Date: 19990126
Docket: 96-2665-IT-G
BETWEEN:
BÂTIMENT FAFARD INTERNATIONAL INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for order
McArthur, J.T.C.C.
FACTS:
[1] The Minister of National Revenue (“the
Minister”) has moved for the dismissal of the appeal under
subsection 58(3) of the General Procedure Rules. The appellant
went bankrupt on April 15, 1997, and the firm of
Lussier, Tull et associés was appointed
trustee in bankruptcy. The appellant’s director and
president, Jules Fafard, wishes to continue in his own name
the proceedings instituted in this Court.
[2] The appellant had appealed from an assessment made by the
Minister for the 1992, 1993, 1994 and 1995 taxation years. On May
2, 1996, a notice of confirmation was issued in respect of the
assessment.
[3] In the notice of assessment, the Minister referred to
section 227 of the Income Tax Act[1] (“the Act”). He assessed
the appellant for the arrears of source deductions owed by 130360
Canada Inc. (“130360”).
[4] In assessing the appellant, the Minister relied on certain
facts. The appellant is a corporation that operated in the
construction industry. The Minister claimed that 130360 was
related to the appellant. No tax returns had been filed by 130360
since 1989. It did not have any assets during the period at
issue. It was also run by Jules Fafard. According to the
Minister, 130360 was related to the appellant. It was basically a
management company that did nothing but pay wages. On a few
occasions, it remitted source deductions that were paid directly
by the appellant. The appellant is thus required to remit the
source deductions owed by 130360. It also owes the penalties
provided for in subsections 227(8) and (9) of the Act and
interest as provided for in subsection 227(8.3) of the Act.
[5] The appellant argued only that 130360 was not related to
it. It also submitted that 130360 ceased operating at the end of
1995 and was dissolved on January 23, 1996.
[6] Jules Fafard brought a motion in the Superior Court of
Quebec to force the trustee to continue the proceedings pending
in this Court. The motion was granted on August 25, 1997.
However, during a proceeding before this Court on September 4,
1998, the Minister moved to dismiss the appeal. The trustee had
clearly stated that it would not continue the proceedings despite
the order by the Superior Court of Quebec. This Court therefore
adjourned to allow the trustee to comply with the order.
[7] On December 4, 1998, the Minister again appeared before
this Court to ask that the appeal be dismissed. By that time, Mr.
Fafard, through his counsel Mr. Bérubé, had
obtained a correction of the judgment of August 25, 1997 rendered
by the Superior Court on the motion. The judgment dated
October 29, 1998, authorized Mr. Fafard to continue the
proceedings pending in this Court. The issue is whether Mr.
Fafard has the capacity to continue the proceedings in his own
name.
[8] Our legal system operates as a two-party adversary system.
A case necessarily involves two parties with opposing ideas and
opinions, the object being to find an answer or solution to the
problem. Our system is based on a fundamental idea, that of a
dialectic.
[9] However, it is also fundamental to our system that justice
be done, and it is accordingly true to say that there are
exceptions to every rule. Our legal system thus provides for
situations in which more than two parties may have an interest in
a case. For example, the civil law of Quebec provides for
situations in which a person may intervene in a case if that
person proves that he or she has an interest therein (article 208
of the Code of Civil Procedure). That article goes even
further: it authorizes a person to represent a party who is
incapable of acting. However, the impact of that provision is
uncertain in the case at bar, since Mr. Fafard is not acting
as an intervener but would like to be substituted for or to
replace the appellant.
[10] In the civil law, a person can bring legal proceedings or
an action if he or she has the required interest. This rule is
set out in articles 55 and 56 of the Code of Civil
Procedure of Québec, which read as follows:
55. Whoever brings an action at law, whether for the
enforcement of a right which is not recognized or is jeopardized
or denied, or otherwise to obtain a pronouncement upon the
existence of a legal situation, must have a sufficient interest
therein.
56. A person must be able to fully exercise his rights
to be a party to an action in whatever form it may be, saving
contrary provisions of law.
A person who is not able to fully exercise his rights must be
represented, assisted or authorized, in the manner provided by
the laws which govern his status and capacity or by this
Code.
. . .
[11] In the case at bar, Mr. Fafard has obtained the
authorization referred to in article 56 of the Code of Civil
Procedure. However, this Court is not bound by the Superior
Court of Quebec’s authorization, since this Court does not
have inherent powers and its jurisdiction is limited. The rules
of this Court include a special rule authorizing the
“transfer” of interest. Section 29 of the General
Procedure Rules provides as follows:
29. (1) Where at any stage of a proceeding the interest or
liability of an appellant or a taxpayer referred to in section
173 or 174 of the Income Tax Act or section 310 or 311 of
the Excise Tax Act is transferred or transmitted to
another person by assignment, bankruptcy, death or other means, a
proceeding shall be stayed until the Registrar is notified of the
transfer or transmission and the particulars thereof.
