Citation: 2011 TCC 59
Date: 20110128
Docket: 2009-1282(GST)I
BETWEEN:
MYRNA JOYCE ELLIOTT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2009-1284(GST)I
AND BETWEEN:
L. PAUL ELLIOTT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2009-1285(GST)I
AND BETWEEN:
LAWRENCE RALPH
ELLIOTT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D'Arcy J.
[1]
The issue in this
appeal is whether the Appellants are liable, as directors, for net tax that Top
Ventures Ltd (the "Company") failed to remit in respect of its HST
reporting periods ending on October 31, 2004, January 31, 2005, and April 30,
2005.
[2]
On May 26, 2008, the
Minister of National Revenue (the “Minister”) assessed each of the Appellants (Myrna Joyce Elliott,
Lawrence Paul Elliott and Lawrence Ralph Elliott), $29,680.16 in respect of the
failure of the Company to remit an amount of net tax as required under
subsection 228(2) of Part IX of the Excise Tax Act (the "HST Act").
The Minister also assessed the Appellants interest of $3,911.07 and penalties
of $3,060.38.
[3]
The Appellants filed
notices of objection to the assessments. On June 26, 2009, the Minster
confirmed the assessments. Each of the Appellants then appealed the assessments
to this Court. The three appeals were heard together on common evidence.
[4]
Lawrence Paul Elliott,
who I will refer to as Paul Elliott, testified for the Appellants. Paul Elliott
is a lawyer, who carries on a general legal practice in Fredericton with his law firm, Matthews, McCrea, Elliott. I found
him to be a credible witness.
[5]
I will first summarize
the relevant facts.
[6]
The three Appellants purchased
the Company in 1994. From the date of purchase, the Appellants were the only
shareholders and directors of the Company. The Company owned a pub in Fredericton called Mama’s Pub & Eatery (the"Pub").
[7]
Paul Elliott testified
that Myrna Elliott had no business experience prior to working at the Pub. She
did not work at the Pub when it was purchased in 1994. However, she became
involved once Paul Elliott went to law school and over time assumed more and
more responsibility for the operation of the business. Eventually she became
the manager of the Pub.
[8]
Lawrence Ralph Elliott,
who I will refer to as Ralph Elliott, is a retired engineer. He also had no business
experience prior to the time the Appellants acquired the Pub. He was not an
employee of the Pub. In the words of Paul Elliott, Ralph Elliott chipped in
whenever possible to help run the Pub, especially in the later years.
[9]
Paul Elliott was a
consultant to the Company, who provided advice on a regular basis. He was paid
$15,000 per year for his services.
[10]
It is clear from the
evidence before me, particularly the testimony of Paul Elliott, that all three
Appellants were involved in the day-to-day management of the Company.
[11]
The Appellant provided
a one-page summary of the Pub's sales between 1994 and March 2005 (Exhibit A-1,
Tab 3). The summary shows that the sales were relatively flat from November
1994 to October 1999 (between $785,000 and $840,000). The Pub's sales
increased in 1999 and 2000 and crossed the one million dollar threshold in 2001
and 2002. The sales fell dramatically in 2003 and then collapsed in 2004.
[12]
Paul Elliott attributed
the drop in sales to the imposition by the City of Fredericton of a ban on smoking in public places, including restaurants such as
the Pub. He testified that the smoking ban devastated the Pub's business. A
significant number of the Pub's customers were smokers. These customers stopped
coming to the Pub once the smoking ban was imposed. This resulted in a monthly
drop in sales of approximately $20,000.
[13]
The Appellants filed an
exhibit (Exhibit A-1, Tab 9) showing the Pub's sales for each month between November
2001 and March 2005. Paul Elliott noted that the Pub's business was seasonal. As
a result, it was important to compare sales in a particular month with the
sales in the corresponding month in a previous year.
[14]
The exhibit shows that
sales in each of the eight months following the July 1, 2003 smoking ban
fell by approximately 25% when compared to sales in the corresponding months in
the previous year. This is consistent with the testimony of Paul Elliott.
[15]
However, the exhibit
also evidences that in each of the eight months prior to the
implementation of the smoking ban, sales fell by approximately 18% when
compared to sales in the corresponding months in the previous year. Although
this drop in sales may not have been as precipitous as the drop that occurred
after the smoking ban was implemented, it indicates that the drop in sales
began prior to the change in the smoking by-law.
