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Citation: 2007TCC476
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Date: 20070824
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Docket: 2004-4287(GST)G
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BETWEEN:
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PAUL LECUYER,
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Appellant,
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And
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Little J.
[1] 864333
Ontario Limited (the “Corporation”) was a company incorporated under the Laws
of the Province of Ontario. The Corporation carried on business as
Superior Chipping. The Corporation was involved in the production and sale of
wood chips. The wood chips were sold to its only customer, Avenor Pulp and
Paper Ltd (“Avenor”).
[2] During
the period in question the Appellant was the President of the Corporation. The
Appellant and his spouse were the Directors of the Corporation. On June 12,
1998, the Appellant’s spouse resigned as a Director of the Corporation leaving
the Appellant as the sole Director.
[3] On
December 13, 1995 West Bay Developments (Thunder Bay) Limited (“West Bay”) became the sole shareholder of the
Corporation. The Appellant owned the shares of West Bay.
[4] The
Appellant owned the majority of the shares in Gravel and Lake Services Ltd.
[5] Commencing
with the reporting period ending June 30, 1996, the Corporation failed to file
Goods and Services Tax (“GST”) returns as they became due.
[6] In
November and December 1997, the Corporation filed GST returns for the six
consecutive quarters commencing June 30, 1996 and ending September 30, 1997.
[7] The
net tax due was not remitted on the filing of the GST returns referred to in
the preceding paragraph.
[8] The
GST return for the period ending December 31, 1997 was late filed in February 1998,
and was a credit return. The credit was applied to the Corporation’s
outstanding tax liability.
[9] The
GST return for the period ending March 31, 1998 was late filed in June 1998 and
the net tax due for that amount was not remitted.
[10] The GST return for the period ending June 30, 1998 was late filed in
September 1998 and was a credit return. The credit was applied to the
Corporation’s outstanding tax liability.
[11] Nil GST returns were filed for the period September 1998 to June 1999.
[12] No GST returns have been filed after the return filed for the period
ending June 30, 1999.
[13] The records of the Canada Revenue Agency (the “CRA”) indicate that by
March 6, 2003, the Corporation owed GST, penalty and interest totalling
$209,559.04.
[14] On April 22, 1999 the Corporation’s debt was certified by officials of
the CRA in the Federal Court Trial Division (See Exhibit R-1, Tab 4).
[15] On June 4, 2003 a writ of execution in respect of the GST assessed
against the Corporation was returned unsatisfied in whole.
[16] On June 20, 2003 the Corporation’s debt was $211,821.51.
[17] On June 20, 2003 the Minister of National Revenue (the “Minister”) issued
a Notice of Assessment against the Appellant. The amount assessed against the
Appellant was $211,821.51. The amount of $211,821.51 was the amount originally
assessed against the Corporation.
B. ISSUES
[18] The issue before the Court is whether the Appellant exercised the
degree of care, diligence and skill to prevent the failure of the Corporation
to remit GST that a reasonably prudent person would have exercised in
comparable circumstances.
C. ANALYSIS AND DECISION
[19] Section 323 of the Excise Tax Act (the “Act”) reads as
follows:
(1) Liability of directors -- 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 solidarily, liable, together with the corporation, to
pay the amount and any
interest on, or penalties relating to, the amount.
(2) Limitations -- 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) Diligence -- 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.
(4) Assessment -- The Minister may
assess any person for any amount payable
by the person under
this section and, where the Minister sends
a notice of assessment,
sections 296
to 311
apply, with such modifications as the circumstances require.
(5) Time limit -- An assessment
under subsection (4) of any amount payable
by a person who is a
director of a corporation
shall not be made more than two years after the person last
ceased to be a director of the corporation.
(6) Amount recoverable -- Where execution referred to in
paragraph (2)(a) has issued, the
amount
recoverable from a director is the amount
remaining unsatisfied after execution.
(7) Preference -- Where a director of a corporation
pays an amount in
respect of a corporation's
liability referred to in subsection (1) that is proved in
liquidation, dissolution or bankruptcy proceedings, the director is entitled to
any preference that Her Majesty in right of Canada would have been entitled to
had the amount not been
so paid and, where a certificate that relates to the amount has been
registered, the director is entitled to an assignment of the certificate to the
extent of the director's payment, which assignment the Minister is
empowered to make.
