Citation: 2012 TCC 425
Date: 20121206
Docket: 2011-1543(GST)I
BETWEEN:
CHANTAL CONSTANTIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Masse D.J.
[1]
This is an appeal from
a reassessment dated August 28, 2008, and bearing the number PL2008-363, made
under subsection 323(3) of the Excise Tax Act (ETA) in respect of the
appellant, Chantal Constantin, in her capacity as a director of a corporation. The
corporation in question is 9121-1482 Québec inc., which operated a business
specializing in sign installation and lighting services under the name of EFN
Installation et Service (the corporation or the company). The assessment was
for a total of $136,028.65 made up of Goods and Services Tax (GST) that the
corporation should have remitted under subsection 228(2) of the ETA for the
period in question, from November 30, 2003, to August 31, 2007, and related
interest and penalties. The assessment was confirmed by a decision on the
objection dated February 21, 2011. Hence this appeal.
[2]
During the period at
issue, the appellant was the sole director and sole shareholder of the
corporation. It is undisputed that the corporation is a legal person duly
incorporated and registered for the purposes of Part IX of the ETA. It failed
to remit the tax amounts that it should have remitted, and the appellant does
not dispute the assessment made in respect of the corporation.
[3]
The only issue in this
case is whether the appellant exercised the degree of care, diligence and skill
to prevent the failure that a reasonably prudent person would have exercised in
comparable circumstances.
Factual background
[4]
The appellant, Chantal
Constantin, and Denis Dubois are a couple and have lived together for over 25
years as common-law partners. They have two children and they are still living
together. The appellant is a
professional who works at the Centre de santé et de services sociaux de Laval. Mr. Dubois is a businessman who has
operated various companies in the lighting field over the years.
[5]
In 2003, Mr. Dubois
purchased a business, EFN Installation et Service, which operated under the
name 9121-1482 Québec inc. He did this with the aim of operating a sign
installation and lighting services business. Mr. Dubois asked his spouse, the
appellant, to be the sole shareholder and director of the company in order to
share the risks inherent in business and to protect the couple's assets. Mr.
Dubois took care of all aspects of managing the company. He made all decisions.
The accounting was done internally as was everything relating to tax
obligations. Ms. Constantin never worked in the business. She never
solicited clients; she never did any administration; she never even signed one
cheque. According to Mr. Dubois, she did nothing for the business. Mr.
Dubois took care of everything and Ms. Constantin was only the director [Translation] "in the books".
[6]
Mr. Dubois showed a
great lack of judgment regarding finances. For reasons that need not be listed
here, in the course of several years, Mr. Dubois became indebted to crooks for
$125,000. The crooks were charging him a very high usurious interest rate of
10% per month (that is $12,500 per month), and, if he did not pay, reprisals
would be taken against him. Mr. Dubois eventually found it impossible to
continue paying these excessive amounts. He therefore began receiving unsubtle
threats. Mr. Dubois was threatened and harassed almost daily, even at home. He
testified that the only way out of it was to participate in a scheme hatched by
one of the crooks, a Mr. Robert Beaudry, which consisted in providing
accommodation invoices to Mr. Beaudry's clients. The scheme involved a
cheque-cashing centre called Arylo. There is no need to describe the minute details
of how the scheme worked; suffice it to say that it was a fraudulent scheme. The
scheme lasted from 2004 to 2007. During that period, Mr. Dubois told the appellant
nothing; he kept her completely in the dark. She was never informed of anything
regarding the fraudulent scheme.
[7]
The appellant became
the director and shareholder of the corporation in March 2003, and the
corporation failed to make GST payments shortly after since the period in
question starts on November 30, 2003. Around June 2007, Ms. Longpré,
auditor at Revenu Québec, audited the corporation. During the audit, it was
Mr. Dubois who communicated with Ms. Longpré. Ms. Longpré allegedly wanted
to ask Ms. Constantin some questions, but Mr. Dubois told her that Ms. Constantin
knew nothing about the company. Ms. Constantin did not know about the audit;
however, she signed a power of attorney authorizing Mr. Dubois to communicate
with Revenu Québec on her behalf. Mr. Dubois presented the power of attorney to
Ms. Constantin, telling her that he must speak with the government, but not
giving her any more explanations than that. She signed it.
[8]
Finally, in September
2008, Mr. Dubois confessed to Ms. Constantin. She suspected that there was
something wrong and asked him what it was. Mr. Dubois told her everything.
