Citation: 2007TCC469
Date: 20070813
Docket: 2006-2920(GST)I
BETWEEN:
GERTRUDE HIGGINS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2006-2921(GST)I
AND BETWEEN:
JOHN HIGGINS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb J.
[1] The Appellants,
Gertrude Higgins and John Higgins, were both directors of Tru-John Enterprises
Inc. (the “Company”) which was carrying on a craft and gift store business in
St. Stephen, New Brunswick. The Company, unfortunately, was not successful. The
financial statements for the Company showed that the Company suffered losses in
its fiscal years ending February 28, 1995, February 29, 1996, February 28,
1997 and February 28, 1998. The Company made a modest profit of $11,516 for its
fiscal year ending February 28, 1999. However, by that point, after taking into
account the profit for 1999, the accumulated deficit was $131,642.
[2] The Company failed to
remit all of the HST that it had collected on its sales. The Appellants were
assessed as the directors of the Company for the failure to remit the HST. The
unremitted HST was for the periods from November 30, 1998 to
September 30, 2000.
[3] The issue in this
case is whether the Appellants, as the directors of the Company, are liable for
the unremitted HST.
[4] The liability of
directors is set out in section 323 of the Excise Tax Act (“Act”).
Subsections (1) and (3) of this Act for the periods under appeal read as
follows:
(1) Where a corporation fails to remit an amount of
net tax as required under subsection 228(2) or (2.3), the directors of the
corporation at the time the corporation was required to remit the amount are
jointly and severally liable, together with the corporation, to pay that amount
and any interest thereon or penalties relating thereto.
...
(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.
[5] The defence raised by
the Appellants in this case was the due diligence defence in subsection 323(3)
referred to above.
[6] The Federal Court of
Appeal in Soper v. R., [1997] 3 C.T.C. 242, completed a detailed analysis
of the due diligence defence in subsection 227.1(3) of the Income Tax Act
which has identical wording to that found in subsection 323(3) of the Act.
The Federal Court of Appeal noted that federal statutes with the same language
should be interpreted in the same manner. In particular the Federal Court of
Appeal was focused on the provisions of the Canada Business Corporations Act
(“CBCA”) which also imposes a duty upon a director and uses the same language
as found in the Act and the Income Tax Act in relation to the due
diligence defence. In Soper, supra, Robertson J. A. of the Federal Court
of Appeal made the following comments:
19 In my view, it is not simply a
fortuitous occurrence that subsection 227.1(3) of the Income Tax Act
adopts the same language as found in subsection 122(1)(b) of the Canada
Business Corporations Act, for both statutory provisions relate to the
standard of care to be exercised. Admittedly, the CBCA provision deals with the
standard of care owed to the corporation while the taxation provision concerns
the standard of care owed to the Crown and Canadian taxpayers. However, that
distinction does not serve to nullify the relevance of the standard set out in
the CBCA, if only because of the presumption of coherence between statutes.
That elementary principle of statutory interpretation is explained by P.-A.
Côté in The Interpretation of Legislation in Canada, 2nd ed. (Cowansville, Quebec: Les
Editions Yvon Blais Inc., 1991) at 288, 290:
Different enactments of the same
legislature are supposedly as consistent as the provisions of a single
enactment. All legislation of one Parliament is deemed to make up a coherent
system. Thus, interpretations favouring harmony between statutes should prevail
over discordant ones, because the former are presumed to better represent the
thought of the legislator.
This presumption of coherence in
enactments of the same legislature is even stronger when they relate to the
same subject matter, in pari materia. Apparent conflicts between
statutes should be resolved in such a way as to re-establish the desired
harmony.
...
To sum up, the presumption of coherence
in related legislation applies particularly to statutes of the same
legislature. But it is also relevant to statutes of different jurisdictions, as
one legislature may be deemed to imitate the form or be consistent with the
substance of a statute enacted by another.
Thus, in order to determine whether the
common law standard of care was modified by statute, it is both appropriate and
instructive to consider not only the due diligence provision set out at
subsection 227.1(3) of the Income Tax Act but also the analogous,
and virtually identical, standard of care provisions found in the Canada
Business Corporations Act.
[7] The conclusion of Robertson
J. A. was that the provisions of paragraph 122(1)(b) of the CBCA
and subsection 227.1(3) of the Income Tax Act provided for an objective subjective
test to be applied in analyzing the standard set out in these sections.
