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Citation: 2003TCC779
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Date: 20031114
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Docket: 2002-1394(GST)I
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BETWEEN:
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JEAN-MARIE PLAMONDON,
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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
Tardif J.
[1] This
appeal was filed in response to a notice of assessment of goods and services
tax ("GST") bearing number PQ‑2000‑5314 that was issued
under the Excise Tax Act ("the Act") for the period of June 1, 1996 to January 31, 1998.
[2] During
the period covered by the assessment, namely June 1, 1996 to
January 31, 1998, the Appellant was a director of Casse‑Croute Bon Appétit Inc.
(hereinafter "the company").
[3] The
issue is whether the Appellant, as a director of the company at the time it was
required to remit an amount of net tax, is jointly and severally liable to pay
the amount the company failed to remit and any interest and penalties relating
thereto.
[4] The
company was assessed for a period longer than the period to which this appeal
relates.
[5] The
assessment under appeal covers the period from October 30, 1996 to September 28, 1998. During that
period, the Appellant was a director of the company as a result of having
purchased all of its shares (Exhibit A‑1).
[6] The
assessment was made under subsections 323(1), (3) and (5) of the Act,
which read as follows:
(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.
(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.
(5) Time limit – An
assessment under subsection (4) of any amount payable by a person who is a
director of a corporation shall not be made more than two years after the
person last ceased to be a director of the corporation.
[7] Several
people testified in support of the appeal.
[8] The
Appellant's daughter and her spouse had acquired a great deal of expertise in
the restaurant business through their experience in various places. Believing
that they had a very good plan, they devoted themselves fully to running a
restaurant located near the garage operated by the Appellant.
[9] The
restaurant operated under the business name Casse‑Croute
Bon Appétit Inc. They soon had to face a very disappointing reality,
namely that they were not earning the income they had anticipated. Despite all
their efforts, all sorts of initiatives and their own involvement, they had to
face the fact that they did not have the financial resources to continue
operating.
[10] Since the Appellant's daughter and her spouse worked at the
restaurant, the Appellant decided to keep it in operation so that his daughter
would continue to have a job. He therefore purchased all the shares of the
company, whose only commercial activity was operating the Casse‑Croute
Bon Appétit Inc. restaurant.
[11] To keep the restaurant in operation, the Appellant had to invest
substantial amounts on a continuing basis. His daughter explained that she had
been very uncomfortable with the idea of having to go and see her father
regularly to ask him for the money needed to continue running the restaurant.
[12] She prepared the cheques and went to her father's office at his place
of business, and he signed the bank papers for their many liabilities and
accounts payable.
[13] During the entire time, she and her spouse maximized their efforts to
increase the restaurant's income. Two‑for‑one specials, brunches
and other events were organized, but nothing ever worked very well.
[14] At one point, the Appellant went to the restaurant for a meeting with
the employees. When he tried to explain how he saw the situation, his
daughter's boyfriend rebuffed him and asked him to be quiet, claiming that he
knew nothing about the restaurant business. Since he did not want to risk
poisoning his relationship with his daughter, the Appellant decided to withdraw
from the discussion.
[15] The evidence did not disclose any other concrete initiatives by the
Appellant to take control of the operations or assume some leadership.
[16] The situation continued to deteriorate, and the Appellant's daughter
even had to leave the business because her health was seriously affected by the
turn of events. Since the business was a total failure and could not be put on
the path to profitability, the Appellant decided to cease operations and sell
the assets to a third party.
[17] Following his decision, he made certain undertakings to the Respondent
to pay the amounts then owed and informed the Respondent that he wanted to
cancel his registration so he would no longer be an agent required to collect
the GST.
[18] The testimony of the Appellant's daughter inspired a great deal of
sympathy when she talked about her relationship with her father, who was
obviously concerned about her well‑being. There is no doubt that she
benefited from his benevolence, generosity, attentiveness and great concern for
the financial problems of the restaurant that gave her a job.
[19] The Appellant was an informed businessman who had acquired
considerable experience over the years. He had been associated with other
corporate entities.
[20] That expertise was apparent when he purchased the assets for the
minimal amount of $1. He thus showed a completely legitimate reflex to protect
his interests by setting things up in such a way that he could take control of
the economic activity generated by the restaurant's operation.
[21] The due diligence defence provided for in subsection 323(3) does
not allow directors to evade their obligations by arguing that they were
unlucky, naive or ignorant or by making other such excuses.
