Date: 20020121
Docket: 2000-4608(GST)G
BETWEEN:
ANDREW NETUPSKY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bell, J.T.C.C.
GENERAL
All sections referred to in these Reasons are
sections of Part IX of the Excise Tax Act respecting Goods
and Services Tax unless otherwise stated.
ISSUE
[1] The issue is
whether the appellant resigned as a director of No. 2 Corporate
Ventures Ltd. ("Ventures") more than two years before
January 15, 1998, the date of the Notice of Assessment - Third
Party ordinary issued by the Minister of National Revenue
("Minister") for tax, interest and penalty in the sum
of $794,698.04 respecting Ventures' failure to remit net tax
as required under subsection 228(2).
If the appellant did resign more than two
years before such reassessment he will, by virtue of subsection
323(5), not be liable as a director under the provisions of
subsection 323(1).
Subsection 228(1) and (2) require Ventures to
calculate the net tax and to remit it on a timely basis to the
Receiver General for Canada. Subsection 323(1) provides that
where a corporation fails to remit tax as so required the
directors of the corporation at the time the corporation was
required to remit the amount are jointly and severally liable,
together with the corporation, to pay that amount and any
interest thereon or penalties relating thereto. Subsection 323(5)
provides that an assessment of any amount payable by a person who
is a director of a corporation shall not be made more than two
years after the person last ceased to be a director of the
corporation.
FACTS
[2] The
appellant's first witness, Roderick Hunter McCloy, solicitor
for Ventures, testified that a written resignation as a director
of Ventures was deposited by the appellant in his office on
December 14, 1995 and that, in his opinion, it was an effective
resignation. The appellant subsequently testified that
McCloy's office was the registered office of the company.
[3] The appellant
testified that he became the sole director and president of
Ventures in 1988. He stated that the shareholdings were altered
in 1988 with him having 50% of the issued shares, a public
company, KSB Enterprises trading on the Hong Kong Exchange,
having 41% of the issued shares and Good Land Ltd., a Hong Kong
company, owning the remaining 9% of the shares. He stated that
Ventures, in 1992, acquired property and engaged in development
of the site into six residential units, construction having been
commenced in the summer of 1992 and completed in the spring of
1994. The appellant then explained that he had, on December 14,
1995, given the written resignation as Director and a written
resignation as president, each signed by him on December 6, 1995
to a Karen MacLean in "McCloy's" office, that she
directed him to "a paralegal" who showed him where the
minute book was and that he put that resignation in the minute
book. He explained that Ventures had ceased its business, that
there were problems in British Columbia respecting leaky
condominiums, that he did not wish to be a director and that the
company would not be used in the future.
[4] The document
respecting his resignation as Director reads as follows:
RESIGNATION OF DIRECTOR
TO: NO. 2 CORPORATE VENTURE LTD. (the
"Company")
I resign as director of the Company,
effective immediately.
DATED as of the 6th day of
December, 1995.
ANDREW NETUPSKY
[5] The document
respecting his resignation as president reads as follows:
RESIGNATION OF OFFICER
TO: NO. 2 CORPORATE VENTURES LTD. (the
"Company")
I resign as President of the Company,
effective immediately.
DATED as of the 6th day of December,
1995.
ANDREW NETUPSKY
Among the documents filed by the appellant
was a Statutory Declaration from Karen McLean reading, in part as
follows:
THAT I recall that Andrew Netupsky attended
the offices of Jones, McCloy, Peterson affiliated law practices
situated at 1700 - Three Bentall Centre, 595 Burrard Street,
Vancouver, British Columbia on or about December 14, 1995 and
that I directed him at that time to a corporate paralegal in the
office who was responsible for maintaining the corporate records
of No. 2 Corporate Ventures Ltd.
The appellant then produced a Statutory
Declaration from McCloy stating inter alia, that he
had
"... no reason to believe that the
Notice was not delivered to the registered office of No. 2
Corporate Ventures Ltd. by Andrew Netupsky on December 14,
1995."
The appellant testified that he did not,
because of the cost of so doing, take any action with respect to
terminating the existence of the Company. He said that McCloy
advised him that the Company would be struck off in two years if
appropriate statements were not filed.
On cross-examination the appellant said that
he had not corrected the record of directors. Presumably, this
refers to notices filed with the British Columbia corporate
registry. He said that, to his knowledge, no other directors were
appointed on or after December 14, 1995. He said further that he
was the sole shareholder on December 5, 1995, the aforesaid
shares having been transferred to him on November 8, 1995. The
appellant testified that a letter from McCloy to him dated June
9, 1998 was sent to the address in Vancouver of his engineering
company.
[6] Respondent's
counsel produced a copy of a letter from the Hongkong Bank of
Canada, Vancouver main branch, dated September 17, 1996 to
Ventures at the engineering company's address. The letter
concerned a $70,000 loan owing by the appellant to the Hongkong
Bank of Canada in respect of Ventures' project. That letter
describes Ventures as THE BORROWER and the appellant as THE
GUARANTOR. He stated that he had signed the letter on behalf of
Ventures.
[7] Respondent's
counsel produced a copy of a letter dated December 9, 1996 from
Manet Developments (1994) Ltd. and Ventures to Revenue Canada,
attention Mr. Marc Roy respecting GST owing. It was signed by the
appellant on behalf of Ventures.
[8] Respondent's
counsel then produced a copy of a letter dated
November 20, 1966 addressed to Ventures to the
attention of Mr. Andrew Netupsky, president. In
response to her question as to whether he had advised Revenue
Canada that he was no longer president, he responded in the
negative. In response to counsel's query as to whether he
would have retained authority to designate one Douglas Reid,
Accountant, to represent Ventures respecting GST discussions with
Revenue Canada, he responded affirmatively.
