Citation: 2011 TCC 388
Date: 20111011
Docket: 2010-661(GST)I
BETWEEN:
MARIE-ÈVE LATULIPPE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR ORDER
Angers J.
[1]
This appeal is from a
reassessment made under the section 323 of the Excise Tax Act (the Act) against
the appellant as director of 6883303 Canada Inc. (hereinafter 688). The onus
placed on the appellant stems from the failure of 688 to remit to the Receiver General
of Canada the positive amount of the net tax which
it calculated in its monthly reports for the periods from December 1, 2008, to
March 31, 2009, which were filed late, that is, in March and in April 2009. The
amount of the unpaid net tax is $18,436.94 plus penalties and interest, for
a total of $19,104.41 as of the date of the assessment, February 15, 2010.
[2]
The appellant has been
the wife of Koun Siriphanh since 2008. She met him in 2000 when she got a job
as a hostess and waitress in a restaurant operated by her husband at the time.
The restaurant in question was owned by 3603580 Canada Inc. and operated as Buffet
Dragon.
[3]
During the years of
operation of Buffet Dragon by 3603580 Canada Inc., the business experienced a
number of financial and other difficulties which resulted in the bankruptcy of
the company in question towards the end of 2007 and in the personal bankruptcy
of Mr. Siriphanh after being personally assessed as a director for $1.7 million.
[4]
Wanting to make a
comeback in the restaurant business, on December 3, 2007, Mr. Siriphanh
incorporated 688 in partnership with his chef and his wife. At the time of the
incorporation, the chef’s wife, Nadine L’Écuyer, was the sole shareholder
and director of 688. With the help of the Chinese community, the restaurant reopened
its doors operating under the same name.
[5]
Things did not go as
planned, and 688 faced financial difficulties which prevented it from
fulfilling its obligations. As a result, they disputes ensued between Mr. Siriphanh,
the chef and Ms. L’Écuyer. Ms. L’Écuyer no longer wanted to be director and look
after the business. Mr. Siriphanh was an undischarged bankrupt and 688 owed Revenue
Canada and Revenu Québec approximately $130,000, not to
mention the amounts owed to certain other creditors.
[6]
Despite all these
difficulties and after consulting with the accountant of 688, Mr. Siriphanh came
to the conclusion that 688 was viable. The accountant therefore suggested
presenting a proposal in bankruptcy to the creditors to reimburse the debt in
full over a period of five years. He had to, however, replace Ms. L’Écuyer
and therefore turned to his wife to assist him in that process.
[7]
It should be noted that
the appellant was never employed with 688 and did not work at the restaurant. She
became pregnant in 2008 and had her baby in November of that same year. Mr. Siriphanh
therefore explained the financial situation of 688 to the appellant, his
relaunch plan and the fact that Ms. L’Écuyer and her husband no longer
wanted to continue the partnership. He told her that he needed her to transfer the
restaurant to her as he no longer had anyone, seeing as he himself was bankrupt.
She was his lifeline. The appellant first refused, having already experienced a
bankruptcy and the loss of all their property, but the following day, Mr. Siriphanh
told her that he would not have asked her had he not been convinced that the restaurant
would do well. It was their only livelihood and he was convinced that the proposal
in bankruptcy would be accepted. It was therefore obvious that, if he were to
lose their business, he would lose everything. She therefore agreed.
[8]
Therefore, the appellant
went to see her lawyer on December 30, 2008, to sign the documentation
required to complete the transfer from Ms. L’Écuyer to the appellant herself. Her
husband explained to her that she would be the new director and she signed the documents
without reading them. She recalled that Ms. L’Écuyer had informed the
lawyer that December 30, 2008, was not the right date and that the documents had
to be dated April 3, 2008, which was done.
[9]
The appellant therefore
signed an agreement to purchase and sell the shares dated April 3, 2008 (Exhibit I‑3),
in which she undertook to purchase the only shares issued and in circulation of
the share capital of 688, that is, 100 Class “A” shares, for the amount of $28,197.79.
