Citation: 2007TCC322
Date: 20070830
Dockets: 2004-4280(IT)G
2004-4274(GST)G
BETWEEN:
GABRIEL LEGER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Angers J.
[1] These two appeals
were heard on common evidence. The appellant was assessed under the Income
Tax Act (ITA) and the Excise Tax Act (ETA) on October 2, 2002. The assessments were
issued against the appellant in his capacity as director of Richard Security
Limited (RSL) in respect of that entity’s failure to remit income tax,
unemployment insurance premiums and Canada Pension Plan contributions (payroll
deductions) for its employees and its failure to remit Goods and Services
Tax/Harmonized Sales Tax (GST/HST) for the periods from April 1 to June 30,
1997, July 1 to September 30, 1997, October 1 to December 31, 1997, April 1 to June 30, 1998, and October 1 to
December 31, 1998 (the periods). RSL was assessed on January 20, 1995, and on September 1,
1995, for the unpaid payroll deductions. In the statement of account attached
to the Reply to the Notice of Appeal, the amount indicated as unremitted as of
the date of the September 1, 1995 assessment is $58,012.18 for the year 1994. The other
outstanding amounts are penalties and interest that accumulated up to 1999, a few
regular remittance cheques that were returned NSF, and amount of $4,915.21 in unremitted
federal tax and $2,998.25 in unremitted provincial taxes for 1998. It is
unclear when RSL was assessed for the unremitted GST/HST for the above periods.
But in both cases, the Minister of National Revenue (the Minister) filed a writ
and a certificate with the Federal Court as required by both the ITA and ETA,
and both were returned unsatisfied. The certificate for RSL’s net tax liability
under the Excise Tax Act is in the amount of $39,193.35 plus penalty and
interest and the certificate for RSL’s net tax liability under the Income
Tax Act is in the amount of $69,530.37 plus interest. Neither amount is in
dispute in these appeals.
[2] The appellant has
submitted the following issues to be decided by the Court:
a) Did
the appellant cease to be a director of RSL by virtue of the March 9, 1998
dissolution of RSL?
b) If
the appellant ceased to be a director of RSL as a result of its March 9,
1998 dissolution, did the appellant become a director of RSL as a result of the
revival of RSL on September 18, 1998?
c) Was
the assessment issued against the appellant more than two years after the
appellant last ceased to be a director of RSL, and if so, is the appellant’s liability
against precluded by virtue of subsection 227.1(4) of the ITA and by subsection
323(5) of the ETA?
d) If it is determined that the
appellant was, at any material time, a director of RSL and if the assessment
issued against the appellant is not otherwise statute-barred, should the
appellant be afforded the due diligence defence provided by subsection 323(3)
of the ETA and subsection 227.1(3) of the ITA?
[3] The respondent has
worded the issue as follows: is the appellant liable under the relevant
sections for the failure by RSL to remit to the Receiver General an amount of
net tax, with penalties and interest thereon, as required by subsection 228(2)
of the ETA, and to remit the federal income tax (payroll deductions) with interest
and penalties, as required by section 153 of the ITA.
[4] RSL was
incorporated on August 6, 1987, under the Business Corporations Act of New Brunswick. Norbert Richard and
the appellant became directors of RSL on August 18, 1987, but the appellant became
the sole director on January 14, 1994. On March 9, 1998, RSL was dissolved
by the Director of corporate affairs for failing to file its annual returns, but
was later revived on September 18, 1998, when articles of revival were
filed with the Director. The articles of revival form shows the name of the
appellant as the applicant and is signed with his name, but the appellant says it
is not his signature.
[5] RSL was in the
business of providing security officers or guards at various sites according to
the needs of its clients. The appellant says he was approached on the subject
of becoming an investor by a fellow physician, namely, the other director
identified above and one Edmond Richard, who was involved in security.
[6] The appellant is a
pediatrician. His educational background is in science: he obtained a bachelor’s
and a master’s degree in science after which he attended medical school and
specialized. He has no business degrees nor has he taken any courses in that
field. During all material periods, he devoted his time to his medical practice,
working at the hospital or at his office and being on call three or four days a
week; this meant an average work week of 90 hours plus on-call emergencies.