[8] The Supreme
Court of Canada in Peoples Department Stores Inc (Trustee of) v. Wise, 2004
S.C.C. 68, [2004] 3 S.C.R. 461, made the following comments in relation to the
objective subjective test as set out by the Federal Court of Appeal in Soper:
63 The
standard of care embodied in s. 122(1)(b) of the
CBCA was described by Robertson J.A. of the Federal Court of Appeal in Soper v. R. (1997), [1998] 1 F.C. 124 (Fed. C.A.), at para. 41, as being
"objective subjective". Although that case concerned the
interpretation of a provision of the Income Tax Act,
it is relevant here because the language of the provision establishing the
standard of care was identical to that of s. 122(1)(b)
of the CBCA. With respect, we feel that Robertson J.A.'s characterization of
the standard as an "objective subjective" one could lead to
confusion. We prefer to describe it as an objective standard. To say that the
standard is objective makes it clear that the factual aspects of the
circumstances surrounding the actions of the director or officer are important
in the case of the s. 122(1)(b) duty of care, as
opposed to the subjective motivation of the director or officer, which is the
central focus of the statutory fiduciary duty of s. 122(1)(a)
of the CBCA.
[9] The Supreme Court of Canada again noted that because
the language in paragraph 122(1)(b) of the CBCA is identical to
that found in subsection 227.1(3) of the Income Tax Act (which is also
identical to the language set out in subsection 323(3) of the Act)
the provisions are to be interpreted in the same manner. Therefore, in my
opinion, the conclusion is that the Supreme Court of Canada has modified the
objective subjective test as set out by the Federal Court of Appeal in Soper
and instead has adopted an objective standard that now should be used not only
for the purposes of paragraph 122(1)(b) of the CBCA but also for
the purposes of section 227.1(3) of the Income Tax Act and subsection 323(3)
of the Act.
[10] The Supreme Court of Canada in Peoples Department
Stores Inc. also made the following comments in relation to this duty:
67 Directors and officers will
not be held to be in breach of the duty of care under s. 122(1)(b) of the CBCA if they act prudently and on a reasonably
informed basis. The decisions they make must be reasonable business decisions
in light of all the circumstances about which the directors or officers knew or
ought to have known. In determining whether directors have acted in a manner
that breached the duty of care, it is worth repeating that perfection is not
demanded. Courts are ill-suited and should be reluctant to second-guess the
application of business expertise to the considerations that are involved in
corporate decision making, but they are capable, on the facts of any case, of
determining whether an appropriate degree of prudence and diligence was brought
to bear in reaching what is claimed to be a reasonable business decision at the
time it was made.
[11] Therefore the issue in this case is whether the
Appellants have acted prudently on a reasonably informed basis and have met the
objective standard imposed upon them of exercising the duty of care, diligence
and skill to prevent the failure to remit the HST that a reasonable
prudent person would have exercised in comparable circumstances.
[12] In this particular case both Appellants were involved
in the day to day operation of the business. Both Appellants met with the
accountant and the lawyer to discuss the set-up of the business and also were
involved with the bank for the Company. Initially they hired an accountant to
look after all their financial matters but since there were difficulties in
having matters completed on time with this particular accountant, they decided
to look after more of the affairs themselves and to hire a separate accounting
firm.
[13] The first call that the Appellants had received from
the Canada Revenue Agency (“CRA”) in relation to the outstanding returns was on
February 20, 1998. As noted above, the unremitted HST amounts were for the
period from November 30, 1998 to September 30, 2000. In other words
all the unremitted amounts were for periods after the Appellants had received
the first telephone call from the CRA. The Company had a history of late filing
its HST returns and not sending in the appropriate amount of HST with its
returns. For some months the Company was entitled to a refund of HST which was
applied to unremitted amounts from earlier periods. There were also several
occasions when several HST returns would be sent in together. Initially the
Company chose to file its HST returns quarterly and then elected to file monthly
(although on many occasions the Company was late in filing its monthly returns).
[14] It is clear from the evidence that the Appellants were
trying very hard to keep the business going as this business had been their
dream. They felt that they had to continue to pay suppliers otherwise they
would not receive any goods for sale. The bank was also putting pressure on the
Company. As they were behind in their bank loans, the bank would apply any cash
in the account to its outstanding debt. The bank also arranged for refinancing
on the Appellants’ personal house to pay off the corporate debts. It should
also be noted that the bank was holding the personal guarantees of the
Appellants for the debts of the Company. The Appellants also borrowed money
from family members to try to keep the business solvent. Unfortunately their
efforts were unsuccessful. The landlord for the premises that the Company was
occupying locked the doors as the Company was in arrears of its rent and this
terminated the business.
[15] Unfortunately for the Appellants there is very little
evidence of the actions that the Appellants took to prevent the repeated failures
to remit HST.
