Schuster v. The Queen, docket 1999-226-GST-I (Informal Procedure)

Date: 20010706

Docket: 1999-226-GST-I

BETWEEN:

KARL SCHUSTER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for order

GARON, C.J.T.C.C.

[1]            This is a motion by the Appellant for particulars on an appeal involving a director's liability assessment made under section 323 of the Excise Tax Act. The Appellant's assessment results from the failure by Loukar Homes Inc., of which the Appellant was a director, to remit the Goods and Services Tax. This appeal is governed by the Informal Procedure.

[2]            The Notice of Motion dated October 6, 2000, in addition to first mentioning that the motion is for the determination of the questions of law set out in subparagraphs a) and b) of paragraph numbered 1 thereof, went on to indicate the following in subparagraph c):

c)              Or in the alternative ought the Minister to deliver further particulars in accordance with the demand for particulars attached hereto as Schedule A.

[3]            The Appellant's motion seeking, inter alia, further particulars was heard on October 16, 2000 and adjourned pending the completion by the parties of steps hereinafter described.

[4]            Following this hearing, an interim Order was issued on October 31, 2000. In this Order, reference was made to an agreement reached between the parties during the hearing of this motion regarding certain preliminary steps relating to the provision of particulars by the Respondent.

[5]            Pursuant to this agreement, the Appellant provided to Counsel for the Respondent a list of questions relating to the assessment under appeal in a letter dated October 20, 2000 addressed to the Court and to Counsel for the Respondent. The requested particulars are contained in the following excerpts from the Appellant's aforementioned letter:

"It is for those reasons that my client requires the following particulars:

Properties

In previous correspondence counsel for the Minister provided a list of ten properties that were involved in the audit. However, upon production the Minister provided information with respect to 14 properties. Despite previous written requests the Minister has never clarified which properties we are dealing with. Therefore, please provide the exact list of the addresses we are dealing with so that we will then know what addresses we do not have to deal with.

Failure to Remit

The Minister takes the position that not all of the transactions involved the sale of 'real property'. There is a distinction: 'building contracts with a lot' and 'building contracts without a lot'. Further, there were a number of projects that were abandoned and the Minister indicates that for some properties there were forfeited deposits; and on other properties there was litigation giving rise to an account receivable. Therefore, for each property please provide the factual basis and the statutory basis that give rise to the liability to remit, together with the dates on which it is said that the obligation to remit arises.

Net Tax

The net tax area has been a source of great confusion for the appellant. Loukar lost substantial amounts of money, being paid to GST registrants, (notionally this ought to result in a return to Loukar). In addition Mr. Schuster also paid out approximately $250,000.00 of his own money to pay debts of Loukar for which he was personally liable. Mr. Schuster is astounded that the Minister can take a position that there is GST owing. Mr. Schuster was careful to follow the directions given by Mr. Feurth in terms of documenting the ITC's, obtaining his rebates, both for GST and FST.

Therefore, with respect to each of the properties in issue please identify and provide the particulars of the following:

                a)              The total amount of GST it is said that ought to have                   been collected      for each property and the statutory                                  basis for such obligation.

                b)             The ITC's which were allowed and why.

                c)              The ITC's that were not allowed and why.

                d)             The rebates for both GST and FST which were                                              allowed and why.

                e)              The rebates for both GST and FST which were not                                       allowed and why.

                f)              Any other amounts in issue.

[6]            A Supplementary Notice of Motion was attached to the Appellant's letter dated October 20, 2000. The Appellant in the Supplementary Notice of Motion "requests that the Court consider the relief set out below as supplementary to the relief requested in the motion heard on October 16^th, 2000, adjourned sine die, to allow the Minister time to file further and better particulars."

[7]            In the Appellant's view, as set out in his Counsel's letter of October 20, 2000, the filing of the Supplementary Notice of Motion was done "in order to clear any potential confusion" as "the relief requested by the appellant in the motion for particulars did not identify the proper rule numbers (52 and 53) and was a little confusing as to whether it was a motion for particulars or a motion for the determination of a question of law."

[8]            The Supplementary Notice of Motion reads in part as follows:

                THE SUPPLEMENTARY MOTION IS FOR:

1. An order that the minister provide complete particulars in accordance with the requests for particulars dated August 22^nd, and October 20^th, 2000.

