Citation: 2008TCC240
Date: 20080526
Docket: 2006-1861(GST)G
BETWEEN:
ROBERT VERRET,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers J.
[1]
The
appellant was assessed by the Minister of National Revenue (the Minister) under
the Excise Tax Act (the Act) on February 16, 2004 as the director
of Brunswick Rent-a-Car Ltd. (hereinafter referred to as “Brunswick”) for that
company’s failure to deduct, withhold or remit the Goods and Services
Tax/Harmonized Sales Tax (GST/HST) payable by it for periods beginning August 1,
1996 and ending April 30, 1999. The assessment was later confirmed on
March 27, 2006.
Paragraph [2] continues next page.
[2]
The
amount of the assessment is $54,431.69, broken down as follows:
|
Period
ending
|
Net Tax
|
Interest
|
Penalty
|
Total
|
|
96-10-31
|
3,052.77
|
1,527.83
|
2,290.38
|
6,870.78
|
|
97-01-31
|
643.37
|
176.67
|
274.66
|
1,094.70
|
|
97-04-30
|
538.52
|
137.17
|
212.86
|
888.55
|
|
97-07-31
|
9,686.51
|
2,467.65
|
3,828.73
|
15,982.89
|
|
97-10-31
|
9,276.30
|
2,363.17
|
3,666.51
|
15,305.98
|
|
98-01-31
|
1,282.81
|
328.35
|
509.52
|
2,120.68
|
|
98-04-30
|
150.20
|
3,507.49
|
5,606.64
|
9,264.33
|
|
99-01-31
|
|
51.67
|
69.86
|
121.53
|
|
99-04-30
|
1,644.70
|
384.27
|
603.08
|
2,632.05
|
|
03-01-09
|
150.00
|
|
|
150.00
|
|
TOTAL
|
|
|
|
54,431.49
|
[3]
The respondent
has acknowledged in her Reply to the Notice of Appeal that the net tax amount
of $150 for the period ending January 9, 2003 relates to what have been
termed “law costs” and did not form part of the amount certified in the Federal
Court. The respondent therefore consents to judgment with regard to that period
and the amount of $150.
[4]
The
Minister registered with the Federal Court of Canada on August 15, 2002, a
certificate for Brunswick's net tax liability of $49,894.41, plus penalty and
interest, and on or about January 28, 2004, the execution for Brunswick's net tax liability stated
in the certificate was returned unsatisfied. The amounts owed are not in
dispute in this appeal.
[5]
The
appellant was at all material times the only shareholder and director of Brunswick as well as its
president; he admitted being an experienced businessman but did not elaborate on
this. Brunswick was incorporated under
the laws of New Brunswick on November 27, 1976 and until the year 2000 operated
a car rental business which included the sale of second-hand car parts; Brunswick also had rental income.
It is admitted by the appellant that Brunswick was registered under Part IX of the Act and
was required to file returns on a quarterly basis. The evidence discloses that Brunswick did in fact file
returns on a quarterly basis and paid on that same basis the net tax owed. It was
as a result of an audit conducted in 1999 that amounts of net tax owing were determined
for periods beginning August 1, 1996 and ending April 30, 1999, and this
led to an assessment against Brunswick and eventually against the appellant. The appellant, as
mentioned, does not contest the amount originally assessed against Brunswick and admits that Brunswick failed to remit the
tax.
[6]
At all
material times, the appellant operated two other businesses, namely, Verret’s
Funeral Homes Ltd. and Gloval Auto Broker (NB) Ltd. The day-to-day operations of
Brunswick and the funeral home
were delegated to and left in the hands of one Patrick Benoit and, to a lesser
degree, the appellant’s son. Mr. Benoit was himself a qualified funeral
director and had worked for both the funeral home business and Brunswick for almost 20 years.
According to the appellant, Mr. Benoit was a man he could trust and, much
to his chagrin, he sometimes trusted him more than his own son. That trust came
to a sudden stop when it was discovered that Mr. Benoit had been misappropriating
Brunswick's funds for a number of years, six or seven years in fact, of which, according
to the appellant he was found guilty approximately a year and a half prior to
the date of this hearing.