[16]
The Company expected
sales to drop after the smoking ban was implemented, but received advice that
the drop in sales would be a short-term phenomenon and sales would recover. Obviously,
this did not occur.
[17]
The drop in sales
resulted in the Company incurring significant losses in its 2003, 2004, and
2005 fiscal years. Paul Elliott testified that the Appellants took numerous
steps in an attempt to minimize the losses, including fighting the
implementation of the smoking ban, reducing operating hours, reducing wages and
reducing other variable costs such as entertainment expenses.
[18]
In order to keep the
business operating, the Company was required to borrow $40,000 from its bank during
its 2004 fiscal period
and borrow over $100,000 from its shareholders (the Appellants).
[19]
The Company sold the
Pub on April 1, 2005 for $50,000. The Company used $13,000 of the proceeds to
pay various suppliers. The Company paid the remaining $37,000 to Myrna Elliott
and Ralph Elliott as a partial repayment of their shareholder loans.
[20]
Ralph Elliott testified
that the Appellants recognized that the Company had an obligation to remit the
HST it had collected on its sales. The Company implemented a system for the
calculation and payment of the HST. It purchased computer software that
calculated the amount of its quarterly remittance. This data was forwarded to
its accountant who prepared monthly reports. The accountant also prepared the
quarterly HST tax returns. The Appellants then signed and filed the HST
returns.
[21]
Ralph Elliott testified
that prior to the imposition of the smoking ban the Company filed its HST returns
"substantially" on time. On cross-examination, he acknowledged that
"sometimes" the Company was two weeks to a month late in filing its
HST returns.
[22]
He testified that once
the smoking ban was implemented and the Company's sales fell, the Appellants
met on a frequent basis to discuss the payment of supplier bills and the
remittance of the HST. Paul Elliott noted the Appellants would determine, based
upon the profit of the Company, what bills "we could handle." In the
short term, using the revenue of the business, the bank borrowings, and the
shareholders’ advances, they were able to pay most bills. However, as the
decrease in sales continued the Company was not able to "fund
everything."
[23]
The Company paid its
HST remittances for its HST reporting periods that ended prior to August 2004. However,
it did not remit any amount in respect of its HST reporting periods that ended
after July 2004.
The Law
[24]
Subsection 323(1) of
the HST Act provides that the directors of a corporation are jointly and
severally liable to pay any amount of net tax that the corporation fails to
remit. The director’s liability
under subsection 323(1) includes any interest on, or penalties relating to, the
net tax that is not remitted.
[25]
Paragraph 323(2)(a) of
the HST Act provides that a director is not liable under subsection 323(1)
unless "a certificate for the amount of the corporation's liability has been
registered in the Federal Court under section 316 and execution for that amount
has been returned unsatisfied in whole or in part."
[26]
In addition, under
subsection 323(3) of the HST Act, a director is not liable under subsection
323(1) where "the director exercised the degree of care, diligence and
skill to prevent the failure that a reasonably prudent person would have
exercised in comparable circumstances."
Preliminary
Issue
[27]
Each of the Appellants
filed, with their Notice of Appeal, an identical schedule entitled
"Reasons for Appeal." The Reasons for Appeal appear to have been
prepared by Paul Elliott and his law firm, Matthews, McCrea, Elliott.
[28]
The Notice of Appeal
states that the grounds for the appeal are the failure by the Canada Revenue
Agency to properly consider the subsection 323(3) due diligence defence. At
paragraph 17 of the Reasons for Appeal, the Appellants also appear to contest
the amount assessed. However, at the commencement of the hearing, the parties
informed me that the amount assessed was not at issue.
[29]
The Appellants and
their counsel did not raise any other issues during the course of the hearing,
until closing argument.
[30]
At the commencement of
his closing argument, counsel for the Appellants raised the issue of the application
of paragraph 323(2)(a) of the HST Act. He argued that since the
Respondent did not call any evidence, it had failed to prove that the Minister
had complied with paragraph 323(2)(a) of the HST Act.