[16] The Federal Court of Appeal in Worrell v. R.,
2000 CarswellNat 2344, [2000] G.S.T.C. 91, stated:
68. In my opinion, it is essential to keep in mind the relevant
question in this appeal: did the directors exercise due diligence to prevent
the company’s failure to remit? This is not necessarily the same as asking
whether it was reasonable from a business point of view for the directors to
continue to operate the business. In order to avail themselves of the defence
provided by subsection 227.1(3) directors must normally have taken positive
steps which, if successful, could have prevented the company’s failure to remit
from occurring. The question then is whether what the directors did to prevent
the failure meets the standard of the care, diligence and skill that would have
been exercised by a reasonably prudent person in comparable circumstances.
69. It
will normally not be sufficient for the directors simply to have carried on the
business, knowing that a failure to remit was likely but hoping that the
company's fortunes would revive with an upturn in the economy or in their
market position. In such circumstances directors will generally be held to have
assumed the risk that the company will subsequently be able to make its
remittances. Taxpayers are not required involuntarily to underwrite this risk,
no matter how reasonable it may have been from a business perspective for the
directors to have continued the business without doing anything to prevent
future failures to remit.
70. This
point was recently made in Ruffo c. R. (1997), [1998] 2 C.T.C. 2203
(T.C.C.), affirmed by this Court on April 13, 2000 (A-429-97), where
Lamarre-Proulx J.T.C.C. stated at paragraph [20]:
I
am of the opinion that the case law of the Court is consistent
on the diligence that the director of a corporation must show to avoid the
liability prescribed in subsection 227.1(3) of the Act. It is the diligence
that is concerned with preventing the failure that can, in many instances,
differ from the diligence that the director must exercise toward the
corporation.
71. She
went on to cite with approval the following statements by Rip J.T.C.C. in Merson
v. Minister of National Revenue (1998), 89 DTC 22 (T.C.C.), where he said
(at page 28):
The
prudence required by subsection 227.1(3) in the exercise of care diligence and
skill is different from that required by a director performing his duties,
under corporate law, notwithstanding that subsection 227.1(3) and subsection
122(1)(b) of the Canadian Business Corporations Act, for example, both
use identical words. The exercise of care, diligence and skill by the director
contemplated by subsection 227.1(3) is not founded on the director's
obligations to the corporation; it is based on one of the corporation's
obligations under the Act and the failure of the corporation to fulfil such
obligation. A director who manages a business is expected to take risks to
increase the profitability of the business and the duties of care, diligence
and skill are measured by this expectation. The degree of prudence required by
subsection 227.1(3) leaves no room for risk.
72. I
do not understand Rip J.T.C.C.'s statement that the "degree of prudence
required by subsection 227.1(3) leaves no room for risk" to mean that
section 227.1 imposes strict liability on directors whose company ultimately
proves to be unable to make good defaults in its remittances. Such a view would
clearly be contrary to subsection 227.1(3), which only becomes relevant when
Revenue Canada is unable to recover the money that the company
ought to have remitted.
73 Rather, I take him to have meant that, if directors
decide to continue the business in the
expectation that the company will turn around and will be able to make good its
remittance defaults after they have occurred, if the company nonetheless fails
without paying its tax debts, it is no defence for the directors to say that
the risk that they took would have been taken by a reasonable person. The subsection 227.1(3) defence only applies if it can be
demonstrated that the directors exercised the care, diligence and skill that a
reasonably prudent business person in comparable circumstances would have
exercised to prevent a future default.
(emphasis added)
[17] Justice Rip (as he then was) in the case of Ciriello
v. R., 2000 CarswellNat 2823, [2000] G.S.T.C. 104, also made
the following comments in relation to the decision to carry on a business in
hopes that it will rebound:
34. Carrying on the business knowing that the company will fail to
remit on time but hoping the company’s fortunes would be revived does not
normally help the director’s defence. The director, in such circumstances,
assumes the risk the company subsequently will be able to make payments.
[18] Also the Federal Court of Appeal in Ruffo c. R.,
2000 CarswellNat 1570, [2004] 4 C.T.C. 39, made the following similar
comments:
6. The appellant’s duty as a director was to anticipate and
prevent the failure to pay the sums owing and not to commit such failure or
perpetuate it as he did from March 1992 on in the hope that at the end of
the day the firm would again become profitable or there would be enough money,
even if it were wound up, to pay all the creditors.
[19] In my opinion that is exactly what the Appellants did
in this particular case. They chose to continue to operate the business in the
hopes that their dream would be realized and that the Company would be
profitable and able to pay the unremitted amounts. There is no doubt that the
Appellants were honest and sincere in their efforts but unfortunately they have
failed to establish that they exercised the degree of care, diligence and skill
to prevent the failure to remit HST that a reasonable prudent person would have
exercised in comparable circumstances.
[20] As a result, the appeals are dismissed.
Signed at Toronto, Ontario, this 13th day of August 2007.
“Wyman W. Webb”
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