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Citation: 2004TCC355
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Date: 20040510
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Docket: 2001-4516(GST)G
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BETWEEN:
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ANGELIKA WEYAND,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Mogan J.
[1] The issue in this appeal is the
possible liability of a director of a corporation under the goods
and services tax ("GST") legislation which is part of
the Excise Tax Act (the "Act"). The
Minister of National Revenue assessed the Appellant under
subsection 323(1) of the Act on the basis that she was a
director of Value Developments Blackberry Road Inc.
("Blackberry"), a British Columbia corporation, when on
or about May 31, 2000, Blackberry failed to remit net tax as
required under subsection 228(2) of the Act. The most
relevant provisions of the Act concerning the liability of
a director are:
323(1) 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(2) ...
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.
The above statutory provisions are almost the same as
comparable provisions in section 227.1 of the Income Tax
Act.
The Facts
[2] The Appellant and her husband,
Jurgen Weyand, were born and raised in Germany. They were married
in 1976 and have three children born in 1978, 1979 and 1987,
respectively. In 1994, they decided to move their family from
Germany to Canada and to reside in Victoria, British Columbia.
They became permanent residents of Canada in February 1995. Mr.
Weyand had been a real estate developer in Germany and so he
decided to do the same thing in Victoria. In 1995, he
incorporated ACT Active Capital Transactions Inc. (hereafter
"ACT"), a British Columbia corporation, to deal with
investments and finances while he looked for a parcel of land to
develop.
[3] In 1997, Mr. Weyand found some
land in the suburb of Saanich, about 10 kilometres from
downtown Victoria. The land was located near the intersection of
McKenzie Avenue and the Patricia Bay Highway. He incorporated
Blackberry to acquire title to the land and do the first project.
Blackberry was incorporated in February 1998. It acquired the
land near McKenzie Avenue; had it subdivided into three lots (two
larger and one smaller) and planned to build on one of the larger
lots. The total cost of the land was approximately $1,800,000.
Blackberry obtained the plans for a residential condominium
building with 39 units. The project was marketed under the
name "the Rainbow at Christmas Hill" because of its
proximity to a local landmark in Saanich. Exhibit A-2 is a copy
of a brochure used to sell the 39 condominium units.
[4] Construction began in early 1999
and was substantially completed by December 1, 1999. The campaign
to sell the condominium units began in March or April 1999 while
the building was still under construction. A professional real
estate firm was retained to sell the units and an aggressive
sales campaign was carried on through the last eight months of
1999. It is a fact, however, that only one of the 39 condominium
units was sold around August 1999. Mr. Weyand said that they had
good success in getting prospective buyers in to view the model
suites; there was a grand opening of "the Rainbow";
there were many favourable comments about the qualify of the
product; but only one purchaser.
[5] There was buyer fear because of
what Mr. Weyand called the "leaking condo crisis",
mainly in Vancouver. The newspapers were full of stories about
condominiums leaking whenever it rained; owners being assessed
$50,000 or $60,000 by their condominium corporations to cover the
cost of substantial building repairs; and sad stories about
elderly people who lost their life savings if they could not pay
the assessed amounts. A few other condominium projects in
Victoria which came on the market at the same time as the Rainbow
in late 1999 and early 2000 suffered the same fate of no sales.
People were afraid to purchase condominium units because of the
bad publicity throughout the media in Vancouver and Victoria.
[6] The purchase of the land and the
construction of the 39-unit condominium building was financed by
ACT lending money to Blackberry. Exhibit A-1 is a copy of the
mortgage granted by Blackberry to ACT on January 25, 1999 in the
amount of $6,500,000. Mr. Weyand said the mortgage amount was not
paid at one time but advanced in stages to pay for the cost of
the land and to pay construction costs as they arose. Exhibit A-6
is a printed statement showing a cumulative balance of the
amounts owing by Blackberry to ACT on the mortgage at any time
from December 31, 1997 to May 26, 2000. Exhibit A-6 also shows
the many amounts advanced by ACT to Blackberry and the relatively
few amounts repaid by Blackberry to ACT. Mr. Weyand was able to
identify in Exhibit A-6 the $50,000 down payment on the land in
December 1997; the payment of $1,530,000 in July 1998 to close
the purchase of the land; and the significant construction costs
which started to accumulate from and after January 1999. From
January 1 to December 31, 1999, the amount owed by Blackberry on
the mortgage increased by approximately $3,400,000 from
$1,951,000 to $5,346,000 representing mainly the cost of the
building.