2. Failing which the Appellant requests that the assessment be struck.

3. Failing which the Appellant requests that the Minister have the burden of proving the failure to remit net tax;

4. Such further and other relief as may be requested and this Honourable Court may allow.

[9]            With a letter dated November 24, 2000 to Counsel for the Appellant, Counsel for the Respondent enclosed schedules which, in the opinion of the Respondent, provided the required answers to the Appellant's motion for particulars. The body of this letter reads thus:

Pursuant to Judge Garon's Order dated October 31^st, 2000, I am enclosing schedules providing you with the answers to your motion for particulars.

As requested, these schedules outline, for each property, the factual and statutory basis giving rise to the Goods and Services Tax ("GST") liability, the dates and consequent periods on which the liability arose, the GST collectible, the allowed input tax credits ("ITC") and the allowed rebates.

It is our understanding that with respect to the corporation's GST liability, no other amount is in issue.

Concerning your request as to whether and why ITCs were allowed, subsection 169(1) allows an ITC to be claimed to the extent that the taxable input is for consumption, use or supply in a commercial activity of a registrant. However, in order to be claimed, subsection 169(4) requires that ITCs be properly substantiated in light of the prescribed information outlined in section 3 of the Input Tax Credit Information Regulation. Consequently, to the extent that the necessary information was provided, the Appellant's ITCs were allowed and in fact, for two periods, i.e. 91/06/30 and 91/09/30, the Appellant was allowed more ITCs than were claimed.

With respect to the rebate issue, to the extent that the conditions of section 254 were met, GST rebates were allowed, as is reflected by the schedules. Furthermore, since this assessment does not cover the Federal Sales Tax payable, your inquiry on this issue is not relevant to the present case.

In providing this information, the Respondent does not admit the relevancy of this evidence. Furthermore, the Respondent reserves the right to object to the admissibility of this evidence at the hearing of the above-noted appeal.

[10]          The schedules in question run over 16 pages and they contain a lot of detailed information in relation to the assessment made against Loukar Homes Inc.

[11]          In a letter dated December 22, 2000, Counsel for the Appellant indicated that the Respondent's response regarding particulars was deficient. Explanations were given in support of this statement in the Appellant's Affidavit sworn on December 22, 2000 and in a copy of a letter to the Appellant attached thereto dated December 21, 2000 from the accounting firm, Deloitte & Touche LLP.

[12]          In response to the letter from the Appellant's Counsel dated December 22, 2000, Counsel for the Respondent maintained in her letter to Counsel for the Appellant dated February 2, 2001 her position that the Respondent had "responded to each and every particular according to Judge Garon's order and as requested in the Appellant's list of questions dated October 20, 2000". Counsel for the Respondent went on to add the following:

... Reviewing each of the specific particulars, it is our position that our letter dated November 24, 2000 and the enclosed Canada Customs and Revenue Agency's schedules addressed specifically each and every particular. More precisely:

·               With respect to the properties, we have provided the exact list of properties in issue;

·               With respect to the failure to remit, we have provided for each property the factual and statutory basis giving rise to the liability to remit, along with the dates on which the obligation to remit arose;

·               With respect to net tax, for each property in issue, we have identified and provided the requested following particulars:

a)              the total amount of GST that ought to have been collected and the statutory basis for such obligation;

b)             the ITCs which were allowed and why;

c)              the ITCs which were disallowed and why;

d)             the rebates for both GST and FST which were allowed and why;

e)              the rebates for both GST and FST which were not allowed and why;

f)              any other amounts in issue.

The points b) to f), these have been addressed in paragraphs 3, 4 and 5 of our letter.

[13]          In the course of a conference call on March 8, 2001, it was agreed by both parties and approved by the Court that the hearing of this motion could be completed by written submissions from both parties. These submissions were subsequently forwarded to the Court.

[14]          Against this background, I turn now to the merits of the motion for particulars.

[15]          It must be recalled that in my Order dated October 31, 2000, I had "ordered that the Respondent supply the particulars required by November 24, 2000".

[16]          First, as noted earlier, this motion is made in the context of a case governed by the Informal Procedure. The Tax Court of Canada Rules of Procedure Respecting the Excise Tax Act (Informal Procedure) do not provide for discovery documents and examinations for discovery. Section 18.3001 and 18.3003 to 18.302 of the Tax Court of Canada Act and the Tax Court of Canada Rules of Procedure Respecting the Excise Tax Act (Informal Procedure) provide for a simplified procedure and an expeditious way of disposing of appeals. Interlocutory proceedings in cases governed by the Informal Procedure are unusual and should not be encouraged. After all, it must not be overlooked that it is the taxpayer who decided to make the election that his appeal be governed by the Informal Procedure. To resort to interlocutory proceedings unless obviously justified would appear to be contrary to Parliament's intention as set out in subsection 18.15(4) of the Tax Court of Canada Act. The latter enactment is made applicable to appeals under Part IX of the Excise Tax Act by section 18.302 of the Tax Court of Canada Act.

