Date: 20020109
Docket: 1999-533-IT-G
BETWEEN:
VICTOR ELIAS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Bowman, A.C.J.
[1]
This appeal is from an assessment in the amount of $735,735.50
made under section 227.1 of the Income Tax Act on the
basis that the appellant was liable as a director for the
unremitted source deductions that it is alleged that A.J. Perron
Gold Corporation ("Gold Corp.") should have remitted to
the Receiver General.
[2]
The appellant's position is that he is not liable for the
source deductions for two reasons:
1.
The employer and the payor of the remuneration was not Gold Corp.
but rather a subsidiary G.S.R. Mining Corporation
("GSR") and therefore Gold Corp. had no obligation to
make the remittances.
2.
In any event the appellant exercised the degree of due diligence
necessary to relieve him of responsibility under
subsection 227.1(3).
[3]
The facts are that the appellant is a lawyer although he has not
practised for a number of years. Prior to ceasing practice to
embark on other commercial activities he specialized in corporate
and securities law.
[4]
The following basic facts from the notice of appeal are either
admitted or have been established in evidence.
1
Victor Elias, (hereinafter "Elias"), served as a member
of the Board of Directors of Deak Resources Ltd. (now A.J. Perron
Gold Corp. after a name change approved by the shareholders on
August 10, 1994), from April 21, 1994 until tendering his
resignation on October 31, 1996.
2
A.J. Perron Gold Corp. was a public company, trading on the
Toronto Stock Exchange with sophisticated management including a
full time Secretary-Treasurer and a comptroller and other
financial staff in its subsidiary corporations.
3
Elias did not at any time own any stock or options in A.J. Perron
Gold Corp. or any related company, but served as an outside
director.
4
A.J. Perron Gold Corp. was a holding company with several
subsidiaries including wholly owned GSR Acquisition Corporation
which in turn owned 77% of GSR Mining Corporation, which in turn
owned 99% of Kerr Jex Corporation. In addition A.J. Perron Gold
Corp. was involved in a joint venture in which both A.J. Perron
Gold Corp. and GSR Mining Corporation held a 50% interest.
5
GSR Mining Corporation is a federally incorporated Canadian
corporation and was the operating entity for A.J. Perron Gold
Corp.'s gold mining activities at Larder Lake and
Virginiatown in the Province of Ontario.
6
GSR Mining Corporation employed a unionized workforce pursuant to
a Collective Bargaining Agreement with the United Steelworkers of
America, Local 9283.
7
GSR Mining Corporation maintained appropriate accounts relating
to its employees with Revenue Canada, the Ontario Workers'
Compensation Board, the Ontario Ministry of Finance Employer
Health Tax Branch, and the Labour Division, Survey of Employment,
Payrolls and Hours of Statistics Canada.
[5]
The appellant was never a director of GSR. That company operated
the Kerr gold mine in Northern Ontario. Gold Corp. apart from key
management staff had no employees.
[6]
It is clear from the evidence and in particular tab 24 of
Volume 1 of the Joint Book of Documents (Exhibit AR-1)
as well as the viva voce evidence of Mr. David
Ansara, the Comptroller of GSR, Gold Corp. would transfer funds
every two weeks from its bank accounts to the bank account
number 512286 of GSR at the Canada Trust Company sufficient
to cover the amount owing for salary and wages to the staff and
to workers paid on an hourly basis. GSR would issue cheques on
its bank account to its employees and would provide them with T4
slips. At the end of each year GSR would prepare and file with
Revenue Canada T4 summaries. GSR's account number with
Revenue Canada was AXC 56920 3.
[7]
Amounts were withheld for federal and provincial income tax,
Canada Pension Plan, Unemployment Insurance and Employment
Insurance and remitted to Revenue Canada under the above account
number by or on behalf of GSR.
[8]
All of the necessary remittances were made for 1995 (except for a
nominal shortfall of $200). In 1996 a cash flow shortage
developed and the two Perron brothers, Alex and John (who
controlled Gold Corp. and indirectly GSR, of which they were
directors) instructed Mr. Ansara to make the necessary
payments of salary and wages to the employees, but not to remit
the payroll deductions to Revenue Canada. The reasoning —
and it is a familiar refrain in directors' liability cases
— was that if the employees and other creditors were not
paid the business would go under and the 160 or so employees
would lose their jobs. It was expected that if the business could
be kept afloat things would turn around and the obligations to
Revenue Canada would be satisfied. It was a business decision
that for the purposes of this case I need neither condemn nor
condone. I state it merely as a fact. It was a decision made by
the directors of GSR.
