the
chairman of the board of Mosaic. The company also had a president and Chief Executive
Officer (Don Whitty) and a Chief Financial Officer (Stephen Hutchinson).
[14] In 1998 or 1999 the
shares of Mosaic started to trade on the TSX Venture Exchange. Mosaic earned a
profit in 2000. The following table shows the profit (or loss) earned (or
incurred) by Mosaic during the years 1999 to 2002:
|
|
1999
|
2000
|
2001
|
2002
|
|
Profit (Loss)
|
($970,899)
|
$253,110
|
($451,161)
|
($1,446,396)
|
[15] Mosaic was only profitable
for one year following its rebirth as an education company. The Appellant
stated that it was profitable for the first three quarters of 2001 but
following the events of 9/11 (September 11, 2001), the business environment
changed significantly. As the Appellant stated:
A. After
9/11, it became clear really to the Board and myself that...and senior
management, that things weren’t quite going to be the same again. And like I
said before, six (6) months after 9/11, the phones virtually stopped ringing,
not just with us, but with everybody.
[16] Subsection 323(3) of the Excise
Tax Act and subsection 227.1(3) of the Income Tax Act provide a
defence for a director in relation to an assessment for unremitted amounts by a
corporation, which is the same in both statutes. Subsection 83(2) of the Employment Insurance Act and subsection
21.1(2) of the Canada Pension Plan provide that subsections 227.1(2) to
(7) of the Income Tax Act apply for the purposes of those Acts and
therefore the same defence is available to a director who is assessed for
unremitted premiums under the Employment Insurance Act and unremitted
contributions under the Canada Pension Plan. Subsection 323(3) of the Excise
Tax Act provides as follows:
(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.
[17] In Higgins v. The
Queen 2007, TCC 469, [2007] G.S.T.C.
103 I made the following comments:
6 The Federal Court of Appeal in
Soper v. R., [1997] 3 C.T.C. 242, completed a detailed analysis of
the due diligence defence in subsection 227.1(3) of the Income Tax Act
which has identical wording to that found in subsection 323(3) of the Act.
The Federal Court of Appeal noted that federal statutes with the same language
should be interpreted in the same manner. In particular the Federal Court of
Appeal was focused on the provisions of the Canada Business Corporations Act
(“CBCA”) which also imposes a duty upon a director and uses the same
language as found in the Act and the Income Tax Act in relation
to the due diligence defence. In Soper, supra, Robertson J. A. of the
Federal Court of Appeal made the following comments:
19 In my view, it is
not simply a fortuitous occurrence that subsection 227.1(3) of the Income
Tax Act adopts the same language as found in subsection 122(1)(b) of the Canada
Business Corporations Act, for both statutory provisions relate to the
standard of care to be exercised. Admittedly, the CBCA provision deals with the
standard of care owed to the corporation while the taxation provision concerns
the standard of care owed to the Crown and Canadian taxpayers. However, that
distinction does not serve to nullify the relevance of the standard set out in
the CBCA, if only because of the presumption of coherence between statutes.
That elementary principle of statutory interpretation is explained by P.-A.
Côté in The Interpretation of Legislation in Canada, 2nd ed. (Cowansville, Quebec: Les
Editions Yvon Blais Inc., 1991) at 288, 290:
Different enactments of the same
legislature are supposedly as consistent as the provisions of a single
enactment. All legislation of one Parliament is deemed to make up a coherent
system. Thus, interpretations favouring harmony between statutes should prevail
over discordant ones, because the former are presumed to better represent the
thought of the legislator.
This presumption of coherence in
enactments of the same legislature is even stronger when they relate to the
same subject matter, in pari materia. Apparent conflicts between
statutes should be resolved in such a way as to re-establish the desired
harmony.
...
To sum up, the presumption of
coherence in related legislation applies particularly to statutes of the same
legislature. But it is also relevant to statutes of different jurisdictions, as
one legislature may be deemed to imitate the form or be consistent with the
substance of a statute enacted by another.
Thus, in order to determine whether the
common law standard of care was modified by statute, it is both appropriate and
instructive to consider not only the due diligence provision set out at
subsection 227.1(3) of the Income Tax Act but also the analogous,
and virtually identical, standard of care provisions found in the Canada
Business Corporations Act.
7 The
conclusion of Robertson J. A. was that the provisions of paragraph 122(1)(b)
of the CBCA and subsection 227.1(3) of the Income Tax Act
provided for an objective subjective test to be applied in analyzing the
standard set out in these sections.
8 The Supreme Court of Canada in Peoples Department Stores Inc
(Trustee of) v. Wise, 2004 S.C.C. 68, [2004] 3 S.C.R. 461, made the
following comments in relation to the objective subjective test as set out by
the Federal Court of Appeal in Soper:
63 The
standard of care embodied in s. 122(1)(b) of the
CBCA was described by Robertson J.A. of the Federal Court of Appeal in Soper v. R. (1997), [1998] 1 F.C. 124 (Fed. C.A.), at para. 41, as being
"objective subjective". Although that case concerned the
interpretation of a provision of the Income Tax Act,
it is relevant here because the language of the provision establishing the
standard of care was identical to that of s. 122(1)(b)
of the CBCA. With respect, we feel that Robertson J.A.'s characterization of
the standard as an "objective subjective" one could lead to
confusion. We prefer to describe it as an objective standard. To say that the
standard is objective makes it clear that the factual aspects of the
circumstances surrounding the actions of the director or officer are important
in the case of the s. 122(1)(b) duty of care, as
opposed to the subjective motivation of the director or officer, which is the
central focus of the statutory fiduciary duty of s. 122(1)(a)
of the CBCA.
9 The Supreme Court of Canada again noted that because the
language in paragraph 122(1)(b) of the CBCA is identical to that
found in subsection 227.1(3) of the Income Tax Act (which is also
identical to the language set out in subsection 323(3) of the Act)
the provisions are to be interpreted in the same manner. Therefore, in my
opinion, the conclusion is that the Supreme Court of Canada has modified the
objective subjective test as set out by the Federal Court of Appeal in Soper
and instead has adopted an objective standard that now should be used not only
for the purposes of paragraph 122(1)(b) of the CBCA but also for
the purposes of section 227.1(3) of the Income Tax Act and subsection
323(3) of the Act.
