Citation: 2007TCC333
Date: 20070808
Docket: 2006-1673(GST)I
BETWEEN:
RAMIN ASADOLLAH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rossiter, J.
[1] This appeal
concerns a Director’s liability assessment, under section 323 of the Excise
Tax Act (the “Act”), against Ramin Asadollah (“Asadollah”), the
registered Director, Secretary and Treasurer of Smart Security Systems Inc.
(“Smart”).
FACTS
[2] Asadollah first met
Frank Guido (“Guido”), the President of Smart, in December 1996, when Asadollah
was hired as a Smart employee. Smart’s business involved selling alarms and in
some situations offering free alarms in exchange for a five-year security
contract with a monthly monitoring fee. Asadollah’s role was to acquire,
install and service alarm systems and supervise 5 employees, while Guido looked after sales and
office administration. Asadollah was to be paid a salary which essentially
covered his automobile expenses. The company had a bookkeeper, Alex Liu
(“Liu”), who was responsible for maintaining the company’s financial records,
including completing and submitting the GST returns. While Guido generally gave
instructions to Liu, Asadollah did so as well, about 10% of the time.
[3] Smart was
incorporated by Guido without the involvement of Asadollah. Both parties agree
that there was a written agreement between them, whereby Asadollah would become
a 50% shareholder in the company, if he worked for and remained with the
company, for a period of 5 years. Guido says that in an attempt to gain
Asadollah’s trust and provide him with some job security, Guido also made
Asadollah a Director and Officer (Secretary and Treasurer) of the company. The
records of the Ministry of Consumer and Business Services of the Province of Ontario confirm that
Asadollah was a registered Director and Secretary/Treasurer of Smart from May
5, 1997 to the date of the records November 30, 2004, although Asadollah
asserted that he did not know that he was listed as a Director.
[4] Throughout the life
of the company, the relationship between Guido and Asadollah appeared to be
very informal; there was no evidence as to any Directors’ meetings being held
at any time, however, their interests were clearly connected. In fact, when
giving their testimony, both Guido and Asadollah made numerous references to
“we”. In discussing the finances of the company Asadollah spoke in terms of, “We
were okay and it is not true that we were going month to month.” About the
hiring of Asadollah, Guido spoke in terms of “We formed the new company Smart Systems.”
and in discussing the financial operations of the company, Guido spoke in terms
of “We had enough money to support us but once we lost a major builder, we had
a problem.” The manner in which Asadollah and Guido spoke about Smart suggests it
was their company, their business, their operation.
[5] Contrary to the position
originally taken in his Notice of Appeal, at trial Asadollah denied the
assertion that Guido had total financial control of Smart at all times. Asadollah
had access to Smart bank accounts: he had signing authority up to $1,000 (as
did Liu), though he did not take part in arranging corporate financing. As
well, both he and Guido equally used their credit cards when the company was
short of money to pay suppliers and shared the company revenues to repay their
credit balances.
[6] In the first year,
they had enough money to support this operation. However, about six months
before the company eventually closed its doors, a major builder customer
decided not to proceed with the purchase of about 500 alarms. The company’s
financial situation rapidly deteriorated from then on and both Asadollah and
Guido had to regularly pay supplier accounts with their own money. Before the
company failed completely, Asadollah advocated for and was instrumental in
ensuring their employees were paid, in order to avoid any problems with the Labour
Board or others. Both Guido and Asadollah claim that they believed the GST
returns were being filed by Liu and that they did not know that they had fallen
behind, until after the company ceased operating, some time in 2002 or 2003.
[7] Guido told
Asadollah, that because the business could not be sustained, he was going to
resign. He said he assumed that Asadollah would do the same. Guido said that
Asadollah knew, and agreed, that they could not compete with bigger companies
because they were also offering free alarms and they had deeper pockets. Guido
resigned his directorship of the company in January 2000 without further
discussion with Asadollah.
[8] On January 26, 2005, the
CRA issued a Notice of Assessment against Asadollah, as Director of Smart.
ANALYSIS
[9] Asadollah makes
three alternative arguments:
1. The Notice of
Assessment is statute barred; if not, then
2. while
he may have been a Director in law, he was not a Director in fact; if not, then
3. he
exercised a degree of care and diligent skill that a reasonably prudent person
would have exercised in comparable circumstances to prevent a failure of the
corporation to remit GST as provided in subsection 323(3) of the Act.
Is the
Notice of Assessment statute barred?
[10] Asadollah submits
that subsection 323(4) of the Act engages sections 296 to 311, which therefore
engages the four year limitation period, starting from the return due date, in
section 298(1). He argues that the assessment issued on January 26, 2005 was therefore
statute barred. In the alternative, Asadollah referred to subsection 323(5) of
the Act which provides for a two year limitation period after a person last
ceased to be a Director. Asadollah argues that he ceased being a Director when
he initially quit the company. Therefore he suggests that under subsection
323(5), the assessment was out of time.
