|
Citation: 2005TCC353
|
|
Date: 20050519
|
|
Docket:2003-910(GST)G,
|
|
BETWEEN:
|
|
CARL JEFFREY McGOWEN,
|
|
Appellant,
|
|
And
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
|
|
REASONS FOR JUDGMENT
Miller J.
[1] Mr.
McGowen appeals the assessment of the Minister of National Revenue (the
Minister) pursuant to section 323 of the Excise Tax Act (the Act),
whereby the Minister assessed Mr. McGowen, as a director of Panda Marketing
(1997) Ltd. (Panda) for $61,215.98 in respect of Panda's failure to remit net
tax. Mr. McGowen maintains he exercised the degree of care, diligence and
skill required by subsection 323(3) of the Act to escape liability.
[2] Mr.
McGowen has been a successful businessman for many years. He struck me as a straight
shooter with a keen sense for business. I accept his testimony that in all his
business endeavours he has never had any problems with Canada Revenue Agency
(CRA), until this current situation, in which he left management of his company
to a less than capable manager. The issue to be determined is how far must a
director go to ensure management, known to be incompetent, complies with the
requirements of the Act. Did Mr. McGowen go far enough to meet the
objective–subjective standard established by case law? Notwithstanding my
impression of Mr. McGowen as an honest, forthright businessman, I find he did
not meet the requisite standard.
Facts
[3] Mr.
McGowen and his brother built up a chain of convenience stores known as Macs,
which they sold in the early 1970s. In the 1980s, they developed another line
of convenience stores called Hasty Market. Mr. McGowen has had extensive and
successful experience in the retail industry.
[4] In
1995, Mr. McGowen connected with Mr. David Chong, someone who formerly worked
for Macs. Mr. McGowen helped him in franchising a convenience store in Calgary. Mr. McGowen was impressed with Mr. Chong's skills.
In 1996, Mr. Chong was involved in franchising flower businesses.
Mr. Chong wished to be independent from the Edmonton company, Growers Direct, with whom he was connected. He wanted Mr.
McGowen to be his partner in expanding and franchising flower businesses.
[5] Mr.
McGowen saw this cut-flower business as ideally suited to being franchiseable,
as he put it. He clearly liked Mr. Chong, and was impressed with Mr. Chong's
marketing capabilities.
[6] Mr.
McGowen started financially assisting Mr. Chong with a view to the two of them
becoming partners. Lawyers drew up papers to document the arrangement, but the
deal was never consummated. Throughout 1996, Mr. Chong experienced
significant financial woes operating his business in Alberta, as was evidenced
by communications back and forth between Mr. McGowen in Vancouver and Mr. Chong in Calgary; for example, in January 1996, Mr. Chong writes to Mr. McGowen stating
the "dire need for cash to keep suppliers from suing". Mr. Chong even
suggested an amount of $120,000 was necessary to be injected. Mr. McGowen did
not send $120,000 at that time, but up until January 1997, he did advance
approximately $200,000 to Mr. Chong.
[7] In
October 1996, Mr. McGowen advised Mr. Chong by memo that he needed to open a new bank
account, as "the Feds have seized" funds in existing accounts. Mr.
McGowen asked for a listing of payables, indicating what was supplied. Mr.
McGowen testified that he asked Mr. Chong on an ongoing basis to have proper
systems in place.
[8] In
November 1996, Mr. Chong advised the Appellant that payroll cheques were still
bouncing, that CRA had taken $5,000 to $6,000, "the GST department"
had taken about $9,600, the bank had taken $6,500 to lower its overdraft, Mr.
Chong could not service his delivery vans and he was facing an eviction notice.
Matters did indeed look grim for Mr. Chong. Mr. McGowen asked Mr. Chong for "GST
and revenue statements".
