Docket: 2007-1889(IT)G
BETWEEN:
WAYNE BARRY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Motion heard
on August 13, 2009, at Edmonton, Alberta.
Before: The Honourable
Gerald J. Rip, Chief Justice
Appearances:
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Counsel for the Appellant:
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Chad J. Brown
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Counsel for the Respondent:
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Elena Sacluti
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____________________________________________________________________
ORDER
Upon
motion by counsel for the appellant for an order to compel the respondent's
nominee, Mr. Scott
Cameron, to answer certain questions and
produce certain documents at the examination for discovery;
It
is ordered that counsel for the appellant be allowed to pose specific questions
on the following matters:
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Questions regarding document
number 16 from the respondent's List of Records.
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Questions regarding employees
referred to in document number 16 from the Respondent's List of Records.
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Questions regarding RBC
cancelled cheques referred to in document number 16 from the Respondent's
List of Records.
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Questions regarding source
documentation relied upon during preparation of document number 16 from the
Respondent's List of Records.
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Questions regarding funds
received by the Minister of National Revenue from the bankrupt corporation's
estate and which tax account of the bankrupt corporation those funds were
directed to.
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subject
to the respondent's right to object for the usual reasons. The appellant shall
have 20 days from the date of the order to give notice in writing to the
respondent's counsel whether the discovery of Mr. Cameron will be
continued orally or by written questions and answers.
It
is further ordered that the respondent produce the following documents:
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T4 Summaires for 2001, 2002,
2003 and 2004, for the corporations Prefco Enterprises Inc., Preferred
Restoration and Emergency Services Inc., PCG Preferred Construction Group,
Coast Flashing and Scaffolding Ltd., Paramount Homes 2002 Ltd., and
Wellington Homes Inc.
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T4 records for some of the employees
referred to in document number 16 from the Respondent's List of Records
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Working paper file of Rusty
Cale (Trust Account Examiner) concerning his examination of Prefco
Enterprises Inc., including his T20 Audit Report and T2020 Logs
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T2 Corporate Tax Returns for
Prefco Enterprises Inc., PCG Construction Group Inc., Preferred Restoration
and Emergency Services Inc., Coast Flashing & Scaffolding Ltd., Paramount
Homes 2002 Ltd., and Wellington Homes Inc. for the 2002 to 2005 taxation
years.
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The order of the Court dated April 7, 2009 setting
out the various steps to the hearing of the appeal is amended as follows:
a) Any Amended List of Documents shall be filed and served on
the opposing party not later than December 15, 2009;
b) The examinations for discovery shall be completed not later
than March 1, 2010;
c) Answers to undertakings given on discovery shall be
completed not later than April 15, 2010;
d) The parties shall communicate with the Hearings Coordinator,
in writing, on or before May 30, 2010 to advise the Court among other things whether or not the case will
settle, whether a pre-hearing conference would be beneficial or whether a
hearing date should be set. In the latter event, the parties may file a joint
application to fix a time and place for the hearing in accordance with
section 123 of the Rules.
Costs will be in
the cause.
Signed at Ottawa, Canada,
this 14th day of October 2009.
"Gerald J. Rip"
Citation: 2009 TCC 508
Date: 20091014
Docket: 2007-1889(IT)G
BETWEEN:
WAYNE BARRY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Rip, C.J.
[1]
The appellant has made
an application for an order that the respondent's nominee, Mr. Scott
Cameron, at the examination for discovery in this appeal answer certain
questions and produce certain documents which the nominee has refused.
[2]
The application was
made in the course of an appeal by Wayne Barry from assessments issued pursuant
to section 227.1 of the Income Tax Act ("Act") as
a result of the failures by Prefco Enterprises Inc. ("Prefco"), a
publicly held holding corporation, to remit $731,490.62, and PCG Construction
Group Inc. ("PCG"), a subsidiary of Prefco, to remit $84,290.31 to
the Receiver General for Canada, for unpaid source deductions, interest and
penalties as required by section 153 of the Act at times he was a
director of Prefco and PCG. The assessments against Prefco relate to its 2001
to 2004 years, the assessment against PCG is for 2000.
[3]
Subsection 227.1(1)
reads as follows:
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Where a corporation has
failed to deduct or withhold an amount as required by subsection 135(3) or
135.1(7) or section 153 or 215, has failed to remit such an amount or has
failed to pay an amount of tax for a taxation year as required under Part VII
or VIII, the directors of the corporation at the
time the corporation was
required to deduct, withhold, remit or pay the amount are jointly and
severally, or solidarily, liable, together with the corporation, to pay
that amount and any interest or penalties relating to it.