[7] At all material
times, RSL employed an average of 30 employees and day-to-day operations were managed
by one employee who was assisted by a bookkeeper. Edmond Richard held the
management function until March 1995 when he resigned. His resignation came
about when the appellant was informed that Mr. Richard had possibly been misappropriating
funds since 1990. An accounting of Mr. Richard’s possible misappropriations
shows that he may have deprived RSL of an amount of $187,725 over those years.
Mr. Richard was replaced by René Martin, who had been a supervisor with RSL for
a number of years and who had an accounting background. He stayed with RSL
until March 1998 and was replaced by one Jean-Guy Richard, who managed the
corporation until it ceased operating in December of that year.
[8] The assistant to
the bookkeeper was Pauline Lajoie. She held that function until 1994. When she was asked to leave, she was
replaced by one Jeannine Maillet who, in turn, was also asked to leave in 1996.
René Martin took over the
bookkeeping until he left in March 1998, and Jean-Guy Richard then assumed both
functions until RSL ceased operating in December 1998. The appellant was
informed of that last fact by Jean‑Guy Richard when he met him by chance
in a shopping centre in January or February of 1999. Strangely enough, the
appellant does not know what went on at RSL to cause it to cease operating in
December 1998.
[9] The appellant initially
said that he believed he was first made aware of RSL’s failure to remit the
GST/HST in 1994 but later admitted that it was earlier than that. He signed in
September 1993 a letter addressed to Revenue Canada Customs and Excise, as it then
was, acknowledging he was a director of RSL, that RSL was indebted to the Crown
for unremitted tax and that he knew about the director’s liability in the ETA.
The letter was provided in consideration of the agreement of the Minister of
National Revenue to grant him a release with respect to a requirement to pay
that had been issued.
[10] As for the failure
to remit the payroll deductions, the appellant was informed thereof by Mr. Richard in the months preceding
his resignation in March 1995. He was told that RSL needed additional funds to
cover the payroll deductions. As of the end of 1994, and as mentioned earlier, RSL
had failed to remit payroll deductions totalling $58,012.18, including
penalties and interest, despite the fact that the appellant had injected more
funds into the business to cover the outstanding GST/HST debt.
[11] At or around that
time, the appellant informed his personal accountant, Pierre Cormier, about RSL’s failure
to remit and instructed him to take measures to avoid a reoccurrence. He was instructed
to supervise the staff and ensure that remittances were made in timely fashion.
At the same time, the appellant also informed René Martin (who replaced
Edmond Richard) of the situation and instructed him to keep in touch with
Pierre Cormier. In addition and in the same year, the appellant instructed his
management staff to enrol in an accounting and business course, given by the Province of New Brunswick, in order to improve
their skills and become aware of their obligations and responsibilities as
managers of a business. They did enrol in the course.
[12] The appellant also
instructed the in-house bookkeeper to prepare an income statement for RSL on a
monthly basis. That statement itemized as well the monthly expenses and thus provided
the appellant with the monthly gross profit or the loss. Those statements were
prepared over the periods in issue on a fairly regular basis. Other than that,
the appellant has not seen any annual financial statement of RSL or its books, but
he understood that the expenses were being paid. The appellant did not sign
cheques for RSL or its tax returns. That was done by the day-to-day manager.
[13] From that time until
April 1997, RSL made its GST/HST remittances. When RSL failed to remit for the
periods from April 1 to June 30 and July 1 to September 30, 1997, and when the
appellant became aware of its failure to remit the GST/HST for those periods,
he wrote a letter to Aimé Gallant at Revenue Canada on September 11, 1997, in which he referred
to the late remittances and explained RSL’s financial difficulties, and its
problems with its managers and requested a waiver of the interest and penalties
on the outstanding payroll deduction remittances for 1994.