Ms. Constantin demanded that he not register any other businesses under her
name and wanted him to [Translation]
"get her out of there". Then, Mr. Dubois denounced Mr. Beaudry and
his crooked associates to the police. Legal proceedings were instituted, and as
a result Mr. Beaudry was sentenced to imprisonment.
[9]
Of course, Mr. Dubois
had financial difficulties with the business, and therefore the bank sometimes
delayed the payment of cheques he deposited, which created a cash-flow problem.
This interfered with the sound operation of the business. Therefore, he needed "cash
flow", and he stated that he had brought Ms. Constantin to Rapide
Chèque and Arylo, two cheque-cashing centres, to sign documents authorizing the
opening of accounts at these centres. He explained that the bank [Translation] "froze" his
clients' cheques and that he needed [Translation]
"cash quickly" in order to continue operating the business.
[10]
From time to time, Ms.
Constantin asked him about the company; she asked him [Translation] "how it was going". He always told
her that it was going well, but that there were sometimes bad debts. He never
told her the real situation. He stated that he and Ms. Constantin had the
authority to sign the corporation's cheques, but that she had not signed any. Ms.
Constantin was not involved in any way in the banking; all she did was sign
some documents from time to time. When the assessments were made in respect of
the company, Mr. Dubois did not dispute them. The company ceased operations in
2007. He explained to the appellant: [Translation]
"The company is no longer operating; we're going to get rid of it. There
is no point keeping it."
[11]
He said that he had had
a visit to his home that he described as a threat when his daughter aged 14 or
15 at the time was home. Ms. Constantin was not there. One must wonder why the
daughter said nothing to the appellant. Mr. Dubois was very upset by the
threats, which he continued to receive, but he did not tell Ms. Constantin
about them before 2008. He said that his spouse never spoke to him about her
role as director of the company. She knew that she was the sole director of the
company, but she never asked him any questions about her responsibilities as
director. She did not worry about the risks related to the company. She did not
ask him questions regarding the payment of taxes by the company because she
knew that it was the accountant who prepared the financial statements. According
to Mr. Dubois, she never worried about anything else because she knew that
he was working with professionals. However, she always saw the financial
statements. In September 2004, when Mr. Dubois brought the appellant to the
cheque-cashing centre Rapide Chèque, he told her that the company was having
some [Translation] "minor"
financial difficulties and that it was [Translation]
"temporary". In November 2005, when he brought her to the cheque-cashing
centre Arylo, he explained to her that it was more secure than Rapide Chèque.
[12]
The appellant
testified. She has been a social worker and has worked full time at the Laval
CFFF for 26 years. She has no training in accounting or management and has no
experience in business management. Mr. Dubois and she have lived together for
25 years, and they have two children aged 19 and 17. She told the Court that
she had signed the documents that made her director at Mr. Dubois' request in
order to protect his assets against another person with whom he did business. She
said that her spouse is a businessman and that she had trusted him completely. She
testified that she had done almost nothing for the EFN company. She was not
involved at all in the corporation's internal decisions. It was her spouse who
took care of everything. However, she said that she had signed financial
statements or other documents when Mr. Dubois brought them to her to be signed.
She invested nothing in the business and she had never received any
remuneration whatsoever. She was never on the business's premises. She said
that she had asked Mr. Dubois questions to see how things were going as much
regarding EFN as the other companies. These questions were general: for
example, [Translation] "how
was his day" and [Translation]
"is everything going well?" Her spouse did not tell her very much,
other than from time to time mentioning that he had gone to see the accountant,
that he had the financial statements or that he had bad debts. She did not ask
him for more details. Between 2003 and 2007, she did not suspect anything and
had not the slightest suspicion about Mr. Beaudry and other people's threats
and harassment of her spouse. She knew nothing about the false invoice scheme. She
found out only at the end of August 2008 when her spouse confessed to her and
told her about everything.
[13]
She admitted that, on
September 27, 2004, she had signed Exhibit P-6 at her spouse's request. Exhibit
P-6 is the document authorizing the opening of an account at Rapide Chèque, a
cheque-cashing centre. By signing, the appellant, as a surety, personally
undertook to cover any cheques given to Rapide Chèque by the company. She
authorized Denis Dubois to cash the company's cheques. She said that her spouse
had explained to her that the company had been having [Translation] "minor", "temporary"
difficulties, that the bank was late – this could take a week or two – paying
the company's cheques and the company needed cash right away, which would
enable it to continue operating. She asked him about the financial difficulties
experienced by the company, but Mr. Dubois' explanations satisfied her. She
also admitted that, on November 2, 2005, she signed Exhibit P-7, which is the
document authorizing the opening of an account at Arylo, another cheque-cashing
centre. This was again done at her spouse's request and for the same reasons he
previously gave. But this time he added another one, namely, that Arylo was
more secure than Rapide Chèque.
