Citation: 2010TCC127
Date:20100303
Docket: 2009-2268(GST)I
BETWEEN:
MICHAEL VRSIC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Miller J.
[1] Mr. Vrsic appeals by way of
the Informal Procedure a GST director’s liability assessment arising against
A.C. Standard Industrial Supply Ltd. ("AC" or
"Company"), in the amount of approximately $68,000. Mr. Vrsic raised
a due diligence defense at trial, but it became clear to me, upon review of the
Canada Revenue Agency’s ("CRA") schedule of amounts owing (see
attached Schedule "A"), that there was a significant problem with the
underlying assessment against the Company. I advised the parties I would
consider whether I could do anything about the underlying assessment and if I
felt I could, I would allow the Respondent time to make written submissions.
This is, in fact, what evolved and I have now received those written
submissions, which I will address later in my reasons. The Appellant did
not make any further representations, though was afforded an opportunity to do
so.
Facts
[2] AC was incorporated by Mr.
Vrsic’s father and a business partner in 1980. The Company was in the business
of supplying tools and fasteners etc. to the tool and die industry. After
the death of the business partner, Mr. Vrsic joined his father in the family
business. Mr. Vrsic left a two year business course at Sheridan College to do so. So, in 1988, he
commenced fulltime work at AC, first as a truck driver, but eventually ending
up handling sales for the Company. He was made a director in 1989 and
secretary-treasurer in 1996.
[3] AC had an internal
bookkeeper, Ms. Louise Armstrong, who took care of the Company’s books,
including determining and making all tax remittances. Although Mr. Vrsic was a
signing officer, and he acknowledged that he was the one to oversee the bookkeeping,
he left these matters in Ms. Armstrong’s hands. Indeed, he provided a stamp of his
signature, so that she need not chase after him to sign every cheque. He asked
regularly if remittances were made and was always assured they were. The CRA
conducted occasional GST audits – once every second or third year – and Mr.
Vrsic also inquired if everything was in order from their perspective, and was
again advised that it was.
[4] The Company was reasonably
successful, increasing its workforce and its sales over the years. Mr. Vrsic
acknowledged that after 9/11, and again with difficulties in the steel industry
and later in the automobile industry, business, and more importantly cash flow,
became more difficult. Not, however, until the summer of 2006 did Mr. Vrsic
appreciate the severity of the Company’s financial woes. He had relied upon
financial statements which suggested business was okay. His father, who had
suffered a stroke in 2003, and remained only peripherally involved in the Company,
advised Mr. Vrsic in 2006 that there was a problem with tax remittances. Since
some time in 2005 Ms. Armstrong had, according to Mr. Vrsic, been preparing
cheques for remittance to CRA, but had not been sending them in. Mr. Vrsic did
not catch this, not having checked to see if all cheques had cleared. He
testified he had external accountants, who he met with once a year, but
apparently they too did not identify this failure, assuming that remittances
were simply being made.
[5] Mr. Vrsic, recognizing the
Company’s financial future was quickly turning south, poured $300,000 of his
own money into the business in 2006. He had tried imposing a strict 30-day time
period on customers for payments of accounts, but some of his major customers
ignored the request and paid late.
[6] When Mr. Vrsic determined
what Ms. Armstrong was doing he confronted her. She left. She had been a 20-year
valued employee and simply left, leaving bookkeeping affairs to Mr. Vrsic,
including not providing a passcode to gain access to computer records.
[7] Mr. Vrsic believed that the
only way to meet the Company’s obligations, including the tax liability, was to
sell the Company’s assets. He pursued a deal with a competitor, thinking they
would get paid out at least $300,000 for the Company’s inventory. The
competitor balked and Mr. Vrsic eventually unloaded the inventory for just
$5,000. He had made a conscious decision to ensure that his employees were
looked after, with the Company’s limited resources.
[8] The Company’s sales went
from $100,000 a month to less than $25,000 a month in the dying months of the Company’s
life. Mr. Vrsic acknowledged, in an emotional outburst, that the failure of the
Company to pay the taxes was his fault, though he tried to generate sufficient
funds by first depositing $300,000 into the Company and next by attempting to
sell the inventory.
[9] Mr. Qadir, from CRA,
testified that the CRA estimated AC’s liability for the first two quarters of
2007 based on the past sales history. Also, given that AC did not file any returns
for those two quarters, the Government did not take account of any Input Tax
Credits ("ITC") in calculating AC’s liability. The Government
attempted unsuccessfully to collect the amount owing from AC. It then proceeded
to file the necessary certificate before pursuing the director, Mr. Vrsic.
Issues
i)
Is the due
diligence defense available to Mr. Vrsic?
ii)
Can the
underlying corporate assessment be reviewed?
iii)
If so, is it a
correct assessment?
