Docket: 2010-2628(GST)I
BETWEEN:
PIERRE GOUGEON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
____________________________________________________________________
Appeal heard on June 28 and August 31, 2011,
at Ottawa, Ontario
Before: The Honourable Justice François
Angers
Appearances:
|
For the Appellant:
|
The Appellant himself
|
|
Counsel for the Respondent:
|
Éric Bernatchez
|
____________________________________________________________________
JUDGMENT
The appeal from the assessment under Part
IX of the Excise Tax Act, notice of which is dated January 6, 2009,
and concerns the period from February 28, 2006, to February 29, 2008, is
dismissed.
Signed, this 11th day of October 2011.
“François Angers”
Translation certified true
On this 31st day of October 2011.
Johanna Kratz, Translator
Citation: 2011 TCC 420
Date: 20111011
Docket: 2010-2628(GST)I
BETWEEN:
PIERRE GOUGEON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Angers J.
[1]
This is an appeal from
an assessment of the Appellant dated January 6, 2009, under Part IX
of the Excise Tax Act (the “Act”). The Appellant was assessed for
$10,015.92 in net tax, and associated interest and penalties, which the corporation
Quadrisard Canada ltée (the “corporation”) should have paid under
subsection 228(2) of the Act. The Appellant was the corporation’s sole
director during the relevant period.
[2]
It is undisputed that
the corporation is a body corporate duly incorporated and registered for the
purposes of Part IX of the Act. The corporation failed to remit the tax it
had collected. It was assessed for tax, including penalties and interest, for
the February 28, 2006, to February 29, 2008, period.
[3]
On November 10,
2008, the corporation went bankrupt, and the Minister of National Revenue (the “Minister”)
registered a certificate for the tax, penalties and interest payable by the
corporation ,within the time prescribed at paragraph 323(2)(c).
[4]
The only issue is
whether the Appellant, in his capacity as director, exercised the degree of
care, diligence and skill to prevent the failure that a reasonably
prudent person would have exercised in comparable circumstances, as required by
subsection 323(3) of the Act, thereby avoiding liability under
subsection 323(1) of the Act.
[5]
According to the Appellant,
the corporation’s financial difficulties began in 2000, when it lost its
computer data. As he still believed that the corporation was able to generate
profit, he prepared a new business plan in 2003 or 2004. The corporation was a
local business that sold and manufactured framed and laminated wall decorations.
[6]
The Appellant was a
senior manager of the corporation and, as we know, its sole director. As the
corporation was already late in its remittances, in September 2005, he
applied to the bank for an increase in the corporation’s line of credit. The
application was denied. He then invested his own money in the corporation so
that the corporation could meet its financial obligations. He thus succeeded in
paying some of the tax arrears payable by the corporation to the Minister, and
his evidence includes letters proposing various arrangements for paying the
corporation’s tax arrears.
[7]
The corporation ran
into difficulties, particularly in 2005 and 2006, that hardly helped its
financial situation. These difficulties involved disputes with its tenant and with
employees. As for paying taxes under the Act, the corporation paid only the
arrears. In fact, the amount of the assessment under appeal was calculated
using the returns produced by the corporation during the periods at issue, for
which it had not, however, made any payments.
[8]
The Appellant has
undoubtedly put a great deal of effort into making his business profitable,
which, however, ran into difficulties that definitely did not help. It must
however be recalled that what the Act requires of a director is to demonstrate
that he or she was specifically concerned about the corporation’s failure to
remit its taxes and that he or she exercised the degree of care, diligence and
skill to prevent the failure that a reasonably prudent person would have
exercised in comparable circumstances.
[9]
In a recent decision, Buckingham
v. Canada, 2011 FCA 142, the Federal Court of Appeal reminded us of
Parliament’s intention regarding the relevant provisions. At paragraphs 52, 56
and 57, the Court stated as follows:
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.
. . .
A director of a corporation cannot justify a defence under the terms
of subsection 227.1(3) of the Income Tax Act where he condones the
continued operation of the corporation by diverting employee source deductions
to other purposes. The entire scheme of section 227.1 of the Income Tax Act,
read as a whole, is precisely designed to avoid such situations. In this case,
though the respondent had a reasonable (but erroneous) expectation that the
sale of the online course development division could result in a large payment
which could be used to satisfy creditors, he consciously transferred part of
the risks associated with this transaction to the Crown by continuing
operations knowing that employee source deductions would not be remitted. This
is precisely the mischief which subsection 227.1 of the Income Tax Act
seeks to avoid.
Once the trial judge found as a matter of fact that the respondent’s
efforts after February 2003 were no longer directed towards the avoidance of
failures to remit, no successful defence under either subsection 227.1(3) of
the Income Tax Act or subsection 323(3) of the Excise Tax Act
could be sustained.
[10]
The Appellant managed
his business for several years, and throughout these years, the corporation was
consistently late in its remittances, explaining the amount of interest and
penalties in the assessment. It becomes clear therefore that the corporation
cared little about making its remittances when they were due and that the Appellant,
being its directing mind and fully aware of the situation, cared little about
this duty. In his capacity as director, it was also his duty to ensure that the
corporation make its remittances when they were due.
[11]
It seems clear to me in
the present matter that the director preferred to use this money to finance the
corporation’s activities, which the statutory provision actually intends to
prevent. I quote here another excerpt from Buckingham v. Canada, 2011
FCA 142:
49 The traditional
approach has been that a director’s duty is to prevent the failure to remit,
not to condone it in the hope that matters can be rectified subsequently: Canada
v. Corsano, [1999] 3 F.C. 173 (C.A.) at para. 35, Ruffo v. Canada,
2000 D.T.C. 6317, [2000] 4 C.T.C. 39 (F.C.A.). Contrary to the suppliers of a
corporation who may limit their financial exposure by requiring cash-in-advance
payments, the Crown is an involuntary creditor. The
level of the Crown’s exposure to the corporation can thus increase if the
corporation continues its operations by paying the net salaries of the
employees without effecting employee source deductions remittances, or if the
corporation decides to collect GST/HST from customers without reporting and
remitting these amounts in a timely fashion. In circumstances where a
corporation is facing financial difficulties, it may be tempting to divert
these Crown remittances in order to pay other creditors and thus ensure the
continuation of the operations of the corporation. It is precisely such a
situation which both section 227.1 of the Income Tax Act and section 323
of the Excise Tax Act seek to avoid. The defence under subsection
227.1(3) of the Income Tax Act and under subsection 323(3) of the Excise
Tax Act should not be used to encourage such failures by allowing a due
diligence defence for directors who finance the activities of their corporation
with Crown monies on the expectation that the failures to remit could
eventually be cured.
[12]
The Appellant has not
demonstrated that he took concrete steps to ensure that the remittances be made
when they were due. Rather, his steps were curative in nature, since he
preferred negotiating long-term payment agreements for paying the arrears.
[13]
The Appellant has
failed to demonstrate that his inaction in this case was justified because he
lacked the knowledge or ability to prevent the failure. The appeal is
dismissed.
Signed, this 11th day of October 2011.
“François Angers”
Translation certified true
On this 31st day of October 2011.
Johanna Kratz, Translator
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