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Citation: 2003TCC90
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Date: 20030306
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Dockets: 2002-2219(IT)I
2002-2216(GST)I
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BETWEEN:
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CONNIE BIRCHARD,
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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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AND
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Dockets: 2002-2218(IT)I
2002-2214(GST)I
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PERRY BIRCHARD,
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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
Rowe, D.J.T.C.C.
[1] The appellant - Connie Birchard -
(Birchard) appeared on her own behalf and as agent for her
husband, Perry Birchard. Counsel for the respondent and Birchard
agreed her appeal from assessment 76627 - dated October 9, 2001 -
issued by the Minister of National Revenue (the
"Minister") pursuant to subsection 323(1) of the
Excise Tax Act (ETA) - in the amount of $4,828.15,
representing net tax, interest and penalties - in respect of the
failure of Dortec Distributors Ltd. (Dortec) to remit tax
pursuant to subsection 228(2) of the ETA could be heard
with the appeal of Perry Birchard from assessment 76628
- also dated October 9, 2001 - issued by the Minister
- in the same amount - in respect of the failure of Dortec to
remit Goods and Services Tax (GST) as required by the
ETA.
[2] Counsel for the respondent and
Birchard also agreed her appeal from assessment 27044 - dated
February 7, 2002 - issued by the Minister for federal income tax,
Employment Insurance (EI) premiums, Canada Pension Plan (CPP)
contributions - deducted at source but not remitted by Dortec -
as detailed in Schedule "A" attached to the Reply to the Notice
of Appeal (Reply) - pursuant to subsection 227.1(1) of the
Income Tax Act (ITA), section 83 of the
Employment Insurance Act (EIA) and section
21.1 of the Canada Pension Plan (Plan) could be heard with
the appeal of Perry Birchard from assessment 27045
- dated February 7, 2002 - issued by the Minister
under the same provisions of the aforementioned legislation - in
the same amounts - also arising from the default of Dortec to
make remittances, as required.
[3] Counsel for the respondent and
Birchard agreed the evidence - where relevant - could be applied
to any of the above-referenced appeals in respect of assessments
issued pursuant to the ETA and/or ITA.
[4] Connie Birchard testified she
received her designation as a Certified General Accountant (CGA)
in 2001 and resides in Black Creek, British Columbia. Dortec was
incorporated on February 26, 1996 and a GST registration - with a
quarterly reporting requirement - was completed on February 28,
1996. Dortec manufactured and installed windows and doors for use
in residences and commercial premises and operated from leased
premises in Campbell River, B.C. Birchard stated she and her
husband Perry Birchard had invested money in Dortec - in 1996 -
because her brother-in-law - Mark Johnson - had been working in
the predecessor business while holding a 10% equity in that
entity. When Johnson was presented with an opportunity to
participate in the purchase of that business, Birchard and her
husband raised funds by placing a mortgage - in the sum of
$150,000 - on their residence. The plan had been that Johnson -
from his earnings at Dortec - would make the ensuing mortgage
payments. Johnson and his fellow shareholder - David Terence
Bridges - each holding 1/3 of the shares - had been appointed
directors and officers of Dortec. Although the Birchards also
held - together - 1/3 of the Dortec shares, they were not
appointed directors. Within a year, the Birchards were not
receiving payments from Johnson and undertook legal action in
order to obtain control of Dortec by assuming - together - total
ownership of company shares. On March 1, 1998, both of them were
appointed directors of the company. Birchard stated she and her
husband had signed several documents at the office of their
solicitor but had not realized they were directors until
September, 1998. Birchard was a student in the CGA program and -
since March, 1998 - had assumed an active role in managing the
financial affairs of Dortec. She examined various documents and
files and spoke with the accountant who had been responsible for
filing Dortec corporate returns. Birchard had no previous
experience in business and had never served as a director. In
June or July, 1998, Birchard stated she had uncovered fraud and
embezzlement on the part of a bookkeeper who had been employed by
Dortec Securities Ltd. (DSL), a home security business owned by
Birchard and her husband which he operated from their residence.
Criminal charges were laid and the individual was convicted of
fraud and theft of the sum of $9,000. In the course of the
ensuing accounting investigation undertaken by Birchard, she
estimated the actual amount of the defalcation was approximately
$20,000. Since the person responsible for the theft was on social
assistance and without assets, the Birchards decided it was not
worth pursuing any civil remedy. As a result of the activities of
the former bookkeeper, Birchard stated she had to re-construct
the books and records of DSL for the period of March to
September, 1998, by examining original documents such as invoices
and cheques. During this period, Dortec had been operating on the
basis that the two shareholders - Johnson and Bridges - worked in
the business with the assistance of one or two part-time
employees. When Birchard examined the books and records of
Dortec, she discovered GST returns had been prepared but not
filed. In addition, she determined the numbers therein were
incorrect and had to revise the returns in order to provide
accurate information prior to submitting them to Revenue Canada,
the predecessor of Canada Customs and Revenue Agency (CCRA).