[14]
The appellant stated
that she had signed the annual declarations for the Registraire des entreprises
du Québec for 2003 and 2005 and that her spouse signed the one for 2004. When
she signed these documents, she asked him [Translation]
"what the papers were" and he simply told her that they were for the
company. In 2008, when she found out about the false invoices and the threats,
she told him: [Translation] "You're
going to get me out of there. I don't want anything to be in my name anymore".
She insisted that he go to the police.
[15]
In cross-examination,
she said that, although she was the sole director and shareholder, she had no
knowledge of the risks she was facing as a director even though she knew that
there were risks. She did not seek out information about this. She admitted
that, on February 4, 2003, she signed as president and secretary of the company
the paperwork for opening a business account for the company at the National
Bank (see Exhibit I-3). She signed a power of attorney/registration for GST/QST
and source deductions dated January 10, 2003, authorizing five employees to
take the steps needed to register the company for the purposes of GST and
Quebec Sales Tax (QST) and for the purposes of tax deductions at source (see
Exhibit I‑4). As president, she signed a power of attorney dated February 3,
2003, authorizing Mr. Dubois to sign for her all cheques she made on
behalf of the company (see Exhibit I‑5). She signed a letter dated
November 3, 2003, informing Revenu Québec of a change of address for the
payments of GST, QST, source deductions and income tax (see Exhibit I-6). She
signed a resolution of signature (undated) that stated that Denis Dubois
was the company's representative and that he exercised management powers
consisting in issuing, accepting, endorsing, receiving payment for, negotiating
and discounting any cheques, promissory notes, bills of exchange or other
negotiable instruments (see Exhibit I-7). She admitted that she had signed a
power of attorney dated November 18, 2005, authorizing a client to issue
cheques payable to Denis Dubois following supplies made by the company (see
Exhibit I-8). She also signed a document dated September 5, 2007, authorizing
Revenu Québec to communicate confidential information regarding the company to
Denis Dubois and naming Mr. Dubois as her representative and agent with the Ministère
du Revenu du Québec (see Exhibit I-9). She was not aware of the fact that
Revenu Québec was conducting an audit in June 2007. Her spouse did not tell her
anything about an audit when she signed Exhibit I-9. She told the Court that
she had looked at the financial statements but that she had asked her husband
very few questions about the documents despite the fact that the sales for 2005
had dropped a great deal compared to the previous year. She told the Court
that, although she had seen the financial statements, she had not read them line
by line.
The appellant's position
[16]
The appellant maintains
that she was only an outside director and that she had exercised the diligence
that a reasonably prudent person would have exercised in comparable circumstances.
The appellant trusted her spouse, who is an experienced businessman. She also
trusted the company's accountants to tell her if something was wrong with the
business. The appellant asked her spouse general questions in order to find out
what was going on with the business. Unfortunately, in the circumstances, her
spouse misled her; he straight out lied to her and kept her in the dark about
the real situation. She could do nothing to prevent the corporation's failure
as she had not the slightest inkling of anything that would make her suspect
that the company failed to meet its tax obligations. The appellant stated that,
in this factual context, she had exercised the diligence that a reasonably
prudent person would have exercised in comparable circumstances. In addition,
she argues that there is nothing in the factual background of this case that
could lead to the conclusion that she was wilfully blind to the company's real
circumstances. In sum, her spouse lied to her, misled her and deliberately kept
things from her. Therefore, the appellant argues that she should not be liable
as a director following the company's failure.
The respondent's position
[17]
The respondent claims
that the appellant did not show that she had exercised the degree of care,
diligence and skill to prevent the failure that a reasonably prudent person
would have exercised in comparable circumstances. The respondent maintains that
the appellant did not carry out her duties as a director on an active basis and
in a positive manner and that, indeed, she did nothing at all. According to the
respondent, she cannot use her inaction as a defence against a claim for
malfeasance. In addition, the appellant could have known and should have known
that the company was having tax problems because she knew that the company had
financial problems. She did not worry about the company's tax remittances
despite the fact that she had a positive duty to do so. She left everything up
to her spouse even though she, in her capacity as director, had the obligation
to do what was needed. She signed all documents that needed to be signed, which
were given to her by her spouse; she signed them voluntarily, without being
constrained or threatened, but refused to learn about their importance. She had
enough doubts to wonder, but she refused to ask questions or to go further to
find out the real state of things. The respondent maintains that the appellant
practiced the ostrich's philosophy and hid her head in the sand so as to know
nothing. She was wilfully blind, and, moreover, she completely abdicated her
responsibilities, transferring them to her spouse. It was not a delegation of
responsibilities but rather a total abdication of all her powers and all her
responsibilities. This cannot constitute due diligence.