[9] Respondent's
sole witness, Marc Roy ("Roy"), testified that he
audited Ventures in 1996, having first contacted it on April 2,
1996. He said that the appellant was still listed on the GST
computer system as the person to contact. Roy testified that the
appellant had said some documents had been purged. In response to
Respondent's counsel's question as to whether he was made
aware that the appellant was no longer president, he replied in
the negative. He also said that the appellant had not advised him
that he had resigned as a director. On cross-examination, Roy
said that he had searched "BC Online" and that the
appellant was listed as a director and president.
APPELLANT'S SUBMISSION
[10] The appellant, acting
for himself, said that he resigned as a director and officer of
Ventures on December 6, 1995 and that the written resignation was
delivered to the company's corporate offices where the minute
book was kept on December 14, 1995. He then said that he had been
assessed as aforesaid on January 15, 1988 and had, therefore,
resigned more than two years before such assessment. He referred
to a letter dated October 28, 1998 sent by McCarthy
Tétrault to a Revenue Canada Appeals Officer[1], reading, in part, as
follows:
The Notice of Assessment is invalid due to
the application of subsection 323(5) of the Excise Tax Act
because the assessment was made by the Minister of National
Revenue more than two years after the date that Andrew Netupsky
ceased to be a director of the Company.
Subsection 323(5) states:
"323.(5) An assessment under subsection
323(4) of any amount payable by a person who is a director of a
corporation shall not be made more than two years after the
person last ceased to be a director of the corporation."
The Excise Tax Act does not define when a
person ceases to be a director of a corporation. It is therefore
necessary to refer to the applicable law governing the
Company.
The Company Act
The Company was incorporated under the
Company Act (British Columbia). Therefore the
provisions of that statute are relevant in determining when
Andrew Netupsky ceased to be a director of the Company.
A director ceases to hold office when he
resigns. At the relevant time, paragraph 154(1)(a) and subsection
154(2) of the Company Act, R.S.B.C. 1979, c.59 (the
"Company Act") states:
"154.(1) A director ceases to hold
office ... when he
(a) dies
or resigns".
"154.(2) Every resignation of a director
becomes effective at the time a written resignation is delivered
to the registered office of the company or at the time specified
in the resignation, whichever is later."
The Resignation specifies that Andrew
Netupsky's resignation is effective immediately. Therefore,
Andrew Netupsky ceased to be a director of the Company pursuant
to subsection 154(2) of the Company Act on the date that the
Resignation was delivered to the registered office of the Company
namely, on 14 December 1995.
The effectiveness of the resignation of
Andrew Netupsky does not depend in any way on whether or not the
date of the resignation is entered in the Company's register
of directors.
It is true that the Company is required under
the provisions of the Company Act to keep a register of
directors. Paragraph 140(c) of the Company Act states:
"140. Every company shall keep a
register of its directors and enter in it the ...
(c)
date on which each former director ceased to hold office as a
director".
However, it is not an offence for a company
not to update the register of its directors. Moreover, the
omission by the Company to enter the date on which Andrew
Netupsky ceased to hold office in the register of its directors
does not render his resignation ineffective. On the contrary, the
effectiveness of Andrew Netupsky's resignation is determined
strictly with reference to subsection 154(2) of the Company
Act.
Similarly, the effectiveness of the
resignation of Andrew Netupsky does not depend in any way on
whether or not a notice of the resignation was filed with the
Registrar of Companies. It is the Company, rather than Andrew
Netupsky, which is required under the provisions of the Company
Act to file a notice of resignation with the Registrar of
Companies. Subsections 156(1) and (2) of the Company Act
state:
"156.(1) Every company shall, within 14
days after the resignation or removal of a director or the
company becoming aware of his not being qualified, file with the
registrar a notice, in Form 11 of the Second Schedule, of a
director ceasing to hold office ...."
"156.(2) A company that contravenes
subsection (1) commits an offence and is liable to a fine not
exceeding $50 for each day it is in default."
In addition, any officer or director who
authorized, permitted or acquiesced in an offence committed by a
company has committed an offence and is liable to a fine. Section
366 of the Company Act states:
"366. Where a corporation commits an
offence against this Act, every director or officer of it who
authorized, permitted or acquiesced in the offence commits an
offence and is liable on conviction to a fine of not more than
$2,000."
It may be true that the Company has committed
an offence under subsection 156(2) of the Company Act it if has
failed to file a notice of Andew Netupsky's resignation in
prescribed form with the Registrar of Companies. Although the
Company's omission renders it liable to a fine pursuant to
subsection 156(2) and renders any director or officer who
authorized, permitted or acquiesced in the omission liable to a
fine pursuant to section 366, it does not render Andrew
Netupsky's resignation ineffective. Therefore, no adverse
inference can be drawn regarding the effectiveness of Andrew
Netupsky's resignation from the fact that the Company did not
file a notice of resignation with the Registrar of Companies as
required under subsection 156(1).
The foregoing discussion is supported by
jurisprudence on the issue.
Relevant Jurisprudence
The effectiveness of a director's
resignation under the Company Act (British Columbia)
was recently considered by MacKay, J. in The Queen v. Wellburn
and Perri (1995) 95 DTC 5417 (Federal Court - Trial
Division). A copy of the Reasons for Judgment are enclosed for
your reference.
The issue in The Queen v. Wellburn and
Perri was whether subsection 227.1(4) of the Income Tax
Act (Canada) (the "Income Tax Act") applied to
invalidate a notice of assessment issued by the Minister of
National Revenue against the defendants as the former directors
of Olympic Hotels Ltd. for liability purportedly arising under
subsection 227.1(1) of the Income Tax Act as a result of the
failure by that company to remit certain amounts withheld from
its employees' remuneration contrary to paragraph 153(1)(a)
of the Income Tax Act.
Subsection 227.1(4) of the Income Tax Act is
identical in effect to subsection 323(5) of the Excise Tax Act.