Birchard also discovered Dortec had not remitted the Provincial
Sales Tax (PST), as required. As a result, she contacted the
appropriate officials in that agency and entered into an
arrangement whereby the arrears would be paid by the end of
September, 1998. Birchard also became aware of several accounts
payable - to major suppliers - that were in arrears
and decided these debts had to be paid in order that Dortec could
continue to receive material required for manufacturing the
products offered for sale. Bridges and Johnson agreed to reduce
their drawings - per month - from $2,220 to $1,100 and
Johnson's wife worked as a bookkeeper/receptionist for Dortec for
a small wage which was attributed to her from a portion of the
total amount of $1,100 assigned to her husband. On
September 11, 1998, Birchard filed GST returns for reporting
periods from September 1, 1997 through May 31, 1998. By
October, 1998, the payroll remittance return required by
provisions of the ITA had been correctly filed. Dortec had
secured a contract to supply a substantial amount of product to a
customer, commencing in March, 1999. However, the Campbell River
branch of the Royal Bank (Royal) elected to pursue legal remedies
in relation to an outstanding loan and a bailiff seized Dortec
assets and locked the doors on December 21, 1998. Birchard stated
that - subsequently - all control over Dortec affairs was assumed
by the bailiff and/or a receiver. Mark Johnson and David Bridges
were assigned into bankruptcy on June 21, 1999 and July 19, 1999,
respectively, and ceased to be directors of Dortec on said
respective dates. Birchard stated that, until March 1, 1998, she
and her husband had not been directors of Dortec nor had they
held out to any person that they were involved in that capacity.
Instead, they had been serving as "silent partners" and
had invested money in order to assist Johnson in purchasing the
business. After assuming control of Dortec, Birchard became aware
there were not sufficient funds on hand to remit the outstanding
GST amount. The PST arrears were considered to present a more
pressing and potentially harmful problem than the amount owed in
respect of GST and, in compliance with the adage, "the
squeakiest wheel gets the grease", Birchard - on behalf of
Dortec - began submitting monthly payments - in the sum of $1,700
- to pay off the PST debt. By September, 1998, those arrears had
been paid in full and Dortec was able to remit ongoing PST on a
current basis when due. During this period, major suppliers of
Dortec were also receiving large payments in order to maintain
ongoing business relationships. By the beginning of December,
1998, Birchard stated she had formulated a plan whereby Dortec -
by the end of February, 1999 - could reduce - by 50% - the amount
owed to CCRA relating to unremitted source deductions.
Concurrently - on the strength of the substantial contract
beginning in March, 1999 - Birchard stated she had drafted a plan
to "plug away a little more aggressively" at paying off
the amount Dortec owed in respect of unpaid GST. Birchard stated
she obtained a bundle of documents - Exhibit A-1 - in May, 1999,
pertaining to the seizure of Dortec assets by the bailiff acting
on behalf of Royal. An examination of various documents and
letters revealed that Dortec employees had accepted a settlement
- in the sum of $6,300 - with respect to unpaid wages. Two
separate documents - each entitled "Demand Notice" -
dated January 25, 1999 and February 1, 1999, respectively, had
been issued by a delegate of the Director of Employment Standards
- an agency of the provincial government - to Vancouver Island
Bailiffs Ltd., the entity that had carried out the seizure on
December 21, 1998. A certain amount had also been paid in respect
of PST payable from the sale - by the bailiff - of seized Dortec
equipment to buyers; two sets of bailiff fees in the sums of
$5,507.20 and $5,229.75, respectively, were also paid from the
proceeds of the sale of seized Dortec assets. The sum of
$13,838.61 was remitted to Royal on the basis it was a secured
creditor. The Deputy Commissioner administering collection
provisions pursuant to section 107 of the Social Security Tax
Act, R.S.B.C. 1996 Chapter 431, had caused a Certificate to
be filed in the Supreme Court of British Columbia on July 21,
1998 in relation to an outstanding amount of $8,698.00 owed by
Dortec. In accordance with the provisions of said Certificate, it
continued to be of the same force and effect and all proceedings
could be taken after it - as if it were a judgment of the Supreme
Court - for the recovery of a debt of the amount stated against
the person (Dortec) named therein. Birchard estimated Dortec owed
Royal approximately $150,000 prior to the seizure. In the months
following March, 1998, she had analyzed the overall financial
situation of Dortec and concluded it would take the company about
5 years to pay down debt to the point where it could become a
profitable business. The purchase price of the former business -
later owned and operated by the newly-incorporated Dortec - was
approximately $100,000 but an additional $50,000 had been
invested as working capital. Birchard referred to a letter -
Exhibit A-2 - dated March 1, 1999 addressed to Dortec, wherein
she and her husband - Perry Birchard - resigned as directors of
Dortec, effective immediately. Birchard delivered this letter to
the residence of another Dortec director, her brother-in-law Mark
Johnson. On October 9, 2001, the Minister issued an
assessment - Exhibit A-3 - to Perry Birchard, pursuant to
subsection 228(2) of the ETA. On October 9, 2001, the
Minister issued an assessment - Exhibit A-5 - to Connie Birchard,
pursuant to subsection 227.1(1) of the ITA and relevant
provisions of the EIA and the Plan. On February 7,
2002, the Minister issued an assessment - 27044 - Exhibit A-4 -
in respect of the same indebtedness but including interest to
that date. Birchard stated that when the bailiff arrived at the
Dortec premises to carry out the seizure - on December 21, 1998,
she telephoned Jeff Harris at Revenue Canada and advised him of
the action being taken at that moment by Royal. Shortly
thereafter, she faxed a list - to Harris - of Dortec accounts
receivable in order that Revenue Canada could issue
appropriate documents to Dortec customers and obtain payment
directly of the specific amount stated on the invoices.