(8) Contribution -- A director who satisfies a claim under
this section is entitled to contribution from the other directors who were
liable for the claim.
[20] Section 323(3) of the Act refers to the degree of care, diligence
and skill that a reasonably prudent person would exercise in comparable
circumstances. It therefore follows that the question is whether the Appellant
acted in a reasonable and prudent manner.
[21] The nature of the failure of the Corporation was the unforeseen
circumstances associated with its only customer, Avenor. Avenor was a large
multi-national enterprise, and it had unilaterally indicated to the Corporation
in December 1996, that it had overpaid or over advanced amounts to the
Corporation totalling $383,000.00 (see Exhibit A-1, Tab 10).
[22] The Appellant, Mr. Lecuyer, was of the view that Avenor had short
changed the Corporation by a significant amount ($1.6 million). The combination
of those two circumstances led to the ultimate failure of the Corporation to
remit the GST that is now sought from Mr. Lecuyer directly under section 323,
of the Act.
[23] Mr. Lecuyer testified. I found him to be a credible, direct and
forthright witness. The evidence indicates that at the time West Bay purchased the shares of the Corporation, he was cognizant of the financial
difficulties because the Corporation owed Gravel & Lake Services Ltd. some
money. However, the Appellant did not know the extent to which there was a serious
financial problem.
[24] Tab 3 of the Appellant’s Exhibit A-1 indicates that these over
advanced amounts, of which Avenor was complaining, related to a period in 1994
at a time when Mr. Lecuyer was not the director, not an officer and not a
shareholder of the Corporation.
[25] As noted above, when West Bay purchased the
shares of the Corporation in December 1995, Mr. Lecuyer was aware of the
financial difficulties facing the Corporation. However, he did not appreciate
that Avenor was not only short changing the company but indicated in December
1996 that it had advanced too many dollars to the Corporation.
[26] Ms. Hansen, an official of the CRA, stated that the first payment that
was actually missed by the Corporation relates to a period subsequent to the December
1996 time period.
[27] The payment of the $45,000.00 in GST that was due on January 31, 1997
is a period subsequent to when Avenor said to the Corporation “I am sorry, you
owe us $383,000.00”.
[28] Mr. Lecuyer, through his other company, (Gravel & Lake Services
Ltd.), did make payments to the CRA on behalf of the Corporation. Mr. Symington,
the Corporation’s accountant, testified that Gravel and Lake Services Ltd. had
paid in excess of $150,000.00 of GST to the CRA. In other words efforts were
made by the Appellant to direct payments on behalf of this deficient balance.
[29] Exhibit R-1, Tab 9 is a copy of a letter from Mr. Lecuyer to the CRA.
In this letter Mr. Lecuyer makes the following comments:
This is in response to your letter
of June 9, 2002.
Please note that I am the sole
Director of the company and have been since the change in ownership on or about
December 15, 1995.
I have and will continue to use Due
Diligence in matters concerning the above noted company. (i.e. the Corporation)
I have made every attempt to meet the financial obligations and reporting
requirements of the company since I became the Owner & Director. Not only
with the Levels of Government but with Financial Institutes, Trade Payables and
the employees of the Company.
I have not taken any salaries
personally out of this company since I acquired it to this date.
I have made every effort to turn
the company around since I took over and turn it into a viable operation. The
company was in a deficit equity position of $88,000.00 unknown to me at the
time of take over.
In 1998 additional financial
pressure came when the Bank withdrew its operating facilities and we had to pay
down all its long term debt which was fully secured.
In early 1999 the chipping plant
became totally disabled and beyond repair and the loss was not covered by
insurance. I had lost the ability to generate revenue completely from this
company.
We then had to satisfy our
creditors from our other operations namely Gravel and Lake Services Ltd which
has put a severe handicap on this operation where we employ 15 – 20 people.