[7] After the building was completed
in early December 1999, there was a risk of theft or vandalism if
a high quality residential building like the Rainbow remained
unoccupied over a lengthy period of time. The couple who had
purchased the one unit in August 1999 moved their furniture in on
December 1 when the Rainbow was ready for occupancy, but then
left for Arizona for the winter intending to return in April
2000. At first, Mr. Weyand would go over to the Rainbow in the
evenings to turn certain lights on and off just to give the
appearance that people were living there. In January 2000, he
found a policeman and his wife who would move in, rent-free, and
in return would make one or two rounds of the building every
evening making sure that the real estate agents (still showing
the suites) had closed and locked all doors and windows, and
turning on selective lights to give an appearance of
occupancy.
[8] Having sold only one condominium
unit, Blackberry was in financial trouble in January 2000. There
were operating costs to maintain the building and holding costs
to service the big mortgage to ACT. In desperation, Mr. Weyand
considered three alternatives. The first was to discount the
price of the units in the hope that lower prices would lead to
more sales. This did not work. The second was to sell the whole
building for social housing to a non-profit social agency in
Victoria. Two agencies looked at it seriously but lost interest
because the location was too far from shopping. The third
alternative was to bring over from Vancouver a marketing company
which had previously been successful in selling similar units in
Victoria. The Vancouver marketing company advised that there was
simply no market for Blackberry's units at that particular
time (January/February 2000).
[9] The building needed tenants for
maintenance reasons because it was full of moisture from the
construction materials. It needed the ventilation which comes
from opening and closing windows and doors and from the movement
of people. Blackberry needed tenants for financial reasons
because it had no revenues. In these circumstances, Mr. Weyand
decided that his only option was to rent the 38 unsold
units. He made the decision to rent in February 2000. Management
of the rental operation of the Rainbow was assigned to Devon
Properties Ltd. ("Devon") of Victoria. All of the 38
units were rented in a three-week period. Exhibit R-1 is a letter
from Devon dated April 6, 2000 reporting for the month of March
and enclosing a cheque for $16,500. Exhibit R-2 is a second
letter from Devon dated May 5, 2000 reporting for April and
enclosing a cheque for $26,700. Both of the letters from Devon
were addressed to Mr. Weyand.
[10] Mr. Weyand had retained a professional
accounting firm to provide bookkeeping and accounting services to
ACT and Blackberry. When Blackberry started to submit bookkeeping
material which showed that rents were coming in, the accountants
advised Mr. Weyand that GST was payable on what they called a
"self supply". The accountants were referring to
subsection 191(1) of the GST legislation which applies to a
person who constructs a building and then rents all or part of it
as a place of residence. Omitting many words which I regard as
irrelevant for the purpose of this appeal, subsection 191(1)
states:
191(1) For the purposes of this Part, where
(a) the
construction ... of a residential complex that is a single
unit residential complex or a residential condominium unit is
substantially completed,
(b) the
builder of the complex
(i) gives
possession of the complex to a particular person under a lease,
licence or similar arrangement ... entered into for the
purpose of its occupancy by an individual as a place of
residence,
(ii) ...
(iii) ... and
(c) the
builder, the particular person or an individual who is a tenant
or licensee of the particular person is the first individual to
occupy the complex as a place of residence after substantial
completion of the construction ... ,
the builder shall be deemed
(d) to have
made and received, at the later of the time the construction
... is substantially completed and the time possession of
the complex is so given to the particular person ... , a
taxable supply by way of sale of the complex, and
(e) to have
paid as a recipient and to have collected as a supplier, at the
later of those times, tax in respect of the supply calculated on
the fair market value of the complex at the later of those
times.
[11] The effect of subsection 191(1) is
significant. If a person constructs a building with the intention
of selling it and then, for whatever reason, grants possession of
the building to a tenant under a lease as a place of residence,
that person is deemed to have sold the building at the time when
the tenant took possession and to have collected GST on the fair
market value of the building at that time. Subsection 191(1)
applied to Blackberry in March and April 2000 when the new
tenants took possession of the 38 unsold units. Mr. Weyand had no
knowledge of subsection 191(1) or its consequences until late
April 2000 when the accountants advised him of Blackberry's
deemed sale and deemed collection of GST based on the fair market
value of the building.
[12] Mr. Weyand immediately retained Palmer
Appraisals Ltd. to advise with respect to the fair market value
of the Rainbow at 799 Blackberry Road. Exhibit A-3 is the
report of Palmer Appraisals Ltd. dated May 5, 2000 expressing the
opinion that the fair market value of the Rainbow as at March 1,
2000 was $2,900,000. Mr. Weyand was shocked by the relatively low
value determined by Palmer because the cost of the building alone
(disregarding the cost of land) was approximately $3,400,000. The
Palmer Report referred to the "Leaky Condo" syndrome
and the prior sale of unit 401 at $190,000. Notwithstanding the
sale price of that one unit, the Palmer Report fixed the value of
one unit at $85,000.