[7]
Given
the fact that Mr. Benoit was considered a loyal and a key employee, the
appellant constantly relied on his skills for the running of both companies and
could spend almost six months every year in Florida. The appellant had even less
involvement in Brunswick and the funeral home after he suffered two health
setbacks: he was involved some ten or eleven years ago in a motor vehicle
accident caused by a serious aneurysm that resulted in him being in a coma for
21 days, and he also suffered from prostate problems and had to undergo two
surgeries.
[8]
The
appellant's state of health left him weak for a long period of time and he did not
work on a daily basis. He testified that he considered himself as being, in a
way, retired for the last ten or eleven years. He continued spending
approximately half the year in Florida and the other half in Montreal and in Bathurst, New Brunswick.
[9]
Although
the appellant signed the financial statements for Brunswick, these were prepared by Brunswick's chartered accountant
and the appellant did not review them. He relied on Mr. Benoit to provide the
information to the accountant. He also relied on Mr. Benoit to do the in-house
bookkeeping, which was later provided to Brunswick's accountant. The appellant does
not know who signed the quarterly HST reports, but knows that the accountant
prepared them using Mr. Benoit's information. As mentioned earlier, the
quarterly reports were filed on time and the net tax was paid in accordance
with the content of the quarterly reports.
[10]
Brunswick's business began to
decline when it was discovered that the land on which its premises were
situated were contaminated with oil. This eventually led to the business’s
closure in 2000.
[11]
The
appellant's counsel argues that there was no wilful lack of care or diligence
on the part of the appellant. He submits that the appellant had entrusted Brunswick’s
day-to-day operations to one key employee and that he had no reason to question
the accuracy of the information that was later conveyed to Brunswick's accountant for the
preparation of the quarterly reports. He submits that the reports were filed on
time and the net tax paid, leaving the appellant no cause to question the
system put in place. It was only when the audit was conducted that new amounts were
determined that appeared to reveal that not all the net tax was reported.
[12]
Counsel
for the appellant also submits that the fact that the appellant was ill around
the same time should be a factor to be considered, as he became less involved
and less interested and relied even more on his key employee, thinking that
everything was being done properly.
[13]
Counsel
for the respondent submits that the appellant put himself in a position where
he did not know and did not care to know. In counsel’s opinion, such an
attitude constitutes wilful blindness. The appellant completely lost interest,
had no way of knowing what was happening and thus opened himself up to
liability by virtue of his not caring.
[14]
The
issue before this Court is whether the appellant is liable under subsection 323(1)
of the Act, or more precisely, whether he exercised the degree of care,
diligence and skill to prevent Brunswick's failure to remit the amount referred
to above that a reasonably prudent person would have exercised in comparable
circumstances, such that subsection 323(3) of the Act would be
applicable.
[15]
Subsections 323(1)
and 323(3) read as follows:
Liability of directors
323 (1) 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.
Diligence
323 (3) A director of a corporation
is not liable for a failure under subsection (1) where the director
exercised the degree of care, diligence and skill to prevent the failure that a
reasonably prudent person would have exercised in comparable circumstances.
[16]
The
most often quoted decision on director’s liability cases is Soper v. Canada,
[1997] F.C.J. No. 881 (QL), [1997] 3 C.T.C. 242, in which
Mr. Justice Robertson of the Federal Court of Appeal made a comprehensive
analysis of the defence of due diligence available to directors in tax
liability cases. The true test in proving due diligence comprises both
subjective and objective elements. Below are excerpts taken from
paragraphs 29 to 33 (21 – 25 C.T.C.) of the above decision, which are a
good illustration of the meaning to be given to the words “skill”,
“care” and “diligence”.
Skill
29 . . .
In my view, it is correct to distinguish in this way between a reasonably
prudent person and a reasonably skilled person so as to conclude that the
subjective element of the common law standard of skill has not been altered by
federal statute.
Care
30 . . .