[17]          I have considered the Reply to the Notice of Appeal and examined carefully the Respondent's letter of November 24, 2000 to Counsel for the Appellant and the schedules attached thereto as well as the Respondent's letter of February 2, 2001 to Counsel for the Appellant. I have also perused the Appellant's Affidavit dated December 22, 2000 and a letter of December 21, 2000 attached thereto to the Appellant from the firm of accountants Deloitte & Touche LLP. These latter two documents explain why, according to the Appellant, the Respondent's response in respect of the demand for particulars is deficient.

[18]          I am not persuaded that the Respondent was, strictly speaking, required to supply particulars in connection with the Reply to the Notice of Appeal filed in the present case. The purpose of particulars is not to provide a detailed outline of the evidence to be adduced by the person supplying the particulars. Also this demand for particulars is to be viewed in the context of a case governed by the Informal Procedure. In any event, I am of the opinion that the Respondent has met her obligation regarding the definition of issues to be decided by the Court in the present appeal.

[19]          The requested particulars at least in some respects appear to be aimed at an attack against the assessment against the corporation, Loukar Homes Inc. I am inclined to the view that the Appellant cannot challenge the underlying assessment made against the latter corporation.

[20]          In my opinion, it is apparent from section 323 of the Excise Tax Act that the liability of the director is directly related to the amount of net tax and any interest thereon and penalties relating thereto owed by the corporation. This is made clear in subsection 323(2) of the Excise Tax Act which provides in substance that a director is not liable unless the amount of the corporation's liability has been determined in any one of the three means referred in paragraphs (a), (b) and (c) of subsection 323(2). As appears from subparagraph 4(j) of the Reply to the Notice of Appeal, paragraph (a) is in the present instance the applicable paragraph of subsection 323(2) of the Excise Tax Act. This is made even clearer in subsection 323(6) of the same statute which provides that where execution has issued for the amount of the corporation's liability that has been the subject of a certificate registered in the Federal Court, as provided in paragraph 323(2)(a), "the amount recoverable from a director is the amount remaining unsatisfied after execution". Thus a direct link is undoubtedly established in subsections 323(2) and 323(6) of the Excise Tax Act between the amount of the corporation's tax liability and the amount that is recoverable from a director. The corporation's tax liability can only be ascertained by the assessment issued by the Minister of National Revenue to the corporation, unless varied or vacated by the Courts.

[21]          Having regard to the legislative scheme found in section 323 of the Excise Tax Act, it seems to me to be beyond doubt that a director is liable for the amount of net tax and the related interest and penalties owed by the corporation that has remained unsatisfied after execution has issued. I agree with Judge Bowie in Papa v. R., [2000] G.S.T.C. 74, that the "underlying assessment, if it has not been varied or vacated as the result of a successful objection or appeal, absolutely fixes the amount of the corporation's liability. It is that liability, so fixed, for which the directors may become liable under section 323, if the conditions of that section are satisfied."

[22]          In considering the case law relating to the question whether a director of a corporation assessed personally for a corporation's tax debt can challenge the underlying assessment of the corporation, I have not overlooked the recent decision of the Federal Court of Appeal in Gaucher v. The Queen, 2000 DTC 6678, where, in dealing with a case involving a transfer of property under section 160 of the Income Tax Act, Justice Rothstein concluded that a taxpayer has the right to challenge a primary assessment on which the taxpayer's derivative assessment is based on. In my view, this decision of the Federal Court of Appeal is not applicable to the present case, because, as I will attempt to establish, the applicable provisions governing the director's tax liability differ in some important respects, from the legislation governing the transferee's tax liability arising from transfers of property generally between persons not dealing at arm's length.

[23]          There are no provisions in section 325 of the Excise Tax Act and section 160 of the Income Tax Act dealing with transfers of property between certain classes of persons that are similar to subsections 323(2) and 323(6) of the Excise Tax Act referred to earlier or to the corresponding subsections 227.1(2) and 227.1(5) of the Income Tax Act.

[24]          The differences in the legislative scheme regarding the director's tax liability on the one hand and on the other hand the transferee's tax liability can be easily explained by the dissimilar factual contexts in which these two types of liability arise.