10 The Supreme Court of Canada in Peoples Department Stores Inc.
also made the following comments in relation to this duty:
67 Directors and officers will
not be held to be in breach of the duty of care under s. 122(1)(b) of the CBCA if they act prudently and on a reasonably
informed basis. The decisions they make must be reasonable business decisions
in light of all the circumstances about which the directors or officers knew or
ought to have known. In determining whether directors have acted in a manner
that breached the duty of care, it is worth repeating that perfection is not
demanded. Courts are ill-suited and should be reluctant to second-guess the
application of business expertise to the considerations that are involved in
corporate decision making, but they are capable, on the facts of any case, of
determining whether an appropriate degree of prudence and diligence was brought
to bear in reaching what is claimed to be a reasonable business decision at the
time it was made.
11 Therefore the issue in
this case is whether the Appellants have acted prudently on a reasonably
informed basis and have met the objective standard imposed upon them of
exercising the duty of care, diligence and skill to prevent the failure to
remit the HST that a reasonable prudent person would have exercised in
comparable circumstances.
[18] It seems to me, as I had
concluded in Higgins, that since:
(a)
the
objective subjective standard as described by Justice Robertson in Soper,
was determined based on his review of paragraph 122(1)(b) of the Canada
Business Corporations Act (the “CBCA”) (which he described in paragraph 19
of his decision as “the analogous, and virtually identical, standard of care
provisions” as found in subsection 227.1(3) of the Income Tax Act); and
(b)
the
Supreme Court of Canada in
Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 S.C.C. 68, [2004] 3 S.C.R. 461 in
dealing with the standard of care imposed by paragraph 122(1)(b) of the
CBCA specifically addressed the objective subjective standard as set out by
Justice Robertson in Soper and indicated that it should be an objective
standard,
that the standard of care imposed by subsection
227.1(3) of the Income Tax Act and subsection 323(3) of the Excise
Tax Act should be the same as the standard of care imposed by paragraph
122(1)(b) of the CBCA and therefore is an objective standard.
[19] The Appellant in this case also sought to
classify himself as an “outside director” until 2003. This classification is based
on the comments of Justice Robertson in Soper when he stated that:
32 … I
intend to focus on the category of cases respecting the distinction between
inside and outside directors since that line of authority is the most pertinent
to this appeal.
33 At the
outset, I wish to emphasize that in adopting this analytical approach I am not
suggesting that liability is dependent simply upon whether a person is
classified as an inside as opposed to an outside director. Rather, that
characterization is simply the starting point of my analysis. At the same time,
however, it is difficult to deny that inside directors, meaning those involved
in the day-to-day management of the company and who influence the conduct of
its business affairs, will have the most difficulty in establishing the due
diligence defence. For such individuals, it will be a challenge to argue
convincingly that, despite their daily role in corporate management, they
lacked business acumen to the extent that that factor should overtake the
assumption that they did know, or ought to have known, of both remittance
requirements and any problem in this regard. In short, inside directors
will face a significant hurdle when arguing that the subjective element of the
standard of care should predominate over its objective aspect.
(emphasis added)
[20] Although, as noted above, it does not seem
to me that there is any longer a subjective element to the standard of care,
the distinction between inside directors and outside directors is still relevant.
The Supreme Court of Canada in Peoples Department Stores Inc. (Trustee of)
stated that:
67 Directors and officers will not be
held to be in breach of the duty of care under s. 122(1)(b)
of the CBCA if they act prudently and on a reasonably informed basis. The
decisions they make must be reasonable business decisions in light of all the
circumstances about which the directors or officers knew or ought to have
known.
[21] The circumstances about which inside
directors (those involved in the
day-to-day management of the company and who influence the conduct of its
business affairs) will know
(or ought to know) will be different from the circumstances about which outside
directors will know (or ought to know). Therefore it seems to me that the
distinction between inside directors and outside directors is still relevant
and is still the starting point for the analysis. Inside directors would know
or would be expected to know more about the day-to-day operations of the
company, the circumstances related to the financial affairs of a company (and
its ability to meet its remittance obligations and its compliance with these
obligations) and about potential problems than outside directors.
[22] It is the position of
the Appellant that he was not an inside director of Mosaic until February 13, 2003.
However, it seems to me that the Appellant was an inside director long before
February 13, 2003 and was an inside director prior to the first default in the
remittance of payroll amounts or GST/HST that is in issue in this Appeal.
[23] The Appellant and his
family acquired Mosaic in 1997. The Appellant is the only person who was a
director of all of the companies listed above. It seems obvious from the
testimony of the Appellant that he was directly involved in the acquisitions of
the businesses that were directly or indirectly acquired by Mosaic. The
Appellant was also the largest shareholder of Mosaic.
[24] The Chief Financial
Officer (Stephen Hutchinson) resigned in the spring of 2002. Prior to his
resignation, Robert Baird, who appears to be the person who was responsible for
preparing the remittance forms and the GST/HST returns, reported to Stephen
Hutchinson. During cross examination the Appellant acknowledged that he
directed Robert Baird. Although it is not clear when the Appellant began
directing Robert Baird, it is more likely than not that this occurred following
the resignation of Stephen Hutchinson in the spring of 2002. The Appellant also
referred to Robert Baird’s office being at the other end of the building which
indicates that the Appellant had an office at Mosaic. Since the Appellant had
an office at Mosaic and was directing Robert Baird this indicates that the
Appellant was involved in the day-to-day operations of Mosaic. The Appellant
also had signing authority for the bank account of the company which indicates
that he was involved in the day-to-day operations.
[25] The Appellant also
referred to various initiatives that Mosaic was pursuing to raise capital. It
appears that following the events of 9/11, a great deal of the Appellant’s time
would have been devoted to pursuing options to raise capital and deal with the
declining sales. The Appellant noted in his testimony that he and Don Whitty
had travelled to Toronto in early 2002 to arrange to have the paperwork started for a proposed
equity issue.
[26] It also appears that the
other directors were resigning their positions. The following shows the dates
of resignation from the Board of Directors of Mosaic, for those persons who
were directors as of September 11, 2001, based on the documents that were filed
under the CBCA:
|
Name
|
Date of Resignation
|
|
Richard Buckingham
|
|
|
Carey Edwards
|
May 10, 2002
|
|
Allen Ruben
|
February 28, 2003
|
|
Michael Bishop
|
|
|
Brian Neill
|
March 1, 2003
|
|
Lucille Pacey
|
|
[27] The Appellant stated
that Michael Bishop (who is related to the Appellant) also had resigned as a
director. Although the Appellant could not provide a specific date he stated
that Michael Bishop left “quite early”. The Appellant also stated that Lucille
Pacey (who lived in Vancouver) had also resigned as a director, although again the Appellant could not
provide a specific date.
