Citation: 2007TCC298
Date: 20070517
Docket: 2005-3450(IT)G
BETWEEN:
RALPH E. TUCKER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip, A.C.J.
[1] Ralph Tucker has
appealed on assessment of a liability pursuant to subsection 227.1(1) of the Income
Tax Act ("Act").
The assessment, notice of which is dated April 29, 2004, was made since,
according to the Minister of National Revenue ("Minister"), D&M
Educational Services Limited ("D&M") had failed to deduct tax as
required by section 153 or had failed to remit such amounts to the Receiver
General for Canada at times when Mr. Tucker was a director of the corporation,
that is, from June 15, 2000 to January 31, 2003.
[2] The amounts and
actual periods assessed are as follows:
|
Period Covered
|
Amount Assessed
|
|
|
|
|
July 15, 2000 to Dec. 31, 2000
|
$ 1,080.18
|
|
Jan. 1, 2001 to Oct. 31, 2001
|
$ 52,535.58
|
|
Nov. 1, 2001 to Dec. 31, 2001
|
$ 11,429.64
|
|
Jan. 1, 2002 to Jan. 31, 2003
|
$102,056.47
|
[3] Mr. Tucker is a
successful businessman in St. John's, Newfoundland. He and his wife founded Keyin College ("Keyin"), a
trade school, in 1980 and he served as its business manager since 1981. In
about 1994 or 1995 the college was franchised to operators in Atlantic Canada.
Mr. Tucker was also a director of about nine or ten corporations. He was president
of the Newfoundland Labrador Association of Career College. He was also Chair
of the Workplace Health Safety and Compensation Commission of Newfoundland and Labrador and has sat on the
national board.
[4] Mr. Tucker was
aware of the duties and liabilities of a director, including liabilities under
the Act.
[5] The franchisor of
Keyin was Keycorp Inc. Mr. Tucker was a shareholder of Keycorp. He was also a
director of Keycorp and its President. At one time Keycorp had 14 franchises
operating in the Atlantic provinces. During the period 2000 to 2002, there were nine active
franchises of Keyin.
[6] Mr. Tucker kept in
constant touch with the staff and students of the franchised colleges. The key
to the business' success was marketing, making sure the students got what they
paid for and that programs offered met the expectations of the students. Franchisees
were rated for growth and were offered assistance. If a franchisee had a
deficient program, Mr. Tucker ensured that remedial action was in place. Remedial
action could be slight or radical, including the closing of a franchise.
[7] The schools
operated under provincial trade school legislation.
[8] A franchisee was
granted a geographical location for his or her school, including a program and
operational rules and guidelines. The franchisees were mentored. Programs were
updated. There was a formal franchise agreement.
[9] Keycorp had at
least five officers, a president, a director of marketing, a director of
operations who was responsible for the curriculum, a controller and a
secretary.
[10] Franchisees were
responsible for day-to-day operations such as staff hiring, banking, observing
provincial legislation and following Keycorp's guidelines.
[11] Franchisees had
three sources of cash flow: student tuition, Canada student loans and Service Canada,
the funding arm of the federal government to support training initiatives.
[12] The royalty fee the
franchisee paid to Keycorp was the aggregate of:
a) ten per cent of revenue;
b) three per cent for co-operative
advertising; and
c) one per cent for new
marketing and to research new curriculum.
[13] D&M operated the
Halifax campus from 1997 to
2000. The Halifax campus was not
progressing to the degree anticipated by Mr. Tucker. The franchise required
help. Mr. Tucker visited the school on several occasions and eventually assigned
one of his trusted employees, Debbie Lawrence, to the Halifax campus to evaluate the situation, to
audit the company's operations, and recommend improvements.
[14] Ms. Lawrence had
been working for Keycorp for about 15 years. She has a Bachelor of Commerce
degree. She had worked at IBM and was strong in communications, according to
Mr. Tucker. She was originally hired to teach communications and moved through
the ranks to Director of Marketing at the St. John's campus and then to Head
Office as Director of Operations. Ms. Lawrence had designed curriculum and
development, was responsible for advertising and marketing as well as
"corporate budget". She eventually had signing authority for the
corporation.
