Citation: 2011 TCC 36
Date: 20110121
Docket: 2008-280(GST)G
BETWEEN:
salem nachar,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre J.
[1]
This is an appeal from
an assessment dated November 29, 2006, made by the Minister of National Revenue
(Minister) under section 323 of the Excise Tax Act (ETA).
The appellant was assessed an amount of $67,143 (including net tax, penalties
and interest) for the failure by Naza Tri-Pac Auto Repairs Ltd. (Naza),
of which the appellant was the sole director, to collect and remit net goods
and services tax (GST) for the period from July 1, 2000 to December 31,
2003.
[2]
Section 323 of the ETA
read as follows during the period at issue:
Liability of directors
323. (1) Where a corporation fails
to remit an amount of net tax as required under subsection 228(2), 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.
Limitations
(2) A director of a corporation is not liable
under subsection (1) unless
(a) a certificate for the amount of the corporation's liability referred to in that subsection has
been registered in the Federal Court under section 316 and execution for that
amount has been returned unsatisfied in whole or in part;
(b) the corporation has commenced liquidation or dissolution proceedings or has been
dissolved and a claim for the amount of the corporation's liability referred to
in subsection (1) has been proved within six months after the earlier of the
date of commencement of the proceedings and the date of dissolution; or
(c) the corporation has made an assignment or a receiving
order has been made against it under the Bankruptcy and Insolvency Act
and a claim for the amount of the corporation's liability referred to in
subsection (1) has been proved within six months after the date of the
assignment or bankruptcy order.
Diligence
(3) A director of a corporation is not liable for a failure under subsection (1) where
the director exercised the degree of care, diligence and skill to prevent the
failure that a reasonably prudent person would have exercised in comparable
circumstances.
Assessment
(4) The Minister may assess any person for any
amount payable by the person under this section and, where the Minister sends a notice of assessment, sections 296 to 311
apply, with such modifications as the circumstances require.
Time limit
(5) An assessment under subsection (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.
Amount recoverable
(6) Where execution referred to in paragraph
(2)(a) has issued, the amount recoverable from a director is the amount
remaining unsatisfied after execution.
Preference
(7) Where a director of a corporation pays an amount in respect of a corporation's
liability referred to in subsection (1) that is proved in liquidation,
dissolution or bankruptcy proceedings, the director is entitled to any
preference that Her Majesty in right of Canada would have been entitled to had
the amount not been so paid and, where a certificate that relates to the amount
has been registered, the director is entitled to an assignment of the
certificate to the extent of the director's payment, which assignment the
Minister is empowered to make.
Contribution
(8) A director who satisfies a claim under this
section is entitled to contribution from the other directors who were liable
for the claim.
[3]
The appellant raises
three arguments in his defence. First, he argues that at all relevant times he
exercised all reasonable due diligence in remitting GST on sales made in the
course of Naza’s business and therefore, pursuant to subsection 323(3) of the
ETA, is not jointly and severally liable as a director for any shortfall in the
GST remitted to the Canada Revenue Agency (CRA). Second, he submits that
he is entitled to challenge the underlying assessment of Naza notwithstanding the
fact that, in his capacity as sole director of Naza, he did not challenge that
assessment at the time as required by the ETA. Third, the amount of the
underlying assessment made against Naza, which relates specifically to GST on
propane sales at the service station, was not properly calculated in that the
procedure adopted by the CRA’s auditor in arriving at the amount of the shortfall
in remittances of the GST collected by Naza was unreliable. The respondent takes
issue with all three arguments.
Facts
[4]
The parties filed a
Statement of Agreed Facts (Partial), which is reproduced hereunder.
1.
The appellant was the sole officer and director
of Naza Tri-Pac Auto Repairs Ltd. (the “corporation”).
2.
The corporation was a GST registrant with GST
registration number 131216665RT.
3.
The corporation was required to report GST on a
quarterly basis.
4.
At all material times, the corporation operated
a Mohawk service station in Surrey, British Columbia as a franchisee;
5.
The corporation sold fuel, including propane, at
the service station.
6.
The corporation was invoiced for the propane it
purchased from Superior Propane as follows:
|
Total
Litres volume (YR.)
|
Cost
|
Incl. GST
|
Just GST
|
|
Volume 2000 –
535,827
|
183,504.16
|
196,349.45
|
12,845.29
|
|
Volume 2001 –
599,457.90
|
213,049.14
|
227,962.58
|
14,913.44
|
|
Volume 2002 –
600,753.90
|
164,192.51
|
175,685.99
|
11,493.48
|
|
Volume 2003 –
579,533.80
|
250,708.23
|
268,257.81
|
17,549.58
|
7.
The appellant worked at the service station on a
daily basis and was involved in all aspects of the business including:
preparing all documents and office work; keeping the inventory up to date and
purchasing; preparing daily sales reports; calculation of GST on commissions
earned from gasoline sales, and; recording of sales information in synoptic
ledger book for the corporation.
8.
The corporation’s financial statements were
prepared for it by an accountant, Mr. Nizar Mawani, based on information
which the appellant supplied.
9.
The appellant, on behalf of the corporation,
established an account for GST remittances during the periods, calculated the
GST, filed GST returns and made GST remittances to the Minister of National
Revenue.
