Citation: 2012 TCC 117
Date: 20120405
Docket: 2010-2419(GST)I
BETWEEN:
LYNDA M. LAGACÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AND BETWEEN:
Docket: 2010-2421(GST)I
RICHARD EASTVELD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan J.
[1]
The appellants, Lynda
Lagacé and Richard Eastveld, are appealing director liability assessments
issued against them under the Excise Tax Act (the “ETA”) for a
corporation’s unremitted goods and services tax (“GST”) in the amount of $40,721,
including tax, interest and penalties, for the period from January 1, 1998 to
December 31, 2007. The appeals were heard on common evidence at the
request of the parties.
[2]
Ms. Lagacé was the
sole de jure director of the corporation in question, Eastveld
Management Inc. (“Eastveld Management”).
[3]
The corporation carried
on a real estate brokerage business, employing Richard Eastveld, a chartered
real estate broker. Mr. Eastveld was assessed on the basis that he was a de
facto director of Eastveld Management. The respondent’s characterization of
Mr. Eastveld as a de facto director of the corporation was accepted
by Mr. Eastveld’s counsel, who brought evidence to show that Mr. Eastveld
was the sole active director of the corporation.
[4]
The Minister of Revenue
of Quebec (the “Minister”), acting on behalf of the Minister of
National Revenue, relied on the following assumptions of fact in making the
assessment against each appellant:
(a)
the Company was incorporated under the Canada
Business Corporations Act (its title at the time) R.S.C. 1985, c. C-44;
(b)
the Company is registered for the purposes of
Part IX of the ETA since September 1998 and its registration number is
879193191;
(c)
The Company filed its return with the Minister
for the yearly reporting periods of 1 January 1998 to 31 December 2007, within
the time otherwise prescribed or produced amended returns and calculated its
net tax therein; that net tax being a positive amount, i.e. $21 368,44;
(d)
When the Company filed the returns, it did not
pay to the Receiver General the positive amount of the net tax it calculated
therein; that amount being due no later than the day on which the return for
the particular period was required to be filed;
(e)
On May 9, 2008, a certificate under article 316 E.T.A.
was registered at the Federal Court for the relevant period for the amount of
$35 638,65;
(f)
The execution of the certificate has been
returned unsatisfied;
(g)
From 11 January 1999 to 15 September 2009, the
Appellant was a director of the Company;
(h)
During the yearly reporting periods concerned
and during the period where the Company had to remit the net tax calculated,
the Appellant did not resign, was not replaced and was not dismissed as a
Director of the Company;
(i)
The Appellant knew the financial difficulties
facing the Company;
(j)
The Appellant did not exercise the required
degree of care, diligence and skill, nor did she [/he (appeal No.
2010-2421(GST)I)] take all required measures to prevent the Company’s failure
to fulfil its obligations in respect of the ETA that a reasonably prudent
person would have exercised in comparable circumstances, among which is the
obligation mentioned in subparagraph (d) above;
(k)
The Appellant did not take the appropriate
measures for implementing an efficient system aimed at ensuring that the
Company pay the sums due to the Minister under the ETA.
Issue
[5]
The issue in these
appeals is whether the appellants, in their capacity as directors of Eastveld
Management, are liable for Eastveld Management’s unremitted GST, or whether they
satisfied the requirements of the due diligence defence under subsection 323(3)
of the ETA.
Appellants’ position
[6]
The appellants invoke
the due diligence defence under subsection 323(3) of the ETA, submitting that
they exercised the degree of care, diligence and skill that a reasonably prudent
person would have exercised in comparable circumstances to prevent the
failure of the corporation to remit the GST. According to counsel,
Mr. Eastveld was the directing mind and sole active director of the corporation.
Counsel labelled Mr. Eastveld as an inside director. On the grounds that
Ms. Lagacé was a passive director, counsel invites me to show greater
leniency in my assessment of the due diligence defence presented on her behalf.