Statutory provisions
[18]
The relevant provisions
of the ETA are as follows:
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.
. .
.
(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.
[19]
The only issue is
whether the appellant, in her capacity as director, "exercised the degree
of care, diligence and skill to prevent the failure that a reasonably prudent
person would have exercised in comparable circumstances", as required by
subsection 323(3) of the ETA, thereby avoiding liability under subsection
323(1) of the ETA.
Analysis
[20]
In Soper v. Canada,
[1998] 1 F.C. 124, 149 D.L.R. (4th) 297, 97 DTC 5407, [1997] 3 C.T.C. 242, 1997
CanLII 6352, the Federal Court of Appeal summarized the principles governing
the liability of directors of corporations. In
carrying out the duties of his or her position, a director must act with
integrity but also show a degree of skill and diligence. A director need not exhibit in the
performance of his or her duties a greater degree of skill than may reasonably
be expected from a person of his or her knowledge and experience. It is an "objective
subjective standard". That is to say, the standard is partly the standard
of the reasonable person, but it is defined based on the knowledge and
experience of the particular individual. A director is not bound to give
continuous attention to the affairs of his or her company, but the common law
would not permit directors to adhere to a standard of passivity and
irresponsibility. A director who acts irresponsibly – for example, by not
attending all board meetings – does so at his or her own risk. Having regard to
the needs of the business itself and the requirements of the articles of
association, powers and responsibilities may properly be left to some other
official, a director is, in the absence of grounds for suspicion, justified in
trusting that official to perform such duties honestly. The larger the
business, the greater will be the need to delegate. It is incumbent upon an
outside director to take positive steps if he or she knew, or ought to have
known, that the corporation could be experiencing a remittance problem. The typical
situation in which a director is, or ought to have been, apprised of such a
problem is where the company is having financial difficulties.
[21]
The "objective
subjective" standard gave some flexibility towards directors described in
tax provisions such as subsection 323(3) of the ETA. But the Supreme Court of
Canada rejected the "subjective" standard in Peoples Department
Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, 2004 SCC 68. Justices
Major and Deschamps wrote the following at paragraphs 62 to 64 of their Reasons
for Judgment:
62 The statutory duty of care in s.
122(1)(b) of the CBCA emulates but does not replicate the language
proposed by the Dickerson Report. The main difference is that the enacted
version includes the words "in comparable circumstances", which
modifies the statutory standard by requiring the context in which a given
decision was made to be taken into account. This is not the
introduction of a subjective element relating to the competence of the
director, but rather the introduction of a contextual element into the
statutory standard of care. It is clear that s. 122(1)(b) requires
more of directors and officers than the traditional common law duty of care
outlined in, for example, Re City Equitable Fire Insurance, supra.
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. Canada, [1998] 1 F.C. 124, 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.
64 The
contextual approach dictated by s.122(1)(b) of the CBCA not only
emphasizes the primary facts but also permits prevailing socio-economic
conditions to be taken into consideration. The emergence of stricter standards
puts pressure on corporations to improve the quality of board decisions. . . .
[Emphasis added.]
[22]
The Federal Court of
Appeal reached the same conclusion regarding subsection 323(3) of the ETA
in The Queen v. Buckingham, 2011 FCA 142. In Buckingham, the
taxpayer was a sole director and the principle shareholder of a corporation. He
managed the business's daily activities day to day and therefore played an
important role in its operations. He acknowledged that he had financed the business
with GST/HST amounts because it was having financial difficulties. Therefore, he
was assessed under section 323 of the ETA for the GST/HST amounts that the
business had not remitted and related penalties and interest. Justice Mainville
of the Federal Court of Appeal dealt with the standard of care, diligence and
skill. Justice Mainville indicated that subsection 323(3) of the ETA does not
set out a general duty of care, but rather establishes a ground of defence against
the specific liability set out in subsection 323(1) of the ETA. Directors must show
that the conditions required to successfully use such a defence are met. The
due diligence duty in subsection 323(3) of the ETA is expressly intended to
prevent the failure of corporations to remit the amounts due. Directors must
establish that they exercised the degree of care, diligence and skill required "to
prevent the failure". The purpose of this subsection is clearly to prevent
failures to remit. Justice Mainville ruled that the due diligence standard is
an objective standard, not an "objective subjective" standard. The
reference to the concept of the reasonably prudent person clearly indicates
that the test is objective rather than subjective. Justice Mainville discards
any notion of a subjective standard and states the following at paragraph 37:
Consequently,
I conclude that 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.