[13] In the hope that the Palmer Report
(Exhibit A-3) was wrong, Mr. Weyand right away wanted a second
opinion. He retained Top Ten Appraisals of Victoria to provide
that second opinion. Exhibit A-4 is the report of Top Ten
Appraisals dated May 29, 2000 expressing the opinion that the
fair market value of the Rainbow as at May 26, 2000 was
$3,118,000. The Top Ten Report estimated the value by sale price
per unit at $79,300 which is only 6.7% less than the value
($85,000) determined by Palmer. Upon receiving the Top Ten
Report, Mr. Weyand was resigned to the fact that the fair
market value of the Rainbow (approximately $3,000,000) was
significantly less than the amount owing ($5,265,000) by
Blackberry to ACT on May 26, 2000. See Exhibit A-6.
[14] The Palmer Report (Exhibit A-3) set a
value of $2,900,000 as at March 1, 2000. The Top Ten Report
(Exhibit A-4) set a value of $3,118,000 as at May 26, 2000. The
38 units were all rented in a three-week period in February and
March according to page six of the Palmer Report. If I assume
that the fair market value of the Rainbow was constant at
$3,000,000 throughout the period when the tenants took possession
of the 38 units, then Blackberry had a GST liability of $210,000
(7% of $3,000,000) as a consequence of subsection 191(1) of the
Act. Mr. Weyand would have known of this liability around
May 5 when he received the Palmer Report. In fact, he would have
expected the GST liability to be greater because he thought that
the value of the Rainbow was substantially higher than the amount
($2.9 million) appraised by Palmer. He stated that he was
"shocked" at the low value of the Palmer appraisal.
[15] Around May 22 or 23, 2000, Mr. Botten
of Top Ten called Mr. Weyand to say that his (Botten's)
second valuation was going to be a bit higher than the Palmer
appraisal but in the same ballpark. By May 23, Mr. Weyand knew
from two independent appraisals that the fair market value of the
Rainbow was approximately $3,000,000 when Blackberry's
debt to ACT was about $5,200,000. Mr. Weyand resigned as a
director of Blackberry on May 24, 2000 and told his wife (the
Appellant) that he was resigning. She knew that she was the only
remaining director. When Mr. Weyand was asked in chief by
Appellant's counsel what he had told the Appellant, he
answered:
A. I had a
discussion with my lawyer. I told him that we got a problem here,
that we had loaned all these funds by ACT and it looks like that
we are having a big loss here, and that I have two independent
appraisals which show that there is going to be a huge loss, and
I asked his advice and his advice was that I should cut my losses
and just try to get out of it and make sure that the damage to
ACT is not getting any bigger as it already is.
We discussed this, and the first idea was to foreclose on the
property, and I said that I want to resign and have - because I
thought it's going to look very funny if I am foreclosing as
the same person on myself, and he said this would be no problem,
it would be perfectly legal, but I didn't like the appearance
of it. So I told him I'm going to resign, and also we are
still, I mean, family and related, but then my wife can go and
act and can act for the company and I can act only for one
company, because I thought that there was a bit of a conflict of
interest which, in the appearance, I certainly didn't
appreciate that.
Q. Now, what
you've just stated in that answer, is that what you told your
wife, or you're telling us what the conversation was you had
with the lawyer?
A. Well, this was my
conversation with the lawyer, and then I told my wife that
I'm resigning, and that we would have to close down Value
Developments, Blackberry Road, and she said, "Well, what do
you want me to do? What do I have to do?", and I told her,
"Well, the lawyers are going to take care of everything. I
mean, there's nothing that you have to do on your own. The
lawyers will prepare everything and then we can go from
there."
Q. Now, on that
date, May 24th, 2000, when you resigned, what did you understand
the assets of Blackberry to be?
A. I understand the
assets of Blackberry were basically the condominiums. Everything
else I understood, and I knew was neglectable (sic), so
was basically non-existing. There were a few dollars in the bank,
but the truth is, okay, the company was broke. The liabilities of
the company exceeded by a huge amount, by a huge amount, the
value of the assets.
(Transcript pages 42 and 43)
[16] The Appellant's evidence is
consistent with that of her husband when she testified in chief
as follows:
Q. Now, we heard
from your husband that on May 24th he resigned. Were you aware of
that at that time?
A. I was told by him
that he will resign, yeah.
Q. Okay. I'm
sorry, we were both speaking at the same time. What did you say,
again?
A. I was told by him
that he is going to resign.
Q. And can you tell
me what you did when he told you that he was going to resign?
A. I had asked him
if I am now an only director, what my - what do I have to do and
what my - what I should - what I should do now, and I was told by
my husband, and I actually talked to the lawyer, as well, and the
lawyer told me that he would prepare the necessary paperwork for
me, and that was for me enough to hear because he, as the lawyer,
would know what to do in this situation.
Q. And when you say
you spoke to both your husband and the lawyer, did you speak - is
this on or around May 24th?
