Citation: 2010 TCC 298
Date: 20100604
Docket: 2005-36(GST)G
BETWEEN:
DAVID A. BARRETT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Jorré J.
Introduction
[1]
The goods and services
tax (the “GST”) legislation creates a deemed trust with respect to GST
collected
and requires that corporate directors exercise due diligence in seeing to it
that companies remit net GST collected.
If they fail to exercise due diligence, directors may be held liable for the
unremitted net tax.
[2]
The Appellant appeals
from a director’s liability assessment of some $128,000 pursuant to section 323
of the Excise Tax Act (the “ETA”).
[3]
There are certain
conditions before a director may be held liable. This case turns solely on one
of those conditions. Pursuant to paragraph 323(2)(a) of the ETA a
director is not liable unless:
(a) a certificate for the amount of the
corporation’s liability . . . has been registered in the Federal
Court . . . and execution for that amount has been returned
unsatisfied in whole or in part;
[4]
In this case, it is not
disputed that a certificate has been registered nor is the Appellant’s status
as a director disputed. No due diligence defence is alleged.
[5]
The Appellant’s
position is that, in this case, the requirement that “. . . execution
. . . has been returned unsatisfied . . .” has not been
complied with.
[6]
The Appellant and his spouse
started and operated together a company called Creative Promotions Limited in
1975. The Appellant ran the sales and marketing side of the business while his
spouse ran the financial side of the business.
[7]
The business ceased
operations in 1995 at the same time as the Appellant’s marriage was coming
apart. The Appellant and his spouse subsequently divorced.
Appellant’s position
[8]
It will be useful at
this point to outline the Appellant’s position. The Appellant argues that the
Canada Revenue Agency (the “CRA”) and the sheriff were insufficiently diligent
in collecting the debt: collection action against the corporation took far too
long; had action been taken quickly enough there were ample funds in the
company bank account to pay the debt; when action was taken insufficient effort
was made to find assets and, when the actual execution took place, it was too
perfunctory. Accordingly, the Appellant submits that the execution carried out
does not meet the requirements of paragraph 323(2)(a) of the ETA.
Timeliness
[9]
Events did unfold
slowly. The periods for which amounts of net GST were not remitted started in
October 1993 and ended in March 1995. The debt was only certified in
the Federal Court in October 1998. The sheriff was directed to execute the
writ in October 2000, the writ was returned unsatisfied in November 2000 and
the assessment in issue was dated September 8, 2003.
[10]
However, the Minister
was not inactive in this period as indicated by the testimony of the
Respondent’s two witnesses and, among other things, according to assumption
11q) in the Respondent’s reply, which assumption was not contradicted:
[B]etween March 17, 1993 and September 28, 2001, the
Minister issued no less than 33 Statements of Account for the Corporation’s GST
liability, to the Corporation’s business address and the Appellant’s residential
address.
[11]
The Appellant led
evidence that as of March 31, 1995, Creative Promotions had over $230,000
in cash at the bank and, valued at cost, some $270,000 in stocks and bonds
whereas liabilities were under $175,000. The Appellant testified that in 1998
there would still have been enough assets in the company to pay the GST
liability although he could only provide generalizations as to what funds were
left and when the assets might have been used up.
[12]
Although the Appellant testified
that his spouse took care of the financial side, both he and his spouse had
access to the bank account. As to what became of the assets of the corporation
after operations ceased, not only did the Appellant’s spouse take some of the
funds,
but the Appellant also stated:
“1995 until today is 14 years. During that time I university-educated four
children, and I went through a divorce, which took care of what was left.” The
Appellant also invested about $20,000 in a friend’s business. Thus he and his
children benefited from part of the corporation assets still available after March 31,
1995.
[13]
Whether or not the
company had enough assets to cover the GST liability if the Minister had moved
to seize corporate assets in 1998 does not affect the Appellant’s liability,
nor does the fact that collection efforts were slow. It must be recalled that
it is the company’s obligation to pay the liability and the Appellant’s
obligation as director to see to it that the liability is paid. There is no
doubt that the period in question was a very difficult one in the Appellant’s
life but that does not change his responsibilities as director.
[14]
The only time limits
that apply to the Minister’s actions here are those specifically set out in the
ETA.
There are many time limits in the ETA but the only one that could be
applicable here is in subsection 323(5) which says that no one may be assessed
for director’s liability more than two years after one has ceased to be a
director. There is no suggestion that the Appellant ceased to be a director
more than two years prior to the director’s liability assessment made against
him.
