Citation: 2011TCC421
Date: 20110912
Docket: 2009-3273(GST)I
BETWEEN:
BRADLEY THOMAS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the bench on May 11, 2010, in Ottawa, Ontario.)
McArthur J.
[1]
These appeals are from
a reassessment by the Minister of National Revenue under subsection 323(1)
of the Excise Tax Act (GST) (the “Act”). They were heard under
the informal procedure of this Court. The reassessment of $43,840 is in respect
to the failure of 610745 Saskatchewan Ltd. (610) to remit net tax pursuant to
subsection 228(2) of the Act for periods ended on December 31, in
1998, 1999, 2000, 2001, 2002 and 2003.
[2]
The Minister’s position
is that the Appellant was a director of 610 and pursuant to Saskatchewan’s Business Corporation Act continued to be a
director of the Company for at least two years after the Company was struck off
Saskatchewan’s Corporate Registry.
[3]
The Minister adds that
the Appellant did not exercise the degree of care, diligence and skill that a
reasonably prudent person would have exercised in comparable circumstances as
contemplated in subsection 323(3) of the Act to prevent the failure
of 610 to remit the net tax for the reporting periods as referred to.
[4]
The Appellant submits
that he ceased to be director as of the date 610 was dissolved being August 31,
2005 and in any event, he exercised the due diligence contemplated in
subsection 323(3).
[5]
In May of 1998, 610, a
GST registrant, acquired three commercial properties in Saskatoon. The Appellant became the beneficial owner of 75% of
the properties. He practiced optometry in Unity and Meadow Lake, Saskatchewan for over 20 years. His practice kept him busy having
offices in both communities that are two and a half hours apart from each other
and I believe approximately two hours from Saskatoon.
[6]
In the mid-1990’s he
retained Gerard Gardiner (Gerard) for investment and financial advice. Gerard
was an investment advisor in a private firm. Upon his advice the two of them
purchased shares in a corporation (599418 Saskatchewan Ltd.) that was the sole
shareholder of 610 who became the registered owner of the three commercial
properties. Pacific and Western Trust Corporation later Pacific and Western
Bank (P&W) loaned money to the Appellant and Gerard to purchase the
properties.
[7]
Under an oral agreement
between the parties, Gerard undertook to handle the day to day operation of
610. The Appellant had neither the time nor the aptitude to become involved in
the property management and accounting. This is not an uncommon arrangement
between a busy professional and a hands-on partner.
[8]
In addition to the
Appellant, his accountant of many years Mr. Robinson CA also testified. They
acknowledged that Gerard would do the bookkeeping and Mr. Robinson would
complete the financial statements and GST returns. He prepared statements and
tax returns for May to December 31, 1998 and January 1 to December 3, 1999 only
because he prepared statements for the remnant of 1998 in the year 1999. He did
not receive the documents from Gerard after 1999 that were necessary to prepare
GST returns and other documentation for the ensuing years.
[9]
The Appellant relied
completely on Gerard and his accountant on questions regarding GST and
bookkeeping financing, financial statements, returns and so on. The question is
whether this was sufficient to satisfy subsection 323(3).
[10]
610’s property business
experienced several financial difficulties in the early 2000s and the Appellant
was called to advance $75,000 to the bank in November 2002 to keep 610
financially stable.
[11]
At the same time he
also guaranteed a $25,000 bank loan for Gerard’s share of the $100,000 cash
requirement.
[12]
610 sold a property in
2001 and a second in 2002, the proceeds of which went to the bank to reduce its
debt. In November 2002, the Appellant specifically asked Gerard if the GST
filing and payments were up to date and was advised that they were.
[13]
In 2003, 610, the
Appellant and Gerard bought peace and a release from the bank by deeding the
third property to the bank and paying it $100,000. The Appellant paid $75,000
at this time and guaranteed a $25,000 note from Gerard to the bank. At this
time the Appellant believed that all of 610 debts were paid including GST
requirements.
[14]
For two or three years,
prior to the real estate purchase, the Appellant relied on the advice and
management of Gerard. Although no specifics were given, he is the one the
Appellant is primarily relying on for this due diligence position. The
Appellant’s evidence was obviously self serving and presented to meet his
present day needs but it was not seriously affected on cross-examination. One
would conclude from the evidence presented that Gerard did not meet the test in
subsection 323(3) but unfortunately we only heard one side of the story.
Gerard was not called to testify. Apparently he has his own assessment arising
from the same scenario to deal with. He may well have a different version of
the facts.