10.
The corporation was audited in 2004 and the
auditor concluded there was a daily GST shortfall of $40 to $62 throughout the
audit period through sampling seven daily cash register tapes of the
corporation and extrapolating those results to the entire audit period. The
auditor traced the shortfall to the corporation’s propane sales. The auditor
calculated the unremitted GST of the corporation by multiplying the net cost
(exclusive of GST) of the propane purchased from Superior Propane during the
audit period, as set out in paragraph 6 above, by 7%. The auditor concluded
that expenses and ITCs were properly claimed and reported for the corporation
and no adjustments were made in respect of expenses and ITCs.
11.
The corporation was assessed on May 15, 2004 by
the Minister of National Revenue for failure to remit GST in the amount of
$50,379.08 for the following periods:
(a) July 1, 2000 to Dec. 31, 2000;
(b) Jan. 1, 2001 to Dec. 31, 2001;
(c) Jan. 1, 2002 to Dec. 31, 2002; and
(d) Jan. 1, 2003 to Dec. 31, 2003.
12.
The corporation was also assessed for penalties
of $4,842.16, and interest of $2,210.45, in addition to the $50,379.08 of GST
described in paragraph 14 [sic] above.
13.
The corporation ceased operating the service
station by March 15, 2004.
14.
On December 6, 2005, the Federal Court of Canada
issued a Certificate under Court No. GST-6408-05 against the corporation for
$61,048.54 and a Writ of Seizure of [sic] Sale for $61,048.54.
15.
The Writ of Seizure and Sale was returned to the Minister of National Revenue by West Coast
Bailiffs on July 4, 2006 marked “unable to locate exigible assets”.
16.
On November 29, 2006, the appellant was assessed
by the Minister of National Revenue pursuant to s. 323(1) of the Excise Tax
Act as a director of the corporation for the amount of $67,143.26, which
amount included net tax of $46,379.08, penalties of $14,267.97 and interest of
$6,496.21.
[5]
In the years at issue,
Naza operated, pursuant to a Marketing Outlet Lease (Lease) that was
renewed annually (Exhibit R-1, Tabs 15, 16 and 17), a retail petroleum facility
and a convenience store under the trade name of Avalon Mohawk (and under the
name of Naza Tri-Pac Auto Repairs Ltd. as of 2001, as per Exhibit R-1, Tabs 15
and 16, article 8.4) on premises owned by Mohawk Canada Limited (Mohawk)
and, starting in 2001, by Husky Oil Marketing Company (Husky)
(hereinafter referred to as Mohawk/Husky). Articles 1.3, 2.2 and
Schedule H of the Lease indicated that the retailer (Naza) was operating the
Mohawk/Husky facility as a commission sales site, meaning that Mohawk/Husky
owned and retained title to the Mohawk/Husky fuels at all times, and that it paid
the retailer a commission on a per‑litre basis. The parties to the lease agreed
that the proceeds from the sale of Mohawk/Husky fuels were held by the retailer
as trustee for Mohawk/Husky and were to be deposited daily in an account of
Mohawk/Husky without any deduction, abatement or set‑off. The retailer was
required to provide daily sales reports by product. The retailer was paid a
commission daily at a predetermined rate for Mohawk/Husky fuels supplied by
Mohawk/Husky and sold through the retail pumps located at the Mohawk/Husky facility.
Mohawk/Husky determined the retail price of all Mohawk/Husky fuels, and the
sales commissions were deducted from the sale proceeds as calculated in the
daily sales reports. “Mohawk Fuels” or "Husky Fuels", as the case may
be, is defined in article 6.3 of the Lease as meaning gasoline, diesel, propane
and liquid fuels marketed, distributed or sold by Mohawk/Husky. The retailer
had to pay Mohawk/Husky an annual fixed rent for the use of the Mohawk/Husky
premises (article 4 and Schedule B-1 of the Lease). The retailer was also
responsible for paying when due all taxes, rates, levies, assessments and
penalties imposed, levied or charged upon the premises, except for real
property taxes, and all pump insurance fees, licence fees, business or income
taxes of the retailer, and any other taxes, rates, levies or assessments
imposed, levied or charged upon the retailer, the Mohawk/Husky facility or the
business of the retailer conducted on the premises (article 12 of the Lease).
[6]
The appellant testified
that he had operated the service station for 14 years. His understanding was
that he operated a franchise, with respect to which he received all
instructions from the franchisor (Mohawk/Husky). He reported to the franchisor daily
on the volume of fuel sold, on which Naza was paid commissions. The appellant
explained that Naza was selling gasoline and propane for vehicles at the pumps.
It was also selling propane for barbecue cylinders. The propane for vehicles
and the propane for cylinders came from one tank, which was filled by a company
approved by Mohawk/Husky, namely Superior Propane.