Subsections 227.1(1) and (4) state:
"227.1(1) Where a corporation has failed
to deduct or withhold an amount as required by ... section 153
... or has failed to remit such an amount ... the directors of
the corporation at the time the corporations was required to
deduct, withhold, remit or pay the amount are jointly and
severally liable, together with the corporation, to pay that
amount and any interest or penalties relating thereto."
"227.1(4) No action or proceedings to
recover any amount payable by a director of a corporation under
subsection (1) shall be commenced more than two years after the
director last ceased to be a director of that
corporation."
The jurisprudence pertaining to section 227.1
of the Income Tax Act is relevant in considering the application
of section 323 of the Excise Tax Act because of the similarities
in the wording and effect of their provisions. In considering the
application of section 323, a court may refer to judicial
decisions made in respect of section 227.1.1
Therefore, although the issue in The Queen v. Wellburn and
Perri pertains to the application of subsection 227.1(4), the
decision of the Federal Court - Trial Division in that case is
relevant in determining the application of subsection 323(5).
The facts in The Queen v. Wellburn and
Perri are remarkably similar to the facts set out above. The
defendants in that case (namely, Wellburn and Perri) were the
sole directors and officers of Olympic Hotels Ltd., a company
incorporated under the Company Act (British Columbia). All
of the issued and outstanding shares of Olympic Hotels Ltd. were
owned indirectly by the defendants through their respective
holding company.
The company operated a hotel but eventually
fell into financial difficulties and failed to remit certain
amounts that it deducted during October 1984 from its
employees' remuneration contrary to paragraph 153(1)(a) of
the Income Tax Act. A receiver-manager was appointed by the
Supreme Court of British Columbia on 28 November 1984 charged
with the responsibility of managing the company's property
and affairs. The company was assessed by the Minister of National
Revenue on 20 February 1985 in regard to its failure to remit the
deductions made by it during October 1984.
On 25 February 1985 the defendants both
signed a memorandum addressed to Olympic Hotels Ltd. whereby they
purported to tender their resignations as directors and officers
of the company.
On 24 March 1987 the Minister of National
Revenue issued a notice of assessment against each of the
defendants as directors of Olympic Hotels Ltd. pursuant to
subsection 227(1) of the Income Tax Act. The notice of assessment
was in the amount of $16,089 representing the unremited source
deductions together with interest and penalties.
1
See for example Drover v. The Queen [1998] G.S.T.C. 45
(Federal Court of Appeal) pertaining to section 323 of the Excise
Tax Act which applied the decision in Soper v. The Queen
(1997) 97 DTC 5407 (Federal Court of Appeal) pertaining to
section 227.1 of the Income Tax Act.
Notwithstanding the defendants'
objections to the notice of assessments, the assessments were
confirmed in July of 1988. However, the Tax Court of Canada
ultimately allowed the defendants' appeal. The Minister of
National Revenue appealed to the Federal Court - Trial Division
by way of trial de novo.
The defendants argued, among other things,
that the notices of assessment were invalid pursuant to
subsection 227.1(4) of the Income Tax Act because they were
issued more than two years after they resigned as directors of
Olympic Hotels Ltd.
The issue is succinctly stated by MacKay, J.
at p. 5422 as follows:
"If the defendants effectively resigned
from office as directors by their memorandum of February 25,
1985, and that resignation was effective more than two years
before the assessments were issued on March 24, 1987, the
defendants are entitled to the benefit of the two-year
prescription period established under ss. 227.1(4)."
At trial, the defendants both testified that
Wellburn prepared the memorandum of their resignations and that
they both signed it.
Wellburn testified that he delivered the
memorandum to the company's registered office namely, the
office of the company's lawyer, and left the memorandum with
a secretary or receptionist to place it in the company's
minute book. Perri could not corroborate Wellburn's testimony
in this regard as he did not accompany Wellburn to the
company's registered office. Indeed, Wellburn was unable to
fix a time on 25 February 1985 when he actually delivered the
memorandum.
When Wellburn delivered the memorandum to the
company's registered office, he did not ask to see the lawyer
about the matter nor that it be brought to the lawyer's
attention. Wellburn testified that "he did not think of it
as a very significant document, that it was executed merely to
placate Perri who was upset, that it did not affect their efforts
to try to save the company or to sell its assets and that he did
not want to incur legal costs for the solicitor's
services." In this regard, MacKay, J. expressed some
surprise that Wellburn, a chartered accountant, "paid less
attention to legal formalities of his own corporation than he
could have done in a professional manner for someone
else".
Neither Wellburn nor Perri subsequently
referred to their memorandum of resignation until 1987 when
reference to the memorandum was made by them in their respective
notice of objection. Indeed, Wellburn testified that he regarded
the memorandum to be so insignificant that he had forgotten about
it until their counsel was preparing their respective notice of
objection. It was at that point that Perri remembered that they
signed a memorandum of resignation and that it was delivered by
Wellburn to the company's registered office. As a result, the
defendants requested the company's lawyer to review the
company's records whereupon the memorandum was found in the
company's minute book.
Based on the provisions of section 154 of the
Company Act (British Columbia) MacKay, J. noted that the
issue of the defendants' liability under section 227.1 of the
Income Tax Act depended entirely on the determination of when the
memorandum of resignation was delivered to the company's
registered office.
For their part, council for the Minister of
National Revenue argued that there was no credible evidence on
which the Court could conclude that the memorandum was delivered
to the company's registered office more than two years before
the date that the notices of assessment were issued under
subsection 227.1(1) of the Income Tax Act. Counsel based their
argument on the fact that there was no corroborating evidence of
when the memorandum was delivered by Wellburn to the
company's registered office and on evidence that the
defendants continued to act as the company's directors. The
evidence also indicated that the company's register of
directors was not updated with the date of the defendants'
resignation and a notice of the defendants' resignation in
prescribed form was not filed with the Registrar of Companies as
required by subsection 156(1) of the Company Act (British
Columbia). This omission supported the testimony of the
company's lawyer which was to the effect that he was not
aware in February or March of 1985 of the defendants'
resignations or of the memorandum of resignation being left at
his office. Indeed, the company's lawyer testified that he
did not recall seeing the memorandum of resignation at the time
it was purportedly delivered to his office by Wellburn even
though he would have expected that it would have been brought to
his attention in light of the established procedures of his
office. Nevertheless, the lawyer could not attest to there never
being errors made by those of his staff responsible for the
office routine systems.