A. Yeah.
Q. And did you speak
to the lawyer in person or by telephone, do you remember?
A. I cannot recall
that.
Q. And at that time,
around May 24th, did your husband or the lawyer tell you anything
about your or the company, Blackberry's, responsibilities to
remit GST?
A. No.
(Transcript
pages 172 and 173)
[17] Returning to Mr. Weyand's
testimony, he described the discussions on May 24 concerning his
decision to resign as a director of Blackberry:
Q. So what happened
next, after May 24th, 2000? You've told us you resigned.
You've told us what the appraisal showed the value of the
properties were, and now you've told us what the amount owing
to ACT was. What happened next?
A. Well, we
basically followed piece by piece, both my wife and I, the
instructions of the lawyers. This was way beyond our expertise
now. The lawyer recommended that we should not foreclose on the
property, that the facts would be so clear that it would be just
a waste of money to go through foreclosure proceedings, and that
he would have to go through certain steps with calling the loan
in and asking for payment, and instead of foreclosing we could
basically agree on a transfer of the assets to the financing
company.
(Transcript page 48)
The lawyer advised that of course ACT could foreclose, but
with the corporation of the company in debt, this could be
avoided, and he said that the discrepancy between the money owed
and advanced and the assets transferred would be so big that they
would be beyond any criticism that there might be some assets
being transferred which had a hidden value, or something. He
said, of course you can foreclose, but if the company in debt
agrees to that, then we can do this without a foreclosure
proceeding and save you some legal costs. And then he said, in
any event, okay, he has to make a demand for payment and give a
notice of intent to execute the security, and he prepared these
documents and he talked to me on this day, and he talked to my
wife on the day on the phone, and then later on in the following
days we met with him several times, signing the documents that he
prepared.
(Transcript page 49)
Q. I want to be very
specific, or I want you to listen to the specific question, Mr.
Weyand. You've described a number of things that the lawyer
told you.. Are you aware of the details of the conversation that
the lawyer had with Mrs. Weyand or were you not present for
that conversation?
A. I was --- I was
present whenever there was documents to be signed by both of us,
and even when the lawyer, of course, is talking to my wife and
talking to me, we both hear what he's saying.
Q. Mm-hmm. And
you've discussed a number of documents which we'll go
through in a moment, but on the 24th, May 24th, were all those
items discussed with your wife?
A. No, not in - not
at - on May the 24th I just resigned, and I still have the idea
that we would foreclose on the company, and he said there are
other options and he will prepare some documents, and in any
event, the initial steps would be all the same. And then he
talked to my wife, and on May the 24th my wife was not with me
when I saw the lawyer, but I understand that they talked on the
phone later.
Q. Later on the 24th
or -
A. Yeah.
Q. -- was that a
later day?
A. Later on the
24th, I understand.
(Transcript pages 50 and 51)
[18] The lawyer who was advising Mr. Weyand
on behalf of ACT and the Appellant (Mrs. Weyand) on behalf of
Blackberry prepared the following three documents which were
signed by both Mr. Weyand and the Appellant:
Exhibit A-7 is a Demand for Payment signed by Mr. Weyand
on behalf of ACT demanding payment of $5,873,351 from Blackberry
with interest at the rate of $1,609 per day from and after May
27, 2000.
Although the Demand stated that "Payment must be made within
15 days", the Appellant signed an acknowledgement on
behalf of Blackberry in the following terms:
Value Developments Blackberry Road Inc. hereby acknowledges
receipt of the within demand for payment, and hereby agrees that
the said sum, together with interest thereon as aforesaid, shall
be paid forthwith, and hereby waives any right to be given any
time, or any notice period, or any period of grace, within which
to make payment.
Exhibit A-7 was signed by Mr. Weyand and the Appellant on
May 26, 2000.
Exhibit A-9 is a Notice of Intent to Enforce a Security
signed by Mr. Weyand on behalf of ACT and consented to by the
Appellant on behalf of Blackberry. Exhibit A-9 was signed by Mr.
Weyand and the Appellant on May 27, 2000.
Exhibit A-10 is a Deed of Composition signed by the Appellant
on behalf of Blackberry and by Mr. Weyand on behalf of ACT.
Although Exhibit A-10 speaks for itself, it appears to be a
conveyance of Lot A, Lot C and all of the Rainbow
(condominium land and building, excluding the unit sold in August
1999). In effect, Blackberry conveyed to ACT in Exhibit A-10 all
of its real property interests in satisfaction of its debt to
ACT. Exhibit A-10 was signed by the Appellant and Mr. Weyand on
May 31, 2000.