[28] The Appellant also
stated, in an affidavit that he had previously submitted to the CRA to support
another director whom the CRA was proposing to assess, that he arbitrarily
appointed the other person as a director of one of the subsidiary companies
without that person’s consent. In the Affidavit (which was sworn on
November 20, 2004) the Appellant stated as follows:
1.
I was a director of Mosaic Technologies Corporation (“Mosaic”) and
played a significant role in the operation of Mosaic.
2.
Mosaic had two subsidiary companies, Multimedia Ventures Inc. (“MVI”)
and Multimedia Ventures (Alberta) Inc. (“MVAI”). MVI and MVAI operated
multimedia training centers in Manitoba and Alberta respectively.
3.
When Mosaic purchased the multimedia training centers, I put
Allen Ruben (“Ruben”) down as a director for both MVI and MVAI as he was
director of Mosaic and I thought the companies needed at least two directors.
4.
I did not receive and never did receive Ruben’s consent to make
him a director of MVI and MVAI.
5.
There was never a director’s meeting held with respect to MVI or
MVAI and Ruben was not involved in any way with the operation of either
company.
[29] This illustrates that
the Appellant had a significant amount of influence over Mosaic and its
subsidiaries. The Appellant also acknowledged in the first paragraph of his
affidavit that he “played a significant
role in the operation of Mosaic”.
[30] It seems to me that the
Appellant was an inside director before the first default in remittances which
is in issue in this appeal occurred (which would be in the fall of 2002).
[31] Therefore the issue is
whether the Appellant, as an inside director, “act[ed] prudently and on a reasonably
informed basis”. Were his decisions “reasonable business decisions in light of
all the circumstances about which [he] knew or ought to have known”?
[32] In this case, it seems to me that the
analysis in relation to the employee deductions should be dealt with separately
from the analysis related to the unremitted GST/HST. In McKinnon v. The
Queen 2003 TCC 884, 2004 D.T.C. 2049, [2004] 2 C.T.C. 2302, then Associate Chief Justice Bowman
made the following comments:
18 Another
argument that is frequently made in these cases and which I regard as
fallacious runs somewhat as follows: “You were stealing from money held in
trust for the Crown to run your business and pay your employees”. This is, I
think, an inaccurate and unfair characterization. It implies that there is a
separate account (or cookie jar if you will) into which the payroll deductions
are put and then withdrawn to pay the company's expenses. The fact is there is
no cookie jar, real or notional, and no money to put into it even if there
were. The net amount paid to the employees is all there is to go around. The
employees, suppliers and other creditors are paid because if they are not the
business will be closed down. Where, as here, unforeseen supervening events
make it impossible for the payroll deductions to be paid to the government, I
do not think there is anything the appellant could reasonably have done to
ensure the payment.
[33] The amounts for payroll deductions are not
funded by a third party but are paid from whatever resources the company might
have available to it. The remittance obligations are part of the costs related
to the employees. During cross examination the Appellant stated at one point
that there was not usually much money in the account. He also admitted that the
amounts that had been deducted from the payroll payments were being used to pay
other bills. However, no specific amounts were identified and no banking
statements were introduced to show the amount that was in the bank account at
any particular time. While an employer may have continuing obligations to
employees, it does not necessarily mean that the employer has received the
necessary funds to pay these obligations. For example, if the total amount of
salaries payable on a particular day is $100,000 and the total source
deductions that are to be deducted therefrom and remitted is $25,000, the net
amount payable to the employees is $75,000. If the employer only has $75,000 in
its bank account, then paying the employees $75,000 will reduce the bank
account balance to nil. There simply would not be any money left to hold in
trust. No third party has paid $100,000 to the employer to cover the payroll
and the employer must fund both the $75,000 payable to the employees and the
$25,000 payable for the source deductions from whatever sources it might have,
if it can. This is different from the amounts to be remitted for GST/HST which
are funded by the third parties upon whom the GST/HST is imposed. I will
therefore deal with these remittance obligations separately.
Unremitted Payroll Amounts
[34] As noted above the first
year that Mosaic made a profit (and the only year that it made a profit) was
2000. At the end of December 2000 the company had just under $760,000 in cash
and short term deposits. The total current assets of the company at that time
were over $2.1 million. The Appellant also stated that the company was
profitable for the first three quarters of 2001. However there were a number of
events that were beyond the control of the company that led to its demise.
[35] As had been previously
mentioned, the events of 9/11 had a detrimental affect on the business of the
company. As well the company had signed a non‑binding letter of intent
with Innovatia in relation to a proposed contract with Nortel. In order to be
able to fulfill its obligations under this contract the company had to hire
additional employees. The contract was expected to produce revenues of
approximately $4 million a quarter. That would have been a very significant
amount for a company that reported total revenue in 2000 for 12 months of $4.9
million.
[36] However a formal
contract was never executed. The Appellant described the circumstances as
follows:
A. So the
first three (3) quarters of 2001, the company was profitable and we were
getting ready to... We had signed a letter of intent, I believe, late 2001, a
non-binding letter of intent with Innovatia to start a very significant
contract for Nortel. So the company had to wrap up its intellectual capacity
by way of hiring people to handle the contract.
Q. H’m.
A. In
2001, about midway through it, Nortel were dragging their heels a bit, then we
had 9/11, and the bottom seemed to fall out really of everything in the
technology business, and...
Q. And
when you say technology business, are you talking about your business or...
A. Our
business, our customers’ businesses. Everything seemed to get put on hold back
at that point in time. So meanwhile, we had a fair... We had a fair buildup
of people to handle execution of the contract, so we started... Really in
2001, we started letting people go because Innovatia and Nortel were dragging
their heels with the big contract. I think it was 4 million dollars a quarter
or something. It was quite significant for our company at the time.
[37] The Appellant first
referred to the letter of intent being signed late 2001 but then referred to Nortel
“dragging their heels” and then 9/11 occurring, so it seems to me that the
Appellant simply incorrectly referred to late 2001 for the signing of the
letter of intent and this letter of intent was signed in late 2000 or early
2001.