[14] The appellant and
René Martin met with representatives of Revenue Canada; the appellant at that
time instructed René Martin to check the receivables and to make sure
Revenue Canada got paid. He kept being informed by René Martin that
everything was getting done, that is, the remittances were being made. According
to the appellant, whenever he asked if RSL was current in its remittances, René
Martin’s answer was always yes. The appellant relied on René Martin, as he had been
cleared by the Royal Canadian Mounted Police (RCMP) and was accredited as an
investigator. In addition, the appellant says he knew René Martin personally
and believed him to be an honest person. In fact, the appellant says he thought
the same of Edmond Richard, who had also undergone some form of verification by
the RCMP. Notwithstanding, RSL failed to remit GST/HST in the months following
September 1997, except for the periods from January 1 to March 31, 1998, and
July 1 to September 30, 1998.
[15] René Martin left in 1998 and
was replaced by Jean-Guy Richard who had been with RSL for a long time as a guard and had also attended
the course referred to earlier. He handled the day-to-day operations of RSL
until he left at the end of 1998 and decided to terminate all RSL’S operations
without consulting or telling the appellant.
[16] According to the
appellant, Mr. Jean-Guy Richard is the person who
undertook to revive the corporation when it was dissolved in March 1998 for
failure to file its annual returns. According to the appellant, Mr. Richard
signed his (the appellant’s) name on the articles of revival dated September
16, 1998. The appellant was never informed nor aware of that fact until a few
days before the trial. The appellant had no discussions with Mr. Richard
concerning the dissolution or the revival of the corporation. Neither of these
was authorized or approved by the appellant. The same is also true of the
annual return filed on the same day as the articles of revival. The appellant
states that he was not reappointed a director of RSL after its dissolution in
March 1998.
[17] The appellant also
invested in three other corporations or businesses over the years but cannot
say if he was a director of any of them. His only interest therein was as an investor;
he left everything else to his lawyers or accountants, on whom he relied to
assist him. He has no knowledge of how a corporation is structured nor of the
role and responsibilities of directors.
[18] The evidence also
reveals that RSL’s bookkeeping was poorly done over the years in issue, as an
accountant retained by Jean-Guy Richard was unable to piece everything together.
[19] The first issue is
whether the appellant ceased to be a director of RSL upon its dissolution on
March 9, 1998, and if he did, whether the Minister is barred from assessing the
appellant by reason of subsection 227.1(4) of the ITA and subsection 323(5) of
the ETA, which state that no action or proceedings to recover any amount
payable by a director of a corporation under subsection (1) of the ITA or
subsection (4) of the ETA shall be commenced more than two years after the
director last ceased to be director of that corporation.
[20] The appellant was
not aware that the Director of corporate affairs had issued a certificate of
dissolution with respect to RSL on March 9, 1998, nor was he aware that
his manager had signed his (the appellant’s) name on articles of revival on
September 16, 1998. It appears to me that this situation is consistent with the
appellant’s testimony that he delegated the day-to-day operations of RSL to his
managers and that they were thus authorized to sign RSL’s financial statements
and tax returns. I can only assume that an application to revive the
corporation would have received approval from the appellant, a fact which was
not strongly disputed by the appellant’s counsel and rightly so.
[21] That being said,
subsection 136(5) of the New Brunswick Business Corporations Act (NBBCA) deals with the
rights and privileges of a corporation upon its revival; it provides as follows:
136(5) Subject to subsection (6), a
corporation or body corporate is revived on the date shown on the certificate
of revival and thereafter the corporation or body corporate, subject to the
rights acquired by any person after its dissolution, has all the rights and
privileges and is liable for the obligations that it would have had if it had
not been dissolved or had its charter forfeited.
[22] Counsel for the
appellant made reference to two New Brunswick cases, namely, H.A.R.
Construction Ltd. v. DeMerchant Construction Ltd., [1990] N.B.R (2d) 343
and ADI Ltd. v. 052987 N.B. Inc., [2000] N.B.J. No. 467 (QL). Both cases
dealt with the status of dissolved corporations in terms of their contractual
obligations, but said nothing about the status of their directors at dissolution.