[19] Exhibit A-5 is a monthly statement from
the Toronto-Dominion Bank for the period April 28 to May 31, 2000
for the Blackberry account showing a balance of $17,456.51 as at
May 23. On May 26, there was a transfer of $17,000 out of the
Blackberry account to account number 0304899. Mr. Weyand stated
that he effected the transfer on May 26 to an ACT account, and
that he did not tell the Appellant (his wife) anything about the
transfer even though he had resigned as a director of Blackberry
on May 24 and she was the sole director on May 26. See pages 54
and 55 of the transcript. There were two Blackberry cheques for
$200 and $155.04, respectively, which he had signed and sent on
May 20 but were not cashed until May 26 and 31. Mr. Weyand did
not tell his wife (the Appellant) that those cheques were
outstanding when he resigned as a director of Blackberry on May
24. The transfer of $17,000 and the two small cheques had the
effect of reducing the Blackberry account at the
Toronto-Dominion Bank from $17,456.51 to $101.47.
[20] Exhibit A-11 is a photocopy of a group
of ten GST returns filed by Blackberry for various periods in
1998, 1999 and 2000. Three were signed by Mr. Weyand; three were
signed by a person named Lee who Mr. Weyand said worked in the
accountant's office; two were not signed, one was signed by
the Appellant; and the tenth was signed in a name which cannot be
identified. The GST return signed by the Appellant was for the
period February 1 to April 30, 2000. She signed it on June 5,
2000 showing GST owing in the amount of $200,871.07 but no
payment enclosed. Mr. Weyand explained the circumstances in which
the Appellant signed that one GST return:
A. I gave it to my
wife and I said, "This still has to be signed. It's from
the accountant," and she kind of like went, "Oh,
another one?" So she - "Another form to sign?",
but she signed it and we just mailed it.
(Transcript page 64)
[21] By Notice of Assessment dated February
9, 2001, the Appellant was assessed as a director of Blackberry
in the amount of $217,703.04. The Appellant has come to this
Court appealing from that assessment.
Analysis
[22] There is no dispute concerning the fact
that the Appellant was a director of Blackberry at all relevant
times. The primary issue is whether she satisfied the due
diligence test in subsection 323(3) of the Act. There is a
secondary issue concerning the extent of her liability as a
director, if she is liable at all, but I will leave aside for now
the secondary issue. Section 323 of the Act is, for all
practical purposes, the same as section 227.1 of the Income
Tax Act. There has been much more litigation under section
227.1 of the ITA than under section 323 of the ETA.
Therefore, I will use cases concerning section 227.1 in order to
interpret and apply section 323 to the facts of this appeal.
[23] One of the leading cases concerning
liability of a director is the decision of the Federal Court of
Appeal in Soper v. The Queen, 97 DTC 5407. In
Soper, Robertson J.A. described the standard of care in
subsection 227.1(3) of the ITA as objective and
subjective. See paragraphs 29 and 30 at page 5415.
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".
Later in his reasons, Robertson J.A. distinguished between
inside and outside directors. See paragraph 33 at page 5417.
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.
[24] In argument, counsel for the Respondent
conceded that the Appellant was an outside director of Blackberry
prior to May 24, 2000. That was a reasonable concession because
the evidence clearly established that the Appellant's
husband, the only other director, managed the day-to-day business
of Blackberry. He was solely responsible for financing the
construction of the Rainbow (cash advances from ACT to
Blackberry); he chose the real estate agent to sell the
condominium units; he decided to change from a sales program to a
rental program; he chose the agency to find tenants; and he
obtained the two appraisals with respect to the fair market value
of the Rainbow. The Appellant was passive through these
endeavours.
[25] When the Appellant first became a
director of Blackberry in March 1998, soon after the company was
incorporated, she was told by the lawyer and by her husband that
it was just a formality. Transcript page 165. Circumstances
changed on May 24, 2000. Mr. Weyand resigned as a director of
Blackberry and told the Appellant that he had resigned. She knew
at that time that she was the only director. In paragraph 16
above, there is a passage from the Appellant's testimony in
which she stated:
A. I had asked him
if I am now an only director, what my - what do I have to do and
what my - what I should - what I should do now, and I was told by
my husband, and I actually talked to the lawyer, as well, and the
lawyer told me that he would prepare the necessary paperwork for
me, and that was for me enough to hear because he, as the lawyer,
would know what to do in this situation.
(Transcript page 172)
When answering a question put to her by her own counsel, the
Appellant used the word "now" twice and ended her
answer with the phrase "in this situation". I infer
from her use of those words that she knew that her role as a
director was no longer a formality. She indicated from her
questions to the lawyer and to her husband that she realized
something more was expected of her as "an only
director".
[26] As of May 24, 2000, the Appellant
probably needed independent legal advice but there is no evidence
that she obtained it. Indeed, the evidence is that she, as the
sole director of Blackberry after May 24, followed the advice of
her husband's lawyer and the directions of her husband
without any questions, and that she signed the documents which
were put before her without even reading them. Was the Appellant
an outside or inside director after May 24, 2000 ?
