Date:
20021125
Docket:
2000-1594-GST-G
BETWEEN:
AGATHA KIT
CHUN LAU,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent,
AND
Docket:
2000-1596(GST)G
BETWEEN:
PATRICK WING
CHU LAU,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Bowman,
A.C.J.
[1]
These appeals are from assessments under subsection 323(1)
of the Excise Tax Act of the appellants as directors of
Nikiko Restaurant Inc. ("Nikiko") for unremitted goods
and services tax ("GST") for the period October 1,
1992 to June 30, 1996. The appellants are husband and
wife.
[2]
The position of Agatha Lau ("Agatha") is that she was
not a director of Nikiko and in any event she exercised the due
diligence contemplated by subsection 323(3) of the Excise
Tax Act. Patrick Lau ("Patrick") admits that he was
a director but says that he was an outside director as that
expression was used in Soper v. The Queen,
97 DTC 5407 (F.C.A.), and that in any event he
exercised the due diligence contemplated by
subsection 323(3). He raises a further argument about the
validity of an assessment issued after a corporation has filed
for bankruptcy and also argued that a substantial portion of the
services were zero-rated.
[3]
For the reasons that follow I am satisfied that the appellants
are entitled to succeed.
[4]
Patrick has practised as a commercial photographer for the past
26 years. In 1990 or 1991 he was approached by two friends
who were successful businessmen (the investors) in Macao and who
wanted to open a Japanese restaurant in Canada. They asked
Patrick to oversee the restaurant and he agreed to do so as a
favour to these people although his understanding was that he
would not be involved in the day-to-day operations.
[5]
On March 25, 1991 Patrick caused 935376 Ontario Inc. to be
incorporated under the Ontario Business Corporations
Act.
[6]
In April it changed its name to Nikiko Restaurant Inc. The
articles of incorporation showed Patrick as the sole director.
All of the issued and outstanding common shares of Nikiko (100
common shares) were owned by Patrick.
[7]
Two offshore trusts, one for each of the families of the two
investors, each owned 100 Class A shares. These shares
were non-voting but were convertible into an equal number of
common shares.
[8]
Patrick hired a manager to run the restaurant. He did not have
the time to do the bookkeeping and as he needed someone for this
purpose he asked his wife Agatha to do so and she agreed. Neither
Patrick nor Agatha ever received any remuneration. She had no
formal training in bookkeeping and at Patrick's suggestion
she consulted with Ricky Wong, a manager for KMPG Peat Marwick
Thorne ("KPMG"), a national accounting firm. He set up
the accounting system for her including a computer system
relating to the payroll, the expenses and the receipts.
Mr. Wong also discussed with her the GST filings. Agatha did
the quarterly GST filings and would calculate the GST payable and
the input tax credits on the computer using the ACCPAC and
Excalibur systems. If she had a problem she would call KPMG. She
would prepare the cheques to the government for the GST
payable.
[9]
She sent to KMPG the GST forms that she had filed, as well as the
corporate forms, books and bank statements and assumed that if
she did not hear from them she was doing nothing
wrong.
[10] Nikiko
carried on the restaurant business from March 25, 1991 until
January 1997. On January 11, 1997 Nikiko ceased
operations and on January 17, 1997 it filed an assignment in
bankruptcy. On January 20, 1997 the CCRA issued a notice of
assessment to Nikiko for the GST that is the subject of the
derivative assessments against the appellants.
[11] The claim
by the CCRA for unremitted GST appears to arise partially from
what have been described as management or consulting fees of
$183,230, $352,743 and $306,454 received by Nikiko mostly from
the investors in the years 1993, 1994 and 1995. No GST was paid
on these fees.
[12] I shall
deal first with the assessment against Agatha. The central
question is whether she was a director of Nikiko. Mr. Henry
Hui was the first witness called on behalf of the appellant.
Mr. Hui is a barrister and solicitor who has practised law
in Ontario since 1975. He was the lawyer who acted on the
incorporation of Nikiko on March 25, 1991 and has kept the
minute book of the company in his office. The entire minute book
was entered as an exhibit. It shows Patrick as the incorporator.