Analysis
[10] The provisions in play are
subsections 323(1), (2) and (3) of the Excise Tax Act (the "Act"):
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 solitarily, 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.
[11] There remains some discussion in the jurisprudence
as to the correct test in applying the subsection 323(3) due diligence defense:
the objective‑subjective test established by the case of Soper v.
R,
or simply an objective test as enunciated by the Supreme Court of Canada
in Peoples Department Stores Ltd. v. Wise,
(see for eg. Justice Ryer’s comments in paragraphs 11 and 12 of Hartrell v. R.). My view is that Justice Rothstein put it most
succinctly and accurately in the case of Moriyama v. R. where he stated:
…
19. It will always be possible to find that a director did not
take some step to prevent a failure of a corporation to remit tax. However, the
test of due diligence under subsection 323(3) is not whether every conceivable
step has been taken, but rather what steps to prevent failure "a
reasonably prudent person would have exercised in comparable
circumstances".
…
[12] Did Mr. Vrsic take steps a
reasonably prudent person would have taken in comparable circumstances? Mr.
Vrsic certainly was involved in the business on a day-to-day basis. He admitted
that one of his responsibilities was overseeing the bookkeeping for the Company.
What steps then did he take in this capacity to ensure remittances were made?
He entrusted the responsibility to a long-term employee, who had for almost 20
years, properly and effectively carried out her duties, including, in the
latter years, the preparation and remittance of GST. Mr. Vrsic would regularly
ask Ms. Armstrong if she had looked after the GST. He would inquire of the CRA
auditors on their visits if all was well. Even in 2004 and 2005 when cash flow
started to become problematic he believed remittances were looked after, and
indeed they were. The last quarter of 2005 was when Ms. Armstrong first
determined there were insufficient funds to meet the Company’s GST obligations.
To this point, I find Mr. Vrsic had acted prudently in relying upon his
capable bookkeeper, inquiring regularly with respect to remittances and
occasionally touching base with the CRA auditors on that issue. As Justice
Rothstein put it, there may have been some further steps the Appellant might
have taken to prevent the failure in late 2005, but, on balance, I find Mr.
Vrsic acted as a reasonably prudent person would have acted up to that point.
[13] My concern lies with Mr.
Vrsic’s efforts and lack of controls in determining that CRA was not being
paid. By 2006, matters were worsening financially for the Company. Mr. Vrsic,
by a review of bank reconciliations alone, could have and should have detected
the fact that CRA had not cashed a cheque of some $8,000 for the last quarter
of 2005. At some point in 2006, he is also explicitly made aware of the
GST problem. While he injects cash into the Company, he makes a conscious
decision to look after employees ahead of paying the CRA. His actions, as a
whole, do not reflect any diligence in attempting to prevent failure to remit.
His actions to attempt to salvage some of the inventory with a view to paying
off CRA is not the exercise of due diligence to prevent the failure: it is an
attempt to make good the debt after the fact. This is not sufficient.
[14] I conclude that Mr. Vrsic
can rely on the defense of due diligence for the last quarter of 2005, but not
thereafter. With nothing further, this would result in the assessment against
him personally being reduced by $6,694 plus the interest and penalty related to
the period ending December 31, 2005.
[15] I turn now to the question
of the underlying assessment, and, specifically, the Government’s assessment of
$20,000 for each of the first two quarters of 2007. This assessment, according
to Mr. Qadir, was based on an assumption by the Government of sales in 2007
equivalent to the history of sales over the previous year. In fact, as Mr.
Vrsic testified, sales in 2007 were less than a quarter of what they were previously.
Also, the Government allowed zero for ITCs as AC filed no forms claiming ITCs.
The assessment for the first two quarters, I find, is grossly overstated. Can I
do anything about that? I believe I can.
[16] First, can Mr. Vrsic
challenge the underlying assessment of AC? There have been two schools of
thought developing in the Tax Court on this issue (see for example the cases of
Kern v. R.
and Scavuzzo v. R.,
Maillé v. R.
and Zaborniak v. R.).
I stand by my comments in Kern, where I stated that the language of the Act
leaves the door open for a director to challenge the underlying assessment,
where the company has not itself done so. Combined with the principles of
natural justice approach taken by the Federal Court of Appeal in the case of Gaucher
v. R.,
I find it is open to Mr. Vrsic to challenge the assessment against AC.