The judgment of this Court in Pello v. Canada, [2003] T.C.J.
No. 342 (QL), was also referred to by counsel, but again, the issue in
that case was the effect of corporate status once a corporation is revived, but
that matter was considered in terms of whether the corporation in question was
capable of retroactively carrying on business during the tax years in issue and
whether the Crown had acquired the right during the corporation’s dissolution
to assess the appellant with respect to the business income earned. That
decision does not address the issue now before this Court.
[23] Most cases in this
area deal with the equivalent sections in the Canada Business Corporations
Act (CBCA) and the Ontario Business Corporations Act (OBCA). The equivalent section in
the CBCA is subsection 209(4) and it provides as follows:
209.(4) Subject to any reasonable terms
that may be imposed by the Director, to the rights acquired by any person after
its dissolution and to any changes to the internal affairs of the corporation
after its dissolution, the revived corporation is, in the same manner and to
the same extent as if it had not been dissolved,
(a) restored to its
previous position in law, including the restoration of any rights and
privileges whether arising before its dissolution or after its dissolution and
before its revival; and
(b) liable for the
obligations that it would have had if it had not been dissolved whether they
arise before its dissolution or after its dissolution and before its revival.
[24] And the equivalent section in the OBCA is
subsection 241(5) which provides as follows:
241.(5) Where a corporation is dissolved under subsection (4) or any
predecessor of it, the Director on the application of any interested person,
may, in his or her discretion, on the terms and conditions that the Director
sees fit to impose, revive the corporation; upon revival, the corporation,
subject to the terms and conditions imposed by the Director and to the rights,
if any, acquired by any person during the period of dissolution, shall be
deemed for all purposes to have never been dissolved.
[25] In a recent decision
of the Ontario Superior Court of Justice, Litemor Distributors (Ottawa) Ltd.
v. W.C. Somers Electric Ltd, 73 O.R. (3d) 228, Justice Panet
reviewed the law in this area and said the following about subsection 209(4) of
the CBCA and subsection 241(5) of the OBCA, at paragraphs 27 to 31.
[27] On a plain reading of the wording of
the statute, it appears that Parliament intended that the effect of revival is
to be retroactive, such that the revival extends back to the moment of
dissolution. The dissolution is deemed not to have occurred. This would imply
that, upon revival, any acts undertaken in the name of the corporation by its
principals during the period of dissolution would be “cured” so that such acts
are deemed to have been taken by the corporation itself even though it was
dissolved at the time.
[28] This interpretation of s. 209(4) of
the CBCA is reinforced by a decision by the Ontario courts dealing with the similarly-worded provisions of the Ontario
Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”).
Section 241(5) of the OBCA states that upon revival, a corporation
“shall be deemed for all purposes to have never been dissolved”. Ontario courts have consistently found that this wording
implies that the revival of a corporation is retroactive to the date of its
dissolution: see especially 602533 Ontario Inc. v. Shell Canada Ltd.
(1998), 37 O.R. (3d) 504, 155 D.L.R. (4th) 562 (C.A.); see also Zangelo Investments Ltd. v. Glasford State Inc.,
[1988] O.J. No. 1167, 63 O.R. (2d) 542n (C.A.); 546672 Ontario Ltd. v.
Perricciolo (1991), 3 O.R. (3d) 774, [1991] O.J. No. 1034 (Gen. Div.); and Stein-Peters
v. Ontario (Municipal Board), [2001] O.J. No. 1839, 20 M.P.L.R. (3d) 1
(Div. Ct.). The finding of retroactive effect for corporate revival under the OBCA
lends strong support for a finding of retroactive revival under the CBCA,
especially given that the Ontario statute does not contain the more
explicit wording of the federal statute.