[7]
The appellants submit that
the corporation’s failure to remit GST was directly caused by the negligent
actions of the corporation’s external tax accountant. According to the
appellants, the Minister made matters worse for them by applying payments made
by the corporation to other tax debts for which they are not liable.
Analysis
[8]
Subsection 321(1) of
the ETA outlines the liability of directors where a corporation fails to remit
net tax owed:
323. (1) Liability of directors – 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.
[9]
The appellants invoke
the due diligence defence that is available under subsection 323(3) of the ETA
to a director who has been assessed as liable for a corporation’s unremitted
tax. Subsection 323(3) states:
323. (3) Diligence – 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.
A New Objective Standard Set in The Queen v. Buckingham
[10]
It was held in the
recent Federal Court of Appeal decision in The Queen v. Buckingham that the
Court should apply an objective standard when evaluating a director’s due
diligence defence under both subsection 323(3) of the ETA and subsection
227.1(3) of the Income Tax Act (the “ITA”).
[11]
Before Buckingham,
the leading authority on the applicable test was Soper v. Canada, a case
in which the Federal Court of Appeal determined that the objective-subjective
standard was the appropriate test.
As stated by the Court:
[40] . . . The standard of care laid down in
subsection 227.1(3) of the Act is inherently flexible. Rather than treating
directors as a homogeneous group of professionals whose conduct is governed by
a single, unchanging standard, that provision embraces a subjective element
which takes into account the personal knowledge and background of the director,
as well as his or her corporate circumstances in the form of, inter alia,
the company’s organization, resources, customs and conduct. Thus, for example,
more is expected of individuals with superior qualifications (e.g. experienced
business-persons).
[41] The standard of care set out in subsection 227.1(3) of the
Act is, therefore, not purely objective. Nor is it purely subjective. It is not
enough for a director to say he or she did his or her best, for that is an
invocation of the purely subjective standard. Equally clear is that honesty is
not enough. However, the standard is not a professional one. Nor is it the
negligence law standard that governs these cases. Rather, the Act contains both
objective elements – embodied in the reasonable person language – and
subjective elements – inherent in individual considerations like “skill” and
the idea of “comparable circumstances”. Accordingly, the standard can be properly
described as “objective subjective”.
After the Buckingham decision, the objective
standard established in Peoples Department Stores Inc (Trustee of). v. Wise, replaced the
“objective‑subjective” test from Soper.
[12]
On October 11, 2011, in
two Tax Court of Canada decisions, Gougeon v. The Queen, 2011 TCC 420,
and Latulippe v. The Queen, 2011 TCC 388, Justice Angers also referred to the standard set out in Buckingham.
As Justice Angers stated in Latulippe:
[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 . . .
[Emphasis added.]
The Objective Standard and Its Rationale
[13]
In Buckingham,
the Federal Court of Appeal outlined how to apply the objective standard and explained
the underlying rationale of the Supreme Court of Canada in Peoples for
imposing such a standard:
[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 emergency
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.
[Emphasis added.]
Contextual Factors Are Relevant
[14]
The Court must
evaluate, on an objective standard, whether the appellants demonstrated the
degree of care, diligence and skill to prevent the failure to remit that a
reasonably prudent person would have exercised in comparable circumstances.
This evaluation should not be undertaken, however, without considering the
particular circumstances facing the corporation and the appellants. The Federal
Court of Appeal asserted in Buckingham that contextual factors are part
of an objective analysis:
[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. As noted in Peoples Department Stores
at paragraph 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 [[1925] 1 Ch.
407].
[15]
Here, the context
includes the appellants’ allegation that the corporation’s tax accountant’s
negligence contributed to the corporation’s failure to pay the GST.
Focus Is on Efforts to Prevent Failures, Not Attempts
to Remedy
[16]
In Buckingham,
the Federal Court of Appeal specifically notes that the test under subsections
227.1(3) of the Income Tax Act and 323(3) of the Excise Tax Act requires
consideration of a director’s actions undertaken to prevent a failure to remit.
The Court states:
[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.