[27] In Soper, inside directors are
referred to as "those involved in the day-to-day
management of the company and who influence the conduct of its
business affairs". By inverse reasoning, an outside director
must be one who is not involved in day-to-day management and who
does not influence the conduct of business. To put the matter in
context, the Appellant acted as a sole director of Blackberry for
a period of only 13 days from May 24 (when her husband resigned
as the other director) until June 5 when she signed
Blackberry's final GST return (Exhibit A-11). When
considering the conduct of the Appellant as sole director of
Blackberry over that 13-day period, we are not looking at a
company engaged in heavy manufacturing or a company with a sales
force of 500 persons. We are looking at a company divesting
itself of its principal asset, a residential tenancy.
[28] I will consider the Appellant first as
an inside director and second as an outside director. When there
are two or more directors of a corporation, a particular director
may be characterized as "inside" or "outside"
depending on the role which that particular director plays in the
business affairs of the corporation. When there is only one
director of a corporation, and when that person knows that he or
she is the only director, that person in my opinion is implicitly
an inside director because that person knows that he or she
cannot rely on any other individual to bear the responsibilities
of a director. Accordingly, I hold that the Appellant was an
inside director of Blackberry from and after May 24, 2000.
If a sole director (knowing that he or she is the only director)
permits some third party to be responsible for corporate
management, I would regard the third party as the agent of the
sole director, and the conduct of the third party as the conduct
of the sole director. To the extent that the Appellant permitted
her husband to manage any of the affairs of Blackberry after May
24, I look upon him as her agent and upon his conduct as her
conduct.
[29] In Soper, the Federal Court of
Appeal stated that an inside director would have the most
difficulty in establishing the due diligence defence. I think
that statement assumed that the inside director would have actual
knowledge of the relevant corporate affairs. On May 24, 2000, the
Appellant knew that Blackberry had been unable to sell the
condominium units; she knew that the 38 remaining units had been
rented; she knew that her husband owned both Blackberry and ACT;
and she knew that she (as the only director of Blackberry) was
being asked to sign important documents (Exhibits A-7, A-9 and
A-10) on short notice. In all the circumstances of May 24,
following her husband's resignation and realizing that she
was the only director of Blackberry, I would expect the Appellant
to ask only a few simple questions. Why is one family company
(ACT) demanding payment from another family company (Blackberry)?
See Exhibit A-7. If Blackberry cannot pay any money but will
transfer property to ACT, why is that being done? See Exhibit
A-10. Will any creditor of Blackberry be hurt by the transfer of
property? What is the hurry? Why do these documents like
Exhibit A-7 (May 26), Exhibit A-9 (May 27) and Exhibit
A-10 (May 31) have to be signed so quickly? The Appellant did not
ask any of these questions.
[30] ACT was not a stranger, like an
arm's length mortgagee, reaching out to seize the Blackberry
property because its value had fallen below the principal amount
owing on the mortgage. ACT was a family company; very much not at
arm's length with Blackberry. There is no evidence that ACT
was being pressed by any of its creditors to seize
Blackberry's property in order to pay ACT's creditors.
Quite the contrary. There is no evidence that ACT had any
creditors at all. Under cross-examination, Mr. Weyand
described how ACT acquired beneficial ownership of the 38
condominium units under the Deed of Composition (Exhibit A-10)
but legal title to those units remained registered in the name of
Blackberry in order to defer the payment of any land transfer
tax.
[31] Late in 2000, ACT sold the 38 units to
the Appellant and her husband for $3,350,000 which was both cost
to ACT and fair market value. Mr. Weyand said that Revenue Canada
had reviewed the transaction and accepted the value and price as
conferring no shareholder benefit on him and the Appellant. When
the condominium market recovered in 2002 and the 38 remaining
units were put up for sale, the vendors of beneficial title were
the Appellant and her husband but the deeds of conveyance were
signed by the Appellant, her husband and Blackberry because
Blackberry was still on title. It was the ultimate sale to
arm's length buyers in 2002 which finally triggered the
payment of land transfer tax.
[32] Having regard to the history of the 38
condominium units after May 24, 2000, there does not appear to
have been any financial pressure from outside the Appellant's
family requiring the transfer of those 38 units from Blackberry
to ACT. Mr. Weyand described how shocked and concerned he was to
learn from the Palmer appraisal (Exhibit A-3) and the Top Ten
appraisal (Exhibit A-4) that the fair market value of the Rainbow
building was only $3,000,000 when the amount owing by Blackberry
to ACT was $5,200,000. He may have been shocked but, on the
evidence, he had no reason to be concerned that some outside
creditor would seize any family asset like the 38 unsold units in
the Rainbow building. I conclude that the 38 condominium units
were transferred from Blackberry to ACT in order to strip
Blackberry of its assets and make it judgment proof against any
creditor although this point was not, for obvious reasons,
acknowledged by Mr. Weyand or the Appellant. My conclusion is
reinforced by the fact that Mr. Weyand, on May 26, 2000, two days
after he ceased being a director of Blackberry, transferred
$17,000 from Blackberry's bank account to an ACT bank
account; thereby reducing the Blackberry bank account to $101.47
(Exhibit A-5).
