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Citation: 2005TCC119
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Date: 20050211
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Dockets: 2004-683(IT)I
2004-684(GST)I
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BETWEEN:
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BERNARD TANNER,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
AND
COLIN LESSER,
Intervenor.
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REASONS FOR JUDGMENT
Rowe, D.J.
[1] The appellant - Tanner - appealed
from an assessment of income tax issued pursuant to section 227.1
of the Income Tax Act (the "Act") in respect
of the failure of the corporation Specter Services Ltd. (Specter)
to remit a certain amount of payroll source deductions for the
1998 taxation year together with interest and penalty
thereon.
[2] Tanner was also assessed pursuant
to subsection 323(1) of the Excise Tax Act (the
"ETA") for the failure of Specter to remit an amount of
net Goods and Services Tax (GST) in accordance with subsection
228(2) of the ETA. Interest and penalties were also added
to the principal amount.
[3] Jefffrey E. Sharpe appeared on
behalf of Colin Lesser (Lesser), an individual who had been
mentioned several times in the Notices of Appeal filed by Tanner
with respect to both the income tax (IT) appeal and the GST
appeal. Tanner had served Lesser with a subpoena to attend at the
hearing of these appeals.
[4] Sharpe applied for an Order
pursuant to Rule 28 of the Tax Court of Canada Rules (General
Procedure) which reads as follows:
Leave to Intervene
(1)
Where it is claimed by a person who is not a party to a
proceeding
(a) that such person has an interest in the
subject matter of the proceeding,
(b) that such person may be adversely
affected by a judgment in the proceeding, or
(c) that there exists between such
person and any one or more parties to the proceeding a question
of law or fact or mixed law and fact in common with one or more
of the questions in issue in the proceeding,
such person may move for leave to intervene.
(2)
On the motion, the Court shall consider whether the intervention
will unduly delay or prejudice the determination of the rights of
the parties to the proceeding, and the Court may,
(a) allow the person to intervene as a
friend of the Court and without being a party to the proceeding,
for the purpose of rendering assistance to the Court by way of
evidence or argument, and
(b) give such direction for pleadings, discovery or
costs as is just.
[5] The appellant took no position
with respect to the application nor did the appellant who
appeared on his own behalf.
[6] Upon hearing from Sharpe and
reviewing certain allegations set forth in the respective Notices
of Appeal, I granted leave to Colin Lesser to intervene in the
proceedings for the purposes set forth in Rule 28(2)(a). I
refrain from providing additional reasons for granting leave
since they are not relevant to the determination of any of the
issues in the within appeals. Further, it would undermine the
purpose of granting said leave if those unproven allegations were
recited in the course of giving reasons.
[7] Counsel for the respondent and the
appellant agreed the IT appeal and the GST appeal could be heard
together.
[8] Bernard Tanner testified he is a
Professional Engineer and that the following assumptions of fact
set forth in paragraph 8 of the Reply to the Notice of Appeal
(Reply) filed in respect of appeal 2004-683(IT)I are correct:
(a) the Corporation
was incorporated on March 28, 1995, under the Business
Corporations Act of Alberta;
(b) the Appellant
became a director of the Corporation on March 28, 1995;
(c) the Appellant
was the sole director of the Corporation;
(d)
at all material times the Corporation was a valid and subsisting
corporation;
(e)
at all material times the Corporation's business involved
supplying and selling a dry paint application;
(f)
the Corporation ceased carrying on its business on or about
August 31, 1998;
(g)
the Corporation operated its business for approximately 3
½ years;
[9] Tanner stated he intended to put
Specter into bankruptcy but had been unable to raise the $7,000
fee. The appellant stated Lesser had incorporated Spectrum
Process Industries Inc. (SPI) on November 21, 1997, as indicated
on the Alberta Corporate Registration System Search, filed as
Exhibit A-1. Tanner stated that all revenue - including
applicable GST - generated by the Specter/SPI business
arrangement was deposited into an account bearing the name of SPI
and that prior to the incorporation of SPI, the required GST
remittances had been made by Specter. By way of example, Tanner
filed - as Exhibit A-2 - a photocopy of a cheque dated 6-30-98,
payable to Receiver General - in the sum of $3,258.32 - that had
been drawn on an account at the Fifth Avenue, Calgary, Alberta
branch of the Alberta Treasury Branches (ATB) financial
institution. The cheque was drawn on an account - designated by