[15] Mr. Tucker described
Ms. Lawrence as "very good at what she did". He had confidence in her
abilities.
[16] In any event, Ms.
Lawrence made recommendations to Mr. Walsh which, Mr. Tucker stated, Mr. Walsh
could not "live with". Mr. Walsh advised Mr. Tucker that he
would close the school.
[17] Mr. Tucker would
visit the various campuses about twice a year. When he visited Halifax he did not examine any
books or records. He was interested in meeting faculty and students and
"facilitate" issues with the Department of Education. He wanted to
support Ms. Lawrence to maintain the franchise. Mr. Tucker also relied on
the corporate controller. As for himself, Mr. Tucker acknowledged he
"couldn't be hands on day-to-day". He could not recall
"specifically" asking Ms. Lawrence if she made remittances to the
Canada Customs and Revenue Agency ("CCRA").
[18] Mr. Tucker said he
never allowed a student to leave without being properly trained. He did not
want to close the school and abandon the students. He asked Ms. Lawrence to
take over its operations and adopt her recommendations.
[19] By agreement dated
as of July 15, 2000, Mr. and Mrs. Walsh sold their shares in D&M to Keyin Virtual
Campus Limited ("Virtual"), the shares of which were owned by Mr.
Tucker's three sons. Mr. and Mrs. Walsh resigned as directors. Mr. Tucker
became a director of D&M.
[20] Financial statements
of D&M for the fiscal period ending August 31, 1999 were attached to the
agreement. Mr. Tucker acknowledged that no source deductions were outstanding
as of July, 2000 but he was aware that the Walshes had a dispute with the CCRA.
[21] Ms. Lawrence returned
to Halifax to become the principal and administrator of the Halifax College. According to Mr.
Tucker, she was responsible for the day-to-day operations of the school,
accounts receivable, curriculum, hiring and firing and all financial aspects
such as payroll and source deductions. Mr. Tucker said control of the payroll
was delegated to the controller of Keycorp.
[22] Mr. Tucker declared
that he was "routinely" in contact with Ms. Lawrence during the time
she was in charge of the Halifax College. He visited Halifax on several occasions. He believed
that she was making a "good progression".
[23] Mr. Ken Noseworthy,
the corporate controller, Mr. Tucker testified, prepared weekly and monthly
records of accounts payable and accounts receivable. He made sure, said Mr.
Tucker, that there was sufficient cash for Ms. Lawrence to operate the
business. Mr. Tucker did not review financial records; he would discuss
finances with Mr. Noseworthy.
[24] Ms. Lawrence did not
inform Mr. Tucker of any cash shortfall but did advise Mr. Noseworthy. Eventually
Mr. Tucker realized that money was required for Halifax and that the Walshes were "not
completely frank with us. The Walshes had taken care of their own personal
issues and almost cleared out the bank account." Mr. Noseworthy caused
Keycorp to advance funds to D&M.
[25] Mr. Tucker also
complained that Ms. Lawrence had never mentioned that the accounts with the
CCRA were outstanding; as far as he was concerned, the only issue with the CCRA
was a possible refund of $26,000 from the CCRA to Mr. or Mrs. Walsh.
At one point Mr. Tucker thought that the Walshes would pay the $26,000 to
D&M.
[26] Mr. Tucker never
suspected that Ms. Lawrence was not keeping him informed. The first time he
became aware of the problem with the CCRA, that D&M was not remitting tax, was
in about August or September 2001 when Ms. Lawrence called Mr. Noseworthy
to inform him "that she was behind on some payroll tax". At that
point Mr. Tucker "shipped" Mr. Noseworthy to Halifax to find out what the
problem was.
[27] Mr. Tucker explained
that the controller would supervise new franchisees to make sure they were not
getting into trouble. He did not say whether or not, in 2000, he considered
D&M a "new" franchise.