In order to make the payment, the appellant signed a demand promissory note in
favour of Ms. L’Écuyer in the same amount (Exhibit I‑2). However,
she did not recall having to pay anything and Ms. L’Écuyer never made a
demand for the payment of said note.
[10]
Her share certificate was
dated April 3, 2008 (Exhibit A‑2) and resolutions were also signed (Exhibit
I‑1). On December 30, 2008, 688 applied for a liquor licence (Exhibit I‑5)
and the application was signed by the appellant. On March 24, 2009, she also
signed a deposit account agreement for 688 with the Royal Bank (Exhibit I‑6).
688 received a document production requirement on January 22, 2009, at the restaurant’s
address, but the appellant stated that she had no knowledge of that letter.
[11]
According to the
accountant of 688, the appellant was a nominee. He met with the appellant on
several occasions to discuss means of saving the family business. The appellant
asked the accountant whether she should make the proposal in bankruptcy and he assured
her that it was the right thing to do. She determined that 688 was capable of paying
its debts and the trustee also told her that everything would be fine.
[12]
On March 13, 2009, the appellant
signed the proposal in bankruptcy and the creditors’ meeting was held on April
3, 2009. The meeting was presided over by the representative of the trustee,
Chantal Gingras, and attended by two representatives from Revenu Québec (including
René Belisle), the appellant and the accountant of 688, Yves Godin.
[13]
The minutes of the
meeting (Exhibit I‑8) tell us that the creditors (actually, Revenu
Québec), were against the proposal, and it is noted that the appellant admitted
that she acted as a nominee, and that she stated that Sébastien Harvey de Noël and
Associates prepared in December the documents dated April and that she did not
know what she was signing. The appellant testified that Mr. Belisle told her
that he knew she was not the director of 688 and that it was her husband who
was behind all this. The accountant confirmed in his testimony the comments of
Mr. Belisle and his refusal to accept the proposal. As a result, 688 became
bankrupt.
[14]
According to Mr. Siriphanh,
the appellant’s appointment as director changed nothing at all with respect to
the management of 688. The appellant trusted him to oversee everything and he
also told her that he would take care of the rest if she agreed to do what he
said.
[15]
The first assessment made
against the appellant was $54,145.35 and covered the period from May 31, 2008,
to March 31, 2009. After the objection, the Minister of National Revenue (the Minister)
amended the assessment made against the appellant by changing the period at
issue, which was now that of December 1, 2008, to March 31, 2009. There is no
dispute that the Minister established with the bankruptcy trustee, within the
period prescribed in paragraph 323(2)(c) of the Act, a claim for
the amount of the liability of 688.
[16]
Thus, the issue to be
determined is whether the appellant, as director of 688, owes, pursuant to the
provisions of section 323 of the Act, the positive amount of the net tax that
688 calculated and indicated in its monthly reports for the period from
December 1, 2008, to March 31, 2009, and which it failed to remit to the
Receiver General of Canada.
[17]
The obligation of 688 to
file a return results from the provisions of subsections 228(1) and (2) of
the Act. A director of a corporation is liable under subsection 323(1) of
the Act when the corporation fails to remit the amount of the net tax. A
director may, however, not be liable where the director can establish
applicability of the exceptions set out in subsections 323(2) and (3) of the
Act. The relevant provisions are drafted as follows:
228. (1) 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, except
where subsection (2.1) or (2.3) applies in respect of the reporting period.
Where the net tax for a reporting period
of a person is a positive amount, the person shall, except where subsection
(2.1) or (2.3) applies in respect of the reporting period, remit that amount to
the Receiver General,
(a) where
the person is an individual to whom subparagraph 238(1)(a)(ii) applies in respect of the
reporting period, on or before April 30 of the year following the end of the
reporting period; and
(b) in
any other case, on or before the day on or before which the return for that
period is required to be filed.
323.