[38] Also, sometime after
9/11, the bonding company with whom Mosaic had been dealing, ceased writing
vocational school training bond insurance. The example provided by the
Appellant was that instead of the company paying $5,000 to post a bond for
$500,000, the company had to post the cash collateral for the whole amount in
order to operate the school. This would obviously tie up their cash. Included
with the financial statements for 2002 is a note that identifies the following
“Restricted deposits”:
|
|
2002
|
2001
|
|
Deposits with Private Post
Secondary Education Commission of British Columbia
|
$74,460
|
|
|
Deposits with insurance companies
in relation to performance bonds
|
$87,500
|
$87,500
|
|
Guaranteed Investment
Certificates bearing interest at 2% per annum, maturing October 31, 2003
(note 15(b))
|
$50,000
|
|
|
|
$211,960
|
$87,500
|
[39] At the end of 2001 the
company had just under $245,000 in cash and short-term deposits and its current
assets were just over $1.5 million. The position of the company had
deteriorated from what it was at the end of 2000.
[40] In early 2002,
recognizing that the company was going to require additional capital, the
Appellant worked on a proposed equity issue. The company with which they were
dealing was American Capital Partners from Toronto and the proposal was that American
Capital Partners would arrange for a capital injection of $750,000. The
transactions were never consummated as American Capital Partners could not
raise the necessary funds to make the capital injection. The Appellant
described this event and the possibility of raising equity in the marketplace
as follows:
A. It
never happened because they couldn’t raise the money, and things got
progressively worse through 2002, and...
Q. And
when you say “things got progressively worse”, what do you mean?
A. Well,
you couldn’t raise any equity.
Q. Okay.
A. The
financial markets at that point in time, after the Internet implosion we will
call it, in 2001/2002, in that timeframe, the market was very jittery of any of
this technology stuff, which just a year before, they couldn’t get enough of
it.
Q. Okay.
A. So
things just got very tough.
Q. Okay.
Okay. So the equity raise didn’t work. They weren’t able to raise because of
the markets at that time?
A. That’s
correct.
[41] Mosaic did not have a
line of credit with its bank. Prior to his resignation from the company, Steve
Hutchinson traveled to Winnipeg and met with the account manager of the company’s bank to
explore the possibility of establishing a line of credit for the company.
However the talks with the bank to establish a line of credit were not
successful. The Appellant indicated that the bank was simply not willing to
lend any money to them at that point in time.
[42] To reduce expenses, the
company started to lay off employees and curtailed travel for the executive and
management personnel of the company. Obviously the company also ceased hiring
new employees.
[43] They had also contacted another
brokerage company (Northern Securities) to determine if they could raise
additional funds. These talks were not successful.
[44] However another company,
Global Inter-Tech Inc. (“GITI”), was interested in Mosaic. This company had
several of the same shareholders as American Capital Partners. This company had
cash and they wanted to do a merger with Mosaic. The Appellant started working on
this proposal in August or September 2002. The documents that were submitted at
the hearing included a draft copy of the Share Exchange Offer Information Circular
which indicated that GITI had offered to exchange two GITI shares (priced at
$0.20 each) for one share of Mosaic. American Capital Partners Ltd. acted as
the agent for GITI. The share exchange offer was conditional on at least 51% of
the issued shares of Mosaic being tendered under the offer.
[45] The share exchange offer
proposed by GITI was not accepted by the shareholders of Mosaic. The Appellant
had noted that the share exchange offer would have been very dilutive to the
shareholders of Mosaic. Although the Appellant was the largest shareholder, there
were other persons who held significant numbers of shares and they were not
comfortable with the proposed share exchange. The Appellant indicated that:
A ….The
shareholders of Mosaic and the shareholders of Inter-tech Global in the end
couldn’t get their arms around who was providing what, and it just didn’t
work.
[46] The deal failed. Since
the Appellant was personally involved in negotiating with GITI in relation to
the merger, it appears to me that the reason that the merger failed was not the
fault of the Appellant.
[47] In the notes to the
Consolidated Financial Statements for Mosaic for the year ended December 31,
2002, there is also a reference to the company raising $170,000 from a
non-executive director and $350,000 from TomaNet Inc. in March 2003. The
Appellant did not address either one of these initiatives. Both are described
on the same page as the paragraph to which counsel for the Respondent directed
the Appellant’s intention on cross examination. They are described in the
second paragraph below the paragraph to which counsel for the Respondent drew
his attention during cross examination. It is not clear why the Appellant did
not mention these initiatives but since they appear in the notes to the audited
financial statements it appears that these are two other initiatives that were
undertaken to raise funds for the company. The $350,000 was described as money
to fund the immediate working capital requirements.
[48] Also in February 2003
(which would have been around the time that the share exchange offer deal
failed) the Appellant met with the auditors of the company in Saint John, New Brunswick and
engaged the auditors to sell assets to raise cash. The auditors visited the
facilities and prepared information booklets to attract offers for the assets.
In particular Mosaic was trying to sell four schools and the software
development company located in Miramichi, New Brunswick.
[49] They received expressions
of interest for two of the schools in March of 2003. The Appellant’s recollection
was that potential purchasers were interested in purchasing two of the schools for
approximate $1.3 million. However, no firm offers were received. The auditors
then arranged for interested persons to submit bids for the properties. A bid
of $1 million was received for the school in Calgary and a bid of $300,000 was
received for Pitman College. The company that bid $1 million for the Calgary school could not raise
the required funds and the sale of the Pitman College took too long and Mosaic went out
of business before the deal was completed.
[50] In the latter part of
2002, Mosaic had commenced discussions with Maxim Training Corp (UK) Limited
(“Maxim”) about a possible sale of Mosaic’s Development Group. The assets that
were being sold were intellectual property (the proprietary systems that they
had developed for online courses). On May 5, 2003 the Appellant wrote to Maxim
to outline the general terms of the proposed sale of Mosaic’s Development Group
to Maxim for $1.6 million. The parties subsequently entered into an agreement
of purchase and sale. Mosaic received a total amount of $600,000 by June, 2003
in relation to the sale of these assets to Maxim. The balance of $1,000,000 was
to be paid in September.
[51] Of the amounts received,
$100,000 was paid to the Canada Revenue Agency (the “CRA”) as partial payment
of the outstanding amounts payable by Mosaic or its subsidiary corporations for
unremitted payroll deductions or unremitted GST/HST.