Hence, in the event that the reasonably prudent person is unskilled (which
possibility is discussed above), the statute requires only the exercise of a
degree of care which is commensurate with that person's level of skill. It is
in this manner that skill and care are clearly interconnected. That being said,
it is worth emphasizing that it is insufficient for a director to assert simply
that he or she did his or her best if, having regard to that individual's level
of skill and business experience, he or she failed to act reasonably prudently.
. . .
Diligence
31 Upon
reflection, it seems arguable to me that the term "diligence" is
synonymous with the term "care". That is, diligence is simply the
degree of attention or care expected of a person in a given situation. At
least, that is the way the term is employed in City Equitable. . . .
32 Professor
Welling posits that the reasonably prudent person serving as a director would
surely exercise diligence in attending to his or her duties; a skilled
individual should use his or her skills to perform said duties while an
unskilled individual should obtain "competent outside advice" in
respect of same (supra at 334). I am reluctant to embrace that analysis unreservedly.
Even if a director is unskilled, I fail to see why he or she should not be
entitled to rely, as contemplated in City Equitable, on advice provided by
officials inside the corporation unless the circumstances are such that the
reasonably prudent but unskilled person acting as a director would seek outside
advice. . . .
33 . . .
The reasonable person standard is thus hardly inflexible. It adjusts to the
circumstances and to the individual qualities of the actor. This is all the
more true in the context of federal company or taxation law where that
standard, at least as it applies to directors' duties, is explicitly modified
by the phrase "in comparable circumstances."
[17]
At
paragraphs 37 and 38 (29 – 30 C.T.C.), Mr. Justice Robertson came to the
following conclusion:
37 . . .
The standard of care laid down in subsection 227.1(3) of the Act is inherently
flexible. Rather than treating directors as a homogeneous group of
professionals whose conduct is governed by a single, unchanging standard, that
provision embraces a subjective element which takes into account the personal
knowledge and background of the director, as well as his or her corporate
circumstances in the form of, inter alia, the company's organization,
resources, customs and conduct. Thus, for example, more is expected of
individuals with superior qualifications (e.g. experienced business-persons).
38 The
standard of care set out in subsection 227.1(3) of the Act is, therefore, not
purely objective. Nor is it purely subjective. It is not enough for a director
to say he or she did his or her best, for that is an invocation of the purely
subjective standard. Equally clear is that honesty is not enough. However, the
standard is not a professional one. Nor is it the negligence law standard that
governs these cases. Rather, the Act contains both objective elements embodied
in the reasonable person language and subjective elements inherent in
individual considerations like "skill" and the idea of
"comparable circumstances". Accordingly, the standard can be properly
described as "objective subjective".
[18]
The
Supreme Court of Canada in Peoples Department Stores Inc. (Trustee of) v. Wise,
2004 SCC 68, later adopted an objective standard and made the
following comment in relation to the objective subjective test and the duty of
care in paragraphs 63 and 67 of that decision which read as follows:
63 The
standard of care embodied in s. 122(1)(b) of the CBCA was described by
Robertson J.A. of the Federal Court of Appeal in Soper v. Canada, [1998]
1 F.C. 124, at para. 41, as being "objective subjective". Although
that case concerned the interpretation of a provision of the Income Tax Act,
it is relevant here because the language of the provision establishing the
standard of care was identical to that of s. 122(1)(b) of the CBCA. With
respect, we feel that Robertson J.A.'s characterization of the standard as an “objective
subjective” one could lead to confusion. We prefer to describe it as an
objective standard. To say that the standard is objective makes it clear that
the factual aspects of the circumstances surrounding the actions of the
director or officer are important in the case of the s. 122(1)(b) duty of care,
as opposed to the subjective motivation of the director or officer, which is
the central focus of the statutory fiduciary duty of s. 122(1)(a) of the CBCA.
67 Directors
and officers will not be held to be in breach of the duty of care under s.
122(1)(b) of the CBCA if they act prudently and on a reasonably informed basis.