[23]
He explains this objective
standard as follows at paragraphs 38 to 40:
[38] 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 own personal skills, knowledge, abilities and
capacities: Peoples Department Stores at paras. 59 to 62. To say that
the standard is objective makes it clear that the factual aspects of the
circumstances surrounding the actions of the director are important as opposed
to the subjective motivations of the directors: Peoples Department Stores
at para. 63. The emergence of stricter standards puts pressure on corporations
to improve the quality of board decisions through the establishment of good
corporate governance rules: Peoples Department Stores at para. 64. Stricter
standards also discourage the appointment of inactive directors chosen for show
or who fail to discharge their duties as director by leaving decisions to the
active directors. 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: Kevin P. McGuinness, Canadian
Business Corporations Law, 2nd ed. (Markham, Ontario: LexisNexis Canada,
2007) at 11.9.
[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. . . .
[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.]
[24]
What triggers this
positive obligation? It should be noted in this regard that the conduct to be
examined is that of the director starting from the time when it became clear to
him or her that the company entered a period of financial difficulties. Justice
Mainville stated the following at paragraph 46:
[46] . . . The assessment of the director's
conduct rather 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: Soper at para.
50.
[Emphasis
added.]
[25]
In conclusion, Justice
Mainville provides the following summary at paragraph 52:
[52] Parliament
did not require that directors be subject to an absolute liability for the
remittances of their corporations. Consequently, Parliament has accepted that a
corporation may, in certain circumstances, fail to effect remittances without
its directors incurring liability. 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 concerned amounts.
[Emphasis added.]
[26]
Justice Mainville reiterated
these principles in the Federal Court of Appeal decision in Balthazard v.
The Queen, 2011 FCA 331, at paragraph 32:
[32] In
Buckingham, this Court recently summarized the legal framework applicable
to the care, diligence and skill defence under subsection 323(3), as follows:
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 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.
[27]
Much has been written
about Buckingham: see, for example, Boles v. The Queen, 2011 TCC
288, rendered on June 9, 2011, by Justice Boyle (appeal from the assessment
dismissed); Latulippe v. The Queen, 2011 TCC 388, rendered by
Justice Angers on October 11, 2011 (appeal dismissed); Gougeon v. The
Queen, 2011 TCC 420, rendered by Justice Angers on October 11, 2011 (appeal
from the assessment dismissed); Heaney v. The Queen, 2011 TCC 429, rendered
by Justice Campbell (appeal from the assessment allowed); Lagacé v. The
Queen, 2012 TCC 117, rendered by Justice Hogan on April 5, 2012 (appeal
dismissed); Martin v. The Queen, 2012 TCC 239, rendered by Justice
Angers on August 27, 2012 (appeals allowed in part); Roux v. The Queen,
2012 TCC 249, dated August 15, 2012, where Justice Angers dismissed the appeal
from the assessment; Cappador v. The Queen, 2012 TCC 267, rendered by
Justice Lamarre on July 25, 2012 (appeal dismissed); Deakin v. The Queen,
2012 TCC 270, rendered by Justice Boyle on July 26, 2012 (appeals dismissed); Anderson
v. The Queen, 2012 TCC 333, rendered by Justice D'Arcy, who rejected
the due diligence defence but referred the matter back to the Minister for
reconsideration and reassessment; and Boudreau v. The Queen, 2012 TCC
342, rendered by Justice Bédard on September 28, 2012 (appeal dismissed).
[28]
Mr. Delisle, counsel
for the appellant, referred to several examples where a director was able to
avoid his or her company's tax liabilities because he or she had been kept in
the dark about the true tax situation of the business. Baker v. The Queen,
2010 TCC 268, is the case of a 64-year-old appellant who was not well educated and
was the sole director and shareholder of a corporation. His spouse took care of
all the administrative tasks related to operating the business. The appellant
never knew about the financial problems or the debts resulting from operating
the business, and, although he knew he was the sole director and shareholder of
the corporation, he relied solely on his spouse and was completely unfamiliar
with the responsibilities that fall to a director. The appellant believed that
his spouse was honest and competent and that she took all measures necessary to
fulfill the corporation's legal, commercial and tax obligations. In addition to
admitting that he knew nothing about his responsibilities as a director, the
appellant said that he had never discussed a director's tasks with anybody
including his spouse. He never tried to seek out information about them. Justice
Hershfield allowed the appeal from the assessment, basing himself on the
principles established by the Federal Court of Appeal in Soper. McIsaac
v. The Queen, 2004 TCC 618, rendered by Justice Campbell on September 29,
2004, Ouahidi v. The Queen, 2007 TCC 119, rendered by Justice Favreau on
March 22, 2007, and Pascoal v. The Queen, 2009 TCC 608, rendered by
Justice McArthur on December 2, 2009, all reach the same conclusion.