[7]
The appellant explained
that while Naza charged GST to clients buying propane for cylinders, none was
charged specifically on propane sold for vehicles. He said that propane sales
for vehicles were handled the same way as gasoline sales. Mohawk/Husky
indicated the retail sales price at the pump, which was the exact price charged
to the clients, and the total sales were registered in the daily sales report
for the purposes of calculating sales commissions. According to the appellant,
that sales price fluctuated regularly and could fall below the purchase price charged
by Superior Propane (Transcript, pp. 32-34). The appellant’s
understanding, after talking with people from Mohawk/Husky, was that GST on
propane for vehicles was included in the sales price determined by Mohawk‑Husky
and that it was remitted to the government by Mohawk/Husky in the same way that
the remittances were made for gasoline. For all other products sold by Naza,
including the sale of propane for cylinders, the sales were registered in the
computer which was programmed to calculate the GST to be added and to be charged
to customers. The appellant said he also kept a separate book to record on a daily
basis written summaries of all the sales on which GST was charged. This was
used to complete the quarterly GST returns.
[8]
The appellant never
thought that he was doing anything wrong. He explained that Mohawk/Husky
representatives came regularly to the premises to verify how Naza handled the
sales and how GST was recorded, and they never advised him that GST should be
added on the sale of propane for vehicles. No one from Mohawk/Husky was present
in court to corroborate this. The appellant said that he tried to get someone
from Mohawk/Husky to testify at the hearing, but since the events in question
happened a long time ago, all the managers present at the time had left. The
appellant never thought to verify with the CRA either since the procedure followed
with Mohawk/Husky had always been the same from the beginning, and it was never
questioned.
[9]
The agreement between
Husky and the appellant was cancelled effective March 21, 2004 (Exhibit R-1,
Tab 20). The audit of Naza was done shortly after that, but the appellant did
not think it necessary at the time to call someone from Husky to verify whether
GST had been remitted on the propane sold for vehicles. The appellant said that
he was under the impression at the time that there was a misunderstanding between
Naza and the auditor for the CRA. The appellant did not remember at the hearing
whether the auditor had told him at the time of the audit that there was a
shortfall in the GST remittances on propane sales. Furthermore, he acknowledged
that he did not verify with Husky whether there was a mistake, as he said that,
if there was a mistake, it would be corrected, but he did not think the matter
would end up in court (Transcript, pp. 132-133).
[10]
Although somewhat confused
in this regard, the appellant acknowledged that Naza claimed the input tax credits
(ITCs) on the purchase of propane from Superior Propane. Asked what made him
believe that GST would be remitted by Mohawk/Husky, he answered that the
commission guaranteed in the agreement was on the retail sales price fixed by
Mohawk/Husky. If GST had been added to the retail sales price at his level, the
sales price would not have matched the sales price at the pump (Transcript, pp.
45-46, and 166).
[11]
The appellant called
Mr. Zouheir Abou El Houda to testify. He worked for Naza during the years at
issue. He just confirmed that GST was charged on the sale of propane for
cylinders and that on the sale of propane for vehicles the customer was charged
the price fixed at the pump. He said that he observed that sales of propane for
cylinders and of propane for vehicles were roughly equal. He also said that the
equipment was old and that there was a lot of leakage. He mentioned as well
that the price charged to customers for propane fluctuated frequently, on a
weekly basis.
[12]
Ms. Rav Sandhu, an appeals
officer with the CRA was called by the respondent. Ms. Sandhu said that in
reviewing the documentation provided by the appellant she did not find any
indication that Mohawk/Husky was remitting the GST on propane. In cross-examination,
she conceded she was satisfied that the appellant had in fact taken steps with
respect to his business to ensure compliance with the tax regulations and was satisfied
as well that he was diligent in ensuring that the business’s GST returns were
filed in a timely fashion (Transcript, pp. 194-195).
[13]
Finally, Ms. Cathy Wu,
who conducted the CRA’s audit of Naza, testified at the request of the
respondent. In a nutshell, Ms. Wu determined that the GST on propane was
not being remitted. She was provided with cash register tapes, some summary
sheets, and a handwritten synoptic book prepared by the appellant showing
sales, provincial sales tax (PST) and GST (a photocopy of the information
provided by the appellant to Ms. Wu as an example of what would have been
recorded in the synoptic book was filed as Exhibit A-2; see also Transcript,
pp. 72‑76). What she remembered was that the records were not very
well organized. As a matter of fact, Exhibit R‑2 shows not‑very‑clearly
scribbled figures. The appellant testified that all this was handed to his
accountant for him to put in order.
[14]
Ms. Wu prepared working
papers on which she copied the net sales amounts shown on the cash register
tapes or sales reports. Because the records were not very well organized, she
picked randomly seven daily cash register tapes or sales reports. She
recalculated the GST that should have been collected on the sales amounts,
compared the results with the amounts reported, and found a variance for each day.
She was able to verify that the variance came from the propane sales. In 2003,
the business’s system was changed to a computerized one, which produced daily
sales reports. At the time of the audit, the appellant did not mention that he
made a distinction between the propane sold for cylinders and that sold for
vehicles. She was confident that the variance identified existed for the whole
period, even though the cash register tapes and sales reports she looked at covered
only seven days, because the variance was consistent in each sample, although
there were months between the dates of some of the samples. She said in
cross-examination that the random check was only performed to test whether
something was wrong and that she then assumed that the situation was the same throughout
the relevant period because she assumed that there would have been no change in
the cash register program that would have produced a different variance
(Transcript, pp. 243-244).