[31]
Since counsel for the Appellant
did not provide any prior notice of this argument to counsel for the
Respondent, I gave the Respondent the option of arguing the issue orally or by
way of written submissions. Counsel for the Respondent elected the latter.
[32]
Paragraph 19(m) and (n)
of the Respondent's Reply Statement states that when assessing the Appellants'
liability under subsection 323(1) of the HST Act with respect to the
Company's failure to remit net tax, the Minister relied on the following
assumptions of fact:
m) A Certificate in the amount of $34,791.02,
representing the Company's GST/HST debt at the time, was registered in the Federal
Court on November 1, 2007. It was also registered in the Provincial Property
Registry System on April 4, 2008; and
n) On or around November 1, 2007, a Writ of
Seizure was sent to the Sheriff and served on the Company. It was returned on
May 9, 2008 as Nulla Bona on the grounds that no goods, chattels or real
property under the Company name could be found.
[33]
During the hearing, the
Appellants did not challenge or raise any issues with respect to these
assumptions.
[34]
The issue raised by
counsel for the Appellants is similar to the issue in Naguib v. the Queen,
2004 FCA 40, DTC 6082 (FCA) [Naguib]. In Naguib, the Appellant's
main argument, on appeal to the Federal Court of Appeal, was that the
Respondent had failed to establish that the Appellant made a misrepresentation
that was attributable to neglect, carelessness or wilful default so as to
permit a reassessment beyond the normal reassessment period pursuant to subparagraph
152(4)(a)(i) of the Income Tax Act. When dismissing the appeal,
the Federal Court of Appeal noted the following:
4 The Appellant argued that the onus was initially on the Respondent
to lead evidence proving compliance with section 152(4)(a)(i).
5 The difficulty faced by the Appellant is that he failed
to raise this as a ground of appeal in the Tax Court. Rather he argued that the
net worth assessment itself was flawed.
6 We are of the view that the Respondent did not have a
duty to raise facts so as to justify the application of section 152(4)(a)(i),
in the absence of any challenge by the Appellant in his Notice of Appeal or at
the trial in the Tax Court to the reassessment on the basis that it was issued
beyond the normal reassessment period. While the facts in Crête v. H.M.Q.,
[1997] F.C.J. no. 214 (F.C.A.) are not the same as the present case in that it
involved a motion relating to the pleadings, nevertheless, the statement of the
Court is perhaps helpful:
It is clear that the judge erred. He criticizes the Minister for not
alleging in the reply to the notice of appeal some facts to show that the reassessment
was not out of time. But the Minister, like any other litigant, is never
required to reply to an allegation that has not been made and, however you read
the taxpayer's Notice of Appeal, it contains no allegation that the notice of
assessment was void for being out of time.
[35]
Similarly, in the
current appeals the Appellants did not in their Notices of Appeal or during the
trial, challenge the assessment on the basis that the Minister had not complied
with the provisions of paragraph 323(2)(a) of the HST Act. In
such a situation, the Minister did not have a duty to raise facts to justify
the application of paragraph 323(2)(a) of the HST Act.
[36]
In addition, the
Appellants did not present any evidence in their Notices of Appeal or during
the course of the hearing to challenge the assumptions made in paragraphs 19(m)
and (n) of the Respondent's Reply. In such a situation, the Minister did not
have a duty to present evidence to support the assumptions of fact made in
paragraphs 19(m) and (n) of his Reply. These assumptions satisfy the conditions
of paragraph 323(2)(a) of the HST Act.
Application
of Due Diligence Defence
[37]
It is the Appellants'
position that they have met the conditions of subsection 323(3) of the HST
Act. Their counsel argued that the Company's failure to remit was the
result of an immediate catastrophic event (the smoking ban) that was beyond the
control of the Appellants. He focused on various steps that the Appellants took
to keep the business running after the City of Fredericton imposed the smoking by-law. These steps included reducing operating
hours, reducing variable costs, and the injection of substantial capital by the
Appellants in the form of shareholder loans. The Appellants' counsel
emphasized that the Company received professional advice that the downward
trend in the Pub's business would be short-term and sales would "come
back."
[38]
Subsection 323(3) of
the HST Act will only apply if the Appellants, in their role as
directors of the Company, exercised the degree of care, diligence, and skill to
prevent the failure that a reasonably prudent person would have exercised in
comparable circumstances.
