Citation: 2012TCC333
Date: 20120921
Docket: 2010-1646(GST)G
BETWEEN:
LANCE ANDERSON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D'Arcy J.
[1]
The issue in this appeal is
whether the Appellant is liable, as a director, for net tax that Empire Pubs
Limited (the “Company”) failed to remit under Part IX of the Excise Tax Act
(the “GST Act”).
[2]
On April 14, 2008, the Minister of
National Revenue (the “Minister”) assessed the Appellant $269,911.58 in respect
of the failure of the Company to remit an amount of net tax as required under
subsection 228(2) of the GST Act. The amount assessed included interest
and penalties payable by the Company.
[3]
The Appellant filed a notice of
objection to the assessment. On February 16, 2010, the Minister
confirmed the assessment. The Appellant then appealed the assessment to this
Court.
[4]
The Respondent’s counsel informed
the Court at the commencement of the hearing that the Minister had made an
error with respect to the amount assessed. The amount assessed should have been
$255,625.81.
[5]
The Appellant and Ms. Nancy
Eichenberger, a Canada Revenue Agency (“CRA”) official, testified at the
hearing.
Summary of the Relevant Facts
[6]
The Appellant and his father
incorporated the Company on December 31, 1982. Originally, the
Appellant and his father were the common shareholders and directors of the
Company. However, at the time of the introduction of the GST in 1991, the
Appellant was the only director and shareholder of the Company.
[7]
The Appellant is a sophisticated
businessperson. He holds a Bachelor of Commerce degree from the University of
Toronto and obtained his Chartered Accountant designation in 1980. Between his
graduation from university and 1986, he worked for Clarkson Gordon, Burns Fry,
and the Toronto Stock Exchange. He joined the Company in 1982.
[8]
The Company was formed to carry on
the business of owning and operating pubs located close to the Toronto subway.
By 1987, the Company owned five pubs, the Sticky Wicket, the Guv’nor Pub, the
Spotted Dick, the Porkers’ Stern and the Jersey Giant.
[9]
The Appellant testified that the
Company began, in the early 1990’s, to experience financial difficulties. He
blamed the financial difficulties on the introduction of the GST and on the
recession that hit the Canadian economy in 1992.
[10]
According to the Appellant, the
Company responded to these difficulties by curtailing its expansion plans and
reducing its staff. He noted that the recession resulted in a significant
credit “crunch”, which limited the ability of the Company to raise funds or
sell pubs.
[11]
The Company decided in 1994 to
sell or close the five pubs that it owned. The Company sold the first pub in
the fall of 1994. Three of the remaining pubs were sold in 1995 and the first
half of 1996. The Company closed the fifth pub. The Appellant referred to this
as an orderly liquidation of the pubs.
[12]
The Appellant noted that, after
Company sold the last pub, it began to carry on the business of building
turnkey pubs for third parties. The Company would enter into a lease with a
property owner, build a pub on the site and then sell the completed pub to a
third party. The Company would also purchase an existing pub and then sell the
pub to a third party.
[13]
The Company carried on this
business from 1996 until 2003. The Appellant testified that this business ended
in 2003. However, it became clear during cross‑examination of the
Appellant that the business of building turnkey pubs did not end in 2003.
Rather, Empire Freehouse Incorporated, a new corporation incorporated by the
Appellant’s spouse, continued the business.
[14]
The Appellant’s testimony with
respect to the termination of the Company’s business of selling turnkey pubs
damaged his credibility. In fact, I do not believe the Appellant was completely
forthcoming when testifying before the Court. The Appellant’s testimony with
respect to the proceeds realized on the sale of the pubs is another example of
testimony that damaged his credibility.
The Law
[15]
Subsection 323(1) of the GST
Act provides that the directors of a corporation are jointly and severally
liable to pay any amount of net tax that the corporation fails to remit. A
director’s liability under subsection 323(1) includes any interest on, or
penalties relating to, the net tax that is not remitted.
[16]
Paragraph 323(2)(a) of the GST
Act provides that a director is not liable under subsection 323(1) unless “a
certificate for the amount of the corporation’s liability . . . has been
registered in the Federal Court under section 316 and execution for that amount
has been returned unsatisfied in whole or in part.”