[15]
Ms. Wu then asked the
appellant to provide her with monthly propane sales figures, which he did not
have. She did not want to go through the daily sales for a three‑year
audit period, as this would have meant examining over 1,000 samples, which,
realistically, was not feasible. She therefore decided to assess GST on the
total cost of the propane purchased in a year without considering any profit on
sales. This, according to her, resulted in the most conservative assessment. As
a matter of fact, the appellant had told her that the profit was “not much”.
The purchase cost figures were provided by Superior Propane at the request of
the appellant, and were filed as Exhibit A-1, Tab 1. At the time, the appellant
did not mention that he was losing money on propane. Ms. Wu said, however,
that he was very cooperative, and that is why she did not assess a gross
negligence penalty.
[16]
In cross-examination,
Ms. Wu admitted that the appellant had asserted that sometimes he barely made
any profit due to the competitive market (Exhibit R-1, Tab 27, page 7 of 12,
note 3). She did not consider that there could have been losses because, from
the samples she used, she noted that Naza purchased frequently from Superior
Propane, which meant that it kept a low inventory. Furthermore, the appellant made
no mention of Naza having suffered losses. Ms. Wu also said that even if
GST were considered to have been included in the sales price of propane, there
would still be a variance between the GST collected and the amount remitted.
Appellant’s argument
[17]
The appellant argued
that he made an honest mistake. He mistakenly believed that GST on sales of
propane for vehicles would be remitted by the franchisor (Mohawk/Husky) in the
same manner as it was for gasoline sales. He had developed a long‑standing
relationship with the franchisor, and he trusted them. After all, they were the
experts in that very specialized industry.
[18]
The appellant stated
that, as a director of Naza, he established an account for GST remittances, kept
records on a daily basis, and submitted all of his financial information on
sales and expenses to the franchisor and to his accountant. Neither the
franchisor nor the accountant identified any irregularities. The appellant
remitted correctly the GST on all other products that were sold in the
business. He always filed the GST returns on time and correctly claimed the
ITCs. The appellant did not simply turn his back on his responsibilities in relation
to the business. He honestly attempted to comply with the statutory
requirements to the best of his ability, using the information, facilities and resources
available to him. In his view, he exercised the care that a reasonably prudent
person would have in comparable circumstances.
[19]
With respect to the
audit itself, the appellant asserted that he had the right to challenge the
original assessment against Naza even though it was not contested by the
company itself. He specifically requested permission before this court to amend
his notice of appeal on this particular point, which was granted. The appellant
is of the view that, since the amendment was allowed, the respondent may not
argue now that the appellant is estopped from contesting the original
assessment.
[20]
As regards the
assessment itself, the appellant’s view is that Ms. Wu did not consider in
her approach the fact that half of the propane sales were for cylinders and
that GST was charged on those sales. Using the cost of all propane purchased to
calculate the amount with respect to which there was a failure to remit is
therefore flawed. The resulting assessment is twice as much as the actual shortfall.
Further, Ms. Wu examined only seven samples, meaning that sales for seven days
only out of a period of three and a half years were considered in establishing
a variance. This does not seem very accurate. Her assumptions were also
inaccurate. She assumed that the propane was never sold at loss. It was
established, however, that the price at the pump fluctuated frequently, often
falling below cost price. Furthermore, Ms. Wu did not take into account
loss of propane by leakage and theft.
[21]
The appellant
suggested, in an alternative argument, that the amount of the assessment be
reduced by 5% to take into account leakage and theft, then divided by 2 to take
into account the fact that GST was in fact remitted on the sale of propane for
cylinders, and finally reduced by the amount of $4,000 already paid by the
appellant. This would lower the assessment from $50,379 to $19,930.
Respondent’s
submissions
[22]
The respondent argued
that the appellant, being involved in the day-to-day operation of the service
station, including keeping the financial records, did not exercise due diligence
to ensure that Naza deducted and remitted the GST on its propane sales. There
is, the respondent argued, a higher threshold for inside directors who invoke
the due diligence defence.
[23]
The respondent relied
on the case of Drover v. Canada, 1998 CanLII 7889, in which the Federal Court
of Appeal stated that the obligation imposed on directors is not limited to
that of exercising the requisite standard of care in ensuring that GST was remitted.
There is also an obligation to exercise the same standard with respect to
ensuring that GST is properly calculated.
[24]
The respondent is of
the view that there is no reasonable explanation as to why the appellant would
have thought that the GST on the propane for vehicles would be remitted
differently than the GST on the rest of the propane. Nothing in the
documentation shows that there were any specific instructions about
Mohawk/Husky remitting the GST on propane sales. Naza purchased the propane from
Superior Propane, paid GST on that propane, and claimed ITCs. It is not clear
why, when Naza was claiming ITCs on the propane, the appellant would have
assumed that the franchisor was responsible for the calculation and remittance
of the GST on any of the propane sold by Naza.
[25]
Naza remitted PST on
the propane sales but no GST. The appellant was negligent for not enquiring why
there would be a difference with regard to the two types of propane sales.