[33] In paragraph 28 above, I held that the
Appellant was an inside director of Blackberry from and after May
24, 2000 because she knew that she was the only director after
that date. The state of her knowledge of Blackberry's
business affairs did not change on May 24 just because she became
an inside director but her standard of care changed under
subsection 323(3). She knew from her testimony quoted in
paragraph 25 that her being a director was no longer a formality.
If she had asked some of the simple questions set out at the end
of paragraph 29, she would have learned the purpose and
consequences of transferring the 38 condominium units from
Blackberry to ACT. She had a duty to ask at least some of those
or similar questions. Her failure to inform herself about the
transactions in Exhibits A-7, A-9 and A-10 (all of which she
signed as a director of Blackberry) is a failure to meet the
due diligence test in subsection 323(3) of the Act.
As an inside director, she has a liability in the assessment
under appeal.
[34] If I am wrong in my opinion that a sole
director of a corporation, knowing that he or she is the only
director, is implicitly an inside director (see paragraph 28
above), then I have to consider the status of the Appellant as an
outside director of Blackberry from and after May 24, 2000. In
Soper, Robertson J.A. considered the question of when an
outside director would have a positive duty to act. His statement
is in paragraph 42 at page 5418.
In my view, 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. The typical situation in
which a director is, or ought to have been, apprised of the
possibility of such a problem is where the company is having
financial difficulties. ...
[35] The Appellant certainly knew that
Blackberry had financial difficulties. During her husband's
examination-in-chief, the Appellant's counsel asked all the
right questions to demonstrate how little Mr. Weyand told his
wife (the Appellant) about the business affairs of Blackberry but
Mr. Weyand did tell her that they could not sell the remaining 38
condominium units and that the units would have to be rented. I
take cognisance of the fact that the two directors of Blackberry,
prior to May 24, 2000, were not strangers. They were husband and
wife. They both testified in this appeal. They live together in a
domestic relationship and the Appellant impressed me as an
intelligent woman. Considering that the Rainbow was Mr.
Weyand's first project in Canada after becoming resident here
in 1995, it is not conceivable that they would not discuss the
project and, in particular, that she would not have known that he
was shocked at the relatively low appraised value of the
Rainbow.
[36] Exhibit A-6 shows the many cash
advances made by ACT to Blackberry in 1999 during construction of
the Rainbow. Construction was completed by December 1999. I infer
from Exhibit A-6 that all construction costs were paid on a
current basis as they arose. There is no evidence of any liens on
the project. A lien would, of course, be a deterrent to sales.
The only significant liability arising after December 1999 was
the $200,000 liability for GST which arose when Blackberry
changed from a sales program to a rental program. The GST
liability under subsection 191(1) was based on the fair market
value of the property when the tenants took possession. Mr.
Weyand learned of the GST liability from the accountants in late
April 2000. It was this fresh knowledge which caused the flurry
of activity: two outside appraisals to determine fair market
value; Mr. Weyand's sudden decision to resign as a
director; and the transfer of the project from Blackberry to
ACT.
[37] I will repeat one of the sentences from
Soper quoted in paragraph 34 above:
... 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. ...
In all the circumstances of this case, I find that the
Appellant knew, or ought to have known, between May 24 and May
31, 2000, that Blackberry had a remittance problem in its
obligation to pay about $200,000 in GST. Accordingly, the
Appellant had, even as an outside director, a positive duty to
act. Instead, she did nothing but sign, without questioning, the
documents which were put before her. Marceau J.A. delivered a
brief concurring judgment in Soper commenting on section
227.1 at paragraph 51:
... By these provisions, Parliament, I think, has imposed
on a director of a corporation a completely new, separate and
positive duty. Such duty is owed not to the corporation but to
the Crown, and consists of an obligation to do what one
reasonably can to prevent such failure from occurring. I simply
cannot imagine that such a duty may ever be seen as having been
fulfilled by a director who, as here, has never put his or her
mind to the requirement and has remained completely uninterested
and passive with respect to it.
[38] In argument, Respondent's counsel
referred to the Appellant's conduct between May 24 and May 31
as willful blindness. In my view, it is an appropriate
description. As an outside director, the Appellant did not meet
the standard of care in subsection 323(3); and she is liable in
the assessment under appeal.