Subsequently, several Statements of Account were sent by Revenue
Canada to Dortec and Birchard noted the various amounts of
payments acknowledged therein corresponded with certain accounts
receivable included on the list she had faxed to Harris. Copies
of said statements were filed as Exhibit A-6 and contain her
handwritten notations as to the identity of the customer
responsible for the payment directly to Revenue Canada. Birchard
received a statement of disbursements - Exhibit A-7 - from the
bailiff. In order to demonstrate compliance with GST reporting
requirements and to demonstrate her attempts to negotiate a
payment schedule with respect to arrears, Birchard referred to
certain documents - Exhibit A-8 - including copies of
three GST returns - relating to various periods -
accompanied by a payment - in the sum of $200 - to be applied on
arrears as a gesture of good faith. A statement of arrears -
Exhibit A-9 - issued by the new agency CCRA - dated December 6,
2002 - informed Birchard she owed - in her capacity as director -
the sum of $5,330.14 - in respect of GST - as a consequence of
the default of Dortec.
[5] In cross-examination by counsel
for the respondent, Connie Birchard agreed she had been aware of
GST, income tax and other source deduction reporting and
remitting requirements. As a result, she was shocked to discover
the requisite GST returns had not been filed up to July 1, 1998.
The other company - DSL - operated by her husband - Perry
Birchard had received a notice from the Workers' Compensation
Board (WCB) that it had not paid an assessment in respect of
premiums. An employee of DSL had been injured and, during the
claim process, the absence of a premium payment had been
discovered. Birchard stated that, apart from the problems with
DSL created by the theft and fraud committed by a former
bookkeeper, the financial problems of Dortec consumed her time
and she decided the PST arrears and payments to major suppliers
were a priority. Dortec was not using a bank account to issue
cheques to suppliers and relied on a method whereby money orders
were purchased and sent to a supplier/creditor in order to
demonstrate the payment was guaranteed. Birchard stated her
husband was working full time for a cablevision company and had
begun DSL as a sideline business which continues to operate from
the Birchard residence in Black Creek. In 1999, her husband and
her brother-in-law - Mark Johnson - both suffered serious health
problems. Because Perry Birchard was not knowledgeable in
financial matters, Connie Birchard stated the Dortec financial
problems were not explained to him in great detail but she
informed him about the problems with GST arrears, unremitted
income tax and other source deductions. A bundle of documents -
Exhibit A-10 - was identified by Birchard as relating to
remittances by Dortec in 1998.
[6] Following notice to - and with the
consent of - Birchard, counsel for the respondent filed certain
documents including a Writ of Seizure and Sale
- Exhibit R-1 - dated June 8, 2001 - issued by
the Federal Court - Trial Division - directed to the Sheriffs of
British Columbia with instructions to seize and sell the real and
personal property of Dortec in order to satisfy an amount owing,
as stated in a Certificate made under the ITA. On June 19,
2001, a Writ of Seizure and Sale - Exhibit R-2 - was issued by
the Federal Court - Trial Division - to the Sheriffs of British
Columbia to carry out a seizure against the property of Dortec in
order to satisfy an amount owing under a Certificate issued
pursuant to the ETA. With respect to the seizure for the
amount owing under the ITA, the Writ was returned
- nulla bona - on August 7, 2001. The other
Writ relating to the seizure for a debt owing under the
ETA was also returned nulla bona on August 13,
2001. Certain certified true copies of documents obtained from
the Registrar of Companies, Province of British Columbia -
pertaining to Dortec - were filed as Exhibit R-3.