[26]
The respondent also
argued that under the agreements with the franchisor, Naza earned commissions
from the franchisor on the fuels that it sold, except propane. She stated that
for propane Naza received a discount on the posted sale price upon its purchase
from Superior Propane. She then argued that there was no explanation why, when
the appellant realized that propane was being treated differently for
commission purposes by the franchisor, he did not question the status of the
propane. On this point, it is my understanding that the respondent relied on
the 1991 agreement signed by the appellant with Mohawk, which is found in
Exhibit R-1, Tab 14. Article 6.6 of that agreement was indeed a specific
provision concerning the purchase of propane, which stated that the lessee
(Naza) would receive a propane margin of four cents per litre off the posted retail
price at the time of delivery. In the years at issue, the lease signed was
drafted differently, and no distinction was made regarding propane, which was
included in the Mohawk/Husky fuels. Naza was referred to as the retailer in the
leases for those years and was paid sales commissions daily by means of deduction
from the sale proceeds from Mohawk/Husky fuels sold at the Mohawk/Husky
facility at a retail price determined by Mohawk/Husky. Although it is true that
the propane was supplied by Superior Propane, the appellant testified that this
was a requirement of Mohawk/Husky. In my view, a reading of the provisions of
the leases for the years at issue does not lead to the conclusion drawn by the
respondent that the appellant should have known that, for the purposes of the
GST remittances, there was a difference in the way sales of gasoline and sales of
propane were to be treated.
[27]
With respect to the
appellant’s ability to challenge the corporation’s liability, the respondent
argued that a textual, contextual and purposive analysis confirms that section
323 of the ETA ought to be interpreted as providing for no challenge by
directors with regard to the underlying corporate liability. Section 323 is a
collection provision. The starting point of the analysis in relation thereto is
the corporate assessment, which fixes the net tax owing. Pursuant to
subsections 299(3) and (4), the corporate assessment is deemed to be valid and
binding subject only to its being varied or vacated on objection or appeal. The
respondent stated that an assessment that is not challenged has the same force
and effect as an assessment that is unsuccessfully challenged. When a
certificate in respect of a corporate debt relating to an unpaid assessment is
registered in the Federal Court, that certificate has the same effect as if it
were a judgment obtained in that court for a debt (section 316 of ETA). A
director cannot be assessed until a certificate for the assessment amount has
been registered in the Federal Court and execution for that amount has been
returned unsatisfied. A director’s challenge of the amount assessed against the
corporation would, in essence, be a challenge of the Federal Court certificate.
In the respondent’s view, the statutory language of section 323 does not permit
a collateral attack of the underlying corporate assessment. The word “amount”
must be given a consistent interpretation. Subsection 323(2) specifically
equates the amount of the corporation’s liability referred to in subsection
323(1) with the amount of the corporation’s liability that has been registered
in the Federal Court, which is the amount of the director’s liability. Section
323 serves as a means of collecting the corporate debt arising during the
period of a director’s stewardship. Parliament views the role performed by a
registrant on behalf of the government with regard to the collection of GST as reflecting
a trust relationship (subsection 222(1)). Directors are held accountable; they
are the directing mind; they have legal authority; and they have the power to
direct the corporation in its operations. They act as agents and quasi trustees
of the corporation. They have a full opportunity to challenge the corporate
assessment in the name of the corporation within the time limit set for doing so,
and that constitutes an incentive for them to use that opportunity rather than
sitting back while the passage of time erodes memories and reduces the
likelihood of documentary evidence being located. Thus the integrity of the
assessment in the adjudicative process is preserved.
[28]
The respondent
distinguished the decision in Gaucher v. Canada, [2000] F.C.J. No. 1869
(QL) (C.A.), which permitted the beneficiary of a transfer who had been
assessed under section 160 of the Income Tax Act (ITA) to
challenge the primary debtor’s tax liability. Contrary to the beneficiary of a
transfer who is assessed pursuant to section 160 of the ITA, a director
generally has the power and authority to cause a corporation to challenge the assessment
issued against it. As a matter of fact, a person assessed under section 160 may
not even know of the existence of the underlying tax debt at the time the
property is transferred.
[29]
For these reasons, the
respondent concluded that the text, context and purpose of section 323 of the
ETA reveal that Parliament intended directors to be jointly and severally
liable for the payment of a corporation’s liability resulting from its failure
to remit, as determined first by an assessment respecting the corporation and
then eventually crystallized through the registration of a certificate in the
Federal Court.
[30]
In the event that the
Court should consider it necessary to determine whether the underlying
assessment is correct, the respondent’s position is that there is no basis for
disturbing that assessment. Essentially, the appellant takes issue with the
methodology used by the auditor to establish the amount assessed, but he has
not provided any evidence to contradict the calculation of the shortfall either
on the days selected by the auditor or at any time over the entire audit
period. The appellant has not shown that, during the period at issue, Naza
actually sold propane at a price less than the cost price. He failed to provide
any alternative method or any data demonstrably more accurate than the method
which was actually employed. The respondent referred to the decision of this
court in Ruest v. The Queen, 1998 CanLII 649, in which Judge Tardif held
that the taxpayer did not discharge her burden of showing that the assessment
was ill-founded as, instead of bringing forward arguments to support her
position, she chose to focus on discrediting the respondent’s work.