Agatha's name as a director appears in By-law No. 1 but
neither she nor Patrick signed it. There is a certificate and
consent to act as director dated May 2, 1991 with
Agatha's name on it. She did not sign that either.
[13] A
resolution of the shareholders of Nikiko appears in the book
purporting to elect Patrick and Agatha as directors. It is not
signed. Other resolutions of directors appear in the book but
they are not signed.
[14] In the
directors' register Patrick and Agatha's names appear but
like everything else in the minute book it is not
signed.
[15] Tab 8
of Exhibit A/R-1 is Form 1 under the Corporations
Information Act. It shows Patrick and Agatha as directors. It
is signed by Ms. P. Sun, Mr. Hui's former
secretary. Mr. Hui stated that in light of Agatha's
failure to sign the consent to act as director her name in the
form signed by Ms. Sun was an error. I agree.
Mr. Hui's office had no authority to show Agatha as a
director. She never consented to act as director, she was never
elected director by the sole voting shareholder and she never
held herself out as a director.
[16] As a matter
of fact even if one could place any reliance on the form under
tab 8, there is another form in the minute book apparently
signed by the same Ms. Sun showing that Agatha was elected a
director on May 2, 1991 and that she ceased to be a director
on the same day.
[17] In a
special notice filed with the Ontario Government (tab 37 of
Exhibit A/R-1) there is a document that purports to be
signed by Agatha Lau. She denies ever having seen it and I accept
what she says. Even if she had signed it this would not make her
a director. In any event attached to it as Schedule A is
information on officers and directors, Agatha is shown as having
been elected a director and secretary on March 1, 1990,
which as it happens, is about 14 months before the company
came into existence.
[18] To hold
Agatha liable as a director when she was not one, in law or in
fact, based on the slapdash work of the law firm, would be
unconscionable. Agatha was not at any time a director. Her appeal
is allowed and the assessment against her is vacated.
[19] I come now
to Patrick. He does not have the defence available to him that
his wife has. He admits that he was a director. Like his wife he
received no compensation from the company. His principal defence
is due diligence. Has it been made out? I believe it has. He
ensured that his wife was given instructions in keeping the books
and records. He relied upon her to check with KPMG and she did so
if she encountered a problem. She submitted the returns to KPMG
as well as other information and if they did not get in touch
with her she assumed there was no problem.
[20] I do not
think that one can realistically separate Patrick's defence
of due diligence from his reliance upon his wife's
competence. He was satisfied that she was capable of
understanding and carrying out KPMG's instructions with
respect to accounting for the GST. She carried out those
instructions to the satisfaction of KPMG and her mastery of the
ACCPAC accounting system appears to have been satisfactory. She
had no reason to believe that she was doing anything wrong and
neither did Patrick. All revenues were fully disclosed to KPMG,
including the so-called consulting fees. They were
disclosed in the financial statements prepared by
KPMG.
[21] In fact,
Patrick testified that the amounts were recorded as consulting
fees based on the advice of Connie Mak of KPMG. The consulting
fees, which totalled about $842,000 over the three years 1993,
1994 and 1995, were put into Nikiko's operating account and
recorded by KPMG as consulting and management fees. This is the
only evidence that I have with respect to the nature of these
amounts and so I have to accept the evidence at its face value
although over $800,000 does seem like a lot of money for two
residents of Macao to be paying to a Japanese restaurant as
consulting fees.
[22] In light of
Patrick's expectation that KPMG were monitoring his
wife's work with respect to the reporting and paying of GST I
think he was acting reasonably with respect to Nikiko's GST
obligations.
[23] There have
been a number of cases in this court and in the Federal Court of
Appeal involving directors' liabilities for unremitted tax
under the Income Tax Act and the Excise Tax Act. I
set them out in Fremlin v. R., [2002] G.S.T.C. 65 at
paragraph 32 and they need not be repeated here. They
demonstrate an evolution in the law with respect to the
derivative liabilities of directors for unremitted tax. Some of
the earlier cases in this court imposed in my view an unduly
stringent obligation on directors. Section 323 of the
Excise Tax Act and section 227.1 of the Income Tax
Act do not demand the impossible. They do not require
perfection. Directors are not insurers for the fisc. All that is
needed is that the director "exercise the degree of care,
diligence and skill that a reasonably prudent person would have
exercised in comparable circumstances."