[12] Counsel for the Minister argued that only a taxpayer may
appeal a decision by the Minister and institute an appeal to this
Court. In Nova Ban-Corp. v. Tottrup, 89 DTC 5489, Strayer
J. of the Federal Court–Trial Division stated the following
principle:
Nor does the Income Tax Act [S.C. 1970-71-72, c. 63]
authorize anyone but the taxpayer to challenge a tax
assessment.[2]
[13] This principle derives from the wording of subsection
169(1) of the Act, which reads as follows:
169. (1) Appeal — Where a taxpayer has
served notice of objection to an assessment under section 165,
the taxpayer may appeal to the Tax Court of Canada to have the
assessment vacated or varied . . . .
[14] That provision refers to a “taxpayer”, which
is a term defined in subsection 248(1) of the Act. A taxpayer is
“any person whether or not liable to pay tax”.
[15] In Nova Ban-Corp., supra, the appellant was
a creditor of the taxpayer and was objecting to the
Minister’s assessment. Strayer J. concluded that the
appellant, as a third party, did not have the necessary capacity
to appeal such an assessment. He noted that the fundamental
principle involved is to maintain taxpayer confidentiality.
[16] As well, reference should be made to another line of
cases that seems to authorize a director of a corporation to
contest an assessment against the corporation. The decisions in
question all involve challenges to assessments based on unpaid
taxes.
[17] 495187 Ontario Limited v. The Queen, 92 DTC 6311,
affirmed by the Federal Court of Appeal, 94 DTC 6229, deals with
the capacity of a director to continue in his or her own name
proceedings brought by a dissolved corporation. Reed J.
wrote the following at page 6313:
In the present case, Mr. Hadi Sarraf was the only shareholder
and the only director of the plaintiff company. It is he, to
the extent that he holds any property of the company, who would
have an obligation to pay the tax assessed under the
reassessment. In my view, the correct plaintiff is Mr. Hadi
Sarraf in his capacity as shareholder and director of 495187
Ontario Limited at the time of its dissolution. An order will
issue amending the style of cause accordingly.
[Emphasis added.]
[18] Although that case related to a dissolved corporation,
the same logic can be applied in the case at bar. At the time of
the assessment, Mr. Fafard was a director of the appellant. The
appellant’s bankruptcy did not remove him from his position
as a director. The Bankruptcy and Insolvency Act[3] is silent as to the
status of directors after a corporation goes bankrupt. The
statute under which the appellant was incorporated must therefore
be examined. In the instant case, no mention has been made of the
legislation under which the appellant was incorporated.
Regardless of that omission, the Canada Business Corporations
Act[4] and the
Companies Act[5] set out the conditions under which a director holds
office. Section 108 of the Canada Business Corporations
Act states the circumstances in which a director ceases to
hold office. It reads as follows:
108. (1) [Ceasing to hold office] A director of a
corporation ceases to hold office when
(a) he dies or resigns;
(b) he is removed in accordance with section 109;
or
(c) he becomes disqualified under subsection
105(1).
[19] Thus, a director can lose his or her position only for
the reasons referred to above. Subsection 105(1) of the same
statute provides that a bankrupt is disqualified from being a
director, but it does not deal with the situation in which a
corporation goes bankrupt. In the same vein, section 123.73 of
the Companies Act provides that an undischarged bankrupt
cannot become a director of a company; it says nothing, however,
regarding the case in which a company goes bankrupt.
[20] In this respect, it is my view that Mr. Fafard never
ceased to be a director of the appellant. This is an important
conclusion, since in the case at bar the Minister is assessing
the bankrupt appellant for taxes that were not paid by another
corporation. The Minister generally begins by assessing the
corporation for unpaid taxes. However, section 227.1 of the Act
provides that directors are jointly and severally liable to pay
unpaid taxes. Mr. Fafard could therefore be assessed for the
appellant’s unpaid taxes. If Mr. Fafard has the capacity to
continue the proceedings pending in this Court and is able to
convince the Court that the assessment is unfounded, his
liability as a director will not come into play, since the
initial assessment against the corporation will have been held to
be unfounded.
[21] The primary purpose of section 227.1 of the Act has been
described as follows:
The justification for the imposition of vicarious liability is
simple. The directors of a company are its directing mind. They
are the persons responsible for insuring that the corporation
fulfils its financial obligations.[6]
[22] In The Queen v. Kalef, 96 DTC 6132, the
Federal Court of Appeal held that a director does not cease to
hold that position as a result of the corporation’s
bankruptcy. The director remains jointly and severally liable for
the corporation’s unpaid taxes. In that decision, the
Federal Court of Appeal looked at the provisions of the Ontario
Business Corporations Act, which are virtually identical
to those of the Canada Business Corporations Act. Writing
for the court, McDonald J.A. found that Mr. Kalef had not ceased
to act as a director, since the statute governing the
corporation’s incorporation did not provide that a director
ceased to be such when the corporation went bankrupt and a
trustee in bankruptcy was appointed.