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Lorsqu'une
société a omis de déduire ou de retenir une
somme, tel que prévu aux paragraphes 135(3) ou 135.1(7) ou aux articles 153 ou 215, ou a omis de verser cette somme ou a
omis de payer un montant d'impôt en vertu de la partie VII ou
VIII pour une année d'imposition, les administrateurs de la société, au moment où celle-ci était tenue de
déduire, de retenir, de verser ou de payer la somme, sont solidairement
responsables, avec la société, du paiement de cette somme, y compris
les intérêts et les pénalités s'y rapportant.
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[4]
Mr. Cameron's refusals
to answer questions and produce documents are based on the respondent's position
that their subject matter is "clearly irrelevant" since the appellant
cannot challenge the correctness of the underlying corporate assessments issued to Prefco
and PCG. Respondent's counsel concedes that if I find that the correctness of
the underlying assessments can be challenged, then the questions going to the
underlying assessments are appropriate.
[5]
According to the
appellant the Minister of National Revenue ("Minister") erred in
assessing Prefco in that the Minister included in the payroll of Prefco a
significant number of persons who were not employees of Prefco but its
subsidiaries. To a lesser extent PCG was assessed in the same manner as Prefco.
Except for PCG, Mr. Barry was not a director of the subsidiaries.
[6]
Both parties referred
to Gaucher v. The Queen,
a decision of the Federal Court of Appeal. Ms. Gaucher was taxed vicariously
under section 160 of the Act with respect to a transfer to her by
her former spouse of a residential property at a time the former spouse had
been reassessed tax. Ms. Gaucher wanted to have her assessment vacated by
establishing that the reassessments of the former spouse were statute-barred
and invalid. The Tax Court rejected her argument since it had already affirmed
the former spouse's reassessments. Rothstein J. held, at paragraph 6,
that:
… It is a
basic rule of natural justice that, barring a statutory provision to the
contrary, a person who is not a party to litigation cannot be bound by a
judgment between other parties. The appellant was not a party to the
reassessment proceedings between the Minister and her former husband. Those
proceedings did not purport to impose any liability on her. While she may have
been a witness in those proceedings, she was not a party, and hence could not
in those proceedings raise defences to her former husband's assessment.
[7]
He added, at
paragraph 7:
When the Minister
issues a derivative assessment under subsection 160(1), a special statutory
provision is invoked entitling the Minister to seek payment from a second
person for the tax assessed against the primary taxpayer. That second person
must have a full right of defence to challenge the assessment made against her,
including an attack on the primary assessment on which the second person's
assessment is based.
[8]
According to Gaucher,
once an assessment against a taxpayer is final, for whatever reason, for example,
there is neither objection nor an appeal or there has been a final judgment of
a Court, the assessment is final and binding only between that one taxpayer and
the Crown. Any assessment under subsection 160(1) issued to a third party
cannot affect the assessment between the Minister and the original taxpayer.
The third party was not a party to the proceedings between the original
taxpayer and the Minister and the third party cannot be bound by the assessment
against the original taxpayer. The third party is entitled to raise any defence
that the original taxpayer could have raised against the underlying assessment.
[9]
In the respondent's
view the Court of Appeal's decision in Gaucher should not be applied to
section 227.1 assessments just because both section 160 and
section 227.1 assessments may be categorized as "derivative"
assessments. There are, her counsel submits, substantial and fundamental
differences between the two provisions.
[10]
Respondent's counsel
referred to several director's liability provisions in various Business
Corporation statutes, federal and provincial,
apparently to put forward the principle that section 227.1 is specific to
business corporation law in that a director has the ability to challenge the
debt of the corporation by virtue of his or her position as a director, which
third parties assessed under section 160 do not have.
[11]
The respondent submits
that there are two reasons why the legislature wishes to impose director's
liability for source deductions: firstly to encourage directors, as directing
minds of the corporation, to ensure that the amounts are being paid or remitted
as required; directors are in a better position to know the corporation's
financial position and thus they are held accountable, and secondly, to provide
an alternative source of funds if the corporation becomes insolvent and the
required payments and remittances are not made; this assures the government is
able to recover amounts due to it.