[29] This makes good sense from a
policy perspective, since any other conclusion would carry serious economic and
logistical consequences for dissolved corporations and parties entering into
transactions with them. Corporations are dissolved from time to time, sometimes
without the knowledge of the corporation’s principals. If the corporation is
subsequently revived, it would create unwarranted confusion and uncertainty as
to the rights and obligations of the revived corporation and third parties if
courts were to hold these principals personally liable for acts undertaken in
the name of the corporation during its dissolution: see the comments of Hanssen
J. to this effect in Helcor Enterprises Ltd. v. Moore & James Food
Services Ltd., [1990] 5 W.W.R. 596, 66 Man. R. (2d) 221 (Q.B.).
[30] Interpreting the effect of revival
as being retroactive to the date of dissolution would also accord with the
purpose of the revival provisions of the CBCA, which is to ensure
certainty and continuity in corporate affairs despite the temporary dissolution
of a corporation.
[31] Furthermore, two decisions which
suggest that the CBCA does not have a retroactive effect can be distinguished
since they dealt with an earlier version of s. 209(4) of the CBCA, which
contained the word “thereafter” and did not include the explicit wording of the
current version of s. 209(4): see Wolf Offshore Transport Ltd. v. Sulzer
Canada Inc., [1992] N.J. No. 82, 318 A.P.R. 178 (T.D.), and Dello v.
Canada, [2003] 4 C.T.C. 2331, [2003] T.C.J. No. 342.
[26] It therefore follows
that the revival of a corporation is retroactive to the date of its dissolution
and that, for all intents and purposes, it is deemed to have never been
dissolved. That being so, the Crown’s position that the appellant never ceased
to be a director of RSL after his original appointment on August 18, 1987, is
correct. That approach is consistent with subsection 136(5) of the NBBCA
and with the relevant case law. The appellant’s position as director of RSL was
in a state of suspension during the time between RSL’s dissolution and its revival.
Since the revival of RSL returned that corporation to the same position as it
would have been in if it had not been dissolved, the appellant also returned to
his position as director. The appellant never resigned as director of RSL even though
it ceased operating in December 1998. There is no evidence that it ceased to
exist as a corporation after that date.
[27] Accordingly, the two-year
limitation period imposed by subsection 227.1(4) of the Income Tax Act
and subsection 323(5) of the Excise Tax Act has not expired and the
Minister is therefore not barred from assessing the appellant. This conclusion
disposes of the first three issues raised by the appellant. There remains the
question of whether the appellant should be able to avail himself of the due
diligence defence.
[28] In Soper v. R.,
[1997] 3 C.T.C. 242, the Federal Court of Appeal has suggested an approach that
consists in analyzing director’s liability in terms of being an inside or an
outside director and in terms of the standards applicable to both. Justice Robertson states early on in his
analysis:
33 At
the outset, I wish to emphasize that in adopting this analytical approach I am
not suggesting that liability is dependent simply upon whether a person is
classified as an inside as opposed to an outside director. Rather, that
characterization is simply the starting point of my analysis. At the same time,
however, it is difficult to deny that inside directors, meaning those involved
in the day-to-day management of the company and who influence the conduct of
its business affairs, will have the most difficulty in establishing the due
diligence defence. For such individuals, it will be a challenge to argue
convincingly that, despite their daily role in corporate management, they
lacked business acumen to the extent that that factor should overtake the
assumption that they did know, or ought to have known, of both remittance
requirements and any problem in this regard. In short, inside directors will
face a significant hurdle when arguing that the subjective element of the
standard of care should predominate over its objective aspect.
34 In
some instances, it is easy to see why inside directors have been held liable.
Such is true in respect of Barnett, supra, the first case which
dealt with the due diligence defence. In that case the taxpayer, as director
and sole shareholder of the company, hired a comptroller. When the latter
informed the taxpayer that the company was short of cash, the taxpayer
instructed that the business' key suppliers should be paid first. In these
circumstances, the Tax Court dismissed the taxpayer's appeal from the
Minister's assessment which held the taxpayer personally liable for the source
deductions withheld but not remitted. Equally understandable is the imposition
of liability in the following cases involving inside directors: Quantz v.
Minister of National Revenue (1988), 88
D.T.C. 1201 (T.C.C.); and Beutler v. Minister of National Revenue (1988), 88
D.T.C. 1286 (T.C.C.).