[15]
Accordingly, there is
no merit to the claim that the assessment should be overturned because the
Minister acted too slowly.
Extent of collective efforts
[16]
Whether or not “. . . execution
. . . has been returned unsatisfied . . .” is essentially a
question of fact as stated by Bowman C.J. in Miotto v. The Queen:
42 Whether an execution is completed is essentially a factual
determination. The execution of a writ of fieri facias requires
reasonable efforts on the part of the bailiff. It does not require perfection. . . .
[17]
It is clear that, in
looking at what constitutes reasonable efforts, one must not only consider the
actions of the sheriff but the actions of the creditor, the Respondent, in directing
the sheriff.
Put another way, in determining whether reasonable efforts were made, one
examines the entire process of execution, a process which includes the steps
taken by the CRA in searching for assets and in determining the instructions to
give to the sheriff as well as the actions of the sheriff.
[18]
Were the efforts
reasonable? Two collections officers testified, Hilda Kopli and Jack Rizkallah.
Mr. Rizkallah’s involvement was in 2003 well after the sheriff’s nulla
bona report in November 2000. There were a number of collections officers
over the life of the collections file.
[19]
During their evidence,
there was reference to the contents of an electronic diary and a docket. As I
understand it, these are used to record the steps taken in the course of
collection. Copies of these records were not produced. They might well
have demonstrated more collection efforts than were in evidence. They might
also have had the effect of clarifying some evidence.
[20]
It is useful at this
point to describe what the sheriff actually did.
[21]
By letter dated
October 31, 2000, Ms. Kopli directed the sheriff to register the writ
of seizure and sale
in the sheriff’s office and in the land titles office. She also directed the
sheriff to enforce the writ at one address on Lakeshore Boulevard and levy on the Appellant and his spouse the full
amount of the writ.
[22]
At this time, the
Appellant was the sole director.
[23]
Ms. Kopli obtained
the address from a motor vehicle search for the Appellant and believed he was
there.
[24]
According to the
sheriff’s report of November 21, 2000,
two sheriff officers went to the address on November 2, 2000:
. . . It is an apartment complex (residential). Reception attempted
to contact the occupants but to no avail. Patricia Barrett is listed as the
contact for said address. A business card was left with Reception for Patricia
Barrett but as of this time no call back has been received. No goods or
chattels were observed and a Nulla Bona report is forwarded.
[25]
Ms. Kopli was
satisfied with this because she was expecting a nulla bona report.
[26]
She took no further
steps after this and, as a result of a reorganization, the file was transferred
to another collections officer.
[27]
The actions described
in the last six paragraphs, by themselves, might be described as perfunctory
and would not constitute “reasonable efforts”. The question becomes whether,
when one looks not only at the actions of the sheriff but also at the preceding
efforts of the collections officers, the totality of those actions constitutes
“reasonable efforts”.
[28]
It is important to note
that while a sheriff acting under a writ of seizure and sale may use reasonable
force to enter premises, other than a dwelling, he or she may only do so if he
or she believes on reasonable and probable grounds that there is property
liable to be taken in execution on the premises. In the case of a dwelling the
sheriff may only use force to enter pursuant to a court order; the court order
will only be granted if the court is satisfied that there are reasonable and
probable grounds.
[29]
What then were the
steps taken apart from the certification of the debt? Based on the testimony of
Ms. Kopli, the following occurred apart from certification, the issue of
the writ and the return of execution by the sheriff:
(a) Based on the diary
entries, there had been conversations with the Appellant before she took over
the file.
(b) The diary indicated
that in 1995 the Appellant had stated that the company had no assets and no
money to pay the liability.
(c) It also indicated the
company ceased operations in 1995.
(d) Ms. Kopli did a
personal property search to see if she could locate any company assets.
(e) In September 2000, she
sent a director’s liability letter to the Appellant’s home address which letter
was returned on October 23, unclaimed.
(f) She sent it to the
Appellant’s address that she had found by doing a motor vehicle search. She did
not use the address as shown on the Appellant’s personal income tax return
because mail had been returned from that address leading her to conclude that
the address was invalid.
(g) Ms. Kopli further
testified that she found in the files that the company no longer had its own
address apart from its owners. She did not send the letter to the last
corporate address available on file because that address was the former personal
residence of the Barretts and because the diary showed that it had been up for
sale in 1997; she assumed that by then it had been sold. For the same
reason she did not send the sheriff there.