[39]
This is a question of
fact; however, the Courts have developed certain general principles that must
be considered when applying the law to the facts of a particular case.
[40]
The general principles
were summarized by the Federal Court of Appeal in its decisions in Soper v. Canada
The Queen, 97 DTC 5407 (FCA) [Soper] and Canada (Attorney General) v. McKinnon, [2001] 2 F.C. 203 (FCA) [McKinnon].
[41]
The "due
diligence" test applicable under subsection 323(3) of the HST Act
is objective‑subjective in nature. As noted by the Court of Appeal in McKinnon
above at paragraph 28:
28…in deciding whether a director has “exercised the degree of care, diligence
and skill to prevent the failure that a reasonably prudent person would have
shown in comparable circumstances”, the court must take into account the
characteristics of the directors whose conduct is in question, including their
levels of relevant skill, experience and knowledge. The court must then ask
whether, if faced with similar circumstances, a reasonably prudent director,
with comparable levels of skill, experience and qualifications would have acted
in the same way as these directors……"
[42]
With respect to inside
directors, such as the Appellants, the Federal Court of Appeal noted in Soper
above that they will have the most difficulty in establishing the due diligence
defence since they are involved in the day-to-day management of the company and
influence the conduct of its business affairs.
[43]
It is clear from the
wording of subsection 323(3) of the HST Act that the due diligence
required of the director is to prevent the failure to remit.
[44]
I accept that in the
current appeals the Appellants took numerous steps to keep the business operating
and in a saleable state. However, I do not accept that during the period of
non-remittance (August 1, 2004 to April 1, 2005) they took any steps to prevent
the failure to remit.
[45]
Based upon the evidence
before me, it is clear that the Appellants made the decision not to remit the
net tax owing for the relevant periods. Paul Elliott testified that the
Appellants met on a regular basis and decided which bills to pay and which
bills not to pay. It appears that, during the relevant period, the Appellants
decided to use the available cash to repay the bank loan and pay most, if not all,
of the suppliers. They also decided not to remit the amounts owing in respect
of the net tax. I fail to see how such actions constitute any degree of care,
diligence, and skill to prevent the failure to remit.
[46]
I do not accept the
Appellants' argument that the failure to remit was the result of an immediate
catastrophic event. The smoking ban was imposed on July 1, 2003, 13 months
before the Company began to stop making its remittances. The smoking ban was
not an immediate event. Further, the evidence provided by the Appellants shows
that the drop in the Pub's sales began eight months prior to the implementation
of the smoking ban.
[47]
Regardless, any
argument that the Appellants exercised due diligence was lost when the business
was sold on April 1, 2005. The Company received $50,000 on the sale of the Pub,
more than enough to pay the outstanding remittances plus the remittance for the
reporting period of the Company ending on April 30, 2005. However, the
Appellants chose to use most of the money to repay shareholder loans to Myrna
Elliott and Ralph Elliott, rather than make the required remittances to the Government.
[48]
For the foregoing
reasons, the appeals are dismissed, without costs.
Signed at Ottawa, Canada, this 28th day of January 2011.
“S. D’Arcy”
CITATION: 2011
TCC 59
COURT FILE NO.: 2009-1282(GST)I,
2009-1284(GST)I and
2009-1285(GST)I
STYLE OF CAUSE: MYRNA
JOYCE ELLIOTT, L. PAUL ELLIOTT and LAWRENCE RALPH ELLIOTT and HER MAJESTY THE
QUEEN
PLACE OF HEARING: Fredericton, New
Brunswick
DATE OF HEARING: May
19, 2010
REASONS FOR JUDGMENT BY: The Honourable
Justice Steven K. D'Arcy
DATE OF JUDGMENT: January
28, 2011
APPEARANCES:
|
Counsel for the
Appellant:
|
William G. Stephenson
|
|
Counsel for the
Respondent:
|
Gregory B. King
|
COUNSEL OF RECORD:
For the Appellant:
Name: William
G. Stephenson
Firm: Stephenson
Choukri
Fredericton, New Brunswick
For the
Respondent: Myles J. Kirvan
Deputy
Attorney General of Canada
Ottawa, Canada
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