[23] An analogy may be drawn with that case. If a director
does not cease to hold that position as a result of a
corporation’s bankruptcy, that director will remain jointly
and severally liable for the bankrupt corporation’s unpaid
taxes. Since Mr. Fafard did not cease to be a director, I would
adopt reasoning similar to that of Reed J. in 495187 Ontario
Limited, supra. Mr. Fafard therefore has the capacity
to be a party to proceedings in his own name.
[24] Moreover, as I noted above, in civil matters, the only
applicable criterion for determining whether a person can be a
party to proceedings is sufficient interest. In the case at bar,
Chabot J. of the Superior Court of Quebec authorized
Mr. Fafard to continue the proceedings pending in this
Court. He held that Mr. Fafard had the required interest. I
am aware that interest is not a determining factor in tax
matters. However, given the comments of Reed J. in 495187
Ontario Limited, supra, I am not prepared to accept
that a director’s interest in proceedings is irrelevant.
The director of a corporation is responsible for tax liabilities
originating with the corporation. In the instant case, it seems
to me that Mr. Fafard obtained authorization to continue the
proceedings in accordance with the provisions of the
Bankruptcy and Insolvency Act.
[25] Moreover, if I denied Mr. Fafard the right to continue
the pending proceedings, the result would be unfair. The
appellant would not be represented, since the trustee is refusing
to act. What would then become of the adversary process, one of
the pillars of our entire legal system? Injustice would be the
result: the appellant could not appear before the Court since
there would be no one who could represent it. Trustees often
refuse, for whatever reason, to continue pending proceedings. If
the directors do not have the capacity to be parties to
proceedings after a corporation’s bankruptcy, many
proceedings will remain pending or will simply be dismissed
because of a lack of representation. In the case at bar,
proceedings had been instituted in this Court before the
appellant even went bankrupt. It would be unfair not to allow
Mr. Fafard to continue them. Moreover, authorizing Mr.
Fafard to do so is the most effective way to dispense justice
expeditiously. The Court will first determine whether the
assessment against the appellant is correct, which will determine
the validity of any assessment against Mr. Fafard.
[26] In this regard, I need only refer to Leith v.
M.N.R., 70 DTC 1144, where Board member Fordham stated the
following:
I do not think that deeming the trustee to be the agent of the
bankrupt precludes the latter from acting on his own behalf when
the trustee prefers to remain aloof. In prosecuting this appeal
the appellant has only spent the negligible sum of $15 and will
incur no further costs before the Board. What he is doing may
prove of benefit to the estate—it certainly can do no
harm—in that, if he succeeds, the estate will be
considerably better off than if the re-assessment involved
were to be disregarded and the Minister thereby enabled to obtain
judgment by default for the large amount claimed by him.[7]
[27] Counsel for the Minister argued that that decision is not
applicable to the case at bar since the appellant is a bankrupt
corporation. I cannot accept that distinction. Directors are the
directing mind of a corporation. The corporation is merely an
artificial, intangible legal entity. It is therefore appropriate
to give Mr. Fafard permission to continue the proceedings in
this Court.
[28] A few comments must be made about the principle set out
in Nova Ban-Corp., supra, that only a
taxpayer may challenge a tax assessment. Under section 160 of the
Act, a transferee is jointly and severally liable with the
transferor for the amounts the transferor owes the Minister. The
question of whether the transferee may challenge the validity of
the transferor’s assessment has been considered by this
Court on several occasions. In Thorsteinson v. M.N.R., 80
DTC 1369, Judge Taylor wrote the following at page 1372:
It is open to a transferee assessed under section 160(2) of
the Act to challenge the bona fides of the
Minister’s claim that the liability for tax of the
transferor actually existed at a particular point in time. The
assessed transferee has available all the rights of any taxpayer,
including the opportunity, indeed the obligation, to dislodge the
basis for the liability, not merely to challenge the mechanics of
the assessment of the transferor.
[29] Finally, JudgeBowman took the same approach in Sarraf
v. The Queen, 94 DTC 1506, where he stated the
following at page 1508:
It is of course open to the transferee to challenge the
correctness of the assessment against the transferor even if the
transferor has failed to do so, or is, as is the case here,
precluded from doing so: Thorsteinson v. M.N.R., 80 DTC
1369; Ramey v. The Queen, 93 DTC 791.