[22] "Exercising the degree of care, diligence and skill that a
reasonably prudent person would have exercised in comparable
circumstances" is not just a trite phrase. Determining whether a director
has done so implies that the director's actions or non‑action must be
assessed in comparison with persons who, while not specialists, are generally
well informed and are capable of obtaining information in cases when they are
not well informed.
[23] This defence cannot rely on excuses that are basically subjective. To
assess whether there are grounds for a director to be liable, it is essential
to consider the director's conduct in a comparative context in which the
reference standard is someone who acts in an objectively prudent and properly
informed manner and, above all, who is in control of the situation.
[24] Considerations based on compassion, generosity, family sympathy or
philanthropy must not guide or be the main factors shaping one or more economic
decisions; in other words, persons who decide to invest in a commercial
operation or get involved in income‑generating activities must comply
with the applicable statutes and regulations.
[25] Persons who do not have the necessary knowledge or qualifications must
rely on qualified human resources. Otherwise, they have to accept the
consequences of their actions or their failure to act.
[26] If the issue in this case had to be resolved by considering factors
related to fairness, the Appellant would indeed have made some positive points.
Arguments based on fairness cannot be accepted. This Court must dispose of the
appeal based solely on the Act's provisions. This duty was clearly set out in a
decision rendered by McArthur J. of this Court on June 3, 2003 in Khullar Au Gourmet
International v. The Queen, [2003] T.C.J. No. 348 (Q.L.). He stated
the following at paragraph 31:
Counsel for the Appellants went to great length in
portraying the Minister's assessment as a "travesty of justice",
referring not only to policy, but also to the Canadian Charter of Rights and
Freedoms. It has been frequently held that fairness and equity have nothing
to do with tax law.
[27] The Appellant demonstrated that the Quebec Department of Revenue
("Department") handled his case in a highly questionable manner,
since he obtained incomplete or inadequate information and there was no
consistency in the handling of his case. He also criticized the Respondent's
power to take the law into her own hands by
withholding amounts or requiring payment in a case even before a judgment is
rendered.
[28] Even if the Appellant had good reason to be deeply displeased,
offended, shocked or even incensed by the way the Respondent dealt with his
case, and even if he was very vulnerable in the face of his daughter's
financial problems, I cannot take account of either his frustration or the
compassionate considerations that emerge from the evidence; basically, the
question I must answer is whether or not he was reasonably prudent in
performing his duties as the company's sole director in collecting amounts of
goods and services tax ("GST") and remitting them to the respondent.
[29] Assessing the facts to decide whether a director has acted with sufficient
diligence in fulfilling the director's mandate requires an approach that is
both objective and subjective.
[30] Agreeing to act as a director is in itself a very real responsibility
and requires that several factors be considered. Often, such persons may not
have the appropriate knowledge and must then surround themselves with people
who are qualified to provide the proper guidance and advice.
[31] Ignorance of the Act and its requirements cannot be a valid excuse to
avoid one's obligations. Persons who decide to become involved in a commercial
venture generally do so to derive some benefit therefrom, and they must be
aware of the risks inherent in their choice.
[32] In the instant case, the Appellant was an experienced and informed
businessman. He had been working in automobile sales for several years and had
had to deal with many things, including several employees, competition,
promotions, advertising, management and administration.
[33] For this purpose, he undoubtedly had to rely on professional people,
such as an accountant, a lawyer and so on.
[34] One day, to help out his daughter, he decided to take action in the
hope of solidifying her employment and that of her spouse. His very prudent
first reflex was to purchase all the shares so he would be able to make
decisions, monitor, supervise and ultimately reap the benefits.
[35] The evidence showed that the restaurant was located near the garage he
operated. He was able to go there regularly. As well, his daughter came to see
him regularly to obtain capital outlays that totalled more than $150,000, a
substantial amount.
[36] Some employees of the restaurant also came to see him to ask him to
intervene.
[37] During the entire time, he never did anything concrete, specific or
definite to ensure that the goods and services tax was collected and remitted.
[38] What concrete action did the Appellant take to try to prevent the
company from failing to remit the GST? Absolutely nothing apart from trying to
give his daughter some advice during a meeting, which, for that matter, had
nothing to do with the collection of the tax owed. He never called on the
services of his brother, an accountant, who worked for him in his own business.
He trusted his daughter and regularly injected money to keep the restaurant in
operation.