[17]
In addition, under subsection
323(3) of the GST Act, a director is not liable under subsection 323(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.”
[18]
The Appellant admits that he was a
director of the Company at the time it failed to remit tax and pay interest and
penalties totaling $255,625.81. Further, the Appellant did not challenge the
evidence of the Respondent that the conditions in subsection 323(2) of the GST
Act were satisfied. The Appellant’s sole argument is that his conduct
satisfies the requirements of the due diligence defence
contained in subsection 323(3).
[19]
It is a question of fact whether
the Appellant, in his role as director of the Company, exercised the degree of
care, diligence and skill to prevent the failure that a reasonably prudent
person would have exercised in comparable circumstances. The standard of care,
skill and diligence required under subsection 323(3) of the GST Act
is an objective standard.
The burden is on the Appellant to show that he has satisfied the conditions of
subsection 323(3).
Application of Due Diligence Defence
Preliminary
Issue
[20]
It is the Respondent’s position
that the $255,625.81 assessed under section 323 relates to twenty-three quarterly
reporting periods of the Company ending between January 31, 1995 and April 30,
2003.
[21]
The Appellant disagrees. It is the
Appellant’s position that the $255,625.81 relates primarily to quarterly
reporting periods of the Company ending in 1992, 1993 and 1994.
[22]
The Appellant disagrees with how
the CRA applied the numerous payments made by the Company between June 1994 and
September 1998. Counsel for the Appellant argued that the determination of the
relevant reporting periods is important for the purposes of the due diligence
defence since the defence arises with respect to the failure to remit for a
specific reporting period.
[23]
Both parties presented evidence
with respect to the net tax of the Company for specific reporting periods and
with respect to the payments made by the Company. I have divided this evidence
into the following three periods:
·
GST reporting periods of the
Company ending between January 31, 1991 and October 31, 1993 (the “1991-1993
Period”).
·
GST reporting periods of the
Company ending between January 31, 1994 and October 31, 1998 (the “1994-1998
Period”).
·
GST reporting periods of the
Company ending between January 31, 1999 and July 31, 2003 (the “1999-2003
Period”).
[24]
The Appellant provided a summary
of the net tax of the Company and the payments made by the Company during all
of the relevant periods.
With respect to the 1991-1993 Period, the Appellant noted that the Company
reported positive net tax in each of its reporting periods but only made one
payment to the CRA, an amount of $5,664 remitted on March 5, 1991. However, the
Company did not remit $241,749 of net tax that it reported on its GST returns
for the reporting periods ending in the 1991-1993 Period.
[25]
The Respondent’s evidence in that regard is
consistent with the Appellant’s evidence.
[26]
In summary, at the end of the
1991-1993 Period the Company owed $241,749 plus interest and penalty interest
in respect of late GST remittances.
[27]
The Appellant’s evidence shows
that the Company reported positive net tax in sixteen of its twenty reporting
periods ending in the 1994-1998 Period. The reported positive net tax in these sixteen
periods totalled $140,811. In the remaining four reporting periods, the Company
claimed refunds of $16,925.
[28]
It was the Appellant’s evidence
that the Company made payments on its GST account of $384,687 during the
1994-1998 Period.
The Appellant testified that the Company wanted the CRA to first apply a
payment to any positive net tax of the Company that arose in the reporting
period in which the payment was made to the CRA. Any excess amount would then
be applied to amounts owed for prior reporting periods.
[29]
The Appellant acknowledged that
the Company did not make any payments for the three quarterly reporting periods
of the Company ending on April 30, 1994, April 30, 1995 and April 30, 1996. The
Company reported positive net tax for each of these reporting periods.
[30]
The Respondent’s evidence is
consistent with the Appellant’s with respect to the reported net tax of the
Company during the 1994-1998 Period.
However, the Respondent does not agree with the Appellant’s evidence with
respect to payments made by the Company.
[31]
The Respondent provided a computer-generated
schedule that summarizes the information in the CRA’s records with respect to
payments made by the Company.
