Citation: 2008TCC254
Date: 20080522
Dockets: 2007-2790(IT)I, 2007-2305(GST)I
BETWEEN:
NICK KANAVAROS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Margeson J.
[1] With reference to
file number 2007-2305(GST)I, by Notice of Assessment – Third Party No. A101889,
dated May 19, 2006, the Minister assessed the Appellant as Director of Autotek
Collision Repairs (Downtown) Ltd. (“Autotek”) in the amount of $8,871.09 under
section 323(1) of the Excise Tax Act, R.S.C. 1985, c. E-15, as
amended (the “Act”) for interest and penalties, in respect of Autotek’s
failure to remit GST net tax by the statutory deadlines for the GST reporting
periods ending October 31, 2000, January 31, 2001, April 30, 2001
July 31, 2001, October 31, 2001 and October 31, 2002 (the “Period”) under
subsection 228(2) of the Act. The appeal is from that assessment.
[2] In the matter of Nick
Kanavaros v. The Queen, 2007-2790(IT)I, by Notice of Assessment, Number
37677, dated May 19, 2006 (the “assessment”) the Minister of National Revenue assessed
the Appellant as director of Autotek in the amount of $10,280.94, for the
failure by Autotek to remit source deductions to the Receiver General, together
with interest and penalties as required by s. 153 of the Income Tax
Act, R.S.C. 1985, c. 1 (5th Supp.), as amended. The liability of
the Appellant was under subsection 227.1(1) of the Income Tax Act. The
appeal is from that assessment.
Evidence
[3] In his opening statement,
Nick Kanavaros said that he was in the auto repair business with a number of
outlets. Then he sold one and kept Vancouver and Cambie. ICBC had earlier directed
business to him but he was unable to get on the “valet program”. Consequently his
repeat business was dead. Ninety‑nine percent of his business was in
insurance work and collision repairs.
[4] It became necessary for
him to expand his operation and he spent a lot of money to get into the valet
program but then he could not afford to continue. He used his own funds to keep
the business going. He fell behind on his payments to the Canada Revenue Agency
(the “CRA”).
[5] In his sworn
testimony, he said that on the day that the business and equipment was sold he wanted
to make sure that the taxes owed were paid. The majority of the money received
from the sale went to taxes in the amount of $52,839.80. He referred to Exhibit
A-1, Tab 3 which was a cheque from a law firm to Revenue Canada in this amount. It was
dated December 23, 2003.
[6] After the cheque was
received, CRA demanded interest and penalties. He referred to Exhibit A-2, Tab
1 which was a letter to Touchtone Property Management, his landlord, requesting
a receipt for the $67,451.23 payment made by Autotek on December 23, 2003. This
letter was to enable the Appellant to obtain tax credits due to Autotek by CRA.
He was informing them that CRA was attempting to disallow credits to Autotek
based on not having the invoice from Touchstone Property Management that he required.
The property management company was acting as property manager at the time.
[7] He said that CRA had
not credited him with $9,320.02.
[8] He referred to
Exhibit A-1, at Tab 8 which was a letter from Insurance Corporation of
British Columbia (“ICBC”) directed to the law firm which indicated that Autotek
failed to pay alternative transportation for customers whose vehicles were
being repaired by Autotek. Consequently the ICBC set off $7,338.85 to settle
those accounts. The balance owing to Autotek was $11,599.08. The letter indicated
that a request was being made that the outstanding money to Autotek be made to
Watson Goepel Maledy in Trust. It was dated November 5, 2004 and the funds were
paid to CRA but yet they charged him two years’ interest.
[9] A further $3,093.76
was paid to CRA but it did not change the balance because he was charged other
interest and penalties.
[10] Some monies were not
paid to CRA even though there was money owing to Autotek. The amount of $7,300
was paid out to unsecured creditors even though the demand letters were still in
effect and served. He referred to Exhibit A‑1, Tab 6, which was a
letter from ICBC to Watson Goepel Maledy saying that the letters had been
forwarded to the appropriate departments for their review. But nothing happened
as a result of this letter. Those were still funds owing to Autotek.
[11] Exhibit A-1, Tab 17 is
a Notice of Claim. He indicated that he took Enterprise Rent-a-Car Canada
Limited to Court and claimed $9,120.34 from them. He agreed that he was
responsible for paying the taxes on time but he could not do anything because
the funds were held by ICBC. The funds never went into the company. He had no
power to control the money. None of these funds were ever received by Autotek.