the prefix 127 and hereinafter referred to as #127 account - and
was printed in the name of Specter Services Ltd. with the name
Spectrum Process Industries in brackets underneath. That cheque
was signed by both Lesser and Renee Tanner - the appellant's
daughter - who was president of Specter. Tanner stated the ATB
branch had insisted that Renee Tanner co-sign any cheque issued
by Lesser on the #127 account so two signatures were required to
issue any cheque. The appellant was not a signatory to that
account and Renee Tanner remained as the sole signing
authority on the Specter ATB account. Tanner stated his
understanding of the June 30, 1998 cheque sent to the Receiver
General was that it was either to pay - in full - a current
amount owing and/or had been issued to catch up some arrears in
respect of certain remittances. Specter had employees at that
time and Tanner stated that even if his daughter - as President -
was an employee of the corporation, she was not receiving any
salary for her services and had been required to pledge her own
credit to finance certain business operations carried on by
Specter. The appellant stated Specter hired consultants such as
mechanical engineers and other specialists and remunerated them
on a fee for services basis. Other persons provided casual
labour, as required from time to time, in the course of selling
and supplying the special dry paint application process to
various customers. Tanner stated Lesser was knowledgeable in the
field of that special paint application and obtained contracts on
behalf of Specter including a substantial one entered into with
Wheatland Bins Ltd. (Wheatland) involving large grain storage
units. Tanner stated there had been a design change by Wheatland
and a dispute subsequently arose which resulted in that customer
withholding a final payment in the approximate sum of $100,000.
Although discussions were held with Wheatland, no payment was
forthcoming and Specter did not pursue any legal action to
collect the outstanding balance allegedly owing for services
rendered pursuant to the contract. Specter had constructed large
ovens into which grain bins were inserted and heated to a certain
temperature for a specific period and the powdered paint was
applied by an apparatus or "gun" via a hose directly to the
object being painted. Turning again to the relationship between
Specter and SPI, Tanner stated he and Lesser held discussions in
December, 1997 and struck an agreement whereby SPI would pay all
bills - including taxes - and with the view that - in the end -
profits from the dry paint business would be shared equally
between Specter and SPI. Tanner stated he understood - as a
result of having received information from someone - that Lesser
was an accountant and SPI spent $7,000 to purchase computers and
software so that Lesser could carry out the necessary bookkeeping
and accounting requirements of SPI and Specter in respect of the
painting business. Tanner explained that SPI issued invoices to
customers and when cheques were received in payment, they were
deposited to the ATB #127 account which is the subject of the
Statement of Account for the period ending July 31, 1998,
filed as Exhibit A-3. On said statement, the identity of the
account-holder is formatted with the name Specter Services
Ltd. printed on top of the name Spectrum Process Industries and
it states an address on Coventry Lane in Calgary. Specter
operated an account at the same branch of ATB, as reflected in
the Statement of Account for the period ending August 31, 1998,
filed as Exhibit A-4. The Coventry Lane address - for
Specter - printed on this statement is the same as the one used
in Exhibit A-3. Tanner explained the business arrangement of
Specter and SPI whereby SPI wrote cheques to Specter to cover
field expenses such as disbursements to crew members to cover
motel, food and travel costs. In the appellant's view, as at
December 1, 1997, SPI was fixed with the responsibility to pay
wages to workers and all associated costs because after that date
SPI was the entity that invoiced customers for services rendered
and all resulting payments to that corporation were deposited to
the #127 account described in Exhibit A-3. Tanner estimated that
approximately $350,000 in revenue had been deposited into the
#127 account between December 1, 1997 and July 9, 1998. Prior to
December 1, 1997 and beginning with the period commencing April,
1995, Tanner estimated Specter had gross revenue of about
$100,000 per year, when based on a full year's operation - such
as in 1996 - and continued thereafter at that equivalent rate
until December 1, 1997 when SPI began billing clients. Prior to
the dispute with Wheatland concerning the final payment, Tanner
stated he estimated SPI's trade debts had been approximately
$100,000 and understood that SPI had remitted all the GST
collected from clients in accordance with the invoices issued to
them. Tanner was the sole shareholder of Tanner Engineering Ltd.