[9] In
early 1997, Mr. McGowen suggested to Mr. Chong that the best course to follow
would be for Mr. Chong to "sign over the company" to Mr. McGowen, but
that Mr. Chong continue to manage it. On February 27, 1997, Mr. Chong's
companies sold to Mr. McGowen's newly incorporated company, Panda, all their
flower business assets in consideration for the forgiveness of the debt owed by
Mr. Chong of approximately $203,000. Mr. McGowen was the sole shareholder
and director of Panda.
[10] Under this new regime, Mr. Chong continued to operate the business in Alberta, and it is clear that he continued to operate in
what can best be described as a financially irresponsible manner. As an
independent accountant, Mr. John W. Dicks later put it:
… It was run extremely poorly.
Records were incomplete, missing,
unfilled, unorganized resulting in a tremendous amount of time in rebuilding,
requesting copies to complete the financial summaries. …
Mr. McGowen acknowledged that this was an accurate representation of
Mr. Chong's financial management skills.
[11] Mr. Chong hired Mr. Doug Stone in 1997, though it was unclear exactly
what Mr. Stone's responsibilities were. He only lasted a few months, as it was
discovered he was taking funds from the company. Mr. Chong continued to have
problems meeting the company's financial obligations. Mr. McGowen described how
he personally had to deal directly with the authorities of the City of Calgary to make arrangement for Panda's obligation for the
City's business tax.
[12] By early 1998, Mr. McGowen knew Panda continued to have problems with CRA.
He authorized CRA to deal directly with Mr. Chong or Mr. Randy Bloy,
a resident of British
Columbia who Mr. McGowen
had asked to assist Mr. Chong, although Mr. Bloy declined to do so. Mr. McGowen
indicated that he also sent his own bookkeeper, Lottie Frewin, three or four
times to Alberta to help straighten things out. Ms. Frewin
did not testify, nor were there any memos or documentation of any kind
indicating when she went or what she did. Mr. McGowen described the
situation as having a "tiger by the tail", yet he did not feel he had
the option of firing Mr. Chong because:
(a) Mr. Chong was in Alberta;
(b) Mr. McGowen did not want to leave
British Columbia, and more specifically did not want to
manage the flower business;
(c) Mr. Chong was a "nice
guy"; and
(d) Mr. McGowen still felt Mr. Chong
would buy back the business.
[13] Mr. McGowen was well aware of the company's financial difficulties,
and specifically the problems with CRA, though he stated many suppliers were
having problems and CRA was just one party.
[14] On April 7, 1998, Mr. McGowen received a letter from CRA:
As for the company GST account, the
required quarterly returns are not being submitted and, in fact, have not been
since the company was registered effective March 18, 1997. At the present time,
returns covering the periods ended 970331, 970630, 970930 and 971231 are well
past due and we are considering raising further Departmental assessments for
these periods unless immediate attention is paid to their filing. We do show having
received a GST return reportedly covering the period from February 24, 1997 to
June 30, 1997 and claiming a refund of GST in the amount of $512.79, This
return is unacceptable, however, in that it starts from a date prior to the
company's effective registration date and attempts to cover more than one
reporting period on the same return.
We have or will address all these
account problems with Mr. Chong, however, we felt it timely to advise the
company, and its sole Director, personally of the situation. As relayed
earlier, the dollar and filing arrears which have developed on both accounts
make for an unacceptable situation and we will expect to see matters rectified
in the very near term, otherwise other enforcement action, not excluding legal
action, may well have to be considered and implemented.
Upon receipt of this letter, Mr. McGowen contacted Mr. Chong to "try
and get something going". It appears, however, that Mr. McGowen himself had
to deal with CRA, as in a letter of June 8, 1998 from CRA to Mr. McGowen, CRA
confirms an arrangement had been reached with Mr. McGowen, whereby the company
paid $3,000 towards arrears, plus provided 18 post-dated cheques of $1,000
each. This, however, was to cover source deduction arrears. Mr. McGowen memoed
Mr. Chong concerning this arrangement.