[29]
The respondent relied
on Penney v. Canada, [1999] T.C.J. No. 803 (QL), rendered by Judge
Margeson on November 17, 1999. In that case, at her brother's request, the
appellant became the sole director of a corporation and held all of the shares
in the corporation for her brother. The brother took care of all aspects of
operating the company, which did business in Newfoundland. The appellant lived
in Toronto. A stamp with the appellant's signature was made, but the appellant
never asked any questions with regard to the use of this stamp, which was
placed on various documents without the appellant's being consulted. The
appellant was told that she was not facing any risk and that she had no
obligations regarding the company. She had turned a blind eye to everything
relating to managing the business. She did not operate the business, and she
did not receive any money from it. She made no decisions regarding the business
and did not participate in any way in its operation. The company was fully controlled
by the appellant's brother and she was the sole director, shareholder and
officer only in theory. The brother had full powers and the sister, the
appellant, had no power. The appellant did not know the definition of a
director. The appellant was not interested in the company except to be of
service to her brother, whom she trusted completely. Judge Margeson found that
the appellant's actions in the circumstances were equivalent to refusing to see
the truth. According to what was stated in Starkman v. Canada, [1996]
T.C.J. No. 1629 (QL), 97 DTC 220, even a passive or inactive director cannot
necessarily avoid all liability, and even in the context of a family business,
the circumstances of the case must be taken into account. Judge Margeson found
that the appellant had abdicated her responsibilities, transferring them to her
brother. The Court dismissed the appeal from the assessment and found the
appellant as well as her brother liable for the corporation's failures.
[30]
It should be noted that
all the case law cited above predates Buckingham. Thus, we can see that
before Buckingham a director who had been kept in the dark by family
members who managed the business could rely on the due diligence defence. Certainly,
since Buckingham, the standard has become stricter given that
subjectivity is no longer relevant. Now it is simply an objective standard
considered within the entire factual background. Case law subsequent to Buckingham
clarifies this.
[31]
In Lagacé v. The
Queen, supra, Justice Hogan wrote the following at paragraph 21:
[21] A successful due
diligence defence requires evidence of the directors taking concrete actions to
prevent failure. Applying Buckingham here, it is not sufficient to say
that Ms. Lagacé should not be found liable because she was an outside
director. The evidence shows that she was in business with Mr. Eastveld.
They lived together and worked together in the business out of a home office.
The appellants had the burden of establishing that they took steps to prevent
the corporation's failure. . . .
[Emphasis
added.]
[32]
In Boles v. The
Queen, supra, the appellant argued that he did not even know that he
was a director of the corporation in question before the Canada Revenue Agency
began to prosecute him. He stated that he had never been consulted with regard
to the business's activities or ever participated in its activities or had any
direct knowledge of the business's commercial activities or affairs or, at any
moment in time managed its operations or took part in its operations in any
way. However, he admitted signing some documents for the corporation. Justice
Boyle referred to Buckingham at paragraph 2 of his Reasons for Judgment:
[2] The
most recent pronouncement on the scope of director's liability for unremitted
GST or income tax withholdings and upon director's possible defences thereto
are set out by the Federal Court of Appeal in its recent decision in Canada
v. Buckingham, 2011 FCA 142, dated April 21, 2011. In Buckingham the
Federal Court of Appeal confirmed that the scope of the director's liability
provisions is potentially broad and far reaching in order to effectively move
the risk for a failure to remit by a corporation from the fisc and Canadian
taxpayers generally to the directors of the corporation, being those persons
legally entitled to supervise, control or manage the management of its affairs.
The Court also confirmed that a director seeking to be exculpated for having
exercised reasonable care, diligence and skill must have taken those steps "to
prevent the failure" to remit and not to cure it thereafter. . . .