[24] One might
ask the question "What did the director fail to do that
ought reasonably to have been done?" The answer is, in this
case, nothing. Once Patrick was satisfied that Agatha's
mastery of the system was adequate and that she could rely on
KPMG for any assistance she needed with respect to the GST filing
and remittances I think it would be unreasonable to require him
to go further and check her work, particularly when neither he
nor Agatha were given any indication that anything was
wrong.
[25] This
conclusion is sufficient to dispose of the appeals. However a
number of other arguments were advanced and out of respect to
counsel I shall mention them briefly.
[26] Counsel for
the appellants argued that the director's liability under
section 323 of the Excise Tax Act is
dependent upon a number of conditions being met, one of which is
contained in paragraph 323(2)(c), that
the Crown's claim be proved in the bankruptcy of the
corporation within six months of the assignment in bankruptcy.
Counsel contends that the Crown has failed to prove that this
condition has been met. I agree that the onus of proving this is
on the Crown and the proof of claim did not find its way into the
evidence. Nonetheless the notices of appeal state that the CCRA
filed a proof of claim on February 7, 1997 and the replies
admit the allegation except for the date. Moreover it is pleaded
in both replies as an "assumption", so-called, that the
Minister of National Revenue filed a proof of claim in the
bankrupt estate of Nikiko on February 10, 1997. That
assumption is unrebutted and the practice in this court, subject
to certain exceptions, is that unrebutted assumptions pleaded in
the reply must be taken as true.
[27] This point
seems not to have been argued in Wollitzer v. Canada, [1995] T.C.J. No. 259, to which counsel
referred.
[28] I am
reluctant to push the concept of "assumption" stated
in M.N.R. v. Pillsbury
Holdings Ltd.,
64 DTC 5184, any further than it has already been
pushed. It gives the Crown a powerful advantage and is
potentially capable of abuse. In light of my finding that Agatha
was not a director and Patrick exercised due diligence and in
light of the admitted statements in the notices of appeal I think
it is preferable that I leave to another day the question whether
the mere pleading of an assumption of a fact that is peculiarly
within the respondent's knowledge and in respect of which the
respondent has the onus of proof is sufficient to cast the onus
on the appellant of disproving the assumption. I do not find the
proposition particularly attractive. While it may be that the
persons who criticise the rule on the basis that it means that a
taxpayer in a civil tax appeal is "guilty until proved
innocent" might themselves be criticized for employing in
their zeal a touch of hyperbole, nonetheless it must be
remembered that the rationale for the rule that the taxpayer
bears the onus of proof is found not only in M.N.R. v. Johnston, [1948] S.C.R. 186 but also in
Anderson Logging Co. v. The
King,
52 DTC 1209, where Duff J. said at
p. 1211:
First, as to the contention on the point of onus. If, on an
appeal to the judge of the Court of Revision, it appears that, on
the true facts, the application of the pertinent enactment is
doubtful, it would, on principle, seem that the Crown must fail.
That seems to be necessarily involved in the principle according
to which statutes imposing a burden upon the subject have, by
inveterate practice, been interpreted and administered. But, as
concerns the inquiry into the facts, the appellant is in the same
position as any other appellant. He must shew that the impeached
assessment is an assessment which ought not to have been made;
that is to say, he must establish facts upon which it can be
affirmatively asserted that the assessment was not authorized by
the taxing statute, or which bring the matter into such a state
of doubt that, on the principles alluded to, the liability of the
appellant must be negatived. The true facts may be established,
of course, by direct evidence or by probable inference. The
appellant may adduce facts constituting a prima facie case which remains unanswered; but in considering
whether this has been done it is important not to forget, if it
be so, that the facts are, in a special degree if not
exclusively, within the appellant's cognizance; although this
last is a consideration which, for obvious reasons, must not be
pressed too far.