(Engineering), a Profession Corporation providing services to
clients in the Alberta oil patch. He issued an Engineering cheque
- in the sum of $2,000 - to Specter in order that it could pay
the sum of $1,900.46 in GST. The relevant deposit slip was filed
as Exhibit A-5 and the Specter cheque, signed by Renee Tanner -
dated June 22, 1998 and payable to Revenue Canada - was filed as
Exhibit A-6. The GST registration number of Specter was written
on the memo line of said cheque. Tanner stated he began to
experience health problems and underwent a triple bypass
operation in April, 2000. Prior to that, he was aware that mail
from Canada Revenue Agency (CRA) was being sent to Specter's
address in relation to the failure of Specter to remit funds to
the Receiver General but did not pay attention to the matter
until it became apparent he was facing personal liability with
respect to certain amounts of income tax and GST. Tanner stated
he considered SPI was the proper entity responsible for remitting
income tax and other source deductions as well as amounts due in
respect of GST collected, since it had been responsible for
paying wages and had issued all invoices - including GST amounts
- to customers since December 1, 1997. Tanner stated that
although he could not afford to retain the services of an
accountant at that time, he hired a bookkeeping service to review
the situation and was advised that certain remittances - required
to have been made by Specter - were in arrears prior to November,
1997. Tanner stated that during this review process, he had been
upset by discovering that cheques totalling approximately $40,000
had been issued to Lesser from the #127 account because he had
been operating under the understanding that profit sharing
between Specter, SPI and Brad Popowich - a Field Supervisor -
would only be undertaken at the conclusion of the Wheatland
project when payment had been received in full. Tanner stated he
understood all interested parties had intended that Tanner would
cease to participate in any aspect of the business, Specter would
cease operations, SPI would carry on the paint business and
Tanner's daughter - Renee - would assume an equity position in
SPI in recognition of her efforts and personal investment of time
and money to that point. Once the first job for Wheatland had
been finished, there were another 3 major projects to be
undertaken with the anticipation that SPI - operating alone -
would have a profitable income stream in the foreseeable future
because the experience gained during the first contract would
prove to be invaluable when undertaking additional work of a
similar nature. The appellant noted that - unfortunately - the
rosy future did not pan out due to the dispute with Wheatland
over the final payment on the initial project and the loss of
opportunity to perform ongoing lucrative work for that large
corporation. Tanner stated that at some point he obtained a legal
opinion to the effect that a limitation period had expired and
neither Specter nor SPI could issue a claim against Wheatland in
respect of any sum alleged to have been payable in relation to
services provided. The appellant stated he wished to make it
clear that his daughter - Renee - had not benefited by drawing a
salary from Specter - as alleged by the Minister - and had
pledged her own credit in order to lease a vehicle for the use of
Specter and/or SPI workers. The appellant - with Renee's
permission (she was present in Court) filed a printout of her
income tax return for the 1998 taxation year wherein net business
income was stated as $9,675. In relation to Renee pledging
personal credit and/or using private credit cards, the appellant
filed an Equifax report - Exhibit A-8 - in which there was
reference to Renee drawing on various lines of credit and using
credit cards and/or charge cards for the benefit of Specter. The
appellant stated Renee often used her own credit cards to cover
Specter expenses and was required - by the lessor - to co-sign a
lease on a truck and other equipment in order that Specter could
obtain a vehicle for business use. Tanner referred to a bundle of
deposit slips - Exhibit A-9 - pertaining to various deposits made
to the ATB #127 account. The appellant stated these deposits
represented payments by clients to SPI - the operating company -
and were in response to invoices submitted by SPI. With respect
to paying SPI accounts, Tanner stated he understood Lesser
required Renee Tanner to sign blank cheques so he could add his
signature later, as required by ATB. The appellant stated that by
the end of August, 1998, when it had become apparent Wheatland
was not going to pay any more money to SPI, both Specter and SPI
were unable to meet their financial obligations. Until that
point, SPI had issued cheques to Specter from time to time in
order to reimburse Specter for expenses paid on behalf of SPI in
the course of carrying out painting projects. A series of deposit
slips in relation to the Specter ATB account was filed as Exhibit
A-10. The amounts of the deposits ranged from $1,500 to $2,500
and the notation on the slips indicated the apparent purpose for
which the various cheques were issued, including the one on June
22, 1998, where the memo indicated that the sum of $1,900.46 -
deposited in the form of an Engineering cheque - was "a loan for
GST".