[39] Of course, he was a father concerned about his daughter's well‑being;
he was certainly very generous, but unfortunately his noble sentiments neither excuse
nor erase the obligations that resulted from his role as a director.
[40] There were aspects of the evidence that elicited sympathy, but in no
way did the evidence show – and the burden of proof was on the Appellant
in this regard – that the Appellant had established a system to ensure
that tax was collected and remitted in accordance with the Act's provisions.
[41] The Appellant invested huge sums in the business and derived no
benefit therefrom, apart from the business investment losses he claimed and was
allowed.
[42] However, he has not shown that he made the necessary arrangements to
avoid a potential assessment. The facts and circumstances were such that a
reasonably informed and prudent person should have known and understood that,
in the difficult context that existed, there was a stronger likelihood of
irregularities in the remittance of the tax payable.
[43] The Appellant, being no doubt very concerned about the need to put
large amounts of money into a bottomless pit, showed some indifference to the
duties that the company he headed had to assume as an agent.
[44] The fact that he assumed the tax was being collected and remitted
because he was making large capital outlays on a regular basis is certainly not
enough to find due diligence or reasonably prudent behaviour.
[45] On the contrary, it should have made him suspicious, since in such a
situation the reflex is often to use taxes to fund operations. Moreover, his
daughter was uncomfortable about having to constantly ask him for money.
[46] The Appellant has not discharged his burden of proof by showing on a
balance of probabilities that he acted with due diligence. Rather, the evidence
showed that he was a generous, compassionate father deeply concerned about his
daughter's well‑being.
[47] His responsibility as a director to collect and remit tax was not
given a level of attention and concern worthy of the informed businessman he
was at the time.
[48] For all these reasons, I find that the Appellant has not discharged
his burden of proof by showing on a balance of probabilities that he acted with
prudence and diligence, having regard to his expertise and skill.
[49] In addition, the Appellant was very insistent that the assessment
should be vacated because the time limit for making it had passed. He argued
vigorously that he was no longer a director of the company from the time he
expressly told the Respondent to cancel the registration of the number used for
collecting the GST. As well, the restaurant had ceased operating and the assets
had been sold to a third party who continued operations through another company.
[50] Although the company of which the Appellant was the sole director and
shareholder ceased its restaurant operations, which were its only economic
activity, and took the necessary steps to give up its tax number, thus ending
its mandate as a GST collector, its juridical personality remained. Ceasing
business, being inactive or having no activities whatsoever does not
automatically mean that a company ceases to be a legal person. The Appellant
did not sell or transfer his shares, since the third party purchaser basically
took possession of the assets.
[51] Every director continues to be a director even if activities have
totally ceased. Can a de jure director lose this status because the
company ceases the day‑to‑day activities for which it was incorporated?
[52] The Appellant submitted that, in all fairness, this must be the case.
If he had been a de facto director, it might have been the case,
since the actions that gave rise to that status would have ceased.
[53] However, the situation is very different for a de jure
director, whose status originates in the articles of the company itself. For a de jure
director to cease being a director, it is essential that the applicable formal
and substantive requirements be fulfilled faithfully and completely. Otherwise,
the director will remain a director until the legal requirements have been met.
[54] This is not an interpretation. It is essentially based on the many
court decisions rendered on this point. I am referring in particular to the
following decisions:
·
In Birchard v.
Canada, [2003] T.C.J. No. 128 (Q.L.), Rowe J. stated the following:
In the within appeals, the appellants
delivered a letter of resignation – as directors of Dortec – to the
residence of Mark Johnson, a fellow director. Unfortunately, they did not
seek legal advice and did not contemplate filing a notice of their resignation
with the Registrar of Companies. The letter of resignation could have been
tacked to the door of the now‑vacant Dortec business premises and a copy
thereof later provided to either or both of the bailiff firms and to CCRA. The
empty building was still designated as the Dortec Registered Office and, at
this point, Connie Birchard and Perry Birchard were the sole
shareholders of Dortec. Johnson made an assignment in bankruptcy on
June 21, 1999 – approximately 3 months after the putative
resignation was delivered to him. I have difficulty in understanding what goal
the appellants thought they were achieving by taking that course of action
since it was the act of giving notice to the public at large – by filing
the proper document with the Registrar of Companies – that was important.
Moreover, proper notice of a legal resignation – as director – by
each appellant was critical as it pertained to specific Dortec debts which –
if left unpaid – presented an ever‑increasing risk of personal
liability.