[29] I do not
read that passage as permitting the Crown to plead anything it
likes as an assumption, whether or not it is uniquely within the
Crown's knowledge, and expect the taxpayer to disprove it.
The cards are already sufficiently stacked in favour of the
Crown. A similar reservation was expressed by
L'Heureux-Dubé J. in Hickman Motors Limited v. The Queen, 97 DTC 5363 at p. 5370.
See also Mungovan v. The
Queen,
2001 DTC 691 at paragraphs 10-13. I need not
decide this point here, however.
[30] The next
argument is that the notice of reassessment against Nikiko was
issued on January 20, 1997, three days after Nikiko filed
its assignment in bankruptcy and that in light of
subsection 69.3(1) of the Bankruptcy and Insolvency Act the notice of reassessment is invalid.
Subsection 69.3(1) reads:
Subject to subsection (2) and sections 69.4 and 69.5, on the
bankruptcy of any debtor, no creditor has any remedy against the
debtor or the debtor's property, or shall commence or
continue any action, execution or other proceedings, for the
recovery of a claim provable in bankruptcy, until the trustee has
been discharged.
[31]
Section 4.1 makes the Bankruptcy and Insolvency Act binding on the Crown. Counsel for the appellants
argued that the derivative assessments against the appellants are
based upon an invalid act, the notice of assessment against
Nikiko.
[32] I do not
agree. The notice of assessment is simply a statement of the
Minister's calculation of the taxpayer's liability. As
Thorson P. said in Pure Spring Co. Ltd. v. Minister of National
Revenue,
2 DTC 844, at p. 857:
The assessment is different from the notice of assessment; the
one is an operation, the other a piece of paper. The nature of
the assessment operation was clearly stated by the Chief Justice
of Australia, Isaacs, A.C.J., in Federal Commissioner of Taxation v.
Clarke(1927) 40 C.L.R.
246 at 277):
An assessment is only the ascertainment and fixation of
liability.
a
definition which he had previously elaborated in The King v. Deputy Federal Commissioner
of Taxation (S.A.); ex parte Hooper ((1926) 37 C.L.R. 368 at 373):
An "assessment" is not a piece of paper: it is an
official act or operation; it is the Commissioner's
ascertainment, on consideration of all relevant circumstances,
including sometimes his own opinion, of the amount of tax
chargeable to a given taxpayer. When he has completed his
ascertainment of the amount he sends by post a notification
thereof called "a notice of assessment" ... But
neither the paper sent nor the notification it gives is the
"assessment". That is and remains the act of operation
of the Commissioner.
It is the
opinion as formed, and not the material on which it was based,
that is one of the circumstances relevant to the assessment. The
assessment, as I see it, is the summation of all the factors
representing tax liability, ascertained in a variety of ways, and
the fixation of the total after all the necessary computations
have been made.
[33] Obviously
the notice of assessment serves a function. It is evidence that
an assessment has been made and that the Minister has determined
how much he thinks the taxpayer's liability is. It starts
time limits running. Indeed, it is conceptually somewhat
difficult to believe that an "assessment" can exist in
the Minister's mind in some metaphysical and incorporeal
state, without any notice being given to the taxpayer.
Unquestionably a notice of assessment is required before the
assessment has any practical effect. I do not think an assessment
is complete until notice has been given to the taxpayer. This is
clear from the decision of Thurlow J. (as he then was)
in Scott v.
M.N.R.,
60 DTC 1273.
[34] Nonetheless
I do not think that subsection 69.3(2) of the
Bankruptcy and Insolvency
Act has the effect of
preventing a notice of assessment from being issued against the
company after the assignment in bankruptcy. Undoubtedly it would
prevent the Minister from taking the proceedings contemplated by
section 316 of the Excise Tax Act such
as filing a certificate in the Federal Court and obtaining a writ
under subsection 316(4). I do not however regard a notice of
assessment as being an "action, execution, or other
proceedings ..." within the meaning of
subsection 69.3(1) of the Bankruptcy and Insolvency Act.