[10] The appellant - Bernard Tanner - was
cross-examined by counsel for the respondent. Tanner was referred
to a document headed Income Statement, Consolidated Statement,
for the period ending April 30, 1998, filed as Exhibit R-1. He
agreed the numbers therein pertained to both Specter and SPI even
though he had not requested that sort of analysis from the
bookkeeper because he wanted only to be provided with information
that was relevant to Specter's participation in the business
arrangement with SPI so he could have a better understanding of
what had transpired during the period when Specter and SPI were
operating what he considered to have been a joint venture. Tanner
was referred to the fifth page of said Statement and to an entry
that - as of April 30, 1998 - there was GST payable in the sum of
$17,427.58. Tanner agreed the information was stated therein but
pointed out that he had requested this Statement to be prepared
years later and had not been aware of that particular GST
liability as of April 30, 1998, nor until the bookkeeper had
handed him that document. Tanner stated he had operated his own
Professional Corporation - Engineering - for 30 years and even
though his workers are independent contractors while carrying out
tasks involving testing at oil and gas wells, he is well aware of
the nature and effect of income tax and other source deductions
and the GST requirements associated with his own business since
GST is included in invoices sent by Engineering to its clients.
Tanner stated he met Lesser through Brad Popowich who - at that
time - was a close friend of Renee Tanner. Tanner was referred to
a document - Exhibit R-2 - dated October 2, 1997, and
acknowledged it was intended to be minutes of a meeting between
himself, Renee and Popowich concerning the nature of an intended
business arrangement between Specter, Lesser - and his future
corporation - and Renee Tanner. The appellant stated it was
decided that Renee should serve as President of Specter and that
Popowich - for personal reasons arising out of a marital dispute
- would remain a silent participant. During 1998, Renee was
working as a realtor. The appellant agreed that in those minutes
and throughout their relationship, Lesser had disclosed he was
employed on a full-time basis by another company. He also
conceded Lesser was not present at that meeting. Tanner stated he
had been satisfied Lesser could carry on with his existing
employment and also perform work for the benefit of Specter and
SPI - even though it was within the same industry - because that
job was limited to selling materials rather than undertaking any
application of the product. With respect to referring to Lesser
as capable of assuming the duties of accountant for the joint
venture, Tanner stated he may have obtained that impression as a
result of something told to him by Popowich. The appellant stated
he appreciated that Lesser was entitled to receive cheques issued
on the #127 account in order to reimburse him for expenses
related to projects but still believed Lesser had been paid a
form of salary by receiving cheques drawn on that account that
were signed by both Lesser and Renee Tanner. The appellant
conceded that the books and records of Specter had not been
current at the end of August, 1998 due to the pressure of dealing
with problems arising from the final aspect of the Wheatland
contract.