The schedule shows that during the 1994-1998 Period the Company made payments
to the CRA of $580,928. However, the Company made $211,040 of these payments by
cheques that the Company’s bank returned because of insufficient funds in the
Company’s bank account. As a result, it is the Respondent’s position that the
actual amount received by the CRA was $369,888.
[32]
I accept the Respondent’s
evidence. The evidence before me shows that certain of the amounts that the
Appellant claims were payments were remitted by cheques that were subsequently returned.
Further, the Appellant has acknowledged that the total amount assessed is
correct. If the total amount assessed is correct, then it would appear reasonable
to conclude that the CRA’s calculation of the payments made by the Appellant is
also correct.
[33]
The Respondent’s witness testified
that the CRA applied the payments received to specific reporting periods on the
basis of the remittance slip used by the Company. She noted that if the Company
remitted the payment with a GST tax return for a specific reporting period
(regardless of whether the return was filed on time) the CRA applied the
payment to that reporting period. Alternatively, if the Company did not remit
the payment with a GST tax return, the CRA treated the payment as an arrears
payment and applied it to the Company’s outstanding liability beginning with
the first reporting period of the Company in respect of which it owed an
amount. She noted that the CRA provided different remittance slips for payments
made with a return and for arrears payments.
[34]
It is the Respondent’s position
that the CRA only received five payments (totalling $24,832) with returns filed
by the Company for the 1994-1998 Period. The CRA considered the remaining
payments to be arrears payments and applied those payments to the Company’s
outstanding liability beginning with the first reporting period of the Company
in respect of which it owed an amount.
[35]
In summary, it is the Appellant’s
position that the amount assessed relates to four of the Company’s reporting
periods that ended in the 1994-1998 Period. It is the Respondent’s position
that the amount assessed relates to eleven of the Company’s reporting periods
that ended in the 1994-1998 Period.
[36]
Before leaving the 1994-1998
Period, it is important to note that most of the payments made by the Company
during this period were made pursuant to payment arrangements between the
Company and the CRA’s collections division. The evidence before me discloses
the following payment arrangements (although there may have been others):
·
In 1994, the Company agreed to pay
$20,000 per month in respect of its outstanding GST liability. It provided the
CRA with six cheques; all of the cheques were returned by the bank because of
insufficient funds.
·
In December 1994, the Company made
an $80,000 payment to the CRA. The Appellant testified that his spouse, who
increased the mortgage on the family home, supplied the money.
·
In September 1995, the Company
made a $108,353 payment to the CRA. This amount was paid pursuant to a
direction in favour of the CRA that required the Company’s lawyers to pay the
amount out of the proceeds received on the sale of the Sticky Wicket.
·
In the fall of 1995, the Company
agreed to pay $5,000 per month in respect of its outstanding GST liability. It
provided the CRA with six cheques, three of which were returned by the bank
because of insufficient funds.
·
In the fall of 1996, the Company
agreed to pay $6,000 per month in respect of its outstanding GST liability. It
provided the CRA with twenty-four cheques; six of the cheques were returned by
the bank because of insufficient funds.
[37]
With respect to the 1999-2003
Period, the Appellant’s evidence shows that the Company reported positive net
tax in twelve of its nineteen reporting periods. The reported positive net tax
in these periods totalled $51,451. In the remaining seven reporting periods,
the Company claimed refunds of $67,420.
[38]
It was the Appellant’s evidence
that a single payment was made to the CRA during the 1999-2003 Period. This
payment was for $2,651 in respect of the Company’s reporting period ending on
October 31, 2000. The Appellant acknowledged that the Company did not make any
payments in respect of the remaining $48,800 of net tax the Company reported
for the 1999-2003 Period.
[39]
The Respondent’s evidence is
consistent with the Appellant’s evidence with respect to the net tax and
refunds reported by the Company. However, the Respondent does not agree that
the Appellant made a payment of $2,651 during the period. I accept the
Respondent’s evidence on this point. Although the Appellant provided copies of
cheques to support the payments made during the 1994-1998 Period, he did not
provide a copy of the $2,651 cheque that he claims the Company provided to the
CRA during the 1999-2003 Period. In addition, the Appellant has agreed that the
Respondent’s calculation of the amount owing by the Company is correct.