(1) If a corporation
fails to remit an amount of net tax as required under subsection 228(2) or
(2.3) or to pay an amount as required under section 230.1 that was paid to, or
was applied to the liability of, the corporation as a net tax refund, the
directors of the corporation at the time the corporation was required to remit
or pay, as the case may be, the amount are jointly and severally, or
solidarily, liable, together with the corporation, to pay the amount and any
interest on, or penalties relating to, the amount.
(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
bankruptcy 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.
(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.
[18]
There is no doubt in
the case at bar that the appellant was the de jure director of 688. She agree
to assume this role at the request of her husband and, to that end, she
purchased the only issued shares of 688 thus becoming the sole director of 688.
She subsequently signed all documentation necessary such that her name appears
in the minutes, the resolutions, the bank account agreement, the liquor licence
application and, particularly, in the proposal in bankruptcy of 688 to the
creditors.
[19]
Did the appellant exercise the degree of care, diligence and
skill to prevent the failure that a reasonably prudent person would have
exercised in comparable circumstances? Does the family situation in which the appellant found herself make
it possible to reduce in the present circumstances the required degree of care, diligence and skill ? As for this last question, it is
obviously fact-specific.
[20]
I cannot ignore the
recent decision of the Federal Court of Appeal rendered in Buckingham v. The
Queen, 2011 FCA 142, which sets aside the subjective standard and
established that the test should be objective. The application of this more
strict standard is such that the arguments based on personal shortcomings
should be aside. In that respect, I cite paragraph 38 of the decision:
This objective standard has set aside the common law
principle that a director's management of a corporation is to be judged
according to his own personal skills, knowledge, abilities and capacities: Peoples Department Stores at paras. 59 to 62. To say that
the standard is objective makes it clear that the factual aspects of the
circumstances surrounding the actions of the director are important as opposed
to the subjective motivations of the directors: Peoples
Department Stores at para. 63. The emergence of stricter standards puts
pressure on corporations to improve the quality of board decisions through the
establishment of good corporate governance rules: Peoples
Department Stores at para. 64. Stricter standards also discourage the
appointment of inactive directors chosen for show or who fail to discharge
their duties as director by leaving decisions to the active directors.
Consequently, a person who is appointed as a director must carry out the duties
of that function on an active basis and will not be allowed to defend a claim
for malfeasance in the discharge of his or her duties by relying on his or her
own inaction: Kevin P. McGuinness, Canadian Business
Corporations Law, 2nd ed. (Markham, Ontario: LexisNexis Canada, 2007) at
11.9.
[21]
The particular circumstances
of a director may be taken into account, but only against the objective reasonably
prudent person standard, as the Federal Court of Appeal explains in paragraph
39:
An objective standard does not however entail that the
particular circumstances of a director are to be ignored. These circumstances
must be taken into account, but must be considered against an objective
"reasonably prudent person" standard. As noted in Peoples Department Stores at paragraph 62:
The statutory duty of care in s. 122(1)(b)
of the CBCA emulates but does not replicate the language proposed by the
Dickerson Report. The main difference is that the enacted version includes the
words "in comparable circumstances", which modifies the statutory
standard by requiring the context in which a given decision was made to be
taken into account. This is not the introduction of a subjective element
relating to the competence of the director, but rather the introduction of a
contextual element into the statutory standard of care. It is clear that s.
122(1)(b) requires more of directors and officers than the traditional
common law duty of care outlined in, for example, Re City Equitable Fire
Insurance, supra [[1925] 1 Ch. 407].
[22]
One last passage
reminds us of the intent of Parliament in enacting such a provision. The
following was stated at paragraph 52 in Buckingham:
Parliament did not require that directors be subject to an
absolute liability for the remittances of their corporations. Consequently,
Parliament has accepted that a corporation may, in certain circumstances, fail
to effect remittances without its directors incurring liability. What is
required is that the directors establish that they were specifically concerned
with the tax remittances and that they exercised their duty of care, diligence
and skill with a view to preventing a failure by the corporation to remit the
concerned amounts.