[28] After a week in Halifax, Mr. Noseworthy
reported to Mr. Tucker that the situation was "worse than the impression
he had been given". It was not two or three months of non payments to the
CCRA, it was about five months. Mr. Tucker instructed Mr. Noseworthy to
take control of the accounts at Halifax. Ms. Lawrence no longer had authority to issue cheques.
[29] Mr. Noseworthy
contacted the CCRA so "we'd know what we owed". The controller worked
on accounts payable of all creditors including the CCRA. The CCRA audited D&M.
The CCRA believed no remissions of taxes withheld had been made for six months.
Mr. Tucker instructed Mr. Noseworthy not to pay any tax arrears until the exact
amounts were known. He told Mr. Noseworthy to keep up to date from September
on. There were also discussions concerning the $26,000 possible refund and a
possible $600 credit.
[30] Mr. Tucker now had
to make a choice: either continue to operate the Halifax College or sell it. He started to look for
a new franchisee and as of December 31, 2001, Virtual sold its shares in
D&M to Dibblee Consulting Services Inc. ("Dibblee").
[31] Mr. Tucker recalled
that on closing of the transaction with Dibblee he resigned as a director of D&M.
A copy of the resignation was attached to several closing documents produced at
trial. Mr. Dibblee, a shareholder of Dibblee, was to replace Mr. Tucker as
director.
[32] Amongst the other documents
produced at trial is a Service Nova Scotia & Municipal Relations profile of
D&M, "as of 2001-12-06", recording Mr. Tucker to be a director of
D&M and a Peter G. Green as "recognized agent" of D&M. Mr.
Tucker at first said that he believed Mr. Green was Dibblee's legal counsel. He
said he never met Mr. Green. However, in cross-examination Mr. Tucker recalled
that Mr. Green was D&M's "recognized agent" when he first became
a director of D&M in July, 2000.
[33] Some matters
relating to the closing were signed after closing, all as of the effective date
of the sale.
[34] About a year after
closing, Mr. Tucker received a telephone call from CCRA advising that he was
still on record with Service Nova Scotia as a director of D&M.
[35] Mr. Tucker knew Mr.
Dibblee and thought him to be a credible individual. Keycorp had advanced
$40,000 to D&M to make sure its cash flow was positive. He also deferred
D&M royalty obligations for a year. Mr. Tucker had considered paying CCRA
the $40,000 directly but Mr. Dibblee said he "needed room to
manoeuvre". So long as Mr. Dibblee undertook to pay, "we'd advance to
the company".
[36] Again,
unfortunately, once Dibblee took over D&M, D&M continued to default in
either failing to withhold tax or to remit the tax to the Receiver General. Mr.
Tucker has been assessed on these amounts as well as the amounts not remitted
before 2001.
[37] Mr. Noseworthy has
had extensive experience as a controller for KFC outlets and at Keycorp. He
took an accounting course at Cabot College and was granted a Business Administration
Certificate after studying three years at Memorial University.
[38] At Keycorp Mr.
Noseworthy was responsible for accounting functions as well as reviewing
financial activity by the various franchises and preparing annual statements
for audit. He was also involved in Mr. Tucker's other business activities.
[39] Mr. Noseworthy
declared that Mr. Tucker is involved with a "lot of companies and
committees". Mr. Tucker hired people to carry on the day-to-day operations
and report to him on a regular basis, weekly, monthly, etc. Mr. Tucker is
"hands on" if necessary.
[40] Mr. Tucker's
testimony was essentially corroborated by Mr. Noseworthy. Ms. Lawrence and
Mr. Noseworthy spoke on a weekly basis, or even more frequently, when she was
in Halifax in 2000. They would
"zero in" and discuss payments out of accounts payable "line by
line". Unfortunately there was no line for statutory deductions. No
discussion on payroll deductions took place until September 2001.
[41] Mr. Noseworthy
stated that Ms. Lawrence had worked as a bookkeeper at Keycorp and all
statutory deductions had been sent in on time. Based on past records, he said,
"she knew what had to be done". He had no reason to question her or
doubt her work before September 2001. If Ms. Lawrence required funds,
Mr. Noseworthy would discuss the situation with Mr. Tucker and "he'd
address the issue". He repeated that there were no such discussions
concerning source deduction remittances. Mr. Tucker never instructed anyone not
to remit.