[7] Jennifer Steele testified she is a
Collection Officer for CCRA and had been employed with its
predecessor - Revenue Canada - for almost 20 years. The account
of Connie Birchard and Perry Birchard was assigned to her for
collection. She examined certain documents and discovered David
Bridges had made a bankruptcy proposal wherein the debt owing to
CCRA had been included. She also received certain documents -
Exhibit R-4 - from Comox Valley Bailiffs Ltd. reporting -
inter alia - on the lack of exigible assets as well as a
copy of a Certificate - Exhibit R-5 - bearing Federal Court of
Canada Registry stamp - issued under section 316 of the
ETA. Another report - Exhibit R-6 - containing several
documents was received from the bailiff firm advising that no
exigible assets had been located in order to satisfy the Writ
issued in relation to the indebtedness of Dortec under the
ITA. The amount owing - as stated in the Certificate -
Exhibit R-7 - issued by the Federal Court - Trial Division - was
$15,030.89 from May 24, 2001 to the day of payment.
[8] In cross-examination by the
appellant - Connie Birchard - Jennifer Steele agreed the bailiff
had been directed to attend at the Birchard residence in order to
search for assets. The assessment against Birchard and her
husband had been confirmed on the basis they were both directors
of Dortec and were jointly and severally liable pursuant to
subsection 227.1(1) of the ITA. A Notification of
Confirmation - Exhibit R-8 - dated March 4, 2002 -had been sent
to Perry Birchard. Steele stated that a search at the
Registrar of Companies - in 2001 - had revealed the
appellants were directors of Dortec. Steele stated the only
information she received pertaining to any resignation - by the
Birchards - as directors, was following issuance of the
assessments - based on personal liability - to each of them.
[9] The appellant - Connie Birchard -
submitted that she and her husband had tendered their
resignations as directors of Dortec, effective March 1, 1999. In
view of that, the assessments issued by the Minister - based on
personal liability arising from their role as directors - were
out of time since the relevant provisions of the ETA and
the ITA state no action or proceedings to recover any
amount payable by a director of a corporation can be taken more
than two years after the director last ceased to be a director of
the corporation. Since the first assessments issued to the
appellants were dated October 9, 2001, Birchard submitted the
relevant provisions of the two Acts prohibited the
Minister from assessing them on the basis of personal liability
as directors. Birchard also submitted the evidence revealed she
had attempted to resolve the problems encountered by Dortec and
had made every reasonable effort to ensure that arrears in GST
and unremitted source deductions would be paid within a certain
period.
[10] Counsel for the respondent submitted
the purported resignation - as director - by each of the
appellants was inadequate and of no force and effect because it
did not comply with the relevant provision of the Company
Act of British Columbia concerning resignation of
directors. Further, counsel submitted the resignation was merely
delivered to the home of Mark Johnson, a fellow director, and
such act could not have provided notice to any person entitled to
be so advised. Counsel submitted the evidence had disclosed
Connie Birchard - and her husband - had not taken positive action
to prevent the failure of Dortec to remit the amounts due under
the ITA and/or the ETA and had not exercised the
degree of care, diligence and skill that would have been
exercised by a reasonably prudent person in comparable
circumstances.
[11] The issues in the within appeals
are:
1. whether the Minister
assessed each appellant within the time permitted by the relevant
provisions of the ETA and/or ITA in respect of the
failure of Dortec to remit GST as required by subsection 228(2)
of the ETA and the failure of the company to remit federal
income tax, EI premiums and CPP contributions, as required by
relevant provisions of the ITA, EIA and the Plan,
respectively; and:
2. whether each appellant
has demonstrated an exercise of sufficient care, skill and
diligence under the circumstances to prevent the failure of
Dortec to remit certain amounts due.
[12] 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.
323(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.
[13] The relevant subsection of the
ITA - establishing liability of directors - is
227.1(1) and the wording of the due diligence provision found at
subsection 227.1(2) is identical to the one quoted above from the
ETA and the time limit for issuing an assessment against a
director is also two years.
[14] The first matter I have to deal with is
whether the assessments were issued within the time limit imposed
by the legislation. One of the documents obtained from the
Registrar of Companies - contained in Exhibit R-3 - is a Notice
to Change Office, filed on October 14, 1998, by Mark Johnson, as
a director of Dortec. The address of the Registered Office was
changed from a previous location in Campbell River to 1620
-15th Ave., Campbell River, B.C. V9W 4J4. This Registered Address
was the premise at which Dortec carried on its manufacturing and
sales business. The seizure was effected by the bailiff at this
location and the doors were locked. The position taken by Connie
Birchard is that there was no point in delivering a letter of
resignation - by herself and her husband - as directors, to
premises that were now empty with no one in charge to receive the
letter or to take notice of it.
[15] The relevant provisions of the
Company Act, RSBC, chapter 62, are below:
Ceasing to hold office
130
(1) A director ceases
to hold office when his or her term expires in accordance with
the articles or when he or she
(a) dies or
resigns,
(b) is remove in
accordance with subsection (3),
(c) is not qualified
under section 114, or
(d) is removed in
accordance with the memorandum or articles.
Notice of cessation
132
(1) Every company,
within 14 days after the resignation or removal of a director or
the company becoming aware of a director of the company not being
qualified, must file with the registrar a notice, in Form 9 in
the Second Schedule, of a director ceasing to hold office, but no
filing is necessary for a director who ceases to be a director
and is re-elected or reappointed the same day.