[23]
Counsel for the appellant
cited decisions of this Court which are evocative of a lowering of the standard
of care and diligence applicable to the person characterized as
passive family director as opposed to the person who is truly free to become a
director and does so outside a family context (see Bousquet v. Canada,
2003 TCC 109 and Dirienzo v. Canada, [2000] T.C.J. No. 287 (QL).
[24]
However, our Court
also rendered decisions in which it was less indulgent with respect to de
jure directors, who, considering the family ties, did not assume their
responsibilities as directors. Suffice it to refer to Penney v. Canada, [1999]
T.C.J. No. 803 (QL), [1999] G.S.T.C. 102, Black v. Canada, [1994]
T.C.J. No. 191 (QL), [1994] 1 C.T.C. 2750, Hanson v. Canada, [1996] T.C.J.
No. 1392 (QL), [1997]
1 C.T.C 2456 and Western v. Canada, [1999] T.C.J.
No. 155 (QL). All
of these decisions emphasize that there is nothing in the wording of the
relevant provisions that would suggest that Parliament intended to assist
directors who failed to act because they ignored their responsibilities and
those of the company of which they were the directors. Suffice it to cite paragraph
22 of the decision of Sarchuk J. in Hanson:
The mere fact that one becomes a director in a family
context is not sufficient to permit such director to turn his or her back on
the affairs of the company; to ignore it for all practical purposes; to ignore
her responsibilities; indeed, to fail to ask even the most rudimentary question
as to what those responsibilities are, and thereby to escape liability under
the provisions of the Income Tax Act.
[25]
I accept, as I have
already mentioned, that each case must be decided on its own merits. In the
case at bar, it is obvious that the appellant was aware that she held the
position of director of 688. She did not blindly agree to act in that capacity.
She took the time to think about it and, in my opinion, she knew the role and
responsibilities she had to assume. She also knew very well the reason for the
financial troubles of 688 and, particularly, she knew the amount of the only debt
mentioned in the proposal in bankruptcy, namely, that resulting from the
failure to remit tax on the sales of 688. Her husband was forced to declare
personal bankruptcy owing to the same type of debt of the previous company, which
also failed to make tax remittances. The appellant was therefore well aware of
the importance of making the tax remittances and the consequences of not making
them. Indeed, all the measures she took following her appointment as director
were for the purpose of making arrangements to pay for the arrears. She herself
paid a visit to the notary to purchase all the shares of 688 so as to take care
of the proposal in bankruptcy. I have trouble believing that the appellant could
have signed resolutions by the board of directors of 688, the documents pertaining
to the transfer of the shares of 688, a purchase agreement and especially a
demand promissory note in the amount of $28,197.79 without realizing the nature
and the importance of all this and of the responsibilities this would entail.
[26]
The appellant’s role did
not end there. She subsequently applied for a liquor licence for 688 and
opened a bank account. She had a number of meetings alone with the accountant
for the purpose of preparing the proposal in bankruptcy. If her role was merely
that of nominee, why were such meetings held with her and not with her husband?
The same can be said of the meetings with the trustee in bankruptcy who
prepared the proposal. By assuming all these responsibilities, she demonstrated
that she played an active role, and at no time did she make an effort to prevent
the failure of 688 to remit tax during the relevant periods. Long aware of her
husband’s weakness with respect to the remittance of the tax collected by 688, she
should have ensured tax remittance herself and she did not.
[27]
As for the issue of
whether the auditor could have characterized the appellant as nominee at the
creditor’s meeting, I would like to point out that the Court is not bound by
such an opinion, especially since the auditor was not asked to testify at the
hearing. The same goes for that expressed by the accountant.
[28]
The appeal is dismissed.
Signed, this 11th day October 2011.
“François Angers”
Translation certified true
on this 24th day
of November 2011.
Daniela Possamai,
Translator
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