[25]          In effect, it must be realized that in a director's liability case Parliament is requiring a director to pay the tax owed by another person i.e. the corporation in a situation where the director has received no direct benefit from the primary debtor, the corporation and in many cases not even an indirect benefit. The situation is quite different where transfers of property between specific classes of persons are contemplated under section 325 of the Excise Tax Act and section 160 of the Income Tax Act. In such circumstances, to trigger the application of these two sections a benefit must have been conferred on the transferee and the latter is only liable in general terms to pay for the transferor's tax to the extent that the fair market value of the property transferred exceeds the fair market value of the consideration paid by the transferee for the transfer of such property.

[26]          Another difference between the situation of the director of a corporation in contrast to that of the transferee is that the director would normally have been involved in the decision made by the corporation to challenge (and the steps taken in relation thereto) or not to challenge the assessment made against the corporation on which assessment the derivative assessment against the director is based. For his part, the transferee does not have the opportunity to directly dispute the underlying assessment made against the transferor at the time it was made. The transferee can only challenge the derivative assessment issued to him.

[27]          I have also read with much interest the exhaustive analysis made by Judge Mogan of this Court in the case Shafer (A.) v. Canada, [1998] G.S.T.C. 7. This is a case involving the transferee's liability under section 325 of the Excise Tax Act. In that case, the learned judge concluded that "it is not open to a transferee, in an appeal from an assessment issued under s. 325, to attack the assessment issued to the transferor".

[28]          I therefore conclude that it is not open to the Appellant in an appeal from the assessment made against him under section 323 of the Excise Tax Act to impugn the primary assessment issued against the corporation. Accordingly, the Appellant's demand for particulars must relate only to the derivative assessment made against him.

[29]          I would add that even if this case was governed by the General Procedure, I would be of the view that the Respondent has satisfied the requirements relative to the supply of particulars. In coming to this conclusion, I rely on the judgment of the Federal Court of Appeal in Gulf Canada Limited v. The "Mary Mackin", [1984] 1 F.C. 884. This decision provides a good summary of the principles applicable to demands for particulars. In that case, Justice Heald for the majority of the Court relied on a passage from a judgment by Sheppard, J.A. in Anglo-Canadian Timber Products Ltd. v. British Columbia Electric Company Limited, (1960), 31 W.W.R. 604 (B.C.C.A.). An extract from that judgment reads as follows:

On the other hand the purpose of particulars is to require a party to clarify the issues he has tried to raise by his pleading, so that the opposite party may be able to prepare for trial, by examination for discovery and otherwise. The purpose of particulars was stated in Thorp v. Holdsworth (1876) 3 Ch D 637, 45 LJ Ch 406, by Jessel, M.R. at p. 639, as follows:

"The whole object of pleadings is to bring the parties to an issue, and the meaning of the rules of Order XIX, was to prevent the issue being enlarged, which would prevent either party from knowing when the cause came on for trial, what the real point to be discussed and decided was. In fact, the whole meaning of the system is to narrow the parties to definite issues, and thereby to diminish expense and delay, especially as regards the amount of testimony required on either side at the hearing."

[30]          I am therefore of the opinion that the Reply to the Notice of Appeal and the particulars provided by the Respondent to the Appellant adequately set out the definite issues involved in this appeal. In my view, the Respondent has complied with my Order of October 31, 2000.

[31]          For these reasons, the Appellant's motion for particulars is dismissed.

Signed at Ottawa, Canada, this 6th day of July 2001.

"Alban Garon"

C.J.T.C.C.

COURT FILE NO.:                                                 1999-226(GST)I

STYLE OF CAUSE:                                               Between Karl Schuster and

                                                                                                Her Majesty The Queen

REASONS FOR ORDER BY:                               The Honourable Alban Garon

                                                                                                Chief Judge

DATE OF ORDER:                                                July 6, 2001

APPEARANCES:

                Counsel for the Appellant: John Mill

                Counsel for the Respondent:              Carole Benoit

COUNSEL OF RECORD:

For the Appellant:                                                 Mill & Associates

                                                Windsor, Ontario

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

1999-226(GST)I

BETWEEN:

KARL SCHUSTER,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Motion dealt with by way of written submissions by

the Honourable Alban Garon

Chief Judge

Appearances

Counsel for the Appellant:          John Mill

Counsel for the Respondent:      Carole Benoit

ORDER

          Upon motion by the Appellant for particulars;

          And upon reading the written submissions of the parties;

          The motion for particulars is dismissed.

Signed at Ottawa, Canada, this 6th day of July 2001.

"Alban Garon"

C.J.T.C.C.