35 Similarly,
the taxpayer in Fraser (Trustee of) v. Minister of National Revenue, (1987), 87 D.T.C. 250 (T.C.C.), provides a
good example of an inattentive inside director upon whom liability was
justifiably visited. The taxpayer in that case was a director, minority
shareholder and vice-president of manufacturing operations of a corporation. As
of a certain time, he was apprised of the fact that the company was in arrears
with Revenue Canada. Nevertheless, the taxpayer did nothing more in
respect of that problem than rely on assurances, from the inside directors
responsible for the financial side of the business, to the effect that there
was no need to worry. Having made no efforts to prevent further defaults, the
taxpayer was held personally responsible for the amounts that should have been
remitted to the Crown by the corporation.
36 Of
course, not all inside directors have been held liable. The Tax Court has
refused to impose liability on an inside director in cases where he or she is
an innocent party who has been misled or deceived by co-directors: see Bianco v.
Minister of National Revenue, (1991), 91 D.T.C. 1370 (T.C.C.); Edmondson
v. Minister of National Revenue, (1988), 88 D.T.C. 1542 (T.C.C.); Shindle
v. R. (1995), 95
D.T.C. 5502 (Fed. T.D.); and Snow v. Minister of National Revenue, (1991), 91
D.T.C. 832 (T.C.C.). There are also other examples of an inside
director being exonerated: see Fitzgerald v. Minister of National Revenue,
(1991), 92 D.T.C. 1019 (T.C.C.).
[29] The importance of
making a distinction between an inside and an outside director is that this
determines the degree of the standard of care that may be applicable to each in
analyzing liability. The respondent suggested that in cases where there is only
one director of a corporation, that person implicitly is an inside director.
The respondent cited in support of this position this Court’s decision in Weyand
v. R., 2004 G.T.C. 306. It is thus more difficult for a sole director to
establish the due diligence defence. In another decision by this Court, namely,
Sziklai v. The Queen, 2006 DTC 2798, Mr. Justice Hershfield did an interesting
analysis on the matter of a sole director being implicitly an inside director
as well as an analysis of the standard of care for inside and for outside
directors, and provided a useful reminder as to the applicable standard.
[10] The
inevitable agency of which Justice
Mogan speaks is what he infers
makes the sole director both an insider and a person liable for remittance
failures. With respect, that is a troublesome inference. In Soper v. R. Robertson J.A.
described the basis of the distinction between inside and outside directors by
saying at paragraph 44:
...
inside directors, meaning those involved in the day-to-day management of the
company and who influence the conduct of its business affairs, will have the
most difficulty in establishing the due diligence defence. For such
individuals, it will be a challenge to argue convincingly that, despite their
daily role in corporate management, they lacked business acumen to the extent
that that factor should overtake the assumption that they did know, or ought to
have known, of both remittance requirements and any problem in this regard. In
short, inside directors will face a significant hurdle when arguing that the
subjective element of the standard of care should predominate over its
objective aspect.
As
to outside directors not involved directly in the operation of the business he
observed at paragraphs 52 and 53 that they could:
...
rely on the day-to-day corporate managers to be responsible for the payment of
debt obligations such as those owing to Her Majesty ...
In
my view, the positive duty to act arises where a director obtains information,
or becomes aware of facts, which might lead one to conclude that there is, or
could reasonably be, a potential problem with remittances. Put differently, it
is indeed incumbent upon an outside director to take positive steps if he or
she knew, or ought to have known, that the corporation could be experiencing a
remittance problem.
[11] By
definition then an insider is a person involved in the business. To impute
involvement to a person not involved is incompatible with that defining factor.
Further, to impute involvement to a sole director, and regard the acts of the
person who failed in a duty to be the acts of that director, would mean there
is no due diligence defence available to sole directors. That clearly cannot be
the case nor, in my view, should Justice
Mogan be taken to have meant that
as a firm rule in all cases.