[52] Mosaic never received
the balance of $1 million from the sale of its intellectual property. The
purchaser did not send the payment when it was due in September of 2003 and
went into receivership.
[53] In early 2003 the Appellant
personally started dealing with the CRA in relation to the amounts that were
outstanding from Mosaic to the CRA for unremitted payroll deductions.
[54] The first remittances
for which the Appellant was assessed, are minor amounts for penalties and
interest that are in relation to amounts that should have been remitted in
September 2002 ($14.36 for Multimedia Ventures (Alberta) Inc. and $6.43 for 6678 British Columbia
Limited). There are significant amounts that relate to the period from October
1, 2002 to November 30, 2002 for Multimedia Ventures (Alberta) Inc. ($10,318.83 of federal tax)
and for 6678 British Columbia Ltd. ($7,696.03 of CPP) and for periods after
that time.
[55] It appears from the
schedules that the assessment against the Appellant for unremitted amounts
essentially relates to the remittances that should have been made in December
2002 and thereafter. It appears that some amounts were paid in relation to the
remittances that were due after this date but obviously any payments were not
sufficient. The assessments cover more than one month in several instances and
it is not possible to determine how much of the assessment relates to each
month during the period. It would appear that of the amount assessed against
the Appellant, only $6,380.09 (or 1.3% of the total amount assessed of
$509,868.07 in relation to unremitted payroll deductions) relates to amounts
that it appears should have been remitted before December 2002.
[56] The periods identified
in the Reply are not uniform for each company (for example some periods for
Mosaic are for one-half of a month (e.g. January 16, 2003 to January 31, 2003),
others are for two months (e.g. January 1, 2003 to February 28, 2003) and
others are for the year (January 1, 2002 to December 31, 2002). Some periods
overlap other periods. As well there is no indication of the amount that should
have been remitted for each period. The issue in this case is whether the
Appellant has met the standard of care imposed upon him pursuant to subsection
227.1(3) of the Income Tax Act to prevent the failure to
remit. Therefore it seems to me that it is important to determine what amounts
the company failed to remit and when such amounts should have been remitted so
that the actions that the Appellant took prior to such failure to remit can be
examined to see if such actions satisfy the standard of care as set out in
subsection 227.1(3) of the Income Tax Act. A better way to organize the
information would have been to identify for each particular period of time for
which amounts should have been remitted, the amount that should have been
remitted for such period, the date such amount should have been remitted, the
amount that the CRA has received in relation to such period, and the date that
the payment was made. The penalties and interest arise because amounts were not
remitted as and when they should have been remitted and could be calculated
based on the above information. It seems to me that in determining whether the
Appellant has met the standard of care imposed upon him, the critical
information relates to the actual remittances that should have been made (and
were not) – i.e. what should have been remitted and when should it have been
remitted – so that the actions of the directors taken to prevent
the failure to remit can be examined.
[57] It is impossible to
discern from the information as presented any particular amount that the companies
did remit for the period from December 2002 to August 31, 2003. It is also not
possible to determine how payments were applied by the CRA and whether, for
example, a payment for a remittance for February 2003 may have been applied to
an earlier outstanding balance. Counsel for the Respondent (with the consent of
counsel for the Appellant) submitted into evidence copies of diary information
printed from CRA’s computer system. In total approximately 620 pages of
information were submitted. Perhaps buried somewhere deep within this mound of
paper lies the answer to these questions. In my opinion it is not appropriate
to simply submit huge volumes of paper and then expect the Judge to be able to
find some nugget of relevant facts buried deep within the mound of paper. The
parties are the ones who are familiar with the facts and the documents that are
being submitted and if there is some part of the document that is relevant, the
parties should highlight that part. In any event it appears that the diary
notes deal with the actions taken to collect the outstanding arrears and the
responses received from the representatives of Mosaic. Therefore these deal
with the actions or steps taken to cure the defaults, not the actions or steps
taken to prevent the failure to remit.
[58] In Worrell v. R., [2000] G.S.T.C. 91, 2000 D.T.C. 6593,
[2001] 1 C.T.C. 79, all of the Justices of the Federal Court of Appeal agreed
that the directors in that case had satisfied the due diligence test in
subsection 227.1(3) of the Income Tax Act and subsection 323(3) of the Excise
Tax Act. Justice Evans stated, in that case, that:
77 Given the
limitations placed upon them by the bank's de facto control of the company's
finances, I am satisfied that, on the facts of this case, the directors
exercised the degree of care, diligence and skill to prevent failures to remit
that would have been shown by a reasonably prudent person in comparable
circumstances. That Ms. McKinnon continued to prepare remittance cheques,
admittedly without a realistic hope that the bank would honour them all, also indicates
that the directors were not unmindful of the company's debt to Revenue Canada.
78 Much
more important, in my view, were Mr. Humphreys' continued efforts to find a new
investor, given his belief that the company could then quickly be turned around.
He told the directors that he was confident that a new investor could be found.
Indeed, he identified potential investors within two weeks of being hired,
spoke with twelve people who expressed an interest in investing in Abel and
produced one who was willing to invest, but who proved unacceptable to the bank
for reasons that are not disclosed.
79 As long
as these efforts were being made in good faith by a person with a successful
track record in rescuing companies in the construction industry, the directors
of Abel could reasonably say that, if an investor were found and approved by
the bank, the company would obtain bonding and be in a position to bid on
lucrative contracts, which might well have persuaded the bank to increase its
line of credit again or, at least, to honour Abel's next remittance cheque.
80 Hence, if
Mr Humphreys had succeeded in finding an investor acceptable to the bank, the
failures to remit might have been prevented. The fact that, in the event, he
was not successful and the failures occurred, does not render the directors
liable if they had made reasonable efforts to prevent them. The Court would be
reluctant to second guess the likely efficacy of the directors' efforts to
prevent failures to remit from occurring.
81 However,
it would not have been open to the directors to have relied indefinitely on Mr.
Humphreys' advice if there was no indication of potential investor interest in
the company. The company's viability and the likelihood of its attracting new
investors would have had to be reassessed from time to time in order for the
directors successfully to invoke the due diligence defence provided by
subsection 227.1(3).