[11] The appellant - Bernard Tanner - was
cross-examined by Jeffrey Sharpe, counsel for Lesser, in his
capacity as intervenor. Tanner agreed that Lesser obtained
business through SPI and that this company and Specter would have
profited at the end of the initial Wheatland project by dividing
net revenue on a 50-50 basis. Tanner agreed Lesser had no
responsibility nor involvement with the management of Specter and
that his role was as sole Director of SPI. Tanner also agreed
that Lesser - in the course of their business relationship - had
never represented that he was an accountant. Tanner agreed it was
probable that the ATB #127 account had been opened prior to
November 21, 1997, the date upon which SPI was incorporated. He
also accepted the suggestion by Sharpe that it appeared as though
the new ATB account - intended to be used as a separate operating
account - was registered in the name of Specter with the addition
of Spectrum Process Industries on a lower line of the account
description. Tanner agreed Lesser had provided copies of all
cheques written on that account so they could be reviewed by
himself and Renee. Sharpe handed Tanner a series of handwritten
sheets from a ledger purporting to include descriptions of all
cheques written on the #127 account. After reviewing - briefly -
the sheets, the appellant stated he had not seen them prior to
Court. Sharpe pointed to a series of entries indicating that each
time a cheque was written to Lesser on that account, another
cheque - in an equal amount - had been issued to Specter.
Sharpe referred Tanner to other entries in the sheets and Tanner
agreed there were examples recorded therein where a cheque had
been issued on that account to Specter - for $1,500 - and an
equal amount had been paid - by cheque - to Lesser. The appellant
acknowledged that on projects - other than the one involving
Wheatland - Specter had received its share of revenue generated
from the paint application business operated by SPI. Sharpe
referred the appellant to other entries indicating those
pertaining to cheques issued from that #127 account to pay for
equipment and various other business expenses. Sharpe pointed out
to the appellant that there were occasions upon which a cheque
had been written to Specter but not to Lesser and that - overall
- there seemed to be more cheques written to Specter on that
account than to Lesser. Tanner stated he accepted this
information as being correct and agreed that the cheques written
on that account were to Lesser - personally - and not to SPI, his
corporation.
[12] The appellant stated he was not calling
Renee Tanner to testify and did not want to call Lesser as a
witness even though Lesser had attended in response to a subpoena
that he had issued.
[13] Counsel for the respondent did not call
any witnesses nor did counsel for the intervenor.
[14] In order that the appellant understand
the nature of the jurisprudence relevant to the determination of
his appeals, the appellant adopted my suggestion that he listen
to the submissions of counsel for the respondent prior to making
his own submissions.
[15] Counsel for the respondent submitted
the appellant was an experienced professional engineer who had
operated his own business for 30 years and was well aware of the
duties imposed upon a director of a corporation with respect to
remittances for source deductions and/or GST. Counsel suggested
the appellant attempted to defer responsibility to Lesser and/or
Renee Tanner for important business matters and had failed to
ensure proper accounting measures were in place in order to
prevent a re-occurrence of past accumulations of arrears for
source deductions and/or GST. With respect to the #127 account,
counsel submitted it was - from the standpoint of the appellant -
at best, a joint account with SPI but that the evidence supported
the view it was always the account of Specter and the addition of
the then-unincorporated entity - described as Spectrum Process
Industries - was a mere accommodation by ATB to Specter, its
customer. Counsel submitted there was no evidence to suggest that
services were provided by workers to any corporation other than
Specter. Invoices sent by SPI to clients included the GST
registration number that had been issued to Specter and any
payments of GST by clients were destined for that specific
account. Counsel submitted the appellant in his capacity as sole
director of Specter, could have provided ATB with a resolution to
remove Lesser as a signing authority from the #127 account and
substituted himself as either sole signatory or as a co-signatory
thereon with Renee Tanner, if he decided she should remain on the
account.
[16] Counsel for the intervenor stated he
was satisfied none of the allegations contained in the Notices of
Appeal filed with respect to the IT appeal and/or the GST appeal
had been proven and, as a consequence, had nothing further to
add.