[15] In December 1998, CRA again wrote to Panda, copying Mr. McGowen, asking the
company to provide:
1. A copy of the
purchase agreement between Panda Marketing (1997) Ltd. and Panda Flowers Inc.,
486567 Alberta Ltd., 504336 Alberta Limited, 548687 Alberta Limited, 676988
Alberta Limited, 674621 Alberta Limited, 674260 Alberta Limited, 685890 Alberta
Limited and 455413 B.C. Ltd., including copies of all schedules or addendum
listing the equipment, fixtures and any other assets in detail;
2. Bank
statements, cancelled cheques, and deposit records for the period March 1, 1996
to October 31, 1998;
3. Cheques
ledgers for the period March 1, 1996 to October 31, 1998;
4. Accounts
receivables records including invoice copies, journals, ledgers and, if
maintained, aged accounts receivable listings for the period March 1, 1996 to
October 31, 1998.
On April 29, 1999, Mr. McGowen faxed Mr. Chong with a detailed list of
questions about the company's financial affairs; for example:
5. We need
copies of every deposit slip from the deposit book and/or individual
deposits made to both banks since June 1, 1997. We are paying taxes on revenues
even though some deposits are only loans, etc. Maybe Irene loaned money.
6. We need proof
(cancelled cheques, copies of deposit slips) of every transaction involving
Irene Pang since February 1997.
10. We need all
info with respect to payroll and Revenue Canada from February/March, 1997, up to
the time the bank started handling your payroll. We only receive the net amount
of payroll, not the deducted or contributed portions.
11. Same as above
for G.S.T.
Mr. McGowen recognized that Mr. Chong's managerial skills had been
deteriorating. In June 1999, Panda sold its assets.
[16] By notice of assessment dated September 29, 1999, the Minister
assessed Panda for unreported GST (goods and services tax) of $142,685,
interest of $8,432 and penalties of $11,173. Mr. McGowen hired Mr. John Dicks,
an accountant, to review the corporate GST situation and respond to this
assessment. Panda objected, the Minister confirmed the assessment and Panda
appealed to the Tax Court of Canada. Mr. Dicks was Panda's only witness at the
trial of the Panda matter. Following the Tax Court of Canada's decision
reducing Panda's liability in March 2002, a writ of seizure and sale for
Panda's liability was registered in the Federal Court of Canada, and execution
for such amount was returned wholly unsatisfied. On July 17, 2002, the Minister
assessed the Appellant for Panda's unremitted GST of $45,425.12 for the period
April 1, 1998 to December 31, 1998, plus interest and penalties for a total of
$61,215.98.
Analysis
[17] The sole issue to be determined is whether Mr. McGowen exercised such
due diligence to rely upon subsection 323(3) of the Act which reads:
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.
[18] The first question to address is how to apply the standard of care set
out in section 323 to Mr. McGowen. Both parties relied upon Soper v The
Queen
a decision of the Federal Court of Appeal, though drawing different conclusions
re: the application of the principle to an inside versus outside director to
the facts of this case. The Appellant suggested Mr. McGowen only needs to meet
the standard of an outside director while the Respondent urged me to invoke the
higher standards of an inside director. The Respondent referred me to the Tax
Court of Canada decision of Weyand v. The Queen in which
Justice Mogan held that where a corporation has only one director and that
person knows he or she is a sole director, then that person is implicitly an
inside director.
[19] I do not believe it is always necessary to peg a director as an inside
or outside director for as Justice Robertson stated in Soper:
44
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.
Also, in The Queen v. Corsano,
the Federal Court of Appeal tweaked Soper as follows:
23 It
is true that in Soper, this Court wrote that "[t]he standard of
care laid down in subsection 227.1(3) of the Act is inherently flexible".
It is obvious, however, on the reading of the decision, that it is the
application of the standard that is flexible because of the varying and
different skills, factors and circumstances that are to be weighed in measuring
whether a director in a given situation lived up to the standard of care
established by the Act. For, subsection 227.1(3) statutorily imposes
only one standard to all directors, that is to say whether 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.