[9]
Revenue Canada assessed GSR for the unremitted amounts using the
account number AXC 56920 3. These assessments of GSR
continued until June 28, 1996. Then, starting on
July 24, 1996, Revenue Canada started assessing Gold Corp.,
but using the same (GSR's) account number
AXC 56920 3. These assessments continued until
September 6, 1996, when they started to use another account
number 89684 3430 RP. Concurrently with these
assessments they started issuing assessments against Gold Corp.
on April 30, 1996 using the new account number. These
assessments continued until February 18, 1997.
[10] On
February 27, 1998 they assessed the appellant under
section 227.1 of the Income Tax Act for $735,735.50.
The notice of assessment contains the following explanation:
THE LIABILITY UNDER SECITON 227.1 OF THE INCOME TAX ACT,
SECTION 38 OF THE INCOME TAX ACT - ONTARIO, SECTION 21.1 OF
THE CANADA PENSION PLAN, SECTION 54 OF THE UNEMPLOYMENT INSURANCE
ACT, SUBSECTION 83(1) OF THE EMPLOYMENT INSURANCE ACT IN THE
AMOUNT OF $735,735.50 BEING THE AMOUNT OF UNPAID DEDUCTIONS,
INSTEREST AND PENALTIES PAYABLE BY A J PERRON GOLD CORPORATION,
IN RESPECT OF NOTICES OF ASSESSMENT DATED APRIL 30, 1996, JUNE
17, 1996, JUNE 24, 1996, JUNE 27, 1996, JULY 23, 1996, JULY 25,
1996, AUGUST 7, 1996, AUGUST 13, 1996, AUGUST 20, 1996, AUGUST
27, 1996, SEPTEMBER 5, 1996 AND FEBRUARY 18, 1997.
[11] It is of
course open to the appellant to challenge the assessments of Gold
Corp., in light of Gaucher v. R., [2001]
1 C.T.C. 125, and that is what he has done.
[12] The
assessments against Gold Corp. and hence the derivative
assessment against the appellant are premised on the assumption
that Gold Corp. was paying salary, wages or remuneration to the
employees of GSR within the meaning of section 153 of the
Income Tax Act. That assumption is wrong. Gold Corp.
advanced funds to GSR who paid GSR's employees. No principle
of interpretation permits or requires that I extend the meaning
of the words of subsection 153(1)
Every person paying at any time in a taxation year
(a)
salary, wages or other remuneration
...
to a person who advances funds to the true payor. The evidence
is clear that the person paying the salary wages or remuneration
to GSR employees was GSR not Gold Corp. even though it received
the funds from Gold Corp.
[13] Some
point was made of the fact that Gold Corp. when the remittances
were made to Revenue Canada paid them directly. I do not think
this makes Gold Corp. the person who pays the salary, wages or
remuneration. It was merely satisfying, on behalf of GSR,
GSR's obligation to Revenue Canada. GSR was a viable
operating company. It was not a sham, nor was it an agent of Gold
Corp. nor was Gold Corp. an agent of GSR. They were separate
corporate entities, with separate legal existences.
[14] I
conclude therefore that Gold Corp. never had an obligation to pay
the remittances to Revenue Canada under subsection 153(1).
Accordingly subsections 227(9), (9.1), (9.2), (9.4) and
(10.1) referred to by counsel for the respondent have no
application to Gold Corp.
[15] It
follows therefore that the assessments against Gold Corp. are
wrong and must fall insofar as they form the basis of the
assessment against the appellant. The appellant's assessment
must as a consequence fall as well. As between Gold Corp. and the
Minister of National Revenue, Gold Corp.'s assessments may
well be conclusive if it has not objected. I make no finding on
this point. Gold Corp. is not a party to this action. There was
no failure on the part of Gold Corp. as envisaged by
subsection 227.1(1) and so the foundation of the
appellant's liability under that subsection disappears.