(emphasis added)
[59] The directors in that
case were directors of Abel Metal Limited (“Abel”). The facts of that case are
summarized by Justice Evans as follows:
7 Abel had
been in business in the Toronto area for the best part of thirty years,
manufacturing and supplying non-structural metal components used in
construction. During the recession that hit the construction industry in the
late 1980s and early 1990s Abel suffered serious losses. It began to experience
financial difficulties in the fall of 1992, which continued into the following
year. Nonetheless, in 1993 it still employed seventy people.
8 Abel's
bank, the Canadian Imperial Bank of Commerce, expressed concern over the
company's April 1993 financial statement. As a result, one of the directors,
Mr. Lapointe, gave a personal guarantee to the bank of Abel's debt, which then
stood at $1.6 million. Abel had reached the limit of its credit line by either
the fall of 1992, or early in 1993. Although in the past Abel had always paid
its bills, on September 30, 1993 the bank dishonoured a company remittance
cheque to Revenue Canada for insufficient funds, without giving
prior notice to its customer.
9 Abel's
already difficult financial situation had been made worse when its request for
bonding in June 1993 was refused because there was insufficient equity in the
company. The formal letter of refusal from the bonding company was dated August
30, 1993. Unless Abel could come up with new capital of some $350,000, or find
another source of bonding, the refusal of bonding would severely limit its
ability to obtain profitable new contracts and to contain its already serious
cash flow problem.
10 In an
attempt to extricate itself from its financial troubles, on October 16, 1993
Abel engaged a Mr. Humphreys, a chartered accountant, who had had considerable
success in assisting other companies in the construction industry that had
fallen into financial difficulty. Together with two of Abel's directors, he met
with bank officials to discuss the bank's concerns and to try to work out
solutions.
11 However,
on October 18, only two days later, the bank dishonoured a cheque for $46,000
drawn by Abel in favour of the Receiver General of Canada in respect of September payroll source deductions. At about the same
time, the bank started to reduce the company's line of credit. In a letter
dated October 22, 1993 the bank informed Abel that it should be careful not to
issue cheques that would take it beyond its credit limit with the bank. The
bank also appointed BDO Dunwoody to “monitor” Abel's finances and to report to
the bank on the company's prospects.
12 The bank
also required the directors of Abel to seek approval almost daily for
permission to pay the company's creditors. After the October cheque was
dishonoured for insufficient funds, it was clear both to the directors and Mr.
Humphreys that the bank could not be counted on to honour any cheques issued by
Abel in respect of G.S.T. or source deduction remittances. Nonetheless, Ms.
McKinnon continued to prepare remittance cheques in the hope that the bank
would honour them, which, on a few occasions, it did on a discretionary basis.
13 Mr.
Humphreys was satisfied that Abel was a viable company: it was well established
in the construction business and had weathered previous cyclical downturns in
the industry. His view was that, with an injection of new capital, the company
could be turned around quickly and, even if none were forthcoming, Abel would
be profitable within eighteen months.
14 Despite
strenuous efforts, Mr. Humphreys could produce only one potential investor, but
he was not acceptable to the bank. At this point, on April 27, 1994, the bank
decided to call in its loans and Abel filed for bankruptcy. The company
probably had been insolvent for the previous twelve months, even though it had
apparently paid all its bills before the bank first dishonoured the first
remittance cheque in September 1993.
15 Nearly
all of the company's debt to Revenue Canada for unremitted
payments, from which the respondents' personal liability derives, accrued after
October 18, 1993 when the bank started to exercise control over the cheques
issued by Abel. After Abel filed for bankruptcy, the trustee paid some of the
money owing, namely, all the outstanding employee portions of the deductions.
However, the employer portions of C.P.P. and U.I., and the G.S.T., were not
paid. The unpaid remittances (including interest and late payment penalties)
amounted to $133,747.00 and were the subject of the assessments with which this
appeal is concerned.
[60] The bank in Worrell
reduced the line of credit that had been available to the company. In this
case, Mosaic did not have a line of credit and the bank refused to provide a
line of credit to the company. It is important to note that Justice Evans
placed particular emphasis on the continued efforts to find new investors as he
described these efforts as being “much more important”. In this case, the
Appellant pursued several options in 2002 and 2003 to obtain an investor. It
seems to me that if any of these initiatives would have been successful, the
required remittances would have been made.
[61] In The Queen v. Wheeliker
[1999] 2 C.T.C. 395, 99 D.T.C. 5658 the Federal Court of
Appeal held that the directors were liable for the unremitted payroll
deductions of the non-profit corporation of which they were directors. Justice Létourneau stated that:
50 The evidence revealed that no
positive steps were taken to prevent the Corporation's failure to remit current
and future source deductions when it started to experience financial
difficulties. At the January 13 and February 3, 1993 meetings, no action was
taken by the directors with respect to the matter.
[62] In this case positive
steps were taken by the Appellant as noted above.
[63] Counsel for the
Respondent referred to the case of Comparelli v. The Queen, 2009
D.T.C. 1057, [2009] 5 C.T.C. 2005. However it seems clear that the
company in that case had little revenue and the efforts of the director in that
case to find new investors did not occur until “almost five months after the
failure to remit had occurred”. The efforts of the director in
that case were directed at curing defaults after the failure to remit had
occurred and not in preventing the failure to occur.
[64] In Smith v. The
Queen, 2001 FCA 84, [2001] 2 C.T.C. 192, 2001 D.T.C. 5226,
Justice Sharlow writing on behalf of the Federal Court of Appeal, stated that:
31 The Tax
Court Judge appears to have recognized the efforts made by Mr. Smith in
and after June of 1995, but he noted, at paragraph 138:
The actions that he took did not have the
effect of ensuring that Revenue Canada received any of the monies here.
and, at paragraph 142:
The Court is satisfied that the actions
taken by the Appellant did nothing to prevent the failure.
32 It
appears to me that these comments reveal another error in the Tax Court Judge's
application of the due diligence defence. A director is required only to
act reasonably in the circumstances. The fact that his efforts are unsuccessful
does not establish that he has failed to act reasonably.
(emphasis added)
[65] In McKinnon
(referred to above), then Associate Chief Justice Bowman stated as follows:
16 I revert
then to the question “what could Mr. McKinnon reasonably have done to prevent
the failure?” The single most significant contributing factor was the wholly
unexpected refusal of Rideau to pay the agreed amount. Mr. McKinnon instructed
his lawyer to proceed with legal actions but this is time consuming and
expensive and was met with stonewalling, prevarication and arrogance by Rideau
and its lawyers. Mr. McKinnon did all he could to keep the company afloat and
ensure that its obligations were met. I regard the Canada Customs and Revenue
Agency's stock response of “You should have pulled the plug and let the whole
business go down the drain” as neither commercially realistic nor morally
defensible. It implies that a person, such as Mr. McKinnon, who has put all he
owns and all his time into the creation of a business can simply walk away from
it and abandon all he has built up and leave his employees and their families
in the lurch. If everyone did this it would mean that many more businesses that
manage to survive would simply fold as soon as the going gets rough.