[17]
It is not sufficient to
take actions to remedy failures to remit net tax; the concern in considering a
due diligence defence is to determine what actions were taken to prevent
failures to remit in the first place. A director cannot claim due diligence, as
the appellants do in this case, by arguing that he negotiated an arrangement by
which the corporation would repay its debt as it earned commission income.
[18]
The appellants have failed
to convince me that the corporation’s failure to remit GST was caused by the
negligent actions of Mr. Clayman. The evidence shows that the
corporation’s GST liability was assessed on the basis of the returns that it
filed and the payments that it made. The shortfall was due to the fact that the
corporation did not remit all the GST it collected.
[19]
The respondent provided
a letter dated March 20, 2003, prepared by Mr. Clayman and addressed to
the two appellants, concerning the corporation’s unpaid GST. The relevant
passages read as follows:
. . .
This is further to our recent discussions regarding amounts due by
Eastveld Management Inc. to Revenue Quebec aggregating approximately $60,000.00
and consisting largely of net G.S.T. and Q.S.T. amounts due by the company but
not remitted to Revenue Quebec
as well as accumulated penalties and interest due to said non-remittance and
insufficiency of installment payments required to have been paid.
. . .
(1) That Eastveld Management Inc. is indebted
to Revenue Quebec in the
approximate amount indicated above is indisputable. This indebtedness has
been determined by our own books and records and, accordingly, reported to
Revenue Quebec on a self-reporting basis via documents etc, normally used by
taxpayers for that purpose.
(2) The indebtedness is not the result
of any reassessment(s) of the amounts reported to Revenue Quebec. If such were the case, the company
would have the legal right to object directly to the Minister to any or all
parts of said reassessment(s) via a “Notice of Objection” normally filed under
such circumstances.
(3) Directors of a corporation are generally
personally liable for that corporation’s G.S.T./Q.S.T. indebtedness.
Accordingly, as you have been advised by me (and others) in the past, Lynda’s
assets may be subject to seizure with respect to such indebtedness.
. . .
Lynda and Richard – on a personal note, you have been my clients and
friends for many years and I understand the frustration and stress that this
situation has caused you both. I would hate to see you lose your home – a
likely scenario unless this matter is resolved shortly. I urge you to carefully
consider my previous advice that you borrow on your house an amount sufficient
to liquidate the debt in question. The incremental monthly mortgage payment is,
in my opinion, well worth the relief that you would enjoy from, finally,
bringing closure to this matter in the only way I can see as being feasible
under the circumstances. As the company’s cash flow permits, you can repay the
loan and, eventually, have your monthly mortgage payments return to their
former amounts. Finally, I urge you, as well, to consider another piece of
advice that I have offered in the past. Insufficiency of funds is not an
acceptable excuse for non-compliance with the requirements of the laws and
regulations which govern the G.S.T./Q.S.T. system. All persons (individuals
and corporations) who charge and collect G.S.T. and Q.S.T. do so as a mandatary
of Revenue Quebec and,
therefore, said funds must be remitted to their rightful destination.
Accordingly, I recommend again that, for every commission deposited into the
company’s bank account, segregate approximately 15% of said amounts so that, as
installment or other payments are due, you will be in a position to comply with
the requirements of the system.
[Emphasis added.]
[20]
This letter confirms
that the appellants were aware of the corporation’s failure to remit the GST.
Furthermore, Mr. Clayman advises the appellants to take action to ensure
that the corporation did not continue to fail to remit GST due in the future. Interestingly,
the appellants appear to have ignored Mr. Clayman’s advice, as the
assessment issued against them covers unpaid GST for the period up to December
31, 2007.
[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. As the tax was not paid when the returns were filed,
the only reasonable inference that I can draw is that the corporation and/or
the appellants used the funds for other purposes. No allegation was made that
the tax consultant diverted corporate funds for his personal benefit.
[22]
For these reasons the
appeals are dismissed, and the parties are to bear their own costs.
Signed at Vancouver, British Columbia, this 5th day of April 2012.
“Robert J. Hogan”
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