The decisions they make must be reasonable business decisions in light of all
the circumstances about which the directors or officers knew or ought to have
known. In determining whether directors have acted in a manner that breached
the duty of care, it is worth repeating that perfection is not demanded. Courts
are ill-suited and should be reluctant to second-guess the application of
business expertise to the considerations that are involved in corporate
decision making, but they are capable, on the facts of any case, of determining
whether an appropriate degree of prudence and diligence was brought to bear in
reaching what is claimed to be a reasonable business decision at the time it
was made.
[19]
The
degree of the standard of care was also dealt with by the Federal Court of
Appeal in Soper, supra. The distinction to be made between an
outside and an inside director was somewhat downplayed by the Federal Court of
Appeal in suggesting that the characterization as an inside or an outside
director could not in itself be conclusive on the question of liability,
although that court did say 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”, (Soper, supra, paragraph 41 (33
C.T.C).
[20]
On
the issue of whether a sole director is inevitably an inside director, Mr. Justice
Hershfield in Sziklai v. the Queen, 2006 DTC 2798, determined that whether
or not one is an inside director depends on one’s degree of involvement in, and
knowledge of, the daily operations of the business. His analysis on the subject
is a reminder that the degree of a director’s involvement in the business is
the backdrop to the application of the standard in determining what a
reasonably prudent person would have done in the circumstances.
[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.
[21]
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).
[22]
The
question at issue in this case is whether the appellant, as a director and by
virtue of his position and involvement in the business, was in a position to
detect the potential problem and deal with it. Liability must be determined on
the basis of the facts of each case and the applicable legal principle. Was the
appellant in this case sufficiently involved in the business — as an inside
director would have been — to have realized that the remittances had not been
made or that there was a possibility they had not been made?
[23]
The
appellant testified that he had entrusted the day‑to‑day operations
to a person in whom he had total confidence. He had no reason to suspect that
the GST/HST returns were not being properly made. In fact, the evidence
disclosed that Brunswick was filing its quarterly returns on time and paying the net tax owing. It
was only after the audit was conducted that the appellant was informed and made
aware of the fact that there were errors in the quarterly reports, errors which
were not detailed or explained at the hearing but which produced the results
that we now know.
[24]
The
evidence leads me to believe, on a balance of probabilities, that the
appellant, even though he admits being an experienced businessman, was not sufficiently
involved in the daily activities of Brunswick for him — acting as any reasonably prudent person would
have — to have had any reason to doubt the reliability of his manager in
complying with the Act. In fact, the appellant was himself a victim of
his manager’s fraud and dishonesty. It appears to me reasonable in the
circumstances of this case that the appellant would have had faith in, and trusted,
someone whom he had believed for almost 20 years to be a trustworthy
person and manager.
[25]
In
the absence of doubt or suspicion it appears reasonable to rely on the honesty
and integrity of one’s manager, particularly when the company is not experiencing
financial difficulties. Brunswick’s business began to decline when it was discovered that
the land on which its premises were located was contaminated with oil, which
led to the business’s closure in 2000 after the audit was conducted. In
addition, the fact that the appellant had a serious accident and experienced health
problems before and during the time that the incorrect quarterly reports were
being submitted has some relevance in the application of the test. Those
circumstances gave the appellant all the more reason to rely on the honesty and
competence of his manager. That he was outside the country or away from the
business lends additional support to the fact that he was not involved in the
daily activities of the business.
[26]
The
point at which due diligence is expected from a director is when he has
knowledge, or ought to have knowledge, of the failure to remit or that the
remittances may not be correct. At that point, a director must, in order to
meet the required standard, take a truly meaningful positive step toward
preventing the failure. I find that the appellant in this case had no reason to
suspect that the quarterly reports were incorrect as they were being filed regularly
and the net tax paid was being paid. He had no reason to doubt the honesty and
integrity of his manager, who provided the necessary information to his
accountant, who in turn prepared the quarterly reports. In light of these
circumstances, I find that the appellant acted reasonably prudently.
[27]
The
appeal is allowed with costs and the assessment is vacated.
Signed at Ottawa, Canada, this 26th day of May 2008.
"François Angers"
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