[12]
This, counsel states, is
similar to director's liability provisions in business corporation legislation
where directors are liable for certain debts of the corporation, such as wages
due to employees: section 119 of CBCA. Similarly, as in
subsection 227.1(3), business corporation statutes provide a defence to
the director's liability: sections 118, 119 and subsection 123(4) of
the CBCA, for example.
[13]
On this reasoning
respondent's counsel concluded that a section 227.1 assessment is
different from a section 160 assessment which is not based on principles
of business laws and therefore to apply Gaucher to a section 227.1
assessment "is to fail to recognize the significant role that directors
play as the directing minds of the corporation, and to call into question the
basis for all similar provisions in business corporation laws in Canada".
[14]
Counsel for the
respondent also submitted that unlike a section 160 assessment, a
liability imposed under section 227.1 has to fulfill certain formalities
described in subsection 227.1(2).
[15]
That the underlying
debt in section 227.1 is of a different nature from the debt in
section 160 also means that they are not analogous, according to the
respondent. Source deductions required under subsection 153(1) are held in
trust for the Crown until they are remitted to the Receiver General. A section 160
debt is any debt of a taxpayer under the Act. Further differences
highlighted by the respondent include: there is no due diligence defence in
section 160 as there is for a debt contemplated under section 227.1:
subsection 227.1(3) and that there is no time limit on a section 160
assessment: subsection 160(2), but there is a two‑year limit for a
section 227.1 assessment: subsection 227.1(4).
[16]
The Respondent’s counsel also
argues that, when read together, subsections 227.1(1) and 152(8) of the Act do
not allow a director to challenge a corporate assessment in the context of a
director’s liability appeal, where the corporation itself did not appeal or
object to the underlying assessment. The premise for this argument begins with
the words of Rothstein J., who wrote at paragraph 6 of Gaucher:
"… It is a basic rule of natural justice that, barring a statutory
provision to the contrary, a person who is not a party to litigation cannot be
bound by a judgment between other parties … ."
[17]
According to the respondent, the
natural justice defense made available to a taxpayer in Gaucher, whereby
a third party subject to a derivative assessment could challenge the primary
assessment, should not be available to the directors of a corporation liable
under section 227.1 of the Act because there are statutory provisions to
the contrary in the context of a director’s liability appeal.
[18]
For instance, subsection 227.1(1)
holds the director liable for "that amount" for which the corporation
failed to withhold, deduct, remit or pay. Once the corporation failed to object
or appeal "that amount" in the underlying corporate assessment,
"that amount" became valid and binding as a result of subsection
152(8). Subsection 227.1(1) would then allow the Minister to collect "that
amount" from the directors of the corporation when it would be impossible
to collect it from the corporation.
[19]
Therefore it is important to
determine what Parliament intended by the phrase "that amount" as it
appears in subsection 227.1(1). The respondent holds that "that amount"
means the entire amount for which the corporation was liable in their corporate
assessment. The appellant argues that "that amount" could mean a
lesser amount upon a successful challenge to the underlying corporate
assessment.
[20]
The respondent relies on the
Supreme Court of Canada decision of Canada Trustco Mortgage Co. v. Canada
("Trustco")
for the proposition that the statutory interpretation of fiscal legislation
should be: "… made according to a textual, contextual and purposive analysis
to find a meaning that is harmonious with the Act as a whole."
[21]
The respondent's textual analysis
begins with the words of the Act.
To depart from the ordinary meaning there must be ambiguity, but in Bell
ExpressVu Limited Partnership v. Rex, Iacobucci J. cautioned: "For
this reason, ambiguity cannot reside in the mere fact that several courts –
or for that matter several doctrinal writers – have come to differing
conclusions on the interpretation of a given provision …". In the respondent's view
the phrase "that amount" in subsection 227.1(1) refers to the
full amount the corporation failed to deduct, withhold, remit or pay. It does
not refer to a lesser amount for which the corporation might be liable for had it
chosen to object or appeal the corporate assessment. If such was Parliament’s
intention, counsel submits it would have expressly written in subsection
227.1(1) that "that amount" includes a lesser amount contemplated by
the appellant. The respondent relies on the assessments issued to the
corporation and subsequently to the director as evidence of the clear and exact
nature of the amount in question.
[22]
As far as the contextual analysis
is concerned, the respondent holds that the provisions in the Act must
work towards a common goal or purpose. One must look at the Act as a
whole. Section 227.1 is found in Part XV "Administration and
Enforcement" and forms part of the "Collection" provisions of
the Act which include sections 222 to 229. Therefore, counsel
concludes subsection 227.1(1) serves as an alternative method by which the
Minister can collect certain deemed trust monies of Her Majesty the Queen from
the directors of corporations.