(2) A company that
contravenes subsection (1) commits an offence and is liable to a
fine not exceeding $50 for each day it is in default..
[16] In the case of Pidskalny v. Minister
of National Revenue, 91 DTC 1046, Judge Kempo, T.C.C. dealt
with a purported resignation by a director of a corporation who
had delivered a single copy of his letter of resignation to his
brother at the shop. In that case, the appellant had been unaware
that, in order for his resignation to be effective, it should
have been delivered to the registered office of the company.
Although now re-numbered, the applicable provisions of the
Company Act - at that time - were worded the same as those
quoted above. Judge Kempo observed that it was not necessary
for a director's resignation to be filed - within the 14-day time
limit, or at all - in order to be effective and the fact a
company could be liable to prosecution for failure to comply with
the provision would not negate the validity of a resignation. At
page 1049 of her judgment, Judge Kempo commented as
follows:
In my opinion, while the Appellant "ceased" to be a
director when he resigned, it nonetheless remained statutorily
ineffective pending compliance with subsection 154(2). To
interpret this result otherwise would require a reading-out or
disregard of the statutory words. I have been provided with no
good reason or authority to do this.
Subsection 227.1(4) of the Income Tax Act uses the
following terminology:
(4) No action or proceedings to recover any amount payable by
a director of a corporation under subsection (1) shall be
commenced more than two years after he last ceased to be a
director of that corporation.
Of interest is the highlighted word in the phrase
"ceased to be a director" which is almost
identical to the terminology used in subsection 154(1) of the
British Columbia legislation, "cease to hold
office". While the emphasis of both appears to be in respect
of "cessation", it would be meaningless to view that
aspect in isolation and apart form the substantive matters
pertaining to its legal effectiveness. The resolution of the
cessation of a directorship in its full legal sense remains to be
resolved according to the particular law of the province or
territory having jurisdiction.
Unfortunately for this Appellant his unawareness of and his
failure to comply with the service requirement upon the
Company's registered office effectively put his cessation of
directorship into legal abeyance. However this abeyance would in
my view have terminated upon any form of or attempt at compliance
with subsection 154(2) and/or 156(1) of the British Columbia
legislation.
In the result the Appellant had not legally divested himself
of his directorship after July 1, 1986 and his two-year
limitative argument therefore fails.
[17] In the case of Her Majesty The Queen
v. Harvey Kalef, 96 DTC 6132, the Federal Court of Appeal
considered whether the taxpayer had ceased to be a director upon
the appointment of control over affairs of the corporation by the
trustee in bankruptcy. The reasons for judgment were delivered by
McDonald J.A. who commented at page 6134 and following:
The Income Tax Act neither defines the term director, nor
establishes any criteria for when a person ceases to hold such a
position. Given the silence of the Income Tax Act, it only
makes sense to look to the company's incorporating
legislation for guidance. Bynamics was incorporated under the
Ontario Business Corporations Act. [S.O. 1982, c. 4.]
Subsection 1(1) of the Ontario Business Corporations Act
defines the term "director" as follows:
1. (1) "director" means a person occupying the
position of director of a corporation by whatever name called and
"directors" and "board of directors" include
a single director.
Pursuant to subsection 1(1) of that statute, if a person is
"occupying the position of director of a corporation"
he or she is a director. The definition is quite passive. There
is no requirement that the person exercise the power of a
director or exert direct control over the company's assets in
order to be a "director".
The Ontario Business Corporations Act also outlines the
circumstances under which a director ceases to occupy the
position. Subsection 121(1) of the statute states:
121. (1) A director of a corporation ceases to hold office
when he or she,
(a) dies or,
subject to subsection 119(2), resigns;
(b) is
removed in accordance with section 122; or
(c) becomes
disqualified under subsection 118(1).
Mr. Kalef did not fulfil any of these requirements. He could
have resigned or attempted to resign from his position as a
director of the company but he did not do so. The only impediment
to resignation in the Ontario Business Corporations Act is
found in subsection 119(2). That subsection states that the first
directors of a company cannot resign unless a successor is
appointed. Mr. Kalef was not one of the first directors of
Bynamics and that subsection therefore does not apply. For the
purposes of the Ontario Business Corporations Act Mr.
Kalef remained a director of Bynamics notwithstanding the
appointment of the Trustee in Bankruptcy.
The Federal Court Trial Division decision in The Queen v.
Wellburn and Perri [95 DTC 5417] was released after the
decision of the Tax Court Judge in this matter. In that case
MacKay, J. concluded that the appointment of a receiver does not
indicate the time at which the directors of the company cease to
hold their positions for the purposes of the Income Tax
Act. He discussed the proper interpretation to be given to
subsection 227.1(4) as follows:
Subsection 227.1(4) limits an action to recover on that
vicarious liability, not with reference to the ability of
directors to redress any failure of the corporation, that is,
within the term of their office as directors, but to a reasonable
period after they cease to hold office, i.e., two years after the
person last ceased to be a director of the corporation.