MacKay, J. indicates in his reasons for
judgement that the evidence in regard to the delivery by Wellburn
of the memorandum of resignation to the company's registered
office is unsatisfactory. Nevertheless, he finds as a fact that
the memorandum was delivered to the company's registered
office by Wellburn within a few days of signature of that
document on 25 February 1985 and that the delivery is within
the terms of subsection 154(2) of the Company Act (British
Columbia). Consequently, he finds that the defendants ceased to
be a director of the company more than two years before the
defendants were assessed under subsection 227.1(1) of the Income
Tax Act on 24 March 1987.
In arriving at his decision, MacKay, J.
expressly refers to the requirements under the Company Act
(British Columbia) imposed on a company to file a notice in
prescribed form with the Registrar of Companies within 14 days
after the resignation of a director and to maintain a register of
directors and to record therein the date when every director
ceases to hold office. With respect to these and other
requirements under the Company Act (British Columbia),
MacKay, J. makes the following statement at p. 5425:
"In my opinion, these provisions ...
deal with consequences of failures by companies to properly
report for their own records and to the provincial registrar when
there is a resignation of a director. There is no evidence here
that any report was made in the company's own records and no
report was made to the provincial registrar. Nevertheless, the
termination of office of a director who resigns is established by
ss. 154(2), in this case when the written resignation signed by
the defendants was delivered to the registered office of the
company. In my opinion that provision makes the resignation
effective, and other provisions of the Act, referred to by the
Crown, deal with consequences arising from failure to report a
resignation in light of the requirement that there be a director
or directors. In the result, I find that the appeal by Her
Majesty is dismissed."
[11] The appellant then
referred to a letter of November 24, 1998 from McCarthy
Tétrault to the same Appeals Officer respecting a Revenue
Canada allegation that the appellant was a de facto
Director and commenting on other matters. That letter, adopted by
the appellant as part of his submission is reproduced here in its
entirety.
We are writing in response to your letter of 19 November 1998
which raises several specific issues. Our responses to each issue
is set out below.
DE FACTODIRECTOR
Your letter alleges that Andrew Netupsky continued to
dischange "senior corporate functions" after his
resignation as a director of No. 2 Corporate Ventures Ltd. (the
"Company") on 14 December 1995. It is therefore
asserted by Revenue Canada that he continued to be a director of
the Company within the meaning of the Company Act,
R.S.B.C. 1979, c. 59 (the "Company Act") and the
meaning of subsection 323(4) of Part IX of the Excise Tax
Act (Canada).
Revenue Canada's assertion that Andrew Netupsky continued
to be a director of the Company after 14 December 1995 is based
on the definition "director" in subsection 1(1) of the
Company Act which states ""director" includes
every person, by whatever name he is designated, who performs
functions of a director".
Although not well articulated in the letter, Revenue Canada
appears to rely on this extended definition "director"
in the Company Act to support its theory that a person who has
not been properly appointed under the applicable corporate law as
a director of a company or who has since effectively resigned
from that office (i.e. a person who is not a de jure
director of a company) can nevertheless be a director of that
company if he or she performs the functions of a director of that
company (i.e. a de facto director of the company).
Since your letter does not specify the "senior corporate
functions" that Andrew Netupsky is alleged to have
discharged after 14 December 1995, it is only possible to respond
to Revenue Canada's assertion in the abstract.
There are essentially two responses to the issue raised by
Revenue Canada. Firstly, Andrew Netupsky expressly denies that he
has performed any functions relating to the Company after 14
December 1995. However, even if he had, he did so in his
capacity as the sole shareholder of the Company and not as its
director.
You may recall that Revenue Canada asserted that the
appellants in The Queen v. Wellburn and Perri (1995) 95
DTC 5417 (Federal Court - Trial Division) had performed
certain activities as though they continued to hold the office of
directors and therefore continued to be directors of the company
pursuant to the definition "director" in subsection
1(1) of the Company Act. However, this argument was rejected by
the MacKay, J. on the basis that the actions of the appellants
were or could have been taken in their capacity as shareholders
rather than as directors of the company.
Secondly, no jurisprudence has been cited by Revenue Canada to
support its assertion that a person who is not a de jure
director of a company but is merely a de facto director of
that company can be subject to liability as a director under
subsections 323(4) of the Excise Tax Act or 227.1(4) of
the Income Tax Act (Canada). On the contrary, the decision
of O'Connor, T.C.C.J. in Wheeliker et al. v. The Queen
(1997) 98 DTC 1110 (a copy of the reasons for judgement are
enclosed) stands for the proposition that a person who has not
been a de jure director of a company for at least two
years cannot thereafter be liable to assessment under subsection
227.1(4) of the Income Tax Act (and by extension, under
subsection 323(4) of the Excise Tax Act) even if he has
thereafter acted as a de facto director of the
company.
Wheeliker et al. v. The Queen involved an assessment
issued by Revenue Canada under subsection 227.1(4) of the
Income Tax Act against 6 appellants who were the apparent
directors of a company incorporated under the Companies
Act (Nova Scotia).
The appointment of the appellants as directors of the company
was defective under the applicable corporate law. O'Connor,
T.C.C.J. therefore held that the appellants were not de
jure directors of the company. Nevertheless, Revenue Canada
argued that because each of the appellants acted in the capacity
of a director of the company and performed the functions of
director, they were still subject to liability under subsection
227.1(4) of the Income Tax Act because they were de
facto directors of that company. In this regard, Revenue
Canada relied on paragraph 2(l)(f) of the Companies Act
which defined "director" as, including "any person
occupying the position of director by whatever name
called".