[23]
Finally, with a view to the
purposive analysis, the respondent submits that the words of the Act are
the best evidence of purpose. The purpose of section 227.1 is to allow the
fisc to look to the directors of the corporation, as the directing minds, to
collect "that amount", and any interest or penalties relating to it,
when the corporation does not pay. It ensures that trust monies for Her Majesty
are collected. The respondent declares that since the corporation and its
directors remain jointly and severally liable for that one amount, subject to
subsections 227.1(2) to (6), the amount assessed to the corporation and
latterly the director is the same amount.
[24]
Therefore the respondent concludes
that subsections 152(8) and 227.1(1), when read together, would not allow
a director to challenge the corporate assessment in the context of a director’s
liability appeal because these provisions statutorily bind the directors by the
result of the original corporate assessment.
[25]
I cannot agree with the
respondent.
[26]
I have difficulty in
appreciating the respondent's argument suggesting that the different nature of
the debts in section 160 and section 227.1 of the Act is the
major determining factor affecting the erstwhile director's rights to contest
an assessment issued under one of these provisions. At the end of the day a
section 160 assessment and a section 227.1 assessment are both
assessments levied under the Income Tax Act and taxpayers have rights
under that statute. The respondent appears to have lost sight of the fact that
a taxpayer has the right to fight an assessment with all artillery available to
him or her by law irrespective of the cause or origin of the assessment. To
bind any taxpayer, including a director, to an assessment issued to another
taxpayer violates rules of natural justice, as Rothstein J. stated in Gaucher.
[27]
There are many reasons
a director may be prejudiced by a corporation deciding not to object or appeal
the underlying assessment. And it is not necessarily so, as the respondent
argues, that the director assessed under section 227.1 could have caused
the corporation to object and appeal the assessment. The amount the corporation
may recover, if successful in an appeal, may not be sufficient to prevent its
insolvency or bankruptcy and the directors have decided that it was not worth
throwing good money after bad. Or, the individual director who has been
assessed under section 227.1 may have wanted to object to the assessment
but he or she was outvoted by the other directors. Or the corporation's books
and records may have been in such disorder at the time the corporation was
assessed that it would have been useless to object or appeal, but later on,
when the director was assessed under section 227.1, he or she, or someone
else, may have put the books and records in such good order that it was at
least arguable that the underlying assessment was bad. And I am sure there are
other examples as well.
[28]
I agree with the conclusion of
Bowman C.J. (as he then was) in Scavuzzo:
I do not think
that the reasoning in Gaucher
can be distinguished in a director's liability case. The principle established
in Gaucher
is that a person who is not a party to an assessment and who is derivatively
assessed is not bound by the failure of the primary obligor to contest its
assessment. This principle is consistent with common sense and ordinary
fairness. I do not think that the salutary rule stated in Gaucher
should be eroded or whittled away by flawed distinctions. To extrapolate into
the Gaucher
principle a requirement that in every case we enquire into why the primary
assessment was not challenged, or whether the derivatively assessed directors
should have or could have influenced the primary taxpayer to contest its
assessment would so dilute the principle as to make it meaningless and
unworkable. Once we eliminate the fallacious distinction drawn in Schuster
and Maillé between directors' liability cases and property transfer
cases we are left with the full force of the Gaucher
authority applying to all derivative assessment cases.
[29]
It is open to the assessed
director to challenge whether the corporation was required to deduct, withhold,
remit or pay the amount assessed. If Parliament's intent in section 227.1
was to prohibit the director from contesting the assessment, the provision
would refer to the amount assessed rather than refer to "failed to deduct
or withhold an amount as required by … section 153 …, failed to remit such
an amount … of tax …" since a section 227.1 assessment can only be
issued after the underlying assessment. Indeed, Mr. Barry's whole purpose
in wanting to ask questions and see documents relating to the underlying
assessments is to prove that the "amount as required" is not the
amount the corporations failed to deduct or withhold. Notwithstanding the
respondent's arguments, any intention by Parliament to deny a taxpayer the
right to challenge a tax assessment must be clear and unequivocal.
[30]
The appellant has the right to
challenge the correctness of the underlying assessments issued to Prefco and
PCG. Therefore, on discovery of the respondent's representative, the appellant
may pose questions and receive documents relevant to the underlying
assessments.