[12] This
is not to suggest that the Appellant does not have a standard of care higher
than that placed on an outside director. The purpose for identifying
"inside" versus "outside" directors is to assist in the
determination of what a reasonably prudent person would do in the
circumstances. In this context, the issue might be better posed by asking more
simply whether the Appellant was, by virtue of his position and involvement, in
a position to detect the potential problem and deal with it. This was the
approach taken by Justice Bonner in Mariani v. R. At paragraph 19 he
observed:
I
cannot agree with the respondent's position. The segregation of directors into
inside and outside categories is not undertaken as part of a mechanical process
of classification into rigidly defined categories of winners and losers. Rather
it is a recognition of the self-evident. Some directors are better situated
than others, usually by reason of participation in day-to-day management, to detect
the potential for failure and to deal with it and that situation is a relevant
circumstance.
Justice Hershfield went on to say:
[14] Even
then, however, there is flexibility in the application of tests applicable even
to insiders. The standard is reasonableness, not perfection, even in the case
of an insider of a marginal company. The question is always the same:
"What does the situation prescribe a reasonably prudent person in the
Appellant's position to do in the circumstances?" Justice Sharlow of the Federal Court of Appeal commented that the standard is not
perfection in Smith v. The Queen.
[12] The inherent flexibility of the due diligence
defence may result in a situation where a higher standard of care is imposed on
some directors of a corporation than on others. For example, it may be
appropriate to impose a higher standard on an "inside director" (for
example, a director with a practice of hands-on management) than an
"outside director" (such as a director who has only superficial
knowledge of and involvement in the affairs of the corporation).
[30] The
degree of the standard of care applicable in answering the question of what the
situation requires a reasonably prudent person in the appellant’s position to
do in the circumstances depends on the situation and circumstances in each case.
An appellant’s background and his participation in, and knowledge of, the
affairs of a corporation of which he is a director are all matters to be
considered, particularly when the appellant is the sole director of the corporation.
The question is always, as Justice
Hershfield phrased it,
whether the director, by virtue of his position and involvement, was in a
position to detect the potential problem and deal with it.
[31] There is no doubt
that the appellant in this case invested substantial sums of money in
businesses, including RSL, with a view to getting a return on those investments
and not with the intent of running the businesses himself on a day-to-day
basis. The appellant devoted all of his time to his medical practice and
entrusted the day-to-day operations of RSL in particular to two or three key
employees throughout the entire time that company was carrying on business. The
appellant has no business background nor does he possess business experience other
than running his medical practice, of which the management aspect is left to
his secretary. The appellant’s lack of business acumen is almost disturbing
given the amounts of money invested in the aforementioned businesses and
particularly in RSL, yet his reasons and explanations for having entrusted his
affairs to key employees and his accountant are to a certain extent understandable.
[32] The appellant had
his first encounter with director’s liability for unremitted taxes under the ETA
in September 1993. On September 1, 1993, in a letter to Revenue Canada referred to earlier, the appellant
acknowledged that he was jointly and severally liable with RSL for unremitted
tax. The amount assessed at the time was $77,443.31, this was paid in full and
is not the subject of this appeal. No other failure to remit tax occurred in any
of the subsequent periods of RSL’s operations until the first period now under
appeal, which started in April of 1997 and with respect to which there was a
failure to remit at the end of June 1997. Before the end of the second period,
namely, July, August and September 1997, the appellant became aware of RSL’s failures
to remit tax, and, on September 11, 1997, he again wrote a letter to Revenue Canada, asking for indulgence
regarding the late remittance of the tax. RSL nevertheless failed to remit for
the final period of 1997. No explanations were given as to what actions the
appellant may have taken to ensure that GST/HST remittances were made, other
than directing his key employees to make them. The tax was remitted for the
periods from January to March 1998 and July to September 1998. The remittances
for the last period of 1998 were not made.
[33] It is clear from the
evidence that the appellant knew in September of 1997 that RSL had failed to
remit the tax and that the situation required more than issuing a directive to
key employees to make the remittances. I can only assume that the reason the
tax remittances were made for two periods in 1998 is that RSL had the funds and
that it is not because of any steps the appellant may have taken to deal with
the problem and to ensure that the tax remittances were actually made. In my
opinion, the appellant had to do more than simply rely on an affirmative answer
received on asking René Martin whether they were being
made.