O'Connor, T.C.C.J. agreed with Revenue Canada that each of
the appellants was in fact a de facto director of the
company. The evidence showed that each appellant was, and allowed
himself to be, identified as a director of the company and
regularly attended meetings (referred to in the minutes as
directors' meetings) at which the company's business was
conducted by them in a manner compatible with the discharge of
responsibilities of directors. As well, each appellant was
publicly identified as a director of the company in its annual
corporate filings. Nevertheless, O'Connor, T.C.C.J. held that
the appellants were not liable under subsection 227.1(4) even
though they were clearly de facto directors of the
company.
SECTION 158 OF THE COMPANY ACT
Section 158 of the Company Act states that "no person
shall be the ... president of a company unless he is a director
of the company".
Section 158 establishes a condition which must be satisfied in
order for a person to hold the office of president of a company.
If that condition is not satisfied in relation to a particular
person, that person cannot hold, or continue to hold, the office
of president.
Whereas section 158 may be relevant to the issue of whether
Andrew Netupsky could continue to hold the office of president of
the Company after his resignation as the Company's director,
it is completely irrelevant to the issue of whether his
resignation as a director of the Company was effective.
The words of section 158 simply do not support the assertion
that the effectiveness of Andrew Netupsky's resignation as a
director of the Company depends on his concurrent resignation as
the president. In any event, the issue is moot because Andrew
Netupsky in fact resigned from the office of president of the
Company on 14 December 1995 by delivering a notice of such
resignation (a copy of which is attached) to the registered
office of the Company at the same time as he delivered his notice
of resignation as a director of the Company.
THE COMPANY'S REGISTER OF DIRECTORS
Your letter indicates that on 19 March 1997 a Collections
Officer attended the Company's registered office to inspect
the Company's Register of Directors and that he or she found
no evidence of any resignation.
As indicated in our letter of 28 October 1998 and for the
reasons set out in the decision of MacKay, J: in The Queen v.
Wellburn and Perri, the effectiveness of a director's
resignation is not affected by the company's failure to
update its Register of Directors to reflect that resignation. The
effectiveness of a director's resignation depends entirely on
whether he complied with the conditions in subsection 154(2) of
the Company Act namely, that the resignation be in writing
and that it be delivered to the registered office of the
company.
It is therefore irrelevant whether or not the Collections
Officer found any evidence of Andrew Netupsky's resignation
by inspecting the Company's Register of Directors. Andrew
Netupsky's resignation as a director of the Company was
effective on 14 December 1995 when he complied with the
provisions of subsection 154(2) and the legal result which flows
from that compliance is not affected by the Company's failure
to reflect the resignation in its Register of Directors.
NOTICE OF RESIGNATION FILED WITH THE REGISTRAR
Your letter indicates that a corporate search made on 26
September 1997 disclosed that Andrew Netupsky was the director,
president and secretary of the Company at that time. The
inference is that his resignation was not effective because the
Company did not file the appropriate notice with the registrar of
companies as required under the Company Act.
This issue has already been fully addressed in our letter of
28 October 1998. As previously stated, Andrew Netupsky's
resignation as a director of the Company was effective on 14
December 1995 when he complied with the provisions of subsection
154(2) and it is irrelevant whether or not the Company filed the
appropriate notice with the registrar.
OTHER COMMENTS
You indicate in your letter that Andrew Netupsky's
"suggestion of resignation" on 14 December 1995 is of
recent date yet you acknowledge that he stated during an
interview with Revenue Canada on 6 November 1996 and again on 28
January 1997 that he resigned in April 1995. We therefore assume
that Revenue Canada's real concern is with this purported
inconsistency.
The negative inference which Revenue Canada has apparently
drawn on the basis of the purported inconsistency is ill founded.
It is not surprising in the least that Andrew Netupsky could not
precisely recall the date or even the month of his resignation in
view of the fact that he did not review the Company's minute
book during the interview and therefore did not have the
opportunity to refresh his memory as to the actual date of his
resignation. Moreover, he did not have counsel present during the
interview and was therefore not advised on the issue. In these
circumstances, any inconsistency of the nature described above it
is entirely inconsequential.
Revenue Canada also appears to have drawn a negative inference
from the alleged fact that no "resignation defence" was
raised by Andrew Netupsky during a Revenue Canada interview held
on 16 April 1997. However, there are at least three explanations
for the failure to raise the resignation defence.
Firstly Andrew Netupsky was not advised by his lawyer, George
Davis, regarding the possible application of subsection 323(5) of
the Excise Tax Act as a defence to the proposed assessment. Mr.
Davis does not practice in the area of taxation and therefore
could not have possibly advised him in respect of subsection
323(5).
Secondly Andrew Netupsky's resignation was not actually
effective until 14 December 1995. Therefore, no resignation
defence was available to him at the time of the interview on 16
April 1997. Moreover, the resignation defence would not
necessarily have been available to him at the time of the
interview even if he had actually resigned in April 1995.
Thirdly even if the resignation defence was available to
Andrew Netupsky at the time of the interview on 16 April 1997, he
was under no obligation to raise the defence at that time. The
Excise Tax Act sets out the procedure for appealing an assessment
issued under subsection 323(4) and he is entitled under that
procedure to raise any relevant defence possible in his notice of
objection even if the defence was not previously raised.
CONCLUSION
We fully expect that the foregoing discussion has
satisfactorily addressed the concerns raised by Revenue Canada
and we hope that the appeal by Andrew Netupsky will be confirmed.
However, if you are unable to confirm Andrew Netupsky's
appeal based on our submissions to date, we hereby request a
meeting with you and your supervisor to address any remaining
concerns that you may have.