[31]
The question that the respondent's
representative refused to answer and the documents the respondent refused to
produce at discovery which gave rise to this motion are as follows:
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7/19
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Questions regarding document
number 16 from the respondent's List of Records
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7/27
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Produce T4 Summaires for 2001,
2002, 2003 and 2004, for the corporations Prefco Enterprises Inc., Preferred
Restoration and Emergency Services Inc., PCG Preferred Construction Group,
Coast Flashing and Scaffolding Ltd., Paramount Homes 2002 Ltd., and
Wellington Homes Inc.
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8/24
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Questions regarding employees
referred to in document number 16 from the Respondent's List of Records
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9/2
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Production of T4 records for
some of the employees referred to in document number 16 from the Respondent's
List of Records
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9/7
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Questions regarding RBC
cancelled cheques referred to in document number 16 from the Respondent's
List of Records
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9/12
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Questions regarding source
documentation relied upon during preparation of document number 16 from the
Respondent's List of Records
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9/12
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Questions regarding funds
received by the Minister of National Revenue from the bankrupt corporation's
estate and which tax account of the bankrupt corporation those funds were directed
to
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14/20
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Produce the working paper file
of Rusty Cale (Trust Account Examiner) concerning his examination of Prefco
Enterprises Inc., including his T20 Audit Report and T2020 Logs
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15/12
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Produce T2 Corporate Tax
Returns for Prefco Enterprises Inc., PCG Construction Group Inc., Preferred
Restoration and Emergency Services Inc., Coast Flashing & Scaffolding
Ltd., Paramount Homes 2002 Ltd., and Wellington Homes Inc. for the 2002 to
2005 taxation years.
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[32]
Respondent's counsel states that
each particular question posed by the appellant's counsel would have to be
examined on its merits given the principle applicable to discovery. In her
view, however "the appellant has not stated what those questions might
be" and, therefore, the respondent "cannot state whether or not it
would allow or object to a specific question".
[33]
Mr. Barry filed an affidavit
in support of this application. Exhibit "D" to his affidavit is
a transcript of the discovery of Scott Cameron. Respondent's counsel is
correct in that specific questions are not asked. For example, on page 7,
lines 19 to 23 of the transcript read:
Q. Now, I guess you have indicated that - - or your counsel has
indicated that she is not going to permit any questioning on Respondent's
Document 16 - -
MS. SCALUTI: (for the respondent) That is correct.
MR. BROWN: (for the appellant) - - is that correct? So then we will
reserve those questions for an application, you know, I guess upon
determination by a judge.
MS. SCALUTI: Sure.
Lines 24
to 27 of page 8 and line 1 on page 9 read:
MR. BROWN: So I was going to ask - - there is
a list of employees in this, in Document 16, I was going to ask some
questions about that, but we will just reserve those for after the application.
MS. SCALUTI: Sure.
On
page 9 of the transcript, lines 7 to 21 read:
MR. BROWN: I was also going to ask some
questions about there is a list of RBC cancelled cheques in Document 16. I
will just reserve those for after our application.
MS. SACLUTI: Okay.
MR. BROWN: I was also going to inquire as to
the source documentation that was used in reliance of the trustee application.
I was also
going to ask about funds received by the Minister from the bankrupt's estate
from the trustee and which account those amounts were directed to. I take it
that you would have an objection with that?
MS. SCALUTI: Yes.
[34]
The appellant has not posed any
specific questions on which I can rule. He has referred namely to a general
description of the subject matter of the questions his counsel wishes to ask
the respondent's representative.
[35]
I will permit his counsel to pose
specific questions referring to the subject matter, subject to the respondent's
right to object for the usual reasons. The appellant shall have 20 days
from the date of the order to give notice in writing to the respondent's
counsel whether the discovery of Mr. Cameron will be continued orally or by
written questions and answers.
[36]
As far as production of documents
are concerned, the respondent is ordered to produce the documents described in
the table in paragraph 31 of these reasons.
[37]
The previous order setting out the
various steps to the hearing of the appeal shall be amended as follows:
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Any
Amended List of Documents shall be exchanged by
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December 15,
2009
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Examinations
for discovery to be completed by
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March 1,
2010
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Answer
to any undertakings to be completed by
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April
15, 2010
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The
parties shall communicate with the Hearings Coordinator in writing, to advise
the Court whether or not the case will settle, etc.
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May 30,
2010
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[38]
Costs in the cause.
Signed at Ottawa, Canada, this 14th day of October 2009.
"Gerald J. Rip"
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