[33]
Justice Boyle also
states the following at paragraph 9:
[9] This leaves the question of whether Mr. Boles did in fact exercise
the degree of skill, care, diligence and prudence to prevent the company's
failure to remit GST in the circumstances. There was no evidence
whatsoever that Mr. Boles involved himself at all with Begley Associates
in the years in question and therefore he cannot say that he did anything
actively to prevent the failure to remit the GST. There was some
evidence that in later years he may have helped free up some money for
Mr. Clark, prior to his death, to significantly pay down or pay off any
tax arrears of Begley Associates. However, it is clear that the active
steps must be to prevent the failure and not merely to remedy it. . . .
[Emphasis added.]
[34]
In Latulippe, supra,
Justice Angers wrote the following at paragraphs 20, 21 and 24:
[20] I cannot ignore the recent decision of the Federal Court of Appeal
rendered in Buckingham v. The Queen, 2011 FCA 142, which sets aside the
subjective standard and established that the test should be objective. The
application of this more strict standard is such that the arguments based on
personal shortcomings should be aside. . . .
[21] The particular circumstances of a director may be taken into account,
but only against the objective reasonably prudent person standard, as the
Federal Court of Appeal explains in paragraph 39 [quotation omitted]:
. .
.
[24] However, our Court also rendered decisions in which it was less
indulgent with respect to de jure directors, who, considering the family
ties, did not assume their responsibilities as directors. Suffice it to refer
to Penney v. Canada, [1999] T.C.J.
No. 803 (QL), [1999] G.S.T.C. 102, Black v. Canada, [1994] T.C.J. No.
191 (QL), [1994] 1 C.T.C. 2750, Hanson v. Canada, [1996] T.C.J. No. 1392
(QL), [1997] 1 C.T.C 2456 and Western v. Canada, [1999] T.C.J. No. 155 (QL). All of these
decisions emphasize that there is nothing in the wording of the relevant
provisions that would suggest that Parliament intended to assist directors who
failed to act because they ignored their responsibilities and those of the
company of which they were the directors. Suffice it to cite paragraph 22 of
the decision of Sarchuk J. in Hanson:
The
mere fact that one becomes a director in a family context is not sufficient to
permit such director to turn his or her back on the affairs of the company; to
ignore it for all practical purposes; to ignore her responsibilities; indeed,
to fail to ask even the most rudimentary question as to what those
responsibilities are, and thereby to escape liability under the provisions of
the Income Tax Act.
[Emphasis added.]
[35]
In Deakin v. The
Queen, supra, Justice Boyle states at paragraph 24 that a director's
obligations under subsection 323(3) of the ETA are similar to a guarantee:
. .
. The directors' liability provisions of the legislation
should be regarded by business persons as somewhat similar to a form of
personal guarantee by the directors that can expose them to comparable
liability for the amount involved. . . .
[36]
In my view, directors'
obligations and responsibilities are very significant and may be very onerous,
even in the case of a small family company. The position of a de jure
director should not be assumed lightly. Directors have responsibilities towards
the company, towards the shareholders, towards the company's employees and
towards the tax authorities. In my opinion, a diligent director must seek out at
least general information about what he or she is involved in and take his or
her responsibilities seriously.
[37]
In this case, did the
appellant demonstrate that she had exercised the degree of care, diligence and
skill to prevent the failure that a reasonably prudent person would have
exercised in comparable circumstances? Was she actually concerned about the tax
remittances in order to prevent the company's failure to remit the amounts at
issue? Did she take concrete actions in order to prevent the failure?
[38]
All of the supporting
evidence that was submitted at the hearing clearly shows that the appellant
presented herself to the world including the tax authorities as the president
and director of the company. Although she was the sole director and
shareholder, she had no knowledge of the risks she was facing as director even
though she knew that there were risks. She did not, however, seek out
information about them; yet, it seems to me that a reasonably prudent person,
in comparable circumstances, would inquire about the potential risks related to
the position of a director of a company, even if a spouse was its manager.
[39]
The factual background
shows that the appellant played a role in the company's affairs, even though in
that role she followed her spouse's instructions. No one was forcing her to do
what her spouse asked her to do. She did it to help him out. It is clear that
the appellant knew nothing about the business's operations and had had nothing
to do with operating it. She left all of that to Mr. Dubois. It is true that
she asked Mr. Dubois questions, such as how things were going or how his day
had been or whether everything was going well. But these questions were general
questions concerning the EFN business as well as other companies that Mr.
Dubois managed. Although Mr. Dubois had told her that sometimes there were bad
debts, she had not asked him for more details. I am under the impression that
these questions were asked as part of trivial conversations between spouses. A
reasonably prudent person, who knew that there were bad debts, would not have
asked only general questions.