Termination of office under the law generally may vary from
province to province and from one circumstance to another
depending upon the relevant provincial or federal legislation. I
may not fully comprehend what was contemplated when the learned
Tax Court Judge suggested such a view "would in some
circumstances, such as those under consideration, render the
limitation period devoid of meaningful substance". In my
view, the limitation period would be no more or less devoid of
substance if it commences to run when a director's office
terminates under applicable legislation than if the limitation
period runs with the result of the Tax Court's decision, for
in either case vicarious liability extends for two years after a
former director can act, as a director, to do anything about a
failure by the corporation to meet its obligations under the
Act.
I agree with the reasoning of MacKay, J. While it may be open
to Parliament to expressly deviate from the principles of
corporate law for the purposes of the Income Tax Act, I do
not think such an intention should be imputed. Given the silence
of the Income Tax Act I think the guidance of the
applicable corporate legislation, in this case the Ontario
Business Corporations Act, should be taken. A director cannot
and should not obtain the benefits of incorporation under the
Ontario Business Corporations Act without accepting the
responsibilities as well. At all pertinent times Mr. Kalef was a
director of Bynamics. He did not cease to be a director by virtue
of the appointment of the Trustee in Bankruptcy. He did not meet
any of the requirements for ceasing to be a director established
by the Ontario Business Corporations Act. The time limit
found in subsection 227.1(4) of the Income Tax Act does
not apply to bar the reassessments.
[18] 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.
[19] 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.
[20] The next issue is whether the
appellants have demonstrated that they acted in a manner capable
of supporting their claim of exculpation, as permitted by the
provisions of subsections 227.1(3) of the ITAand 313(3) of
the ETA, respectively.
[21] The decision of 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. The
wording of that provision of the Income Tax Act under
consideration - subsection 227.1(3) - is identical to that of
subsection 323(3) of the ETA relevant to the within
appeals. 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, Connie Birchard
was in the process of completing the CGA program and received her
designation in 2001. Although she had not served previously as a
director of a corporation nor had she been involved in business,
she was well aware of reporting and remitting requirements
related to GST and source deductions. Her husband - Perry
Birchard - operated DSL - a security business - as a sideline to
his full-time employment. Once alerted to a potential problem in
the cash flow of DSL, Connie Birchard was extremely capable in
tracking down details of the defalcation committed by a former
bookkeeper who, although employed by DSL, was also involved with
financial matters and record-keeping requirements of Dortec. In
her testimony, Connie Birchard stated she had informed her
husband - Perry Birchard - of the state of affairs of
Dortec following their assumption of control as a result of
acquiring all shares on March 1, 1998. According to
Connie Birchard, her husband was not knowledgeable in
business matters relating to Dortec, particularly in regard to
details of actions then being undertaken - by her - in order
to resolve the company's precarious financial situation including
the pressing need to pay PST arrears and to satisfy major
suppliers in order that Dortec could continue to receive raw
material necessary to manufacture its products.
[23] In the case of A.G. of Canada et al.
v. McKinnon et al., 2000 DTC 6593. the Federal Court of
Appeal considered the matter of directors' personal liability for
unremitted source deductions and GST. Apart from the usual
considerations pertaining to the issue of due diligence, there
was also the matter of the directors' loss of de facto
control arising from the corporation's bank deciding - suddenly -
to reduce the line of credit and to dishonour cheques made
payable to the Receiver General for source deductions.
[24] Following a thorough review of existing
jurisprudence arising from similar fact situations, at page 6603
- and following - of his judgment, Evans J.A stated:
In my opinion, it is essential to keep in mind the
relevant question in this appeal: did the directors exercise due
diligence to prevent the company's failure to remit?
This is not necessarily the same as asking whether it was
reasonable from a business point of view for the directors to
continue to operate the business. In order to avail themselves of
the defence provided by subsection 227.1(3) directors must
normally have taken positive steps which, if successful, could
have prevented the company's failure to remit from occuring.
The question then is whether what the directors did to prevent
the failure meets the standard of the care, diligence and skill
that would have been exercised by a reasonably prudent person in
comparable circumstances.
It will normally not be sufficient for the directors
simply to have carried on the business, knowing that a failure to
remit was likely but hoping that the company's fortunes would
revive with an upturn in the economy or in their market position.
In such circumstances directors will generally be held to have
assumed the risk that the company will subsequently be able to
make its remittances. Taxpayers are not required involuntarily to
underwrite this risk, no matter how reasonable it may have been
from a business perspective for the directors to have continued
the business without doing anything to prevent future failures to
remit.