[30] For all these reasons, it is my view that Mr. Fafard has
the capacity to continue in his own name the proceedings pending
in this Court.
[31] The second motion was brought by the respondent to quash
a subpoena that the appellant had served on Pierre Gravelle, a
former deputy minister of the Department of National Revenue.
That subpoena directs Mr. Gravelle to bring with him all relevant
documents concerning the appellant’s file.
[32] On June 29, 1995, Mr. Fafard wrote Mr. Gravelle and told
him of the seizures carried out by the Minister. He asked Mr.
Gravelle to give the appellant’s file to another official,
alleging that Mr. Gravelle was in bad faith. Mr. Gravelle
answered that letter on July 17, 1995, and then referred the
appellant’s file to another official.
[33] Counsel for the appellant had a subpoena served on Mr.
Gravelle at a time when Mr. Gravelle was no longer employed
by the Department of National Revenue. In an affidavit dated
September 3, 1998, Michel Lamarre, counsel for the Minister,
described his discussions with counsel for the appellant.
Mr. Lamarre explained to counsel for the appellant that
Mr. Gravelle was no longer in possession of the
appellant’s documents and that his knowledge of the file
was limited. He even offered to file Mr. Gravelle’s
letter by consent. Finally, he offered to summon other officials
of the Minister who might have better knowledge of the file.
However, counsel for the appellant maintained his objection to
the proposals.
[34] In support of his motion, the Minister argued that, since
Mr. Gravelle is no longer employed by the Department of National
Revenue, he does not have the documents concerning this case and
his knowledge thereof is limited. The subpoena served on Mr.
Gravelle is therefore irrelevant to the disposition of this case
and is unreasonable.
[35] This Court’s rules do not have anything specific to
say about the summoning of witnesses. The provincial rules of
civil procedure must therefore be referred to. Article 295 of the
Code of Civil Procedure provides that any person competent
to testify may be compelled to do so. The same article indicates
that all persons are competent to testify if they are in a fit
state to report the facts of which they have knowledge. It would
seem that such knowledge must be personal. Professor Léo
Ducharme has written the following:
[TRANSLATION]
While in theory any person competent to testify may be
compelled to do so, in practice the only persons who may be
compelled to testify are those who have personal knowledge of the
facts involved in the case and who are subject to the
jurisdiction of our courts.[8]
With regard to the summoning of a Minister, Professor Ducharme
stated the following at the same page:
[TRANSLATION]
Moreover, the reason section 69 of the Act respecting the
Ministère du Revenu states that the Minister, the
Deputy Minister and assistant deputy ministers are not
compellable in proceedings to which the Deputy Minister is a
party is that those individuals are normally not able to give
useful testimony since they have no personal knowledge of the
facts in issue. That is why the same section provides that those
individuals must, upon the written application of a party served
at least 30 days before the date of hearing and specifying the
facts requiring testimony, designate a public servant who is
aware of the facts to testify.
[36] Although there is no similar provision in the Income
Tax Act, it is well settled that a Minister cannot be
summoned unless he or she has personal knowledge of the facts. In
Létourneau v. Powers et al., [1975] C.A. 458, the
appellant had served a subpoena on the Minister of Justice and
the Solicitor General of Canada. The Quebec Court of Appeal
upheld the trial judge’s decision quashing the subpoena.
Rinfret J.A. stated the following at page 459:
[TRANSLATION]
Neither the testimony of the Solicitor General of Canada nor
that of the Minister of Justice of Quebec can help the Court
judge these acts, since they were not present; the reports they
might file are not in themselves proof of their content; to have
any probative value, they would have to come from the persons
concerned, who are already before the Court and can be
questioned.
[37] In light of these comments, it is my view that the
appellant cannot summon Mr. Gravelle to appear before this Court.
Although Mr. Gravelle wrote a letter in his own name, I am not
convinced that he has any personal knowledge.
[38] The personal knowledge to which the courts refer involves
drawing conclusions and making observations based on what one has
seen oneself. At the time the letter was written, the Minister
had already begun making seizures. In order to write the letter,
Mr. Gravelle therefore relied on the observations of the
Minister’s officials. Moreover, in both Mr. Fafard’s
letter dated June 29, 1995, and the Reply to the Notice of
Appeal, references are made to the Minister’s officials and
not Mr. Gravelle. Finally, Mr. Gravelle wrote in his letter that
he had had to make inquiries of the officials responsible for the
file to learn about the situation. He did not have personal
knowledge of the appellant’s file.
[39] Accordingly, it is my view that the subpoena should be
quashed.
Signed at Ottawa, Canada, this 26th day of January 1999.
“C.H. McArthur”
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 30th day of September
1999.
Erich Klein, Revisor
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