17 These
cases are usually difficult. We start from the irrefutable fact that the
payroll deductions or goods and services tax were in fact not remitted and so
the CCRA looks to the directors. If one is so minded it is as a rule easier to
dismiss an appeal by a director than to allow it. Frequently the director who
is assessed is in difficult financial straits, cannot afford a lawyer and
attempts to represent himself or herself. It is easy for the CCRA or the judge,
with the benefit of hindsight, to tell the director all of the things he should
have done. Here the CCRA is telling Mr. McKinnon “you should not have gotten
into the business in the first place and once in it you should have gotten out
sooner” I dare say that might have prevented the failure but everyone,
including the government would have lost. That course of action would have been
unreasonable.
[66] It seems to me that we
have the same question in this case. What more could the Appellant have done?
It must be remembered that his actions have to be examined in light of the
circumstances and information that was available at the time. Knowledge of subsequent
events cannot now be used to second guess his decisions. It seems to me that
perhaps the single most significant contributing factor to the unremitted
payroll amounts is the hiring of additional staff to fulfill the obligations
that would have arisen under the contract to provide training to Nortel. This
was a very substantial opportunity for the company. Nortel and its financial
highs and lows have certainly been the subject of media attention. I take
judicial notice of the fact that Nortel did not file for bankruptcy protection
until January of 2009. It is easy, knowing what we know now, to criticize the
decision to hire additional staff based on a letter of intent to provide
services to Nortel. However as noted by the Supreme Court of Canada in Peoples Department Stores Inc. (Trustee of):
67 Directors and officers will not be held
to be in breach of the duty of care under s. 122(1)(b)
of the CBCA if they act prudently and on a reasonably informed basis. The
decisions they make must be reasonable business decisions in light of all the
circumstances about which the directors or officers knew or ought to have
known. In determining whether directors have acted in a manner that breached
the duty of care, it is worth repeating that perfection is not demanded. Courts
are ill-suited and should be reluctant to second-guess the application of
business expertise to the considerations that are involved in corporate
decision making, but they are capable, on the facts of any case, of determining
whether an appropriate degree of prudence and diligence was brought to bear in
reaching what is claimed to be a reasonable business decision at the time
it was made.
(emphasis added)
[67] It seems to me that the
decision to hire the additional employees in anticipation of the proposed
contract with Nortel would have been a reasonable decision when it was made. It
must be remembered that this decision was made in 2000 or 2001, several years
before Nortel went into bankruptcy.
[68] After the events of
9/11, when the Appellant knew that the business environment had changed, he
took positive steps to obtain new capital for the company. Several steps were taken
before the first failure to remit payroll deductions that is the subject of
this appeal. There were discussions with American Capital Partners about a
capital injection of $750,000 (which appear to have advanced beyond a
preliminary discussion phase), the CFO met with the account manager of Mosaic’s
bank to determine if the bank would establish a line of credit for the company,
the company laid off employees and reduced other expenses, the company had some
discussions with Northern Securities (which appear to have not progressed
beyond a very preliminary stage) and the Appellant worked on a proposed share
exchange deal with GITI. The talks with the representatives of GITI commenced
in 2002. All of these steps were taken before any significant defaults, which
are in issue in this appeal, occurred.
[69] It also seems reasonable
that while the Appellant is trying to arrange for a capital injection or a
merger or the sale of a division or assets, that the company should continue to
operate as long as there is a reasonable expectation that such events would
occur. It does not seem to me that this reasonable expectation would have ended
before the deal with GITI collapsed. After the deal with GITI collapsed in
February 2003, the steps changed from seeking capital injections to liquidating
assets. It seems to me that the liquidation of assets was more directed towards
paying arrears (or correcting defaults) than it would be in preventing defaults
from occurring.
[70] There would be a time
delay from the time when the GITI deal collapsed and the employment of
employees could be terminated. Reasonable notice is required to terminate
employment without cause. As Justice Major noted in The Queen in
right of the Province of British
Columbia v. Ossie Sylvester, [1997] 2 S.C.R. 315:
1 Employment
involves, among other things, a contract between the employer and employee. An employee
who is wrongfully dismissed without reasonable notice of termination is
entitled to damages for breach of contract. These damages represent the salary
the employee would have earned had the employee worked during the notice
period, less any amounts credited to mitigation.
[71] Employees simply cannot be
dismissed without proper notice. This would mean that the obligation to pay
salaries (or compensation for proper notice) will continue after any decision
is made to dismiss employees and such costs (which will give rise to requirements
to remit amounts under the applicable legislation) will be incurred regardless
of whether the company has sufficient revenue to cover such costs. No third
party is necessarily providing the funds to the company to cover such costs.
[72] As well since Maxim was
acquiring a division it seems reasonable that the employees of that division
would be retained until the sale was completed and it seems to me that the
Appellant would have had a reasonable expectation that the deal with Maxim
would close.
[73] As a result, in my
opinion, the Appellant has met the standard of care required by him in relation
to the unremitted payroll amounts that are the subject of this appeal. As
noted, the appeal does not relate to the amounts that were assessed in relation
to the income tax that should have been remitted under any provincial income
tax statute and the penalties and interest that relate to those amounts.
Unremitted GST/HST
[74] As I had noted above, it
seems to me that the liability of the Appellant for unremitted GST/HST amounts
should be analysed separately. While the same standard of care will apply for
the purposes of subsection 323(3) of the Excise Tax Act, the
circumstances related to the failure to remit GST/HST are different. The
decisions and actions of the Appellant in relation to the remittance of net tax
under the Excise Tax Act are different from the decisions and actions
related to the payroll deductions.
[75] There are two amounts of
unremitted GST/HST that are in issue in these appeals. The first is for the period
from January 1, 2003 to March 31, 2003 and the amount of unremitted GST/HST is
$86,614. The second is for the three month period immediately following this
first period and the amount of unremitted GST/HST for this period is $53,827.