[12] Appellant then
produced a third letter from McCarthy Tétrault to the same
Appeals Officer and it is reproduced in its entirety as his
submission.
We are writing at your invitation to discuss the implications
of the recent decision of the Federal Court of Appeal in The
Queen v. Wheeliker et al (unreported).
We are also writing to request an update of Revenue
Canada's position regarding this appeal and to obtain a copy
of any additional information which Revenue Canada has obtained
relevant to this appeal which has not previously been provided to
us. Ed Kroft or I will contact you shortly to follow up on these
requests. We also take this opportunity to confirm that the
minute book of No. 2 Corporate Ventures Ltd. has not yet been
returned to us.
BACKGROUND
The Queen v. Wheeliker involves the assessment of
directors of a particular corporation under subsection 227.1 (1)
of the Income Tax Act (Canada).
The particular corporation, Louisbourg Harbourfront Park Ltd.,
was formed in 1980 under the Companies Act (Nova Scotia).
The Articles of Association of Louisbourg Harbourfront Park Ltd.
(the "Corporation") required that each of its directors
hold at least one of its shares. Although each of the respondents
was purportedly appointed a director of the Corporation and acted
in that capacity, none of them actually owned any of its shares
as required by the Articles.
During the period January 1992 to October 1993 the Corporation
failed to remit to the Receiver General federal income tax
withheld from the wages paid to its employees. The respondents
were assessed by the Minister of National Revenue for source
deductions not remitted during the period pursuant to subsection
227.1(1) of the Income Tax Act.
THE DECISION OF THE COURT
As the Income Tax Act does not define the word
"director", it is necessary to consider the ordinary
meaning of that word.
The Court held that a director under the Companies Act
does not include those individuals who do not meet the
requirements prescribed by that statute. Therefore, the
respondents were not directors for purposes of the Companies
Act because they failed to satisfy the requirement of owning
at least one share in the Corporation.
However, the Court allowed the Minister's appeal based on
the common law principal that "a person who has not obtained
the requisite qualifications [to be duly appointed as a director
of a corporation] is prevented from pleading this failure in
order to escape liability attaching to a director". This
principal has evolved from the need "to assist third parties
who deal with persons who act as directors although they lack the
required qualification or authority".
THE IMPLICATIONS OF THE COURT'S DECISION
The decision of the Court in The Queen v.
Wheeliker has absolutely no relevance to Andrew
Netupsky's appeal. The Court's decision is based on the
specific facts in that case. Those facts are clearly
distinguishable from those pertaining to this appeal.
Firstly, the respondents in The Queen v.
Wheeliker held themselves out to the public as directors of
Louisbourg Harbourfront Park Ltd. while acting on behalf of that
corporation notwithstanding that they failed to comply with the
corporate requirements for attaining the office of director.
Andrew Netupsky on the other hand was duly appointed as a
director of No. 2 Corporate Ventures Ltd. and acted accordingly
during the tenure of his office but had duly resigned that office
on 6 December 1995. Whereas Louisbourg Harbourfront Park Ltd.
carried on its activities in the normal course during the
relevant period throughout which the respondents acted as its
director, No. 2 Corporate Ventures Ltd had actually disposed of
all of its asscts, and ceased to carry on business, before Andrew
Netupsky's resignation in December 1995. Therefore, except
for the company's existing creditors, no third party was
dealing with, or became interested in the company after his
resignation. Hence, the policy concern that is the basis for the
Court's decision in The Queen v. Wheeliker isnot
present in this appeal.
Moreover, at no time after his resignation did Andrew Netupsky
hold himself out to the public as a director of No. 2 Corporate
Ventures Ltd. On the contrary, he expressly informed persons who
were interested in No. 2 Corporate Ventures Ltd. that he was no
longer a director. For example, we attach a copy of the letter
written by Andrew Netupsky shortly after his resignation
informing Mr. Mike Cepin of Hongkong Bank of Canada of his
resignation in December 1995. This letter substantiates not only
the fact of Andrew Netupsky's actual resignation in December
1995 but also the fact that he informed interested parties of his
resignation in order to avoid giving the appearance that he
continued to be a director of No. 2 Corporate Ventures Ltd. after
December 1995.
We hope that the foregoing discussion clarifies our position
that the Court's decision in The Queen v.
Wheeliker is irrelevant to Andrew Netupsky's appeal.
However, we would be pleased to discuss this matter further if
you have any specific concerns regarding the implications of the
Court's decision in light of our client's course of
action after his resignation in December 1995.
Yours truly,
McCARTHY TETRAULT
Thomas D. Ciz
Enclosure
cc: Andrew
Netupsky
Ed Kroft
[13] The letter to Mr. Mike
Cepin, from the appellant, dated February 19, 1996 referred to in
the above submission sets out, in part, that:
...
2. Concerning #2 Corporate
Ventures:
- The project
and the company are finished.
- Paul Tse
resigned as an officer in 1995
- I resigned
as a Director and Officer in December 1995.
[14] In closing the
appellant said that the issue of his title, when talking to the
Revenue Canada auditor, "never came up". He said that
he had resigned as a director. He further said they were speaking
to him as a shareholder or member but not a director because
there was nothing to direct.
RESPONDENT'S SUBMISSIONS
[15] Respondent's
counsel said that the appellant's December 14, 1995
resignation was not effective because section 108 of the Company
Act provides that:
"Every company must have at least one
director ... "
Counsel submitted that the sole director of a
company could not "effectively resign". She referred to
Zwierschke v. M.N.R., [1991] 2 C.T.C. 2783. This Court
held in that case that the taxpayer's resignation as director
was ineffective. The resignation was addressed to the company and
signed by the appellant stating:
I hereby tender my resignation as President
of the Corporation, such resignation to take effect
immediately.