[31]
In the present case,
the respondent submitted that the auditor used a fair, rational and acceptable
process, which led to plausible results that are certainly more reliable, (in
the respondent’s view) than those suggested by the appellant. The respondent relied
on the decision of this court in Telus Communications (Edmonton) Inc. v. The Queen, 2008 TCC 5, in which Hershfield J. analyzed the
adequacy of sampling methods used during the audit. The Court drew a negative
inference from the fact that the taxpayer called no evidence to rebut the
testimony of the auditor. In the present case, the respondent submitted that
there was a total absence of evidence suggesting that the methodology used by
the auditor was inaccurate. The onus is on the appellant to prove that the
methodology used was unsound. Yet he did not adduce any evidence of the sales
price fluctuations, or evidence showing that the propane was sold at loss or
that there were claims regarding business losses due to leakage or theft. There
is no evidence substantiating any of those things, according to the respondent.
Analysis
[32]
With respect to the respondent’s
first argument, which relates to the due diligence defence, I agree with
counsel for the respondent that reference must be made to the Federal Court of
Appeal decision in Drover, supra. Relying in part on the previous
decision of the same court in Soper v. Canada, [1998] 1 F.C. 124,
dealing with the due diligence of a director in income tax matters, Robertson
J. A. stated the following at paragraph 6 and following in Drover:
6 In Soper,
the issue was whether the director had exercised the required degree of care to
prevent the failure by his corporation to remit income tax and other source
deductions from employees' salaries. The following passages from Soper
are particularly
relevant (at pages 155, 156, 157 and 160):
The standard of care laid down in subsection
227.1(3) of the Act is inherently flexible. Rather than treating directors as a
homogenous group of professionals whose conduct is governed by a single,
unchanging standard, that provision embraces a subjective element which takes
into account the personal knowledge and background of the director, as well as
his or her corporate circumstances in the form of, inter alia, the company's
organization, resources, customs and conduct. Thus, for example, more is
expected of individuals with superior qualifications (e.g. experienced
business-persons).
The standard of care set out in subsection
227.1(3) of the Act is, therefore, not purely objective. Nor is it purely
subjective. It is not enough for a director to say he or she did his or her
best, for that is an invocation of the purely subjective standard. Equally
clear is that honesty is not enough. However, the standard is not a professional
one. Nor is it the negligence law standard that governs these cases. Rather,
the Act contains both objective elements - embodied in the reasonable person
language - and subjective elements - inherent in individual considerations like
"skill" and the idea of "comparable circumstances".
Accordingly, the standard can be properly described as "objective
subjective".
. . . I am not suggesting that liability is
dependent simply upon whether a person is classified as an inside as opposed to
an outside director. Rather, that characterization is simply the starting point
of my analysis. At the same time, however, it is difficult to deny that inside
directors, meaning those involved in the day-to-day management of the company
and who influence the conduct of its business affairs, will have the most
difficulty in establishing the due diligence defence. For such individuals, it
will be a challenge to argue convincingly that, despite their daily role in
corporate management, they lacked business acumen to the extent that this
factor should overtake the assumption that they did know, or ought to have
known, of both remittance requirements and any problem in this regard. In
short, inside directors will face a significant hurdle when arguing that the
subjective element of the standard of care should predominate over its
objective aspect.
. . .
Of course, not all inside directors have been
held liable. The Tax Court has refused to impose liability on an inside
director in cases where he or she is an innocent party who has been misled or
deceived by co-directors: see Bianco v. Minister of National Revenue (1991), 2 B.L.R.
(2d) 255 (T.C.C.); Edmondson (S.G.) v. M.N.R., [1988] 2 C.T.C.
2185 (T.C.C.); Shindle (B.) v. Canada, [1995] 2 C.T.C.
227 (F.C.T.D.); and Snow v. Minister of National Revenue (1991), 38
C.C.E.L. 70 (T.C.C.). There are also other examples of an inside
director being exonerated: see Fitzgerald (G.) v. M.N.R., [1991] 2 C.T.C.
2595 (T.C.C.).
. . .
In my view, the positive duty to act arises
where a director obtains information, or becomes aware of facts, which might
lead one to conclude that there is, or could reasonably be, a potential problem
with remittance of GST.
[emphasis mine]
7 It could not be expected
that Soper
would provide a ready answer to all questions dealing with directors'
liability. At the same time, it did attempt to provide some general principles
in order to fill the analytical void that existed. The "objective
subjective" standard of care outlined above focuses on whether the
surrounding circumstances are such that a person of the director's ability and
business experience was under a positive duty to act [so] as to ensure that the
corporation's obligation to remit withholding taxes was fulfilled. Certainly,
such a duty exists if a director is aware or should have been aware of a
remittance problem, and is breached if no steps are taken to ensure compliance
with the legislation. As the taxpayer in Soper
was held to be under a positive duty to act and had done nothing to fulfill
that obligation, the due diligence defence was not available. In these
circumstances, it was unnecessary for this Court to consider what steps the
director in that case should have taken once the positive duty to act arose.
8 The present case adds a
further dimension to the principles set out in Soper.
The obligation imposed on directors is not limited to that of exercising the
requisite standard of care in ensuring that GST as calculated was remitted.
