Citation: 2012 TCC 249
Date: 20120815
Docket: 2010-540(GST)I
BETWEEN:
DANIEL ROUX,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1]
The appellant, as a director
of the company Systèmes de traitement d'eau Rainsoft Rive‑Sud inc. (hereafter
Rainsoft), received an assessment dated May 14, 2009, for $31,479.04 for
the period during which he was a director, specifically for the period from
August 1, 2005, to January 31, 2007. The appellant resigned from his position
as director of Rainsoft on May 1, 2008.
[2]
Rainsoft began its
activities in 2004. It is a company that specialized in the sale of water
softening treatment systems. The appellant held 50% of the shares of Rainsoft and
was the vice-president of the company. Rainsoft was registered for the purposes
of the goods and services tax (GST) and filed its returns quarterly.
[3]
According to the
auditor's report, during the period in issue, Rainsoft reported lower sales
figures such that the amounts of the GST and the Quebec Sales Tax (QST) were
thereby reduced as well. The appellant does not dispute this. However, the
difference between the actual sales and those reported by Rainsoft resulted in
net QST owing in the amount of $72,856.63 and net GST owing in the amount of
$60,951.55.
[4]
This information was
disclosed to the tax authorities by voluntary disclosure made by Rainsoft on
March 5, 2007, for the period in issue. On July 17, 2007, Rainsoft signed a [Translation] "settlement agreement
and waiver of the right to object and appeal under a voluntary disclosure"
(Exhibit I-3). This agreement confirms that the GST and QST paid by Rainsoft
are insufficient with respect to the actual sales made by Rainsoft and states
that the amount owing to the tax authorities is assessed at $133,808.28. Rainsoft
agreed to pay the amount due over an eighteen-month period, namely, from August
1, 2007, to January 1, 2009, in remittances of $9,014.
[5]
The appellant was in business
with Nathalie Laviolette, who was the president of Rainsoft and held 50% of the
shares of the company. They agreed to end their business relationship and, on
June 6, 2008, they signed a separation agreement. This agreement, to which
Rainsoft was also a party, came into effect on May 1, 2008, the date on which the
appellant resigned as a director. In this agreement, the appellant and Ms.
Laviolette agreed that the balance owing by Rainsoft following the voluntary
disclosure agreement for the payment of consumption tax (GST and QST) arrears,
which the appellant and Ms. Laviolette were personally responsible for, was
about $65,000. In addition, Ms. Laviolette and Rainsoft undertook to take all
necessary steps to meet their payment commitments related to the voluntary
disclosure and keep the appellant informed of anything that could affect the
payment commitments. The separation agreement provides the appellant with a
right to recourse against Rainsoft and Ms. Laviolette to recuperate anything
the appellant could be obliged to pay under the voluntary disclosure agreement.
[6]
The appellant claims
that before his departure he made sure that Rainsoft met its payment
obligations set out in the separation agreement. After the appellant's
departure, Rainsoft did not continue to honour the agreement. Rainsoft went
bankrupt on November 24, 2008, and Ms. Laviolette filed an assignment in
bankruptcy on that same date.
[7]
The question is
therefore whether the appellant acted with the degree of care, diligence and
skill to prevent the failure under subsection 323(1) of the Excise Tax Act
(ETA) that a reasonably prudent person would have exercised in comparable
circumstances.
[8]
The solidary liability
of directors of a corporation applies where a corporation fails to remit an
amount of net tax as required under subsection 228(2) or (2.3) of the ETA, and
any interest thereon or penalties relating thereto. I reproduce below the
relevant sections of the ETA.
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.
(2) Limitations —
A director of a corporation is not liable under subsection (1) unless
(a)
a certificate for the amount of the
corporation’s liability referred to in that subsection has been registered in
the Federal Court under section 316 and execution for that amount has been
returned unsatisfied in whole or in part;
(b)
the corporation has commenced liquidation or
dissolution proceedings or has been dissolved and a claim for the amount of the
corporation’s liability referred to in subsection (1) has been proved within
six months after the earlier of the date of commencement of the proceedings and
the date of dissolution; or
(c) the corporation has made an assignment or a bankruptcy order has
been made against it under the Bankruptcy
and Insolvency Act and a claim for the amount of the
corporation’s liability referred to in subsection (1) has been proved within
six months after the date of the assignment or bankruptcy order.
(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.
. .
.
(6)
Amount recoverable — Where execution referred to in
paragraph (2)(a)
has issued, the amount recoverable from a director is the amount remaining
unsatisfied after execution.
[9]
Rainsoft declared
bankruptcy on November 24, 1998, and a proof of claim was filed on December 12,
2008 (Exhibit I-6).
[10]
The appellant maintains
that he cannot be held liable with respect to amounts owing after he had
resigned as a director since Rainsoft was not obliged to pay the respondent
more than what had been provided in the payment agreement, and only the
remaining Rainsoft director is liable. The appellant argues that following his
resignation he no longer had to exercise reasonable diligence to make sure that
the agreed payments were made. He claims that while he was a Rainsoft director,
he exercised diligence to ensure that Rainsoft met its payment obligations.
[11]
The Federal Court of
Appeal set out the standard of review applicable to this case in Canada v.
Buckingham, 2011 FCA 142. I reproduce below paragraphs 37, 38 and 39 of the
judgment.
[37]
Consequently, I conclude that the standard of care,
skill and diligence required under subsection 227.1(3) of the Income Tax Act
and subsection 323(3) of the Excise Tax Act is an objective standard as
set out by the Supreme Court of Canada in Peoples Department Stores.
[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. 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]
[12]
In this case, it is
important to recall that, under subsections 228(1) and (2) of the ETA, Rainsoft
was required to file reports and remit the net tax payable in respect of the
goods sold or services provided by the company during the period at issue from
August 1, 2005, to January 31, 2007. The due diligence duty in subsection 323(3)
of the ETA is expressly intended to prevent a failure of a corporation
(Rainsoft in this case) to remit the net tax and the director (the appellant in
this case) must establish that he exercised the degree of care, diligence and
skill to prevent the failure. It is therefore clear that the purpose of
these provisions of the ETA is to prevent non-payment.
[13]
In this case, and based
on the appellant's own admission, Rainsoft failed to report and pay the net tax
during the period at issue. The appellant, as a director of Rainsoft, was
responsible for ensuring that things got done, and he acknowledges this. Rainsoft,
supported by the appellant, did precisely what section 323 is intended to
prevent, that is, a company directs money that is owed to the Crown to other
purposes. It thus becomes impossible for the appellant, under such
circumstances, to claim the defence under subsection 323(3) of the ETA because
he made no effort during the period at issue to prevent failure to comply with
the payment obligations.
[14]
The due diligence defence
raised by the appellant by reason of Rainsoft's voluntary disclosure and his
resignation as a director has nothing to do with the obligations under the ETA.
It is not because there was a voluntary disclosure that the defence of due
diligence applies to the appellant's efforts to ensure that Rainsoft complied
with its payment obligations. There is no link between a voluntary disclosure
and the due diligence defence referred to in subsection 323(3) of the ETA.
[15]
For these reasons, the
appeal is dismissed.
Signed this 15th day of August 2012.
"François Angers"
Translation certified true
on this 26th day of September 2012
Monica F. Chamberlain, Translator
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