[16] This
conclusion is sufficient to dispose of the appeal. However, I
shall deal briefly with the appellant's alternative argument.
Even if I am wrong in concluding that Gold Corp. was not the
person paying the salary, wages and remuneration and therefore
was not liable to make the remittances to Revenue Canada, I think
that the due diligence required of the appellant has been amply
satisfied. He was an outside director. He had no obligation to
enquire into the financial position of an operating subsidiary of
which he was not a director — at least not as a director
for the purposes of section 227.1, whatever may have been
his duties as a member of the audit committee.
[17] There
have been a number of Federal Court of Appeal decisions on
directors' liability. They have invariably propounded a less
rigid or stringent test than that which has been applied by some
of the judges of this court. I agree with that approach. The
cases are Soper v. R., [1997] 3 C.T.C. 242;
Smith v. R., [2001] 2 C.T.C.192; Worrell v.
R., [2000] G.S.T.C. 91; Wheeliker v. R., [1999]
2 C.T.C. 395; and Cameron v. R., [2001]
3 C.T.C. 200.
[18] In
Cameron v. R., Linden J.A. said at page 202:
In our respectful view, the Tax Court Judge did not correctly
apply the jurisprudence of this Court as outlined in Soper v.
R. (1997), [1998] 1 F.C. 124 (Fed. C.A.); Smith v. R.,
[2001] F.C.J. No. 448 (Fed. C.A.); Worrell v. R., [2000]
F.C.J. No. 1730 (Fed. C.A.), and Wheeliker v. R., [1999] 3
F.C. 173 (Fed. C.A.). First, he appears to have held the
appellant to a stricter standard of care than the statute and
jurisprudence require. He stated that the appellant had a
"duty to prevent defalcation (default, according to the
brief of the Crown) under the circumstance." That is not the
law; his duty was only to use reasonable care to prevent
defalcation (or default). As Justice Sharlow explained in
Smith, supra;
A director is required only to act reasonably in the
circumstance. The fact that his efforts are unsuccessful does not
establish that he has failed to act reasonably.
She concluded that the standard is reasonableness, "not
perfection." Moreover, the Tax Court Judge held that the
appellant took "no positive action to set up or place into
existence controls to account for remittances and the ongoing use
of any controls." Although the appellant made "some
efforts to protect Revenue Canada's arrears" he said,
these were "immaterial." Here too, however, he erred,
because, although positive steps are required of directors, they
need only be reasonable, positive steps, not foolproof ones.
According to these principles and based on largely uncontested
facts, the appellant, in our view, complied with this legal
obligation under sub section 227.1(3), that is, the
objective-subjective standard to act as a reasonably prudent
person would have in the circumstance of this case.
[19] Nothing
in the financial statements would have given the appellant any
idea that the remittances of source deductions in 1996 were not
being made. Moreover, there was nothing he could have done to
prevent the failure. The two Perron brothers were, to use
Mr. Ansara's words, calling the shots. The appellant
could not have prevented the failure even if he had known about
it.
[20] The
appeal is allowed with costs and the assessment is vacated.
Signed at Toronto, Canada, this 9th day of January 2002.
"D.G.H. Bowman"
A.C.J.
COURT FILE
NO.:
1999-533(IT)G
STYLE OF
CAUSE:
Between Victor Elias and
Her Majesty The Queen
PLACE OF
HEARING:
Vancouver, British Columbia
DATE OF
HEARING:
December 12 and 13, 2001
REASONS FOR JUDGMENT
BY:
The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF
JUDGMENT:
January 9, 2002
APPEARANCES:
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Judith Sheppard
COUNSEL OF RECORD:
For the
Appellant:
Name:
--
Firm:
--
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-533(IT)G
BETWEEN:
VICTOR ELIAS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on December 12 and 13, 2001,
at Vancouver, British Columbia, by
The Honourable D.G.H. Bowman
Associate Chief Judge
Appearances
For the
Appellant:
The Appellant himself
Counsel for the Respondent: Judith
Sheppard
JUDGMENT
It is
ordered that the appeal from the assessment made under
section 227.1 of the Income Tax Act, notice of which
is dated February 27, 1998 and bears number 12780 be allowed
with costs and the assessment be vacated.
Signed at Toronto, Canada, this 9th day of January 2002.
A.C.J.
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