24 … All
directors of all companies are liable for their failure if they do not meet the
single standard of care provided for in subsection 227.1(3) of the Act. The
flexibility is in the application of the standard since the qualifications,
skills and attributes of a director will vary from case to case. So will the
circumstances leading to and surrounding the failure to hold and remit the sums
due.
[20] The preferred course then is to examine the director's circumstances
at the relevant time to determine how to apply the standard of care, not that
there is any different standard of care. Whether an individual is an inside or
outside director will impact on the application of the standard of care,
although there are several other factors to be considered. What were Mr.
McGowen's circumstances during the period of assessment, April to December
1998:
(i) he was the sole director of
Panda;
(ii) he was a man of considerable
business acumen;
(iii) he was a resident of British
Columbia, though the business was in Alberta;
(iv) he was intimately aware of
Panda's general financial woes, and specifically Panda's deficiencies in its
affairs with CRA;
(v) he knew these deficiencies were a
result of Mr. Chong's incompetence in handling Panda's financial affairs,
specifically as they related to CRA;
(vi) he financed Panda to assist in
dealing with these financial woes; and
(vii) he knew he could be facing
personal responsibility.
[21] Whether Mr. McGowen is called an inside or outside director, he was
certainly an involved director, with a strong business background and an
ongoing appreciation of his company's deficiencies. This is not a case of a naïve
director, or an unknowledgeable director, or an unaware director or a passive director.
Quite the opposite. Under these circumstances, the duty of a director to take
reasonable care to prevent ongoing default requires significant effort on the
director's part. The efforts need not guarantee success but, in the
circumstances just described, the effort must be immediate, forceful and have
some reasonable likelihood of success.
[22] What steps did Mr. McGowen take in the period April to December 1998?
He constantly "got after" Mr. Chong. This is not a positive forceful
step. Indeed, I find Mr. McGowen's unwavering support of someone that he knew
had a history of inability to deal with this very issue, is a negative, not a
positive approach. The reason Mr. McGowen cited for leaving Mr. Chong in charge
shows at best an unrealistic optimism, and, at worst, a wilful blindness to the
commercial reality. Either way it is not how a reasonably prudent person would
have behaved.
[23] Mr. McGowen said that over the two and one-half year period, he sent
his bookkeeper from British
Columbia to Alberta three or four times. I find that by the spring of
1998, the beginning of the assessment period at issue, Mr. McGowen knew
that whatever Ms. Frewin was doing was having no impact whatsoever on the
company's ability to comply with its filing and remittance requirements. I do
not see this step as having any reasonable chance of success.
[24] Mr. McGowen suggested that his request to Mr. Bloy was a positive step
illustrating his due diligence in dealing with the problem. Mr. Bloy was
approached before March 1998 and Mr. McGowen testified that Mr. Bloy, after
meeting Mr. Chong, was not interested. This is not any significant effort on
Mr. McGowen's part to remedy the default, and certainly not during the
period assessed.
[25] Mr. McGowen did deal with CRA directly, but the nature of that dealing
went more to assisting with collection of arrears (and primarily source
deduction arrears) than ensuring ongoing timely filings and remittances for GST
purposes. It was only after the assessment period, that Mr. McGowen took
a truly forceful positive step in hiring an independent accounting firm to
review the company's records and put together the correct numbers for GST
purposes. Mr. Dicks did this several months after the damage was done, once the
assessment had been issued. Given Mr. Chong's ongoing disastrous track record,
why did Mr. McGowen not hire Mr. Dicks in April 1998? That is what a reasonably
prudent person would have done in comparable circumstances. Mr. McGowen
has failed to meet the standard of care required by section 323.
[26] Mr. McGowen indeed had a tiger by the tail, as he put it, yet whether
by reason of friendship to Mr. Chong or unrealistic optimism, Mr. McGowen did
next to nothing to tame that tiger. He did not exercise the degree of care,
diligence and skill a reasonable prudent person would have exercised in
comparable circumstances. The case is dismissed with costs.
Signed at Ottawa,
Canada, this 19th day of May, 2005.
Miller
J.
Email this Content