[39] In Hanson v. The Queen, 97 DTC
796, Judge Sarchuk of this Court stated in paragraph 26 at page
799:
... The mere fact that one becomes a director in a family
context is not sufficient to permit such director to turn his or
her back on the affairs of the company; to ignore it for all
practical purposes; to ignore her responsibilities; indeed, to
fail to ask even the most rudimentary question as to what those
responsibilities are, and thereby to escape liability under the
provisions of the Income Tax Act.
Jane Hanson's appeal was allowed in part only to take into
account the date of her resignation as a director. Otherwise,
Judge Sarchuk's decision in Hanson was affirmed
in the Federal Court of Appeal, 2000 DTC 6564, where
Létourneau J.A., writing for the Court, stated in
paragraph 5:
... In Cadrin, supra, this Court said, at p. 368,
that total passivity based on total ignorance would not allow a
taxpayer to escape liability under ss. 227.1(3). Implicit in this
conclusion is a minimum duty to remedy one's ignorance.
[40] Having decided that the Appellant is
liable under section 323 of the Act, I am required to
consider the secondary issue concerning the extent of her
liability. The Appellant's counsel put forward an alternative
argument that, if she had a liability as a director under section
323, her liability should be restricted to the amount of any
funds or assets which were available to be directed to Revenue
Canada after May 24 when she was the sole director of Blackberry.
Specifically, Appellant's counsel argued that her liability
should be restricted to $17,456.51 because (i) that was the
amount of money on deposit in Blackberry's bank account on
May 24, 2000 (see Exhibit A-5); (ii) the 38 condominium units
were subject to a mortgage in favour of ACT when the amount owing
on the mortgage exceeded the fair market value of the units; and
(iii) Blackberry had no other assets.
[41] The Respondent's counsel argued
that if a person were a director of a corporation which failed to
remit an amount of net tax within the meaning of subsection
323(1), that person was either liable for the full amount which
the corporation failed to remit or not liable at all because of
the due diligence test in subsection 323(3). In other words, the
Respondent argues that if a director cannot meet the due
diligence test in subsection 323(3), the liability of that
director cannot be reduced to the amount of available cash in the
corporation at the time of the failure.
[42] I accept the basic premise of the
Respondent's argument and will not reduce the Appellant's
liability for three reasons. First, as a matter of law, I think
the statute is clear. Subsection 323(1) employs the following
words "fails to remit an amount" and "the
directors ... are ... liable ... to pay that
amount". Also, subsection 323(3) speaks of a director who
exercised care, diligence and skill "to prevent the
failure". When subsection 323(3) speaks of "the
failure", it is referring to the corporation in subsection
323(1) which "fails to remit". In my opinion, it
is the amount which the corporation "fails to remit" in
subsection 323(1) which determines the amount of a
director's liability.
[43] Second, the Appellant has not disputed
the amount of GST which Blackberry "failed to remit" in
May/June 2000 with respect to its liability under the GST
legislation. The Respondent's Reply in the pleadings sets
that amount at $200,455.38. The amount assessed against the
Appellant with interest and penalty is $217,703.04. These amounts
have not been disputed.
[44] And third, on the facts of this case,
there is no reason to reduce the Appellant's liability to the
balance in Blackberry's bank account on May 24, 2000. It is
not possible to determine what might have happened if the
Appellant, as sole director of Blackberry, had refused to sign
any of the Exhibits A-7 (Demand for Payment), A-9 (Notice of
Intent to Enforce a Security) or A-10 (Deed of Composition). On
one scenario, the 38 condominium units may have remained in
Blackberry where the rents, collected by Devon, could have been
garnisheed. Exhibit R-2 is Devon's reporting letter dated May
5, 2000 enclosing a cheque to Blackberry for net rent of $26,700
for April. On another scenario, Mr. Weyand may have signed
all three documents on behalf of Blackberry and ACT placing
himself at risk as a de facto director of Blackberry.
[45] The decision of Associate Chief Judge
Bowman in Fremlin v. The Queen (May 24, 2002) seems to
depend upon the particular facts of that case which can easily be
distinguished from the facts herein.
[46] I look upon the conduct of the
Appellant and Mr. Weyand from May 24, 2000 (his resignation as a
director of Blackberry) to June 5, 2000 (her signature on the
last GST return of Blackberry showing a liability of $200,871.07
but no payment enclosed) as a cynical plan to strip Blackberry of
assets so that the GST liability could not be collected. The GST
liability arose under subsection 191(1) of the Act; it was
the only significant liability in Blackberry after December 1999
(end of construction); it came to Mr. Weyand's attention in
late April 2000; and it triggered all of the activity which
occurred from the Palmer and Top Ten appraisals (Exhibits A-3 and
A-4) to the Deed of Composition (Exhibit A-10).
[47] The appeal is dismissed with costs.
Signed at Ottawa, Canada, this 10th day of May, 2004.
Mogan J.
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