There is also an obligation to exercise the same standard with respect to
ensuring that GST is properly calculated. To interpret s. 321(1) of the Excise
Tax Act, (or for that matter s. 227.1(1) of the Income Tax Act) in a
contrary manner would undermine the purpose of that section. Carelessness in
calculation is as unacceptable as carelessness in remittance. The obligation to
properly calculate GST flows from ss. 228(1) of the Excise Tax Act which
reads as follows:
Every person who is required to file a return under this Division
shall in the return calculate the net tax of the person for the reporting
period for which the return is required to be filed.
9 Utilizing the language
adopted in Soper,
the issue in the present case may be recast as follows: Did the taxpayer
exercise the required standard of care [so] as to ensure that Conestoga did not
fail in its obligation to properly calculate and remit GST to the Receiver
General? Having regard to the surrounding circumstances and the taxpayer's
business experience and acumen should she have been aware that there was a
problem with respect to the proper calculation of GST? Correlatively, if the
taxpayer knew or ought to have known that there was a problem with respect to
its proper calculation, did she exercise the requisite standard of care in
ensuring that the problem was resolved. Though the taxpayer was an "inside
director" (involved in the day to day operation of the business) it is
evident that other persons, including an accountant, were responsible for
calculating and remitting all taxes. I should add that no evidence was drawn to
this Court's attention in support of the understanding that the taxpayer was
actually aware of a problem with respect to the proper calculation of GST.
[33]
Therefore, the question
to be answered first is whether, having regard to the surrounding circumstances
and the appellant’s business experience and acumen, he should have been aware
that there was a problem with respect to the proper calculation of GST on
propane. Second, if the appellant knew or ought to have known that there was a
problem with respect to its proper calculation, did he exercise the requisite
standard of care to ensure that the problem was resolved?
[34]
Here, the evidence
revealed that the appellant had operated the service station for 14 years as a
franchisee of Mohawk/Husky. The original contract signed in 1991 was renewed
annually. In the years at issue, the contract between the parties was drafted
differently. As I said in paragraph 26 above, there was no distinction made
between the commission income from gasoline sales and that from propane sales. The
original contract and the subsequent ones all stated that the lessee or the
retailer was responsible for the payment of taxes imposed upon its business
conducted on Mohawk/Husky’s premises. Except for sales of gasoline and of propane
for vehicles, the appellant did collect and remit GST on all products sold.
With respect to fuels sold at the pumps, the appellant testified that he had always
believed that the GST was taken care of by Mohawk/Husky. As a matter of fact,
he was not made aware of the discrepancy in the GST remittances with respect to
propane until the audit in 2004, after the cessation of Naza’s operations. The
appellant testified that, when he started operating the service station, he
complied with the rules laid down by the franchisor. For 14 years, the franchisor
never mentioned any problem with GST remittances. It is true that no one from
Mohawk/Husky was in court to corroborate this, but the appellant explained that
when preparing for this trial he attempted unsuccessfully to reach someone at Husky
who had knowledge of the situation that existed at the time at issue.
[35]
The respondent brought
up the fact that it was not clear why GST was remitted on propane for cylinders
while it was not on propane for vehicles. In my view, the explanation given by
the appellant is plausible. He did not make any differentiation between
gasoline and propane for vehicles. The price at the pump was fixed by the
franchisor, and it did not cross his mind that a higher amount should be
charged to customers for propane, as such was not the case for gasoline.
[36]
The respondent also
mentioned that Naza remitted PST, on propane sales, but not GST. It is not
clear to me whether PST was remitted on propane sold for vehicles. However, it
is my understanding that there was confusion regarding PST remittances, a
matter which was addressed on the appellant’s own initiative when he was made
aware of a potential problem by the provincial authorities.
[37]
The respondent also
raised the fact that Naza claimed ITCs on the purchase of propane, and stated that
this should perhaps have suggested to the appellant that Naza had an obligation
to remit GST on propane sold. This might be true, but I noticed in court that
the appellant was confused when asked whether Naza claimed ITCs on propane. The
appellant did not appear to me to be a sophisticated, knowledgeable person in
that field. He complied with the tax regulations to the best of his knowledge,
remitting GST on all products sold that were entered in his computer system as
being subject to GST. It is my understanding that the computer was programmed
by someone sent by the franchisor, who regularly verified that everything was being
done correctly.
[38]
In addition, Ms. Sandhu,
the appeals officer, conceded both that the appellant had taken steps with
respect to his business to ensure compliance with the tax regulations and that
he was diligent in ensuring that GST returns were filed on time.
[39]
Having regard to the
surrounding circumstances and the appellant’s business experience and acumen, I
am satisfied that he did not have any reason to believe that there was a
problem with the GST remittances for propane. As was said in Drover,
supra (quoting Soper, supra), a positive duty to act arises
where a director obtains information, or becomes aware of facts, which might
lead one to conclude that there is, or could reasonably be, a potential problem
with the remittance of GST. I am satisfied that here the appellant did not
obtain information, or become aware of facts, which could have led him to
conclude that there was a potential problem with the remittance of GST on
propane while Naza was still in operation. In fact, he learned of the problem only
after the cessation of Naza’s operations, at the time of the audit in 2004. I
therefore conclude that the appellant has met the conditions required in order to
fit within the exception stated in subsection 323(3) of the ETA, as he has satisfied
that the due diligence defence applied in his case.