[17] The appellant submitted he had
undertaken reasonable steps to ensure the proper remittances were
made. In his view, SPI was the operating arm of the joint venture
involving Specter and had undertaken the billing to clients and -
therefore - was in control of funds received as payments and
subsequently deposited to the #127 account. He submitted he did
not have any signing authority on the #127 account and could not
have issued cheques in payment of any amount due to anyone. He
added that it should have been the responsibility of Lesser to
ensure that GST collected by SPI was remitted - when due - to the
Receiver General. The appellant submitted that the drastic turn
of events arising from the failure to receive the final, large
payment from Wheatland had not been anticipated and that this
default was the cause of the demise of both Specter and SPI in
terms of carrying on the dry paint application business.
[18] The relevant provisions of the
ETA are as follows:
323(1) Liability of directors - Where a corporation
fails to remit an amount of net tax as required under subsection
228(2) or (2.3), the directors of the corporation at the time the
corporation was required to remit the amount are jointly and
severally liable, together with the corporation, to pay that
amount and any interest thereon or penalties relating
thereto.
323(3) Diligence - 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.
[19] Pursuant to subsection 153(1) of the
Act, there is a duty imposed on corporations to withhold
taxes and other source deductions from the salary of an employee
and to remit such amounts to the Receiver General. Subsection
227.1(1) of that Act makes a corporation liable for
unremitted amounts and also imposes joint and several liability
of its directors. However, directors may avoid personal liability
if they can establish they acted in a manner so as to entitle
them to the protection afforded by subsection 227.1(3) which is
identical in wording to the saving provision above quoted from
the ETA.
[20] The IT appeal and the GST appeal were
heard together. The relevant facts and jurisprudence discussed in
these reasons are equally applicable in determining whether the
appellant has established that his actions fell within the
identically-worded saving provision in both the Act
and the ETA.
[21] The Federal Court of Appeal in Soper
v. The Queen, 97 DTC 5407 dealt extensively with the
matter of directors' personal liability for a corporation's
unremitted source deductions for income tax. In the course of his
judgment, Roberston J.A. reviewed the legislative history and
framework of the provisions concerning personal liability of
directors together with the standard of care as illustrated by
the jurisprudence in this field. At page 5416 and following,
Robertson J.A. stated:
This is a convenient place to summarize my findings in
respect of subsection 227.1(3) of the Income Tax Act. 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).
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".
V. ANALYSIS
There are far too many cases dealing with section 227.1
of the Act. One way to appreciate the breadth of the extant law
is to categorize the relevant cases. That task has, in fact,
already been accomplished in large part by some of the
commentators: see e.g. Moskowitz ...; see also R.L.
Campbell, "Directors' Liability for Unremitted
Employee Deductions" (1933) 14 Advocates' Q.
453.
For example, in some instances the relevant issue will
be whether an individual was in fact or in law a director at the
relevant time for purposes of imposing personal liability or
whether that individual ceased to hold office by operation of a
valid resignation. In other cases, such as those involving
bankruptcy and receivership, the central issue will be de
jure control. Yet another cluster of cases, including
situations in which a dominant director is able to limit
others' influence over corporate affairs, will deal with
de facto control. I intend to focus on the category of
cases respecting the distinction between inside and outside
directors since that line of authority is the most pertinent to
this appeal.
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.
In some instances, it is easy to see why inside
directors have been held liable. Such is true in respect of
Barnett, ..., 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. M.N.R., 88 DTC
1201 (T.C.C.); and Beutler v. M.N.R., 88 DTC 1286
(T.C.C.).