Section 119(2) of the Ontario Business
Corporations Act, applicable at the time, reads as
follows:
No director named in the articles shall be
permitted to resign his office unless at the time the resignation
is to become effective a successor is elected or appointed.
Counsel submitted that it was common sense
that a company must have a director and concluded her submission
on that point by saying that the last one standing
"can't leave the ship".
Counsel then said if the appellent, if not a
de jure director, was a de facto director. Counsel
submitted that the Appellant held himself out as a director in
that he was listed as the contact person on the GST
"mainframe" and was the only person that could be the
company. She stated that he did not change the information about
being a director, provided books and records to Revenue Canada,
and authorized the accountant to deal with Revenue Canada
respecting GST. Counsel pointed to the fact that the Appellant
had signed a loan document for the Hongkong Bank and also an
assignment of debts on behalf of Ventures. She said that he used
his corporation's address for Ventures and received
correspondence for it. She said that he had not filed a notice of
resignation with the registrar of companies.
[16] Counsel then referred
to McDougall v. R., [2001] 1 C.T.C. 2283. In referring to
this Court's decision she referred to paragraph 15 of that
case which reads as follows:
On January 21, 1997 Louise Marischuk, a
collections officer for Revenue Canada at Penticton, B.C.,
telephones Alec McDougall in Calgary to inquire about GST and
payroll instalments of Columbia. Alec was listed with GST as a
director of Columbia. She testified that she told him about
directors' liability and asked him to fax to her within 7
days (1) a list of Columbia's accounts receivable, and (2)
the unfiled GST returns, and in addition to pay Columbia payroll
remittances for November and December. Alec never told Louise
that he was not a director of Columbia. He also denied that he
was a director of Columbia in his testimony, or that he would
have told Louise at that time that he was a director of
Columbia.
She also presented paragraph 22 which reads
as follows:
Alec held out that he was a director of
Columbia
1. August 2, 1995 to the Bank of
Nova Scotia (Exhibit R-3, p. 1, and pp. 3, 4 and 5)
2. January 24, 1997 to Revenue
Canada (Income Tax) when he signed Columbia's 31/07/1996 T2
Income Tax Return (Exhibit R-4).
3. February 4, 1997 to Revenue
Canada (GST) when he signed the quarterly GST returns.
4. Similarly, when he signed
Columbia's cheques contained in Exhibit R-6, he did not
describe his position with Columbia on the cheques, but anyone
inquiring with the Bank of Nova Scotia respecting his position
with Columbia would have learned that their records showed him as
a director of Columbia. One such a cheque, dated January 29, 1997
was to Revenue Canada.
And paragraph 25, reading as follows:
The evidence is that both Columbia and Alec
held out that Alec was a director of Columbia. Alec did so after
August 1, 1995 and until at least February 4, 1997. Alec held
this out by his own signature to Revenue Canada. Employees and
officers of the corporation also signed documents to that effect,
including Casey Rea's filing of Columbia's GST
registration on September 7, 1994 (Exhibit R-2). Both the Bank of
Nova Scotia and Revenue Canada relied on those
representations.
Counsel then, in paragraph 26, referred to
the Wheeliker v. R decision and quoted Letourneau, J.A.,
who said:
Here, by using the word "directors"
without qualifications in subsection 227.1(1), Parliament
intended the word to cover all types of directors known to the
law in company law, including, amongst others, de jure and
de facto directors.
Then counsel read paragraph 28 in this
Court's judgment, as follows:
Moreover Columbia registered under the
ETA showing Alec as a director; Alec completed ETA
forms as a director of Columbia; and Alec both signed Columbia
cheques on the Bank of Nova Scotia and failed to withdraw
Columbia's ETA filing of his name as a director after
Louise Marischuk had first notified him on January 21, 1997 that
he was recorded as a director of Columbia.
The Court concluded in the McDougall v.
R. case that the appellant was a de facto
director.
ANALYSIS AND CONCLUSION
[17] The words of section
108 of the Company Act, namely:
"Every company must have at least one
director ... "
are markedly different from those found in
section 119(2) of the Ontario Business Corporations Act
referred to in Zwierschke v. M.N.R. which read as
follows:
No director named in the articles shall be
permitted to resign his office unless at the time the resignation
is to become effective a successor is elected or appointed.
The facts indicated that the appellant was
named in the company's articles of incorporation as its first
director. One notes that the word "articles" is used in
that section. There is no evidence to suggest that this was the
situation in the present appeal. Indeed, the appellant testified
that the company had been a shelf corporation. The MEMORANDUM of
Ventures, dated March 28, 1988 shows Philip J. Jones, solicitor
as the sole shareholder, owning one common share. Philip Jones is
also the only signatory to the ARTICLES, section 12.2 of which
reads, in part as follows:
"The subscribers to the Memorandum are
the first directors.
It appears that this reflects the wording of
section 108 in that section 12.2 states that the number of
directors may be changed from time to time:
... but shall never be less than one while
the company is not a reporting company and three while the
Company is a reporting company.
[18] In my view this
court's decision in Zwierschke has no application to
the present appeal. Furthermore, I cannot subscribe to the theory
that section 108 means that a sole director cannot resign. When I
posed to Respondent's counsel the proposition of nine
directors rushing to resign and asked whether if the ninth, being
incapacitated and, therefore, the last so to do, would be unable
to resign she replied affirmatively, suggesting that
he "was stuck".
It seems to me that the words
"Every Company must have at least one
director"
should be interpreted as meaning that a
company cannot validly exist without at least one director. Had
the British Columbia legislators wished to incorporate the type
of language that is found in Zwierschke one assumes that
it would have done so.
[19] Zwierschke
refers to subsection 199(2) of the Ontario Business
Corporation's Act, R.S.O. 1990, c. B.16
("OBCA"). Section 119 of the OBCA refers
to the first directors, those named in the Articles of
Incorporation. Subsection 119(2) states:
119(2) Until the first meeting of
shareholders, the resignation of a director named in the articles
shall not be effective unless at the time the resignation is to
become effective a successor has been elected or appointed. 1994,
c. 27, s. 71 (1).