This point was recently made in Ruffo v. R.,
[1998] 2 C.T.C. 2203 (T.C.C.), affirmed by this Court on
April 13, 2000 (A-429-97), where Lamarre Proulx, J.T.C.C.
stated at paragraph [20]:
I am of the opinion that the case law of the Court is
consistent on the diligence that the director of a corporation
must show to avoid the liability prescribed in subsection
227.1(3) of the Act. It is the diligence that is concerned with
preventing the failure that can, in many instances, differ from
the diligence that the director must exercise toward the
corporation.
She went on to cite with approval the following
statements by Rip, J.T.C.C. in Merson v. R., 89 DTC 22,
where he said (at page 28):
The prudence required by subsection 227.1(3) in the
exercise of care diligence and skill is different from that
required by a director performing his duties, under corporate
law, notwithstanding that subsection 227.1(3) and subsection
122(1)(b) of the Canadian Business Corporations
Act, for example, both use identical words. The exercise of
care, diligence and skill by the director contemplated by
subsection 227.1(3) is not founded on the director's
obligations to the corporation; it is based on one of the
corporation's obligations under the Act and the failure of
the corporation to fulfil such obligation. A director who manages
a business is expected to take risks to increase the
profitability of the business and the duties of care, diligence
and skill are measured by this expectation. The degree of
prudence required by subsection 227.1(3) leaves no room for
risk.
I do not understand Rip, J.T.C.C.'s statement that
the 'degree of prudence required by subsection 227.1(3)
leaves no room for risk' to mean that section 227.1 imposes
strict liability on directors whose company ultimately proves to
be unable to make good defaults in its remittances. Such a view
would clearly be contrary to subsection 227.1(3), which only
becomes relevant when Revenue Canada is unable to recover the
money that the company ought to have remitted.
Rather, I take him to have meant that, if directors
decide to continue the business in the expectation that the
company will turn around and will be able to make good its
remittance defaults after they have occurred, if the company
nonetheless fails without paying its tax debts, it is no defence
for the directors to say that the risk that they took would have
been taken by a reasonable person. The subsection 227.1(3)
defence only applies if it can be demonstrated that the directors
exercised the care, diligence and skill that a reasonably prudent
business person in comparable circumstances would have exercised
to prevent a future default.
Whether directors have exercised due diligence to
prevent such failures from occurring has both a legal and a
factual aspect. As matter of law, the liability of a director for
unremitted source deductions and G.S.T. does not crystallise
until the conditions prescribed by subsection 227.1(2) have been
satisfied. Moreover, if the remittances are made in full, albeit
late, the directors will not be liable for the company's
previous failure to remit.
However, the fact that, before crystallisation, the
liability of the director is inchoate is not incompatible with a
finding that there was a failure to remit when no remittance was
made on the date prescribed in the relevant legislation as the
date when the remittance was due. Thus, for example, subsection
108(1) of the Income Tax Regulations, C.R.C. 1978, c. 945
provides that amounts deducted from employees' wages in a
month pursuant to subsection 153(1) of the Act shall be remitted
to the Receiver General on or before the 15th day of the
following month.
Accordingly, in my view, the directors of Abel could
not have obtained the benefit of subsection 227.1(3) on the basis
of an assertion that they had continued the business, reasonably
relying on Mr. Humphrey's advice that it could be turned
around in eighteen months' time by which time the
economy should have improved. Even if the company successfully
positioned itself to take advantage of the economic upturn and
became profitable, it would only have become able to discharge
its accrued liability and to prevent future failures to remit.
Following this advice could not have prevented any failures to
remit that occured prior the revival of the company's
fortunes, even if the advice had proved to be correct.
Given the limitations placed upon them by the
bank's de facto control of the company's finances,
I am satisfied that, on the facts of this case, the directors
exercised the degree of care, diligence and skill to prevent
failures to remit that would have been shown by a reasonably
prudent person in comparable circumstances. That Ms. McKinnon
continued to prepare remittance cheques, admittedly without a
realistic hope that the bank would honour them all, also
indicates that the directors were not unmindful of the
company's debt to Revenue Canada....
[25] Unlike the situation in McKinnon,
supra, Connie Birchard implemented a system for paying Dortec
invoices due from suppliers by sending money orders rather than
incurring the risk that Royal management might suddenly decide to
dishonour a cheque payable to an important supplier. Once Connie
Birchard became involved in the management of the financial
affairs of Dortec, she corrected the GST returns she had found in
a file, inserted correct information, and submitted them to
Revenue Canada. The source deduction forms in relation to income
tax, EI premiums and CPP contributions were properly
completed and submitted.
[26] The appellants found themselves in a
difficult position. They had invested money in Dortec and -
together - held 1/3 of the outstanding shares. For the most part,
assisting their family member - Mark Johnson - was a major factor
in their decision to become involved in the purchase of the
business later owned and operated by Dortec. Connie Birchard
began working at finding solutions to several pressing financial
problems. By July 21, 1998, the PST arrears - in the sum of
$8,698.00 - had been the subject of a Certificate - contained in
Exhibit A-1 - filed in the Supreme Court of British Columbia by
the Deputy Commissioner of the Social Service Tax Act. Connie
Birchard elected to tackle this problem first by entering into an
arrangement whereby Dortec paid the sum of $1,700 per month on
the arrears and would remit ongoing PST as - and when - due.