[40]
This conclusion
dispenses me from answering the two other arguments raised by the respondent. I
would like to say, however, that in my view the decision of the Federal Court
of Appeal in Gaucher, supra, applies equally to cases of director’s
liability for non‑remitted net tax.
[41]
In Gaucher, it
was stated at paragraph 6:
6 I am of the
respectful view that the Tax Court Judge was in error in coming to this
conclusion. It is a basic rule of natural justice that, barring a statutory
provision to the contrary, a person who is not a party to litigation cannot be
bound by a judgment between other parties. The appellant was not a party to the
reassessment proceedings between the Minister and her former husband. Those
proceedings did not purport to impose any liability on her. While she may have
been a witness in those proceedings, she was not a party, and hence could not
in those proceedings raise defences to her former husband's assessment.
[42]
In my view, whether the
word “amount” in subsection 323(1) refers to the amount shown on the Federal
Court certificate or merely to the amount of net tax that the corporation was
legally obligated to remit (as suggested by C. Miller J. of this Court in Kern
v. The Queen., 2005 TCC 314), one cannot escape the fundamental principle
of Canadian law, reiterated in Gaucher, that it is a basic rule of
natural justice that a person who is not a party to litigation cannot be bound
by a judgment between other parties, unless there exists a statutory provision
to the contrary.
[43]
I further do not agree
with the respondent that the context and purpose of section 323 of the ETA
suggest that a challenge by a director of an underlying assessment should not
be permitted. In Scavuzzo v. The Queen, 2005 TCC 772 (General
Procedure), Bowman C.J. rejected the idea that Gaucher can be
distinguished and that the reasoning therein does not apply to situations
governed by section 323 of the ETA and section 227.1 of the Income Tax Act,
which is also found in a part dealing with collection matters. Bowman C.J.
wrote:
10 With respect, I
think that what was stated in Gaucher is a principle of broad
application and ordinary fairness and it applies equally to assessments of
director's liability under section 227.1 of the ITA and section 323 of
the ETA.
11 The
distinction drawn in Schuster and Maillé, supra, between
section 160 of the ITA assessment [sic] and section 227.1 of the ITA
or section 323 of the ETA assessments does not, in my view, withstand
scrutiny. It is based on the argument that a director who does not cause the
company to file an objection cannot subsequently contest the corporate
assessment when he or she is assessed as a director. This is in my view an
erroneous rationalization of a refusal to follow the Federal Court of Appeal's
judgment in Gaucher.
12 There
are, as Mr. Sherman notes in his editorial comment, many reasons why the
company might not have filed an objection — lack of funds, insolvency or
disagreement among the directors come to mind. Also, the directors may not have
been permitted to object if the company was bankrupt. I note for example that
Garon C.J. (as he then was) in Schuster relied on a transfer of property
case, Schafer v. The Queen, [1998] G.S.T.C.
7. Schafer
had been explicitly overruled by Gaucher.
More recently, Miller J. held that a director who was assessed derivatively
under section 323 of the ETA could challenge the underlying corporate
assessment in Kern v. R., [2005] G.S.T.C.
101. As Miller J. noted in Kern,
a company headed for bankruptcy or insolvency is not likely to object to an assessment.
13 It
is also noteworthy that Justice Bowie in Zaborniak
did not base his conclusion on the distinction drawn in Schuster and Maillé.
He based it solely on his interpretation of the words in section 323 of the ETA.
14 I
do not think that the reasoning in Gaucher
can be distinguished in a director's liability case. The principle established
in Gaucher
is that a person who is not a party to an assessment and who is derivatively
assessed is not bound by the failure of the primary obligor to contest its
assessment. This principle is consistent with common sense and ordinary
fairness. I do not think that the salutary rule stated in Gaucher
should be eroded or whittled away by flawed distinctions. To extrapolate into
the Gaucher
principle a requirement that in every case we enquire into why the primary
assessment was not challenged, or whether the derivatively assessed directors
should have or could have influenced the primary taxpayer to contest its
assessment would so dilute the principle as to make it meaningless and unworkable. Once we eliminate the
fallacious distinction drawn in Schuster and Maillé between
directors' liability cases and property transfer cases we are left with the
full force of the Gaucher
authority applying to all derivative assessment cases.
[44]
This reasoning was
recently approved by Rip C.J. in Barry v. The Queen, 2009 TCC 508.
Further, although it was not specifically addressed in its reasons for judgment,
the Federal Court of Appeal, in the recent case of Abrametz v. The Queen,
2009 FCA 70, agreed to hear the argument challenging the underlying corporate
assessment put forward by a sole director of a company who had been assessed
pursuant to section 323 of the ETA.
[45]
As I have concluded
that the appellant has escaped liability by virtue of subsection 323(3) of the
ETA, it is not necessary for me to analyze whether the assessment against Naza
was valid or not.
[46]
The appeal is allowed,
with costs, and the assessment under appeal is vacated.
Signed at Ottawa, Canada, this 21st day of January 2011.
"Lucie Lamarre"
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