[15]
The Appellant does not
admit that he was director during the relevant period but submits that if so
found he was an outside director as the expression was used in Soper v. The
Queen, 97 DTC 5407 and he exercised the due diligence contemplated in the
Act. He indicated that he ceased to be a director more than two years before he
was assessed and the assessment is statute barred pursuant to
subsection 323(5) of the Act. The two parties to the present case
have their own separate reasons for not presenting Gerard and I draw no adverse
inference from his absence.
[16]
I will first deal with,
what I believe is the Appellant’s principle defence – due diligence.
[17]
Both counsel referred
to the Soper case, which has significantly influenced this Court. I
believe it has assisted tax payers in alleviating in certain instances the
harshness of directors’ liability. It is quoted for the principle that inside
and outside directors are subject to different tests and that it is wrong to
automatically uphold liability of directors where a company fails to pay
government taxes.
[18]
Soper is cited in most directors’ liability
cases and in particular paragraphs 29 and 30.
29 . . . The standard of care laid down in subsection 227.1(3)
of the Act is inherently flexible. Rather than treating directors as 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).
30 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. . . .
[19]
The Supreme Court of
Canada in People’s Department Stores 2004 SCC 68 modified the subjective
objective standard to simply objective. This reduces the present issue to
whether the Appellant acted reasonably given all of his circumstances and has
he met the objective standard in 323(3).
[20]
Presently, I’m left
with a realization all of the facts are not before me and I cannot do anything
but to give the benefit of the doubt to the Appellant.
[21]
The question is whether
Dr. Thomas (PhD) was entitled to rely completely on the diligence and
competence of his investment counsellor and accountant.
[22]
The Appellant’s
business experience was limited. He was aware generally of GST requirements. He
was a director of at least three other corporations, but we are left with scant
details.
[23]
He was satisfied that
they, Gerard and Robinson, were capable of carrying out the bookkeeping and
accounting required with respect to GST. Those requirements are beyond the
grasp of most Canadians.
[24]
The only evidence I
have in this respect is that they both failed him, and I have to accept the
evidence and give the Appellant the benefit of the doubt although the blame is
placed squarely on Gerard who did not testify. The real estate investment
properties of 610 failed due to many things, particularly vacancies.
[25]
The Appellant made cash
infusions over the years of $150,000 to keep the corporation afloat. His
accountant’s office asked Gerard several times for the bookkeeping records to
enable it to prepare the GST returns and financial statements without receiving
what they needed.
[26]
Surprisingly, the
Appellant’s long-time accountant testified that he did not mention to the
Appellant the lack of GST filings for 610 for the years 2000 onward, although
the Appellant met with him several times during the relevant period.
[27]
I think it would be
unreasonable to require the Appellant to go further and demand to check
Gerard’s and Mr. Robinson’s work, particularly when neither of them gave him
any indication that anything was wrong.
[28]
To make a brief
summary, the Appellant was an outside director who left the accounting and GST
returns to his co-owner and accountant in whom he had complete trust.
[29]
He knew in at least
2002 that 610’s real estate holdings were in financial difficulty and he
advanced some $150,000, part in 2002 and part in 2003, to pay debts, and I
infer he was presuming that these debts included GST.
[30]
He asked Gerard in
November of 2002 regarding the GST filings and payments and was assured all was
well.
[31]
He was on the board of
directors of 610 because he was a 75% investor. He was encouraged to make this
investment by Gerard, his advisor. His investment history has been such that he
invested in various ventures that he was introduced to and had others like
Gerard to deal with day-to-day management.
[32]
I find that the due
diligence test in section 323(3) had been met. This is sufficient to allow
the appeal, but as a courtesy I’ll briefly refer to the second Minister’s
position.
[33]
The question is whether
the Appellant ceased to be director of 610 from the moment the company was
struck from the Saskatchewan Corporate Register such that the limitation period
of subsection 323(5) was triggered.
[34]
The Appellant relies
upon the Aujla v. HMQ, 2007 TCC 764 to suggest that in these
circumstances, the assessment is statute barred.
[35]
The Aujla
decision by Bowie J. was later upheld by the Federal Court of Appeal 2008 FCA
304. In this case, the taxpayers were directors of a company that was dissolved
and I underline the word “dissolved” and later revived by Court order.
[36]
The Federal Court of
Appeal confirmed Bowie J.’s finding that a company that is terminated cannot
have directors so that the taxpayers ceased to be directors on the date of the
dissolution of the company.
[37]
In our situation, it is
not clear that the company was struck from the records, other than for
non-filing of corporate returns.
[38]
Without clarity on this
point, it cannot be resolved whether the Appellant ceased to be the director at
the moment the company was struck from the Register.
[39]
The appeal is allowed
without costs.
Signed at Ottawa, Canada, this 12th
day of September 2011.
“C.H. McArthur”
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