He referred to a letter in Exhibit A-2, Tab 7 addressed to the Ombudsman’s
office which set out his position. He went to ICBC before he went to see the
Ombudsman.
[12] In cross-examination he
said that he had been in the business of auto repairs for 22 years. The
original business was downtown and the second place of business was in Cambie.
The Cambie property was leased premises. He worked there daily. He hired and
fired workers. His duties included setting up accounts, determining and paying
wages, marketing, issuing pay cheques and hearing complaints. He hired a
bookkeeper and supplied him with the accounts. He did the payroll and picked up
the papers weekly. At the end of the day the customers were merely charged for
the deductible if it was applicable. He then sent his claim to ICBC for
payment. Rarely did he do a private claim. Ninety-nine percent of his work was from
ICBC.
[13] Through 2001 and 2002 there
were remittance problems. He did not agree that there were remittance problems
since 1995. However there were problems with ICBC since 1998.
[14] From funds which he did
receive he paid CRA first. He did not establish any special account for
remittances. He denied that he transferred any house to his wife to “dodge” his
responsibility.
[15] He identified a letter
dated February 23, 2006 from himself to ICBC in which he indicated the
difficulties in determining what monies were still owing by ICBC to Autotek and
indicated that he had taken it upon himself to deal with this particular issue.
[16] He identified a letter
from Poulsen & Company in Exhibit A-1, Tab 20 which enclosed a statement of
GST paid by Autotek and this showed an amount of $1,683.42. This statement was
dated October 13, 2006. On the bottom of this statement in writing is an amount
of $3,808.95 as the total amount of GST paid.
[17] He referred to a letter
at Exhibit A-1, Tab 21 to the Bailiffs setting out the difficulty that he was
having in maintaining his records of what amounts were received by the Bailiff
and credited to Autotek’s account. He demanded documentation such as the
accounting and proof of payment documents that he could use in a small claims
action.
[18] He identified a letter
to the Appeals Division dated January 23, 2007 with respect to his due
diligence defence and that he took positive steps to ensure that all of his
remittances were paid. He indicated that he was providing documentation to
prove that when fees are not paid in a timely fashion this was beyond his
control. The documents showed that he was instrumental in recovering a total of
$67,531.88 of the debt for CRA.
[19] CRA allowed him only
$2,968.89 in ITCs whereas he claimed $10,151.63.
[20] He referred to Exhibit
A-2, Tab 1 and indicated that the landlord had paid the sum of $9,320.62 to CRA
on behalf of Autotek according to his calculations but they only allowed him
the sum of $2,168.89.
[21] Traci Lynn Johnson was
a team leader at CRA for seven years in customs. She spent three years at the
Royal Bank in collections. She was assigned to the Autotek file with respect to
the outstanding balances on the income tax and GST accounts and outstanding
returns.
[22] She said that the
Appellant’s business was being sold and they wanted to establish their
priority. She reviewed the file and tried to establish debts what were owing.
It was noted in the GST file that there were problems with respect to the GST
remittance back to 1995. The Appellant was advised twice about his liability.
[23] She reviewed the
figures of the assessment for the Appellant as set out in Exhibit R-1, Tab 6
prepared for October 3, 2001 to May 15, 2006.
[24] She also reviewed the
Requirement to Pay found in Exhibit R-1, Tab 8, dated June 16, 2003. She said
that they received no money as a result thereof. However in 2003 some funds
were remitted as indicated by the letter found at Exhibit R-1, Tab 18
dated August 20, 2003. This was a payment in the amount of $3,093.76 as a
result of a trust cheque from Taylor Veinotte Sullivan and was applied to
Autotek’s GST accounts of September 18, 2003. Also received was a cheque for
$52,839.80 to cover the GST and payroll accounts. This was a cheque from Watson
Goepel Maledy dated December 23, 2003 to cover GST and payroll accounts. The
deemed trust amounts were paid out. GST, interest and penalties remained and
penalties amounts remained for the payroll account.
[25] They received no other
funds. In February 2004 they commenced Director’s Liability Proceedings. They received
a due diligence defence from the Appellant as can be seen from the document in
Exhibit R-1, Tab 3. They gave every opportunity to the Appellant to file a
defence. They did not consider that his actions amounted to due diligence. They
certified the debt in the Federal Court as per the document found in Exhibit
R-1, Tab 11. Seizure and sale was issued but they were unable to locate any
assets in 2004.