[42] During discussions
with Mr. Dibblee for sale of D&M, Ms. Lawrence provided information to
the prospective purchaser, said Mr. Noseworthy. He informed Mr. Dibblee of the
tax problem with the source deductions. Mr. Noseworthy stated he had
several discussions with Mr. Dibblee so as to proceed to a closing and to make
sure D&M would not repeat its failures to remit.
[43] Mr. Tucker could not
be said to be an outside director. He was actively involved in Keycorp's
business activities. He took an active interest in the operations of the
various franchisees, including D&M, both before and after the sales of
shares by Mr. and Mrs. Walsh to Virtual. He had an unlimited influence on
management of D&M; both Ms. Lawrence and Mr. Noseworthy answered to him.
[44] When Virtual
acquired the shares of D&M, Mr. Tucker sent Ms. Lawrence to Halifax to manage the
operations of the Halifax College. He had utmost faith in her abilities, as did Mr. Noseworthy. She
was an excellent employee who was, "good at what she did" and was
promoted to various senior positions at Keycorp. Mr. Noseworthy testified that
there were no defaults by Keycorp in remitting source deductions when Ms.
Lawrence was in charge of payroll for Keycorp. However, throughout the
testimony of both Mr. Tucker and Mr. Noseworthy, I was waiting for a
description of Ms. Lawrence's experience in remitting source deductions. I was
concerned that this had been — and probably still was — a function of the
controller at Keycorp.
[45] Mr. Tucker no doubt
delegated functions to his senior employees, including Ms. Lawrence. He was
impressed with her experience and results from her other positions. He sent her
first to audit and then to take over the operations of the Halifax campus and to clean it
up. There is no evidence before me that while she was competent in curriculum
and marketing, for example, she was competent to take care of source deductions
and their remittance to the Receiver General. The work at Halifax may have been more than
she could handle. (She did not testify at trial.) And even after September 1,
2001, when Mr. Tucker was aware of the problems and Mr. Noseworthy had
investigated the situation, D&M continued its failures to remit.
[46] Mr. Tucker did not
exercise the degree of care, diligence and skill to prevent the failures of
D&M to remit that a reasonably prudent person would have exercised in
comparable circumstances and, therefore, is liable for the amounts assessed for
the periods July 15, 2000 to December 31, 2000, January 1, 2001 to October
31, 2001 and November 1, 2001 to December 31, 2001.
[47] On closing of the
transaction with Dibblee for the shares of D&M, Mr. Tucker resigned as
a director. He signed a document resigning as a director of D&M
"effective December 31, 2001" and this document was delivered to
D&M on closing. (There is no evidence that the closing did not take place
effective as of December 31, 2001 notwithstanding, some matters had yet to be
settled after closing.)
[48] Also produced at
trial was a copy of a document purporting to be a record of a resolution of
directors of Dibblee, dated December 31, 2001, authorizing the purchase of the
shares of D&M and appointing Daryll Dibblee "as the director of
D&M".
[49] Respondent's counsel
relied on the records of the Nova Scotia government that Mr. Tucker did not cease to be a director
of D&M on December 31, 2001. This is not the correct source to determine
whether or not Mr. Tucker resigned as director of D&M. It is absolutely
normal for directors of a corporation to resign on a change of ownership. This
is what Mr. Tucker did. That the new administrators of D&M did not inform
the Nova
Scotia
government of his resignation does not hold him to that position. He was not a
director of D&M after December 31, 2001 when D&M failed to remit source
deductions to the Receiver General. He is not liable for any amounts assessed
by virtue of subsection 227.1(1) for any periods after December 31, 2001.
[50] Accordingly, the
appeal will be allowed, with costs, and the matter is referred back to the
Minister for reconsideration and reassessment to delete from the amounts
assessed for the period January 1, 2002 to January 31, 2003, the amount of
$102,056.47 plus interest, if any.
Signed at Ottawa, Canada, this 17th day of May 2007.
"Gerald J. Rip"
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