[40]
In summary, the Company failed to
remit net tax of $51,451 in respect of its GST reporting periods ending in the
1999-2003 Period. Appendix A to the Amended Reply shows that $89,371 of
$255,626 assessed under section 323 of the GST Act relates to the
1999-2003 Period. This amount includes the $51,451 of net tax plus interest and
penalty interest.
[41]
As a result, the issue is whether
the remaining $166,255 assessed relates to reporting periods of the Company
ending in 1992, 1993 and 1994 (the Appellant’s position) or reporting periods
ending in 1995, 1996, 1997 and 1998 (the Respondent’s
position).
[42]
As counsel for the Respondent
noted, the law in this area is well settled. It was summarized by the Federal
Court – Trial Division in 464734 Ontario Inc. et al. v. The Queen, 90 DTC 6206 at
page 6215 as follows:
Where
no direction is given by the debtor then the creditor is free to apply the monies
received as the creditor sees fit. The debtor must expressly authorize how the
funds he is paying to the creditor are to be applied and failure to do so
leaves the creditor to decide. . . .
[43]
There was no evidence before me
that either the Appellant or the Company provided written directions to the CRA
with respect to how the CRA was to apply the payments. The Appellant testified
that he made the “comment” to CRA collections officials on numerous occasions
that the payments should first be applied to the current reporting periods and
any excess then applied to outstanding amounts in respect of prior reporting
periods.
[44]
Ms. Eichenberger testified that
the Appellant did not provide her with instructions with respect to how the
payments were to be allocated. Further, she reviewed the CRA’s records and
could not find any past communication from the Company directing how the
payments should be allocated.
[45]
It appears to me that if the
Company had wanted amounts allocated to certain reporting periods then it would
have provided written instructions at the time it made the payments to the CRA.
At a minimum, one would expect written instructions to have been provided with
the large payments made in 1994 and 1995, particularly the payments of $80,000
and $108,353.
[46]
After considering all of the
evidence, I have concluded that the Company did not provide directions to the
CRA with respect to how the CRA was to apply the Company’s payments.
[47]
However, this issue is not
determinative of the appeal. As I will discuss, there is no evidence before me
that the Appellant, at any time between 1992 and 2003, took any steps to
prevent the failure by the Company to remit its GST.
Due
Diligence Defence
[48]
The Appellant, during his
testimony, and his counsel, during argument, focused on the Appellant’s actions
during 1992, 1993 and 1994. Counsel for the Appellant argued that, in those
years, the Appellant was exercising diligence to prevent the failure of the
corporation to remit tax for reporting periods of the Company ending in those
years.
[49]
The Appellant testified that
between 1991 and the cessation of the Company’s operations in 2003 it was he
who directed the operation of the Company’s business and its financial
reporting. He also acknowledged that he prepared 90% of the GST returns. The
Company’s bookkeeper prepared the remaining GST returns, which were reviewed by
the Appellant and then filed.
[50]
On cross-examination, the
Appellant conceded that the Company filed a number of its GST returns late.
This is an understatement. Exhibit R8 provides the filing history of the
Company for its thirty-five GST quarterly reporting periods ending between
November 1, 1994 and July 31, 2003. The Company reported positive net tax in twenty-six
of the reporting periods. During those nine years, thirty-three of the
Company’s thirty-five GST returns were filed late. Many of the returns were
filed one year or more after their due date.
[51]
The Appellant testified that he
first became aware that the Company was behind in its GST remittances in the
summer of 1991. Since he was the person who prepared and filed the returns and
directed the Company’s operation, it is clear that he was aware of the
Company’s failure on May 31, 1991, the date that the Company’s return for its
second reporting period was due, and the Company failed to remit at least
$20,000 of its net tax for the period.
[52]
The Appellant stated that the
Company responded to its failure to remit the GST by curtailing its expansion
plans and reducing its staff at the pubs and its head office. He noted that the
1992 recession had caused a severe credit crunch that limited the ability of
the Company to raise funds.
[53]
The witness testified that he took
the following steps to mitigate or stop late remittances:
·
The business was started with a
strong business plan.
·
The Company was properly
capitalized and was a proven concept.
·
The Company put in place a proper
accounting system.