[26] In 2004 and 2006 they
still believed that there was a possibility that funds were still owed to
Autotek by ICBC. They issued another Demand Notice to ICBC on August 31, 2004
for the payroll account. They also issued a GST Requirement to Pay on August
31, 2004. They received a response from ICBC on September 3, 2004 to the
Demand Notices saying that the business was no longer in operation and that their
supplier number with ICBC was suspended on June 19, 2003. On January
4, 2006 they received a cheque from Webster Hudson Akerly LLP in the amount of
$11,599.08 pursuant to a Requirement to Pay that they had issued to the ICBC.
On the document it said January 9, 2005 but this was an error and it should
have been 2006. That was credited to Autotek’s account on January 9, 2006.
Exhibit R-1, Tab 9 was a Statement of Account prepared by the Surrey department
showing all payments credited to the account.
[27] Exhibit R-1, Tab 6
shows the particulars of the Notices of Assessments from October 1, 2003 to May
15, 2006. The Department concluded that the shareholder was a director at the
relevant times and that there was no resignation. In that regard she referred
to Exhibit R-1, Tab 15 which was a BC Company Summary for Autotek. She said
that the assessments were raised on May 19, 2006. In preparation for
the hearing she did a search and found that all payments were properly
recorded.
[28] In cross-examination
she referred to Exhibit R-1, Tab 6 showing that the balance in the payroll
account was $10,280.94 and the balance in the GST account was $8,871.09 for a
total of $19,152.03.
[29] Vicki Wee testified
that she has been an auditor with CRA for 6½ years. She has a CGA designation
and is familiar with income tax and GST. She has always been an auditor. She
was first involved with the case at bar on August 14, 2007. She
contacted the accountant for Autotek on August 28, 2007 and said that she had
received an amended return and wanted to review the company documents. She
referred to Exhibit R-1, Tab 20 which was the Amended Goods and Services
Tax/Harmonized Sales Tax (GST/HST) Return. The accountant told her that he had
no documents but only one sheet of documents that the client had given to him.
The accountant was referred to Exhibit R-1, Tab 21. She said that she had
received this from the collection officer. This was prepared by Karim K. Vira,
CRA, CGA, dated October 6, 2006. It purported to show additional GST
ITCs paid subsequent to the assessment and final GST returns. This amounted to
$10,151.63 for the total GST credit.
[30] This witness said this
was the only document provided relative to GST. There were no backup documents.
She asked for them. The Appellant said that he did not wish to spend anymore
time on it.
[31] She referred to a
letter in Exhibit R-1, Tab 19A, to Nick Kanavaros with respect to the amended 2003
GST return for Autotek which told him what was required in order for them to
allow the additional ITCs claimed on the amended 2003 GST return. She needed to
have the original invoices to verify that these expenses were incurred in the
course of the business and that GST was actually paid for these expenses. They
reminded him that he had already said that he no longer wished to spend anymore
time or effort on the matters related to Autotek. Consequently the adjustments request
was denied in full.
[32] On October 18, she
received a telephone call from the Appellant and he said that he did not want
to talk to her except by letter. She sent a letter to him on October 22, 2007
which is found in Exhibit R-1, Tab 19B stating that they needed additional
documents in order to allow additional ITCs. On November 2, 2007 she
received some documents and on December 21 she received a binder of documents
found in Exhibit A-1 where the Appellant was claiming $10,000 credit for ITCs. She
reviewed, for this purpose, her working papers and the document located in Exhibit
R-1, Tab 22 dated January 15, 2008. She only had the surrender of lease and
disallowed the claim of $4,906.54. There were no supporting documents to
support the claim. Where amounts were disallowed, there were no source
documents.
[33] The document located at
Exhibit A-2, Tab 1, referred to as Tenant Ledger, was sent to her the day before
the trial. She reviewed it and said that she determined that the Appellant is
entitled to a credit of $4,520.56.
Argument on Behalf of the
Respondent
[34] Counsel for the
Respondent said that the real issue was whether or not the Appellant acted in
such a manner as to prevent the failure to remit so that the due diligence
defence was available to him. It was his position that the Appellant did not act
in such a way and that the appeal should be dismissed.
[35] He referred to a letter
of September 21, 1995 directed to the Appellant advising him of his liability
as Director. The amounts that were held by ICBC and remitted to CRA were
credited to the account. He referred to Exhibit R-2, Tab 14 in that regard.
[36] He opined that the
Minister has no duty to collect from creditors. It is the Minister’s option to
do so. It is not proper to argue that the Minister was negligent. He referred
to Canales (c.o.b. AAY 147974) v. Canada, [1996] T.C.J. No. 845 for the
proposition that even though Revenue Canada may make an effort to collect some
accounts receivable it owes no duty to the Appellant to do so.