Note: From Gravel and Lake we have managed to pay
in excess of $160,000.00 towards the debt owed to the Federal Government by
864333 Ont Ltd in 2000 & 2001.
[30] In McKinnon v. The Queen, 2003 TCC 884, Associate Chief Justice
Bowman (as he then was) indicated at paragraph 18:
Another argument that is
frequently made in these cases and which I regard as fallacious runs somewhat
as follows: "You were stealing from money held in trust for the Crown to
run your business and pay your employees". This is, I think, an inaccurate
and unfair characterization. It implies that there is a separate account (or
cookie jar if you will) into which the payroll deductions are put and then
withdrawn to pay the company's expenses. The fact is there is no cookie jar,
real or notional, and no money to put into it even if there were. The net
amount paid to the employees is all there is to go around. The employees,
suppliers and other creditors are paid because if they are not the business
will be closed down. Where, as here, unforeseen supervening events make it
impossible for the payroll deductions to be paid to the government, I do not
think there is anything the appellant could reasonably have done to ensure the
payment.
[31] In this situation the Appellant, Mr. Lecuyer,
was not even doing that, i.e. he was not taking funds from the Corporation. Mr.
Symington, his accountant, testified that, Gravel & Lake Services Ltd. was
making the payroll of the Corporation and covering the expenses for the Corporation.
In other word the Corporation was not taking amounts that were held in trust
for GST.
[32] Mr. Lecuyer also indicated that he was not receiving
any remuneration from the Corporation. As noted above, in paragraph 29, no
salary or wages were received by him. I refer again to Justice Bowman’s
comments in McKinnon:
“Where, as here, unforeseen supervening events make it impossible
for the payroll deductions to be paid to the government, I do not think there
is anything the appellant could reasonably have done to ensure the payment.”
[33] I would also note that if we were to change the
phrase “payroll deductions” to “remittances” that is just as applicable in this
situation as it is in the McKinnon case. In this case, we have
unforeseen circumstances. Avenor decides it is owed money by Superior Chipping
and, at the same time, Avenor is not prepared to recognize the $1.6 million
that Mr. McVittie had calculated that it owed to the Corporation. (Note: Mr.
McVittie was the former accountant of Avenor).
[34] Another comment made by Associate Chief Justice
Bowman in McKinnon (supra) is applicable to this case. At
paragraph 14 of McKinnon, Bowman A.C.J. said:
A passage which I find particularly helpful is that found in Smith
v. The Queen, 2001 D.T.C.
5226 (Fed. C.A.) at p. 5231, paragraphs [31] and [32], where
Sharlow J.A. said:
[31]
The Tax Court Judge appears to have recognized the efforts made by Mr. Smith in
an after June of 1995, but he noted, at paragraph 138:
The actions
that he took did not have the effect of ensuring that Revenue Canada received
any of the monies here.
And,
at paragraph 142:
The Court is
satisfied that the actions taken by the Appellant did nothing to prevent the
failure.
[32] It appears
to me that these comments reveal another error in the Tax Court Judge's
application of the due diligence defence. A director is required only to act
reasonably in the circumstances. The fact that his efforts are unsuccessful
does not establish that he has failed to act reasonably. (Emphasis added)
[35] I also refer to Kraeker v. The Queen, 2007
TCC 31. In that case, my colleague, Justice Campbell Miller referred to the McKinnon
decision (supra) and said:
“Turning then to the facts before me, what
did Messrs. Kraeker and Johnson do to prevent the failure that a reasonable
prudent person in comparable circumstances would have done? Did they make
reasonable business decisions? Or, more pointedly, as put by Chief Justice
Bowman in McKinnon – due to unforeseen events, was there anything more
they could have done?”
[36] In this situation, I am convinced that there was
not much more that Mr. Lecuyer could have done with respect to the
Corporation’s dealings with Avenor. Avenor was the Corporation’s only customer.
Mr. Lecuyer thought they had shorted the Corporation financially to the extent
of $1.6 million. Nonetheless, in December 1996 Avenor viewed themselves to have
been shorted $383,000.00 by the Corporation. The financial position with Avenor
put the Corporation in an unfortunate position and it subsequently failed.
[37] I have reviewed the evidence very carefully and
I have concluded that the Appellant exercised the degree of care, diligence and
skill to prevent the failure of the Corporation to remit the GST that a
reasonably prudent person would have exercised in comparable circumstances. I
have therefore concluded that the due diligence test contained in subsection
323(3) has been satisfied and that the Appellant is not obliged to pay the GST
assessed against the Corporation.
[38] The appeal from the assessment made under the Act
is allowed with costs and the assessment made under section 323 of the Act
is vacated.
Signed at Vancouver,
British Columbia, this 24th day of August 2007.
Little
J.
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