The Appellant did not challenge either of these amounts. While there is no
third party who directly provides the funds for payroll deductions (which have
to be paid from whatever sources of funds the employer may have), the recipient
of the particular taxable supply does pay the GST/HST to the supplier.
[76] The obligation to remit
GST/HST is an obligation to remit the net tax which is the difference
between the amount of GST/HST that was collectible (or collected) in a
particular reporting period and the input tax credits that are claimed by the
supplier in accordance with the provisions of the Excise Tax Act. Therefore
even though a particular supplier has made taxable supplies (and therefore has
GST/HST that is collectible or collected), that supplier will not have an obligation
to remit an amount in relation to a particular reporting period if the input
tax credits claimed for that reporting period exceed the amount that is
collectible or collected for that reporting period.
[77] In this case, the
Appellant indicated that Robert Baird was preparing the GST/HST return for the
period from January 1, 2003 to March 31, 2003 and Robert Baird had indicated to
the Appellant that the company would be entitled to a refund. Robert Baird did
not testify at the hearing.
[78] The assessment for
unremitted GST/HST only relates to Mosaic. It is not clear whether the other
companies were also making taxable supplies or whether all taxable supplies
were made by Mosaic. The assessment for the period from January 1, 2003 to
March 31, 2003 is based on the GST/HST return that was prepared by Robert Baird
and which was filed after the filing due date for this return. This return indicates
that the following was the amount of the total sales and the amount of the GST/HST
that was collected or collectible:
Total Sales: $219,931.00
GST/HST collected or
collectible: $110,636.89
[79] This would indicate a
sales tax rate of slightly over 50%. Obviously something is not correct. But
what? The Appellant did not lead any evidence in relation to this matter. It is
possible that the sales amount is incorrect, the GST/HST collected or
collectible amount is incorrect or both are incorrect. Without any evidence I
am unable to determine which amount or amounts are incorrect. It seems to me
that since the GST/HST collected or collectible amount has a direct bearing on
the liability to remit net tax, that it is more likely than not that greater
care would be taken to ensure that this amount is correct. In any event, the
Appellant did not challenge the amount assessed as net tax of $86,614.46 (which
is the $110,636.89 amount referred to above minus input tax credits claimed of
$24,022.43).
[80] Net tax, for the
purposes of the Excise Tax Act, is based on GST/HST collected or
collectible on taxable supplies and available input tax credits. Simply because
the company was losing money does not necessarily mean that the company has
input tax credits that exceed its GST/HST collected or collectible. There was
no evidence nor was there any discussion of whether any of the schools operated
by Mosaic or its subsidiaries qualified as vocational schools for the purposes
of Part III of Schedule V to the Excise Tax Act. A supply, other than a
zero-rated supply, that is made by a vocational school and that is described in
paragraph 8 of Part III of Schedule V to the Excise Tax Act, is an
exempt supply for the purposes of the Excise Tax Act. GST/HST payable in
relation to property or services acquired for the purpose of making exempt
supplies will not give rise to input tax credits. According to the consolidated
financial statements for Mosaic for 2002, the amounts incurred for salaries and
wages was greater than any other expense item. No GST or HST is payable in
relation to salaries and wages and therefore no input tax credit would be
generated by this expenditure. There may also be other expenditures on which no
GST/HST would be paid. An amount is shown in the consolidated financial
statements for Mosaic for 2002 as “Head office general and administrative”
which could include salaries for head office or administration staff.
[81] In order for the
Appellant to establish that it was reasonable for him to do nothing in relation
to the remittance of GST/HST for the period from January 1, 2003 to March 31,
2003, it seems to me that it would have been necessary to hear from Robert
Baird to confirm the accuracy of his comments and to explain the circumstances
related to his comments that the company would be entitled to a refund under
the Excise Tax Act for this period. The Appellant also did not adduce
any evidence with respect to the amount of taxable supplies made by the company
during the period from January 1, 2003 to March 31, 2003. Since a large portion
of the company’s expenses were for salaries (which would not generate input tax
credits), it does not seem to me that the Appellant has established that it
would be reasonable to assume that the company would be entitled to a refund
under the Excise Tax Act for this period.
[82] The GST/HST amounts
would be funded by a third party (the customers who paid GST/HST to the
company). There is no indication of any positive steps that the Appellant took
in relation to the obligation to remit net tax under the Excise Tax Act
(which the company would have received from its customers) on April 30, 2003
and July 30, 2003. According to the GST/HST return filed by Mosaic, the company
collected (or had the right to collect) $110,636.89 of GST/HST for the period
from January 1, 2003 to March 31, 2003 which was $24,022.43 (the amount of its
input tax credits) greater than its liability for net tax. No explanation was
provided to explain why the net tax amount was not remitted by April 30, 2003.
Neither did the Appellant provide any explanation for why the net tax amount of
$53,827 was not remitted for the subsequent period. Prior to the time when
these amounts were to be remitted (April 30, 2003 and July 30, 2003) the
company had switched from trying to locate additional capital to liquidating
assets. The liquidation of assets was not undertaken to prevent failures to
remit GST/HST. As noted by the Appellant, the decision to sell assets was made
to realize cash so that the company could pay its bills. This would be done to
cure defaults in remittances, not prevent failures to remit. As a result, it
does not seem to me that the Appellant has satisfied the standard of care imposed
on him pursuant to subsection 323(3) of the Excise Tax Act to prevent
the failure to remit the net tax that was payable on April 30, 2003 and July 30,
2003.
Conclusion
[83] The appeals from the
assessments of the Appellant as a director of Mosaic and its subsidiary
corporations are allowed and the matter is referred back to the Minister of
National Revenue for reconsideration and reassessment on the basis that the
Appellant is not liable as a director of Mosaic, Multimedia Ventures (Alberta)
Inc., Multimedia Ventures Inc., and 6678 British Colombia Ltd. for any amounts
that any of these companies failed to remit under the Income Tax Act
(Canada), the Canada Pension Plan or the Employment Insurance Act
or any of the penalties and interest related to these amounts.
[84] The appeal from the
assessment of the Appellant as a director of Mosaic for the unremitted GST/HST
amounts together with the related interest and penalties is dismissed.
[85] Since the Appellant was
partially successful, no costs will be awarded.
Signed at Toronto, Ontario, this 6th day of May, 2010.
“Wyman W. Webb”
Email this Content