[37] Likewise, in Qureshi
v. M.N.R., 79 DTC 5161, this decision stands for the proposition that the
Minister must decide what course of action would most likely reap the maximum
results. That decision is not subject to review under section 18 of the Federal
Court Act.
[38] In Blanchard v. Canada, [2000] T.C.J. No. 342
(T.C.C.), at paragraph 110 it was held that, “It is of little consolation
to the Appellants to argue that Revenue Canada did not take positive steps to
collect the accounts by all means possible when indeed the duty to act
positively is upon the company and both Appellants knew this from the
beginning”.
[39] Likewise as in Van
Leenen v. Canada (M.N.R.), 91 DTC 1265, if the Appellant is seeking redress
from the actions of the Minister he must do so in the Federal Court and not in
the Tax Court.
[40] On the matter of
attacking the underlying assessment, counsel referred to Zaborniak v. Canada,
[2004] T.C.J. No. 412 (T.C.C.). The Court held that the taxpayer had no right
to dispute the quantum of the judgment debt as set out in the judgment where
the execution had been returned unsatisfied.
[41] In Scavuzzo v. Canada, [2005] T.C.J. No. 620
(T.C.C.), Justice Bowman determined that the taxpayer has a right to attack the
underlying assessment. However, this was a different case because it was a
section 160 assessment and the taxpayer did not have any opportunity to attack
the original judgment. In the case at bar, the Appellant was well aware of his
personal liability and he could have objected to the original assessment
against Autotek. With respect to the Appellant’s claim for further ITC credits there
were no supporting documents which complied with the requirements of the Act
and the Regulations to support his claim.
[42] The real issue is due
diligence whether that requirement be “subjective” or “objective”. Where the
Appellant is an inside director it does not matter whether the test is
subjective or objective. The Appellant is required to take action to prevent
the failure. It is not enough that he hoped to pay the unremitted amounts when
certain recoveries were affected.
[43] As in Soper v. Canada, [1997] F.C.J No. 881
(F.C.A.), the Appellant was required to take action to prevent the failure when
he gained information or became aware of facts that indicated that there was a
problem and that Autotek was experiencing financial difficulties. The problems
with ICBC started around 1995 and continued into 1998. ICBC started withholding
his money. Later he received an indication from Revenue Canada with respect to his
problem. He did not keep any separate bank account to show that Autotek would
be able to remit the amounts owing. The steps that the Appellant took were
after the fact and they are not sufficient to establish a defence.
[44] The appeal should be dismissed
and the Minister’s assessment confirmed.
[45] If the Court were to allow
the appeal it should only be allowed in respect to the amount as set out in Exhibit
R-1, Tab 22. It should not include the claim for ITCs based upon the rent as
the Appellant stated in his evidence.
Argument on Behalf of the Appellant
[46] Funds were paid to the
landlord and others as a result of his actions. ICBC was contacted by him and
he tried to do something about the debt. He was squeezed out of the business
and was unable to act in any way other than as he did. The amounts were paid to
ICBC and not to him and so he lost control of the payments. He did what he
could to pay the debt. He could do nothing further. If there was income it was
from one source and when that source dried up and others took the payments or
withheld them he could do nothing.
[47] He tried his best and
did everything he could to try to collect the debt. He sent letters out to creditors
who owed money to Autotek and monies were paid as a result of his actions.
[48] The cases referred to
by counsel for the Respondent are not applicable to this case as they are not
similar to this case. He tried to pay CRA first. It was an extremely tough
period for him. The credit line was withdrawn.
[49] As a result of some of
his efforts the property was sold. If the credit had been given to him in 2003
instead of 2006 there would not be the interest and penalties owing. Once the
funds were held back there was nothing further he could do.
[50] The Court should do
what is fair. He did everything that he could. The appeal should be allowed.
Analysis and Decision
[51] Two issues arise in
this case. The first issue is whether or not the Appellant has established a
defence of due diligence. The second issue is whether or not the Appellant is
entitled to any reduction in the amount claimed. The Appellant has argued that
some of the claim against him is incorrect.
[52] Even though the
Appellant argued that he did everything he could to collect monies that were
owing to Autotek, he was ready to admit that these actions were basically taken
after the fact.
[53] There can be no doubt
that the Appellant did his best to try to collect some of the monies that were
outstanding from ICBC and other creditors after the debt arose. He even went to
the extent of commencing legal action himself in order to gain funds to be
remitted to CRA to reduce the debt.