[35] Even if the
notice of assessment were in some way invalidated by the fact it
was issued after the assignment in bankruptcy this does not in my
view prevent the Minister from pursuing his remedies against the
directors. The liability for tax exists independently of the
existence of any assessment (subsection 299(2) of the
Excise Tax Act).
[36] Counsel for
the respondent argued that it was not open to the appellants to
attack the assessment against the company. In light of
Gaucher v. The
Queen,
2000 DTC 6678, this argument is not
sustainable.
[37] I turn now
to the management and consulting fees. Some of them were paid in
cash to Nikiko. Some were from two domestic companies Tri/Novo
and Greatwill. The amounts were initially recorded as
shareholders' loans, but on the advice of Connie Mak of KPMG
they were later designated as consulting fees. Mr. Ho, the
auditor for the CCRA, agreed that if these amounts were
shareholder advances or loans or if they were zero-rated they
were not taxable.
[38] Counsel for
the appellants argued that I should find that the amounts were
shareholder advances, notwithstanding their treatment in
Nikiko's books as consulting and management fees. Given their
magnitude, the irregular way in which they were paid and the fact
that on many occasions they were paid in cash by the wives of the
two Macao shareholders there might be grounds to suspect that
they really were not consulting or management fees. However such
a conclusion would be based on conjecture, not evidence. The only
conclusion that the evidence safely permits is, notwithstanding
the doubts I may have, that the payments were consulting and
management fees.
[39] Counsel
argued then that under Schedule VI, Part V of
the Excise Tax
Act the consulting fees
are zero-rated under section 23 which reads
A supply of
an advisory, professional or consulting service made to a
non-resident person, but not including a supply of
...
(b)
a service in respect of real property situated in
Canada;
...
[40] They were
said by Patrick to relate, in a vague sort of way, to
"investments" - including the stock market or possible
businesses. Counsel argued that this takes then out of the
exception for real estate. That may well be, but if someone wants
a supply to be zero-rated it is not a bad idea to nail down the
grounds with some considerable specificity. I do not care to base
a conclusion on such vague assertions.
[41] Counsel was
also critical of the way in which the assessment against Nikiko
was made. It was argued that it was based on insufficient
information. Perhaps it was, but I have some sympathy for
Mr. Ho, the assessor. He was having difficulty in getting
information from Agatha, the restaurant closed and the company
went bankrupt. He had to move fast and he did. I cannot criticize
that.
[42] I have
concluded that Agatha was not a director of Nikiko at any time
and Patrick has demonstrated that he acted reasonably and met the
due diligence test required by subsection 323(3) of
the Excise Tax
Act.
[43] The appeals
are allowed and the assessments made under section 323 of
the Excise Tax
Act are
vacated.
[44] Counsel for
the appellants asked that before the formal judgment is issued he
be given an opportunity to address the matter of costs. I would
ask that counsel communicate with the registry to determine a
suitable time for dealing with this question. If counsel agree it
can be done by telephone conference or in writing.
Signed at
Ottawa, Canada, this 25th day of November 2002.
A.C.J.COURT
FILE
NOS.:
2000-1594(GST)G and 2000-1596(GST)G
STYLE OF
CAUSE:
Between Agatha Kit Chun Lau and
Her Majesty The Queen
AND Between Patrick Wing Chu Lau and
Her Majesty The Queen
PLACE OF
HEARING:
Toronto, Ontario
DATES OF
HEARING:
September 4 and 5, 2002
REASONS FOR
JUDGMENT BY: The Honourable D.G.H.
Bowman
Associate Chief Judge
DATE OF REASONS
FOR JUDGMENT:
November 25, 2002
APPEARANCES:
Counsel
for the
Appellants:
Robert J. Morris, Esq.
Counsel
for the
Respondent:
J. Michelle Farrell
COUNSEL OF
RECORD:
For the
Appellants:
Name:
Robert J. Morris, Esq.
Firm:
Lerner & Associates LLP
Toronto, Ontario
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
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