[40]
From the factual
background, it is clear that the appellant abdicated almost all of her powers
as director and conferred them on her spouse. As director, she signed a power
of attorney dated February 3, 2003, authorizing Mr. Dubois to sign all cheques
for her on behalf of the company, and it is a fact that she had never signed a
single cheque. It was Mr. Dubois who signed all cheques. The appellant signed
on behalf of the company powers of attorney authorizing Mr. Dubois and his
accountants to communicate with Revenu Québec and designated Mr. Dubois as the
contact person. Mr. Dubois signed documents for the appellant and on her
behalf, which was clearly done with her approval: see income tax returns for
the 2004 and 2006 taxation years. The appellant signed a Signature Resolution (undated)
in order to make Denis Dubois the company's representative and to allow
him to exercise management powers consisting in issuing, accepting, endorsing,
receiving payment for, negotiating and discounting any cheques, promissory
notes, bills of exchange or other negotiable instruments. She signed a power of
attorney dated November 18, 2005, authorizing a client to issue cheques payable
to Denis Dubois following supplies made by the company. She signed a power of
attorney dated September 5, 2007, authorizing Revenu Québec to disclose to
Denis Dubois confidential information about the company and naming Denis Dubois
as her representative and agent with the department. Clearly she would have
signed any document that Mr. Dubois gave her with no more explanations
than [Translation] "It's for
the company". In this case, it is not a delegation of powers; rather, it
is an abdication of decision-making powers in favour of Mr. Dubois. However, a
director of a corporation cannot avoid his or her responsibilities and
obligations simply by casting off the director's powers.
[41]
Did the appellant know
or should she have known that the company was having financial difficulties? She
knew that the company sometimes had bad debts because her spouse had told her
about it. The existence of bad debts in itself is not something out of the
ordinary, but it is a sign that indicates potential problems that call for a
more rigorous monitoring of active debts. She knew that the company had done
business with the National Bank since 2003. But, in September 2004, she signed
the document for the opening of an account at the cheque-cashing centre Rapide
Chèque. In addition, she had to personally undertake to cover as surety all
cheques given to Rapide Chèque by the company. In my opinion, it is unusual for
a company to do business with a cheque-cashing centre instead of a bank. The
appellant's spouse told her that the bank [Translation]
"froze" cheques and that, as a result, the company was short of cash
to the point of needing cash quickly in order to continue its activities. At
that point, although Mr. Dubois described the cash-flow problems as [Translation] "minor" and "temporary",
the appellant should have known that the company had serious financial problems
that should have been closely monitored, especially since she had had to
personally make an undertaking. Clearly, the cash-flow problems were not "minor"
or "temporary" since fourteen months later the company continued to
do business with the cheque cashing centre, Arylo instead of a bank. The fact
that cash-flow problems lasted for fourteen months indicates that the business
had serious financial problems, which was a sign that there were probably also
tax problems. The appellant looked at the financial statements and she even
signed as the director the financial statement dated June 30, 2006, relating to
2005. She did not read the financial statements line by line and asked her
spouse very few questions about these documents despite the fact that, in 2005,
sales dropped a great deal compared to the year before. She signed a power of
attorney dated November 18, 2005, authorizing a client to issue cheques payable
to Denis Dubois following supplies made by the company. She did not wonder
at that time why a client would pay Mr. Dubois directly instead of having the
cheque go through the company. She signed a power of attorney dated September
5, 2007, authorizing Revenu Québec to disclose to Denis Dubois confidential
information about the company and naming Denis Dubois as her representative and
agent with the department. This should have tipped her off about the existence
of a potential problem with respect to remitting taxes. She was definitely
aware of the fact that Revenu Québec wanted to obtain information; if she was
not, why sign a power of attorney?
Conclusion
[42]
Although the appellant's
spouse lied to her and misled her, the factual background shows that there were
many clues of the financial problems that a reasonably prudent person should
have recognized in comparable circumstances. I have come to the conclusion that
the appellant should have known that the business had financial problems and
therefore tax problems. In reality, the appellant was not concerned about the
tax remittances and took no concrete action in order to prevent the company's
failure to remit the amounts at issue.
[43]
In conclusion, having
considered all of the evidence and taken into account the factual background of
this case, I am not satisfied that Ms. Constantin demonstrated that she had
exercised the degree of care, diligence and skill to prevent the failure that a
reasonably prudent person would have exercised in comparable circumstances.
[44]
For these reasons, the
appeal is dismissed.
Signed at Kingston, Ontario, this 6th day of December 2012.
"R. G. Masse"
Translation certified true
on this 23rd day of January 2013
Margarita Gorbounova, Translator
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