[54] His actions were
certainly credible and indeed they did result in substantial amounts of money
being remitted to CRA which may not otherwise have been recovered.
[55] However, this is not
the issue that is before the Court at the present time. In accordance with Soper
v. Canada, supra and other cases, “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”.
[56] There is no doubt in
this case that the Appellant was an inside director. Whether or not the test is
an objective one or a subjective one there is no doubt in the Court’s mind that
the Appellant in this case has not met the burden of establishing that he acted
in a manner that was reasonable and prudent under all the circumstances in attempting
to prevent the failure of Autotek in making the necessary remittances.
[57] It is clear from the
evidence gleaned from the argument of the Appellant that he knew that the
problem existed and that it existed for some time. In spite of the fact that
there is no doubt that he made valiant efforts to try to collect monies owing
to Autotek these actions were well after the fact and well after he had been
made aware that Autotek had not made these remittances, that the money was
being held back from the only source of income, from ICBC. He was well aware that
these funds were not going to be paid to Autotek without a fight.
[58] These are not the
actions of a reasonable director as contemplated by Soper, supra,
and the other cases. These are not actions contemplated to prevent the default.
[59] The Court has great sympathy
with the Appellant for the problems that he encountered when operating the business.
Certainly there were intervening factors that magnified the difficult situation
in which he found himself. The situation was regrettable but the Appellant was
the sole shareholder and director of Autotek. He ought to have known what
monies were coming in to Autotek, he was the one who controlled where the
monies that were received by Autotek were to be paid.
[60] The Appellant was aware
of the difficulty that Autotek was having in collecting money. In spite of the
fact that ICBC was holding back for a considerable period of time the monies
that Autotek was owed, the Appellant was the one that directed which payments
were to be made and when they were to be made. If some of these monies were not
paid out to other creditors or employees, that money would have been available to
reduce the balances owing to the Minister.
[61] The Court is aware that
Autotek was required to pay its employees and pay other expenses to keep the
business running, but the long and short of it is that it was the conscious
decision of the Appellant not to remit those monies to the Minister, to keep the
business running in hopes that things would improve and that the amounts that
he knew were outstanding to the Minister would somehow be paid in the future. This
did not happen.
[62] Such actions do not
satisfy the duty imposed upon him by this section of the statute. These actions
clearly do not meet the test in subsection 227.1(3). This duty is to
prevent the failure to make remittances and not to cure the problem after the
fact.
[63] As indicated in Soper,
supra, the Court is satisfied that “the due diligence requirement laid down
in subsection 227.1(3) a director may, as the Department of National Revenue
has noted, take “positive action” by setting up controls to account for
remittances, by asking for regular reports from the company’s financial
officers on the ongoing use of such controls and by obtaining confirmation at
regular intervals that withholding and remittance has taken place as required
by the Act:”
[64] All of these actions would
have been under the power of the Appellant here because he was the sole
shareholder and director and had complete control over Autotek.
[65] The Court is not
satisfied that the Appellant has met the burden of establishing that he acted
as a reasonable and prudent director would under the circumstances and his
actions do not establish the defence of due diligence.
[66] On the second issue of
the accuracy of the amounts owing, the Court is satisfied on the basis of the
evidence given by the accountant and more particularly by Vicki Wee that all credits
have not been made to the account as set out in the assessment in question made
against the Appellant. She said that the documents that she reviewed in coming
to this conclusion were only faxed to her the day before the trial. She
reviewed them and indicated that the Appellant was entitled to a credit of
$4,520.56 with respect to ITCs not credited to the account after the assessment
was made against the Appellant.
[67] The Court is satisfied
that it would be completely unjust for the Minister to receive such monies and
that the Appellant cannot be given the benefit thereof even though the Minister
did not become aware of the documents until the day before the trial.
[68] In the end result the
Court will allow the appeal under file No. 2007‑2305(GST)I and remit
the matter to the Minister for reassessment and reconsideration upon this
finding that the Appellant is entitled to a further credit of $4,520.56. In all
other respects the appeal is dismissed.
[69] With respect to the
file No. 2007-2790(IT)I the appeal is dismissed.
[70] The Court will hear the
parties with respect to the matter of costs at Vancouver, British Columbia on Friday, June 20,
2008 at 9:30 a.m.
Signed at Ottawa, Ontario, this 22nd day of May 2008.
“T. E. Margeson”
Email this Content