[22] In the within appeals, there is no
question that Tanner, an experienced professional engineer who
has operated his own corporation for 30 years, was well aware of
the requirements of a corporation to withhold income tax and
other source deductions and to remit GST as required. Tanner - at
one point - advanced funds from his own corporation - Engineering
- to Specter so it could pay an amount of GST arrears to the
Receiver General. The position taken by the appellant during
these appeals was that Lesser was responsible for remitting the
GST and the source deductions because SPI was functioning as an "
operating company" in terms of dealing directly with customers of
the joint venture between Specter, SPI, and - at some level -
Renee Tanner and Popowich, personally. There was very little
evidence adduced in these appeals to establish that SPI ever
operated as a corporation and other facts relevant to that issue
point the other way. The ATB #127 account was opened in the name
of Specter - Exhibit A-3 - with the name of the unincorporated
entity - Spectrum Process Industries - added below. Although the
appellant testified that to the best of his knowledge, all
invoices were sent to customers on the letterhead of SPI - the
corporation - and that the resultant payments were in the form of
cheques payable to SPI, there is no other evidence to support
that contention. We do know that the invoices issued to clients
included GST billed under the GST registration number assigned to
Specter. The payments by customers were deposited to the #127 ATB
account - in the name of Specter/Spectrum Process
Industries - and all cheques drawn on said account required
the signatures of Lesser and the appellant's daughter, Renee
Tanner. Renee was the President of Specter and the appellant was
the sole shareholder and director. From time to time, cheques
were issued from the #127 account to Lesser - personally, and not
to SPI - as well as to Specter. The employees involved in the
paint application business probably continued to be employees of
Specter just as they had been prior to December 1, 1997,
but the appellant's position was that Lesser should have ensured
that the applicable source deductions were remitted to the
Receiver General. However, it is clear that Lesser played no role
in the management of Specter.
[23] It is apparent the universe did not
unfold as intended due to the inability of Specter and SPI - the
corporation - or Specter and Spectrum Process Industries - the
operating name of the unincorporated entity - to collect the
final, substantial payment from Wheatland on the initial
contract. To make matters worse, the appellant and his group had
anticipated that Wheatland would offer their consortium several
other contracts and that these would be profitable due to the
experience gained from the first project. Tanner testified he was
in poor health and did not pay attention to the matter of overdue
remittances of income tax and other source deductions - and GST -
to the Receiver General until it became apparent that he was
facing personal liability flowing from his role as a director of
Specter. It is not as though the accrual of arrears was a novel
occurrence because Tanner had bailed out Specter once before with
respect to outstanding GST and he should have been on top of
situation thereafter to ensure the proper remittances were made
in a timely fashion. As sole shareholder and director of Specter,
he had the ability - at all material times - to take control of
the ATB #127 account and thereby ensure that the GST being
collected from customers - and deposited to that account - would
be remitted to the Receiver General. The GST number on the
invoices was the one issued to Specter and would have to be
quoted by those clients in order for them to claim Input Tax
Credits (ITCs) when filing their own GST returns.
[24] Having regard to the evidence, I find
the appellant did not discharge the duty required of him in his
capacity as director as imposed by the relevant provisions of the
Act and/or the ETA because he did nothing to
prevent the failure of Specter to fall - again - into arrears
with respect to withholding income tax and/or GST remittances. It
was not sufficient merely to have his daughter act as President
of Specter and to permit her to be on the #127 account as a
mandatory co-signatory if he was not going to ensure that
she and Lesser issued the appropriate cheques to the Receiver
General when required. In the event they had failed to discharge
that duty, then in his capacity as sole director of Specter, he
could have removed them from the account and substituted himself
as the sole signing authority. Money was being collected from
customers and there was a duty to track the GST portion thereof
and to pay the proper amount to the Receiver General when due.
The haphazard approach to business such as having
Renee Tanner use her personal credit for Specter's purposes
and by failing to document properly the relationship between
Specter and SPI - if SPI ever did function as a corporation
during the relevant period - left the appellant in the
position where he was forced to rely on his reconstruction of
events and on his belated understanding of operating mechanisms
that were employed by him, Specter - his corporation - and by
Renee and Popowich and Lesser during the pursuit of their joint
venture. The appellant hoped the problem of the unpaid
remittances would go away. It did not.
[25] The assessment issued by the Minister
pursuant to provisions of the Act is confirmed and the IT
appeal is dismissed.
[26] The assessment issued by the Minister
pursuant to provisions of the ETA is confirmed insofar as
it pertains to federal income taxes, federal penalties and
interest on those amounts. As a result, the GST appeal is also
dismissed.
Signed at Sidney, British Columbia, this 11th day of February
2005.
Rowe, D.J.
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