[20] K.P. McGuinness,
The Law and Practice of Canadian Business Corporations,
(Markham, Ontario: Butterworths, 1999) at 663, interprets
subsection 119(2) of the OBCA as follows:
8.66 Subsection 119(2) of the OBCA provides
that no director named in the articles may resign his office
unless at the time the resignation becomes effective a successor
has been elected or appointed. The prohibition on resignation
does not apply to successor directors who may be elected or
appointed once the corporation has been organized, but the
wording of the provision is such that it is at least arguable
that a fist director named in the articles who remains in office
following organization is also barred from resigning unless
and until a successor is appointed or elected. From time to time,
the Ministry of Consumer and Commercial Relations has considered
expanding the scope of the section to prohibit any resignation of
directors where the effect would be to reduce the number of
directors remaining to less than a quorum, but to date no such
change has been made in the legislation. Given the range of
duties to which directors are subject, and their potential
liability in respect of those duties, any such change would be
undesirable, as it could prevent a director who is dissatisfied
with the manner in which a corporation is conducting its business
or affairs from taking the only real step that is available
for his or her won protection. Nor is it clear why a person
should be required to continue acting as a director when he or
she is not being remunerated as such. There is no equivalent
provision to subsection 119(2) in the CBCA, nor is this provision
found in certain of the other provincial business corporations
statutes. In Brown v. Shearer, the Manitoba Court of
Appeal held that there was no implied restriction under the CBCA
on director resignations.
(Emphasis added)
[21] In Brown v.
Shearer, [1995] M.J. No. 182, Huband, J.A. said:
Section 108(1) of the Canada Business Corporations Act
states that a director ceases to hold office when he dies or
resigns, and 108(2) specifies that a resignation becomes
effective at the time that the written resignation is sent to the
corporation, or at the time specified in the resignation,
whichever is later. There is nothing in the Act which
limits the right of a director to resign. (This is in
contrast to the Ontario Business Corporations Act, as an example,
which specifies that a director is not permitted to resign unless
a successor is available.)
Counsel for the plaintiff Brown suggests that it is impossible
to conceive of a corporation continuing to operate without
directors, but the Canada Business Corporations Act, under s.
111(2), contemplates that very situation. It provides
that if there is no quorum of directors, or if there has been a
failure to elect the required number of directors, the directors
then in office shall call a special meeting of shareholders to
fill the vacancy and if they fail to call a meeting, or if there
are no directors then in office, the meeting may be called by any
shareholder.
Apart from a statutory limitation, no authority was cited to
us to support the proposition that a director of a company must
continue to serve as a director against his will after having
tendered his resignation.
[22] From these excerpts, one could say that
the effect of subsection 119(2) of the OBCA does not
prevent the appellant from resigning and the policy supporting
that effect is that directors should be afforded the protection
of resigning given the potential liabilities they can incur. This
policy can reasonably be applied to further justify the
interpretation that section 108 of the Company Act does
not prevent a sole director from resigning.
[23] Director resignations are specifically
provided for in section 130 of the British Columbia Company
Act (formerly section 154) which read:
130(1) A director ceases to hold office when his or her
term expires in accordance with the articles or when he or
she
(a) dies or resigns,
(b) is removed in accordance with subsection
(3),
(c) is not qualified under section 114, or
(d) is removed in accordance with the
memorandum or articles.
(2) Every resignation of a director becomes
effective at the time a written resignation is delivered to the
registered office of the company or at the time specified in the
resignation, whichever is later.
(3) A company may, despite any provision in the
memorandum or articles, remove a director before the expiration
of the director's term of office by special resolution, and,
by ordinary resolution, may appoint another person in his or her
stead.
Nothing in this section infers that it is subject in any way
to section 108 of the Company Act. The clearest indication
that section 108 of the Company Act does not prevent a
sole director from resigning is contained in section 131 of that
Act (formerly section 155):
131(1) Unless the articles otherwise provide, a
casual vacancy that occurs among the directors may be filled for
the unexpired term by the remaining directors.
(2) If the number of directors of a company is
reduced below the number set by, or under, the articles as the
necessary quorum for directors, the continuing directors
may act for the purpose of filling the vacancies up to that
number, or of summoning a general meeting of the company, but for
no other purpose.
(3) If there are no directors, the members
holding a majority of the shares entitled to elect directors may,
by instrument in writing, designate one director to exercise the
rights of continuing directors under subsection (2).
(emphasis added)
Section 131(3) of the Company Act expressly
contemplates that it is possible that a corporation have no
directors. This subsection can be reconciled with section 108 in
that section 108 seems clearly to provide the requisite
directorship for a company's valid operational existence. It
appears that when a sole director resigns, the corporation is in
limbo (cannot legally operate) until another director is elected
as set out in section 131(3).
[24] With respect to the
second argument that the Appellant was a de facto director, I do
not find a factual situation such as existed in McDougall.
McDougall was apparently active in the capacity of a
director. The present Appellant simply responded to
communications from the Hongkong Bank and Revenue Canada.
Although Respondent's counsel attempted to make much of the
fact that no notice of resignation had been filed with the
appropriate authority and no notice had been given to Revenue
Canada, I do not find such omissions fatal to the Appellant's
position. In so concluding, I adopt the submissions contained in
the McCarthy Tetrault submissions.
[25] Therefore, I conclude
that the appellant,
(a) effectively
resigned more than two years before January 15, 1998, the date of
the Notice of Assessment, and
(b) was not, at any
time, a de facto director
with the result that the Notice of Assessment
is, by virtue of section 323(5) invalid.
[26] Accordingly the appeal
is allowed.
Signed at Ottawa, Canada this 21st day of
January, 2003.
J.T.C.C.
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