Concurrently, she had to ensure that major suppliers to Dortec
were paid, in order to guarantee a regular flow of material
needed to manufacture the doors and windows ordered by customers.
She was aware that remittances of source deductions were in
arrears and that amounts were owing in respect of GST. She
included a payment - in the sum of $200 - when filing returns for
certain reporting periods and intended to follow up on a plan to
retire GST arrears as well as other accumulating amounts arising
from various unremitted source deductions. Dortec was banking on
increased product sales - pursuant to a substantial contract of
supply and installation beginning in March, 1999 - as the
significant event capable of improving the company's financial
situation. Even then - according to Birchard - Dortec was not
going to be truly profitable for at least 4 or 5 years because it
had to pay down substantial debt, including nearly $150,000 owed
to Royal. Unfortunately, the gamble did not pay off and Royal
sent in the bailiff - just before Christmas, 1998 - to seize all
corporate assets and close down the business. Connie Birchard
acknowledged that she had chosen to give priority to paying off
PST arrears and to satisfying the demands of important suppliers
of material rather than remitting the requisite amounts due and
owing for GST and/or source deductions. She was acting as the
controller for Dortec which was wholly owned by her and Perry
Birchard. Once the Birchards assumed full ownership of Dortec,
and the full extent of the financial problems came to light,
Perry Birchard was made aware of the situation by Connie Birchard
who provided ongoing information - in a general sense - since he
was not particularly adept at comprehending the nuts and bolts
and inner workings of various reporting and remitting
requirements and mechanisms.
[27] Connie Birchard testified that she
recalled signing various documents at the office of their
solicitor prior to assuming full control of Dortec on March 1,
1998. However, she stated she did not specifically appreciate
that she and her husband were directors of Dortec until
September, 1998, when some event - or information received -
caused them to be aware of their status. However, a Notice of
Directors - dated March 1, 1998 - was filed with the Registrar of
Companies on July 3, 1998, listing them as directors of Dortec. I
can accept that Connie Birchard probably had not turned her mind
to the consequences of being a Dortec director until squarely
faced with the consequences at some later point, but I cannot
find on the evidence adduced before me that she did not know she
was a director of Dortec at the time of assuming control of the
balance of the outstanding shares on March 1, 1998. She and
her husband were taking that specific action in order to assume
total control - and ownership - over the Dortec business
operation in order that she could devote her time and expertise
to solving a multitude of problems and to protect their
investment which was secured by a mortgage against their personal
residence. Certainly, it is difficult for someone to prove the
negative but it is not reasonable to conclude - on the evidence -
that Connie Birchard - and/or her husband - were not aware - on
March 1, 1998 - that they were also becoming directors of Dortec
in addition to assuming full ownership of the corporation.
[28] Connie Birchard testified that she
contacted an official at Revenue Canada in order to advise that a
seizure - on behalf of Royal - was currently being carried out at
the Dortec premises. She promptly faxed a list of Dortec accounts
receivables to that individual so Revenue Canada could obtain
payments directly and apply those sums to the arrears.
Fortunately, Revenue Canada took appropriate action and some
funds were collected as a result. However, it strikes me as
somewhat strange that Revenue Canada or it successor - CCRA - did
not undertake the necessary steps to assert priority - on behalf
of Her Majesty in right of the Government of Canada - in the same
manner as the Province of British Columbia had done in relation
to PST arrears. Notification to Revenue Canada by Connie Birchard
- while the seizure was taking place - was the proper course of
action to follow and she is to be commended for that and for her
valiant efforts throughout to keep the business afloat and in
ensuring that proper filings and remittance forms were prepared
and submitted to Revenue Canada even if accompanying payments
could not be made. She contacted the collection department of
Revenue Canada and attempted to enter into satisfactory
arrangements for payment of all arrears, including those
attributable to GST. By alerting Revenue Canada to the seizure by
Royal, Birchard provided an opportunity to that agency to assert
its claim in a manner befitting its probable superior status as a
creditor in order to participate in the ultimate distribution of
proceeds from the sale of seized assets.
[29] The potential liability for directors
is substantial and a mere lack of appreciation for potential
legal consequences at a personal level when things go bad - and
they often do - is rarely going to provide an adequate answer to
satisfy the degree of diligence demanded by the relevant
provisions of the applicable legislation.
[30] The appellants were required to carry
the burden of proof and to demonstrate the various assessments
issued by the Minister - as set forth in the beginning of these
Reasons - are incorrect. The evidence does not permit me to
arrive at that conclusion. As a consequence, both appeals - by
each appellant - are hereby dismissed.
Signed at Sidney, British Columbia, this 6th day of March
2003.
D.J.T.C.C.
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