·
Once the Company realized that the
situation would not improve and when the credit market improved, it began to sell
the pubs.
[54]
None of these actions constitute a
due diligence defence under subsection 323(3) of the GST Act. As
the Federal Court of Appeal noted in Buckingham, the duty of care in
subsection 323(1) of the GST Act is intended to prevent the failure by a
corporation to remit net tax. The Federal Court of Appeal stated that in order
to rely on the subsection 323(3) defence, “. . . a director must . . .
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.”
[55]
There is no evidence before me
that the Appellant took any steps to prevent the failure by the Company to
remit its positive net tax. Rather, the evidence before me shows that the
Appellant was the person who decided not to remit the tax. The evidence shows
that the Appellant made this decision in an effort to keep the pubs operating,
presumably with the hope that the financial position of the Company would
improve or that the pubs could be sold.
[56]
The Appellant and his counsel
placed a great deal of weight on the sale of the pubs. During his testimony,
the Appellant emphasized that the Company used the proceeds from the sale of
the pubs to pay the outstanding GST. Counsel for the Appellant argued that the
Appellant showed himself to be diligent by selling the pubs to raise funds to
pay the GST.
[57]
The evidence before me does not
support a factual finding that the Company used the proceeds from the sale of
the pubs to pay the outstanding GST liability.
[58]
The four pubs were sold between
October 1994 and the summer of 1996. The Appellant testified that the sales
raised gross proceeds of $750,000 and “net” proceeds of $433,000 (after paying
off secured lenders, landlords and some other creditors). He testified that the
Company used the net proceeds to pay the outstanding GST debt.
[59]
However between October 1994 and
the end of 1996 the Company only paid $230,353 in respect of its outstanding
GST remittances. The Appellant testified that $80,000 of the $230,353 came from
a second mortgage on his home, meaning that, at most, $150,000 came from the
sale of the pubs. This represents only 20% of the gross proceeds realized on
the sale of the pubs. It is my view, based upon the evidence before me, that
the Company used 80% of the sale proceeds to pay outstanding debts of the
Company and fund the ongoing consulting business of the Company.
[60]
The Appellant’s testimony with
respect to the sale of the pubs and the use of the proceeds seriously damaged
his credibility.
[61]
Regardless, the Appellant’s
actions of continuing the operation of the pubs for three years while failing
to remit over $240,000 of GST in the hope that this failure could be corrected
if the business recovered or the pubs were sold does not constitute a defence
under subsection 323(3) of the GST Act. As the Federal Court of Appeal
stated in Buckingham:
. . . 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 continuation of the operations of the corporation. It is
precisely such a situation which both section 227.1 of the Income Tax Act
and section 323 of the Excise Tax Act seek to avoid. The defence under subsection 227.1(3) of the Income Tax Act
and under subsection 323(3) of the Excise Tax Act should not be used to
encourage such failures by allowing a due diligence defence
for directors who finance the activities of their corporation with Crown monies
on the expectation that the failures to remit could eventually be cured.
[62]
The Appellant provided no evidence
with respect to any steps he took to prevent the failure of the Company to
remit GST in the years after it sold the pubs. This is surprising since the
Appellant accepts that the amount assessed properly includes $88,371 in respect
of the 1999-2003 Period. The Appellant’s own evidence shows that the Company
failed to pay the net tax that is included in the $88,371 (the remainder being
interest and penalty interest).
[63]
In summary, there is no evidence
before me that the Appellant took any steps during the twelve-year period at
issue to prevent the Company’s failure to remit its positive net tax. In fact,
it is clear from the evidence before me that the Appellant made the decision
not to remit the tax. The Appellant considered the GST charged on the Company’s
sales to be part of the Company’s revenue. He viewed positive net tax for a
specific GST reporting period of the Company as an expense of the business that
was to be accrued and only paid when the Company had excess funds.
[64]
For the foregoing reasons, the
appeal is allowed with costs to the Respondent. The assessment dated April 14,
2008 is referred back to the Minister of National Revenue for reconsideration
and reassessment on the basis that the Appellant is liable under subsection
323(1) of the GST Act to pay $255,625.81.
Signed at Ottawa, Canada, this 21st day of September
2012.
“S. D’Arcy”
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