In light of the matters discussed within the context
of the relevant jurisprudence, I conclude neither of the appellants had ceased
to be a director of Dortec on March 1,
1999 and the two‑year
limitative argument therefore fails.
·
In Ciriello
v. Canada, [2000] T.C.J. No. 829 (Q.L.), a case relating to
subsection 323(5) of the Act, Rip J. reiterated that a company director does not cease to be a
director when the company goes bankrupt.
42. A corporation
continues to exist when it makes an assignment in bankruptcy or is petitioned
in bankruptcy and a trustee in bankruptcy is appointed. The directors may no
longer be operating the bankrupt corporation but they are still directors.
43. I am bound by the
Federal Court of Appeal decision in Kalef. Mr. Ciriello did not
cease to be a director on or about June 25, 1994.
·
In Martin v. Canada,
[2003] T.C.J. No. 362 (Q.L.), Dussault J. also dealt with this question
and discussed Kalef v. Canada, [1996] F.C.J. No. 269 (Q.L.). He stated the following:
7. The corporation
ceased operations in April or May 1997. However, it did not declare
bankruptcy and has not been dissolved. It is still in existence even if this
existence is described as artificial by counsel for the Appellant since,
according to him, its only purpose is to make absolute a suit for damages for
professional liability against the accounting firm Raymond, Chabot, Martin,
Paré. Since the corporation is no longer able to carry out the activities for
which it was formed, counsel for the Appellant maintains that it would be fair
and equitable that it be dissolved and that it would have been had it not been
for the lawsuit against the accounting firm from which the ministère du Revenu
du Québec (the "Ministry") could potentially benefit following an
agreement with the solicitors for the corporation. According to him, in
circumstances such as these, it [translation]
"would be unfair and illogical to convict the Appellant on the pretext
that he is still director of the company while it has lost every 'substratum',
that is, that it is impossible for it to pursue the objectives for which it was
in operation, or its reason for existence, and that it would be fair and
equitable for it to be liquidated, if it weren't for the prosecution laid
against Raymond Chabot for the sole benefit of the ministère du Revenu".
. . .
13. The corporation is still in
existence. There is no evidence that the Appellant has resigned, that he was
removed or became disqualified. To the contrary, the Appellant has acknowledged
that he was always the only director of the corporation. He has stated that he
furthermore is still producing financial statements and annual reports.
Subsection 323(5) should only be interpreted in light of this legal
situation. Under these circumstances, it is obvious that there can be no
limitation since the Appellant has never legally ceased to be the corporation's
director.
[55] In Bonch v. Canada, [2002] T.C.J. No. 687 (Q.L.), the Federal
Court of Appeal set aside a trial decision and affirmed once again that a de jure
director of a company did not cease to be a director until he met the
requirements for doing so under the statute governing the company's
incorporation and that the limitation period therefore ran only from the time
when the taxpayer ceased being a director of the company.
[56] Here, the Appellant was indeed a de jure director of the
company. He had not lawfully resigned or been removed from office. Although the
company had ceased its commercial activities (operating the restaurant) and had
requested that its status as a registrant be cancelled, this had no effect on
the Appellant's status as a director.
[57] During the entire period covered by the assessment, the Appellant was
involved in day‑to‑day management and administration and, more
particularly, provided financing and financial support. He said that he was
excluded from a strategy meeting by his daughter's boyfriend on the pretext
that he had no expertise in the restaurant business. Although this was
confirmed by the very person who affronted him, the Appellant cannot fall back
on that incident as an excuse or justification for losing his status as a
director.
[58] As the owner of all the voting shares, the Appellant was also the only
financial backer. He could and should have been assertive and made the
necessary decisions so that things would unfold in line with his own
expectations and concerns.
[59] The Appellant was the company's de jure director and thus the
only person with the power to make all the decisions, particularly those about
financial affairs and those that might have consequences for his personal
liability.
[60] In this case, while I am sympathetic to the explanations provided
based on the family context, a context that was unusual and difficult, none of
this was sufficient or acceptable to show that the Appellant had ceased being a
director. At the time of the assessment, he was still legally a director.
Accordingly, the limitation period had not started running, which means that
the Appellant's main argument in support of his appeal cannot be accepted,
since the time limit had not expired.
[61] For all these reasons, the appeal is dismissed with costs.
Signed at Ottawa, Canada, this 14th day of November 2003.
Tardif
J.
Translation
certified true
on this 29th day of
January 2008.
Brian McCordick,
Translator
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