[11] The Respondent takes
the position that subsection 298(1) does not apply, based upon Kern v. Canada, [2006] F.C.J. No. 1094
(F.C.A.). The Respondent further suggests that since there is nothing in the Act
to establish when a person ceases to be a Director, the Court should turn to the
appropriate provincial corporate legislation, based upon Kalef v. Canada,
[1996] 2 C.T.C. 1 (F.C.A.).
[12] In my view, the
Respondent’s submissions are correct.
[13] Kern, supra, conclusively states
that subsection 298(1) does not apply to Director’s liability assessments and
the only limitation period that is applicable is that under subsection 323(5)
of the Act. At paragraphs 8 and 9, Létourneau J.A., on behalf of the
Court, stated as follows:
8 In respect of the Tax Court’s
judgment covering the GST, the appellants raised before us an argument that the
assessment in the amount of $51,000 for the 1997 year was made out of time,
i.e. out of the four-year limitation period found in paragraph 298(1)(a)
of the Excise Tax Act.
9 With respect, the limitation
period regarding assessments made pursuant to section 323, as in the present
instance, is found in subsection 323(5). In a nutshell, the period is two years
from the date that the person assessed last ceased to be a director of the
Corporation.
[14] Kalef, supra
provides authority for looking to the provincial corporate statute to
determine when a person ceases to be a Director. In that case, the Court looked
to the Ontario Business Corporations Act. In this appeal, the
appropriate statute is the British Columbia Business Corporations Act
(the “BCBCA”), and in particular subsection 128(1), which states as
follows:
128 (1) A director ceases to hold office when
(a) the term of office of that director expires in
accordance with
(i) this Act or the memorandum or articles, or
(ii) the terms of his or her election or
appointment,
(b) the director dies or resigns, or
(c) the director is removed in accordance with
subsection (3) or (4).
[15] On the facts,
Asadollah did not satisfy any of paragraphs 128(1)(a), (b) or (c) of the BCBCA.
Since he did not cease to hold the office of Director, the two-year time limit
in subsection 323(5) of the Act did not start running and the assessment
is not statute barred.
Was Asadollah a de facto Director?
[16] Asadollah asserts that he
was not a de facto Director because (a) he did not participate in the
day to day management of the company; (b) he did not have control over or
influence the company’s finances; (c) he did not act as a Director; (d) he did
not consider himself a de facto Director; (e) he ceased to be a de facto
Director when the operation shut down in June 1999.
[17] The Respondent takes the
position that Asadollah was both a de jure and de facto Director
and even if he was not a de facto Director, he is not relieved from
liability. He also suggests that the mere fact that a company ceases to operate
does not mean the Director ceases to be a Director.
[18] On rare occasions,
this Court has ruled that a de jure Director was not a de facto Director,
and therefore not liable under section 323 of the Act: François Lambert
v. Her Majesty the Queen, [2005] G.S.T.C. 76 (T.C.C.); Gordon Fitzgerald
et al. v. The Minister of National Revenue, 92 DTC 1019 (T.C.C.); Emilio
Dirienzo v. Her Majesty the Queen, 2000 DTC 2230 (T.C.C.). However, these
cases turned on the fact that the parties were family members, and the
Director’s de jure power or authority could not be exercised without
impacting family harmony. Such is not the case here.
[19] Asadollah was
clearly a de jure Director from May 5, 1997 and continuing through the
relevant time period. Considering the evidence as a whole, I find that
Asadollah was also a de facto Director.
[20] In his testimony
Asadollah claimed that he never had discussions with Guido with respect to
company operations and suggested he was not really involved with any decisions
with respect to the company. He attempted to downplay his knowledge and
involvement in the management of the company and its affairs; trying to leave the
impression he was nothing more than a technician. This characterization is simply
not consistent with that provided by Guido. In this matter, I accept Guido’s
testimony over Asadollah’s. In my view, Asadollah was a Director in fact and in
law. He was actively involved in the management and operations of Smart.
Did Asadollah exercise a degree of
care and diligent skill to avail himself of the protection in subsection 323(3)
of the Act?
[21] Directors who have
been assessed under subsection 323(1) may raise the due diligence defence in
subsection 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.
[22] What would a reasonably
prudent person have done in comparable circumstances? Some suggest the appropriate
test is to apply an objective subjective standard, one that takes into account
the Director’s personal knowledge and background: Soper v. Canada,
[1997] 3 C.T.C. 242 (F.C.A.). Others argue that this test has been replaced by
a strictly objective standard, one that takes into account the Director’s
surrounding circumstances, but not his or her subjective intention: Peoples
Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461 (S.C.C.).
[23] I leave that debate
for another day. In my view, Asadollah did not act with the diligent care and
skill required to meet either standard. On the facts, he had the authority, the
opportunity and the responsibility, to act. He took no positive acts to prevent
Smart’s failure to remit GST. In fact, he chose to satisfy Smart’s other
obligations (e.g. payroll, suppliers), in preference of Smart’s GST liability.
This is clearly insufficient to satisfy the due diligence defence in subsection
323(3) of the Act, viewed objectively, subjectively, or otherwise.
[24] The Appeal is
dismissed, with costs, to the Respondent.
Signed at Charlottetown, Prince
Edward Island, this 8th day
of August, 2007.
"E. P. Rossiter"
Email this Content