[34] The appellant
testified that he first became aware of RSL’s failure to remit the payroll
deductions in the months preceding Edmond Richard’s resignation in March 1995.
At the end of 1994, the unremitted payroll deductions for that year totalled $ 58,012.18,
including interest and penalties. The appellant also testified that it was
during that period that he was made aware of certain irregularities and the misappropriation
of funds by his key employee, Edmond Richard, and later by the in-house
accountant. The amount of money misappropriated was substantial and may easily
explain RSL’s failure, through its key employees, to remit the payroll
deductions.
[35] The appellant had Mr. Richard’s credentials verified
by the RCMP and he had been cleared; the appellant trusted him. RSL had been in
operation since its creation and had not had any bad experiences with its key
employees in terms of how they ran the business. It appeared to the appellant
that everything was running as it should and that there was no need to
intervene or take any action.
[36] In early 1995, when
all these problems surfaced, the appellant informed his personal accountant
about RSL’s failure to remit payroll deductions and instructed him to take steps
to avoid a reoccurrence. He also informed the staff and René Martin of the situation and instructed
them to keep in touch with his accountant. He also instructed the staff to
enrol in a course, given by the Province of New Brunswick, in order to improve their skills
and make them aware of their obligations and responsibilities as managers of a
business, and lastly, he requested that he be given a monthly income and
expense statement. The result of these actions, including the change in
managers, was that there were no other failures to remit except for an amount
of $912.81, including interest and penalties, in 1997 and $11,093.90, including
interest and penalties, in 1998. Five NSF cheques were returned during the
period from November 1996 to April 1998. The appellant was unaware that cheques
were returned.
[37] In light of these
circumstances, it is difficult to conclude that the appellant was, by virtue of
his position and his involvement, in a position to detect the existence of
RSL’s failure to remit the payroll deductions. The appellant was the sole
director of RSL, but had chosen to rely on a key employee to run its day-to-day
business operations, in which regard neither his integrity nor that of the
in-house accountant was ever open to question. In my opinion, the appellant’s
duty to act arose when he became aware of RSL’s failure to remit payroll
deductions. As to these, all remittances were made except for some NSF cheques
and a balance owing in respect of the 1997 and 1998 remittances. Although the
appellant had some involvement in the business, albeit in a somewhat detached manner,
I find that his reliance on his manager and key employees to make the required
payroll remittances to be permissible in these circumstances, even though he was
a sole director, to whom a higher standard may at times be applicable.
[38] I do not find, though,
that the steps taken by the appellant in 1995 were adequate and sufficient to ensure
that the failure to remit would not reoccur. The evidence does not indicate
what his personal accountant actually did to prevent the failure or what other
mechanisms were put in place to prevent it. I do not find that the monthly
income and loss statement provided to the appellant in any way indicated that
the payroll deductions were actually remitted, nor do I find that the appellant
exercised due diligence after 1995 in making sure that they were remitted, and
I say this even though the remittances were made for the most part.
[39] The appellant,
having had bad experiences with the way RSL was managed by its key employees in
terms of GST and payroll deduction remittances, can no longer be allowed to
take refuge behind his reliance on these employees to make the remittances after
1995. It is obvious that in the last year of RSL’s operations, the appellant had
become so detached from the business that he only found out by accident that it
was no longer operating.
[40] The appeal in file
2004-4274(GST)G is therefore dismissed. The appeal in file 2004-4280 (IT)G is
allowed and the assessment is referred
back to the Minister of National Revenue for reconsideration and reassessment on the basis that the
appellant is only liable for unremitted payroll deductions, interest and
penalties for taxation years beyond 1995 excluding any penalties or interest
assessed after 1995 that have been calculated on outstanding balances as at December 31, 1995 or prior to 1996. Each
party shall bear its own costs.
Signed at Edmundston, New Brunswick, this 30th day of August 2007.
“François Angers”
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