(h) She also searched for
a bank account for a new company operated by the Appellant in the hope that it
was still using the bank account of Creative Promotions. She found that
the new company had its own bank account.
(i) Ms. Kopli did
not do a search for a bank account for Creative Promotions and did not know if
any collections officer before her had done so.
(j) Ms. Kopli also
found that a writ of execution had previously been returned unsatisfied with
respect to Creative Promotions’ source deductions liability.
[30]
Mr. Rizkallah
became involved in July 2003 after the writ was returned unsatisfied. He was
the collections officer at the time the assessment in issue was made. The key
part of his testimony is with regard to whether there was a search for a bank
account.
[31]
His testimony was that
he saw that an earlier officer on the file, Mr. Stein, had found a bank
account and discovered that there was a minimal amount in it. While he did not
remember the amount, it could have been something like $9. This occurred
before Mr. Rizkallah took over the file but he did not know when.
Analysis
[32]
To sum up, the key
steps taken leading up to the direction to the sheriff were:
(a) talking to the
Appellant who stated there were no assets;
(b) learning that the
business ceased operations in 1995;
(c) searching for personal
property;
(d) deciding where to send
the sheriff and, in the course of this, determining from the file that the
company no longer had a separate address of its own;
(e) determining that a
previous writ of execution for source deductions had been returned unsatisfied;
and
(f) possibly, the
discovery of a bank account that had a very small amount of money in it (this
occurred, but on the evidence it is impossible to know if it occurred before or
after the sheriff was sent out).
[33]
Were the efforts made
to execute the writ reasonable? As I indicated above execution is a process and
one must look at the entire process to determine whether the efforts of the CRA
and the sheriff were reasonable in the circumstances.
[34]
I am satisfied it was
reasonable for Ms. Kopli to send the sheriff to the address she found
through the motor vehicle search given that she had reasons to think the other
addresses were invalid.
[35]
Much was made by the
Appellant of the fact that the collections officers took account of the
Appellant’s statement that there were no assets left in the company in their
decision-making process as to what steps to take.
[36]
While one would expect
a collections officer to consider carefully such a statement made by a director
and co-owner, the Appellant could reasonably be expected to know if the company
had assets and I am satisfied that it was reasonable for the collections
officers to consider the statement in the circumstances given, among other
considerations, the time that had passed since the company ceased operations.
[37]
One would normally expect
that using information contained in CRA files to look for bank accounts would
be a step in the process of execution, especially since the CRA will frequently
have some indication of a taxpayer’s financial institution.
[38]
In the absence of such
a search for a bank account, considering the other steps in evidence, I would
find that it was not reasonable to stop the process of execution at the point
where it ended.
[39]
If the evidence had
established that the search for the bank account had occurred before the sheriff
had been sent out, given the statement by the Appellant, the failure of the
bank account search and the personal property search to turn up any meaningful
property, as well as the length of time since Creative Promotions ceased
operations, I would have found that it was reasonable to decide not to ask the sheriff
to take any further steps after November 21, 2000. I would also have
concluded that the steps taken constituted reasonable efforts to execute the writ.
However it was not established that the search for the bank account occurred
prior to the return of the writ.
[40]
I considered whether it
would be good enough that the search for the bank account took place after the
return of the writ but prior to the assessment of the Appellant.
[41]
Had the sheriff been directed to take further steps after
November 21, 2000 and prior to the assessment, there is no question that those
steps would be considered in determining whether reasonable efforts had been
made. Given that execution is a process, one could argue that should also be
the case for additional collection efforts by the CRA that do not involve the sheriff
so long as such steps are prior to the assessment.
[42]
I have concluded that
such an approach is not what paragraph 323(2)(a) of the ETA
requires. The legislator did not write in paragraph 323(2)(a) that
“reasonable collection efforts must have been made” prior to a director’s
liability assessment; the legislator wrote that execution must be returned
unsatisfied. Since the CRA may proceed to assess directors upon the return of
the writ, it is clear that the said paragraph envisages that execution is
complete at that point in time. Accordingly, the “reasonable efforts” must be
completed at the return of the writ.
Conclusion
[43]
Consequently, on the
evidence before me, reasonable efforts were not made prior to the return of the
writ and the condition of paragraph 323(2)(a) was not met. Accordingly,
the appeal will be allowed and the assessment vacated.
Signed at Ottawa, Ontario, this
4th day of June 2010.
"Gaston Jorré"
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