[17] The Respondent then argues that
the Appellant cannot succeed on an unpleaded issue. The Respondent claims she
was precluded from pleading material facts and assumptions in support of the
assessment. Further, the Respondent was prevented from producing evidence and
not afforded an opportunity to prepare and argue a case to support the
assessment. I find none of these arguments persuasive. This was an informal
procedure case. While there are some rules, proceedings are to some degree
conducted in a rough and tumble fashion with a view to an expedient process and
a correct result. To suggest that Mr. Vrsic should have amended his pleadings
is imposing a general procedure attitude on an informal procedure case. Also,
for the Respondent to suggest she was not afforded an opportunity to prepare or
argue this new issue is completely confounding to me. I specifically gave
the Respondent a month to do just that, and I have received and considered its
arguments. I am not sure what more is required. Finally, for the Respondent to
suggest there may have been more evidence that could have been presented is
also a non-starter. The Respondent called a CRA representative. It was so
blatantly evident from the Respondent’s own book of documents that there was
some disconnect between reality and the Government’s assessment of AC’s last
two quarters, that I asked the CRA representative about it. I then asked
Respondent’s counsel if there are any questions arising. I then followed up by
writing to counsel seeking further submissions about these last two quarters. I
do not accept the Respondent’s implication that, in this informal procedure
case, she has been in any way denied full opportunity to address the matter.
So, I intend to consider the correctness of the assessment of $40,000 of GST
for the last two quarters of AC’s business life.
What evidence do I have?
[18] First, I have Mr. Qadir’s
evidence that the two $20,000 assessments were based on historic sales figures
for AC, without granting any ITCs. Second, I have the uncontroverted evidence
of Mr. Vrsic, who was forthright and honest, that in the last two quarters
business had dropped over 75%.
[19] Certainly, it is open to
the Government to make an arbitrary assessment: it is then open to the taxpayer
to disprove that assessment. The Government argues the Appellant led no
evidence to show the assessment is incorrect. I certainly heard evidence that
the GST assessed by the Government, was based on sales many times greater than
what AC’s true sales in fact were. Granted, I only had Mr. Vrsic’s viva voce
evidence, but I had formed a favorable impression of his honesty and integrity,
and I accept that sales had fallen to the extent he suggested. This fits
entirely within the overall story of the rise and fall of this business.
[20] I find the $20,000 GST
arbitrarily assessed by the Government for the last two quarters has been
readily disproved as it was based on sales four or five times greater than what
would be an accurate reflection of sales. So, even without considering ITCs, I
reduce the GST from $20,000 per quarter to $4,500 per quarter.
[21] With respect to the
availability of ITCs, counsel for the Respondent cited Justice Bowie’s comments
in the case of Key Property Management Corp. v. R.,
which addresses the mandatory versus directory nature of the subsection 169(4)
requirements to claim an ITC:
The information prescribed is found in the Input Tax
Credit Information (GST/HST) Regulations (the Regulations). The amount of
information that a registrant must obtain in support of a claim for an ITC under
these Regulations increases as the consideration for the supply increases, and
the requirements at each level are quite specific. Counsel for the Appellant
seem4ed to take the position that he oral evidence of Mr. Krauel should be an
adequate substitute for compliance with the specific requirements of the Act
and the Regulations. I reject any such proposition. It is well know that any
value added system of taxation is potentially vulnerable to abuse, and that one
of the most vulnerable aspects is in connection with claims for input tax
credits. The whole purpose of paragraph 169(4)(a) and the Regulations is to
protect the consolidated revenue fund against both fraudulent and innocent
incursions. They cannot succeed in that purpose unless they are considered to
be mandatory requirements and strictly enforced. The result of viewing them
as merely directory would not simply be inconvenient, it would be a serious
breach of the integrity of the statutory scheme. [emphasis added]
[22] The Respondent acknowledged
that the documents required pursuant to the ITC Information Regulations need
not be presented in Court, though there must be some testimonial evidence
establishing the existence of such documents at the relevant time. Indeed, I
did not hear any evidence on this front.
[23] Mr. Vrsic testified as to
the Company’s sales in the last two quarters, but offered no evidence regarding
the Company’s expenses, no evidence as to suppliers, nothing upon which I could
make a reasonable finding that the subsection 169(4) requirements had been met
with respect to any particular amounts. While it may make some commercial sense
that supplies were 25% in the last two quarters, and that ITCs should be
allowed on that basis, that would be complete speculation on my part, with no
evidentiary grounding. I cannot allow any ITCs in these circumstances.
[24] In conclusion, the appeals are
allowed and referred back to the Minister for reassessments on the basis that
the assessments against Mr. Vrsic should be reduced by $6,694 for the
quarter ending December 31, 2005 and by a further $31,000 for the last two
quarters ending March 31, 2007, and June 30, 2007, for a total reduction of
$37,694 plus applicable interest and penalties. I grant Mr. Vrsic costs of
$250.
Signed at Ottawa, Canada, this 3rd day of March, 2010.
"Campbell J. Miller"
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