Jeffrey v. The Queen, docket 98-1155-GST-I (Informal Procedure)

Date: 19990920

Docket: 98-1155-GST-I

BETWEEN:

WARDEN JEFFREY,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Beaubier, J.T.C.C.

[1] This appeal pursuant to the Informal Procedure was heard at Toronto, Ontario on September 9, 1999, jointly and on common evidence with the appeal of the Appellant's father, Ron. Both testified. The Respondent called Frank Ruggles to testify. The Appellant was assessed as a director of Franklyn Sprinkler & Fire Service Ltd. ("Franklyn") on account of Franklyn's failure to remit GST for the period May 15, 1989 to February 15, 1995.

[2] In May, 1989 Ron met Frank Ruggles ("Frank"). After they had agreed, he formed 838836 Ontario Inc. ("838836") in May, 1989 and, because Frank could not attend, had his adult son, Warden ("Ward") sign as a co-director. Ron signed and filed a Notice of Change of Directors (Exhibit R-2) which made Frank a third director. Both signed a consent to act as directors dated May 17, 1989 (Exhibit R-1). 838836 changed its name to Franklyn.

[3] On June 28, 1989 Ron and Frank signed an agreement (Exhibit A-1) whereby Frank became the General Manager at a salary and profit share and received 5 shares in Franklyn. Ron got 75 shares and agreed to loan Franklyn approximately $50,000, which he did. Ron was Secretary and Ward President. After his first signatures, Ward never again took any part in or had anything to do with Franklyn. Frank and Ron became alternate signatories for Franklyn at the Royal Bank of Canada. Frank's shareholdings were to increase at 5 per year until they became 25. Ron and Frank both expected that Frank would become the majority shareholder of Franklyn with the passage of time.

[4] Ron registered Franklyn for Workers Compensation purposes and signed the necessary bank forms for Franklyn at the Royal Bank of Canada in Grimsby, where Frank was. Ron transferred his loan to Franklyn into the Grimsby account. He also dealt with Franklyn's lawyer in Toronto until Franklyn changed lawyers to a firm outside of Toronto.

[5] There is no evidence that any other corporate records were ever signed.

[6] Frank ran the day to day operations of Franklyn. His wife, Pat, was the unpaid bookkeeper. Franklyn's office was in their home. They did Franklyn's paper work. When GST came in they filed GST forms, but they did not pay the GST.

[7] Once the corporation was set up Ron was working in Toronto. He was not involved in the management of Franklyn. He saw the annual statements of Franklyn and met with Frank occasionally, both for business and social purposes. Ron and Frank also met with the bank on a cursory basis once a year, but until 1995 there was no discussion of GST with the bank. But Ron never knew that GST was not being paid. Ron knew it had to be paid, but the financial statements were quite ordinary and they just showed payables due. They did not specify GST and Ron did not ask Frank about GST.

[8] Frank Ruggles was called by the Respondent. Frank testified that in his view Ward had no vote. He was just listed as president of Franklyn.

[9] All of the witnesses agreed that Warden only signed the incorporating documents at the request of his father and thereafter took no part in the affairs of Franklyn. Both Ron and Warden testified that they understood that two signatures were required to start a corporation, Frank Ruggles was not available to sign, and therefore Warden signed "to help out". Warden testified that he thought that he would be replaced by Frank Ruggles and didn't ever expect to become involved in Franklyn.

[10] Warden has a grade 10 education and has spent his life as a factory worker. He never heard of The Ontario Corporations Act, did not know director's duties, was never told what it meant to be a director, simply signed the papers at the lawyer's office and did nothing else respecting Franklyn. He was never an employee or a shareholder, nor did he take part in any decisions respecting the corporation. He was never in the corporation's office and did not know where it was.

[11] His father, Ronald Jeffrey, signed a corporate form listing Warden as a director and president of Franklyn. Ronald personally hoped that someday Warden would take over his position in Franklyn. However, he never told that to Warden until just before the trial of this matter.

[12] Warden did ask his father for a job from time to time and he believes that he might have asked his father for a job at Franklyn, but he is not sure of that. He simply never thought he had anything to do with Franklyn and had no idea of Franklyn's situation until he was contacted by Revenue Canada. It should be noted that Ronald lived in Georgetown, Ontario and generally worked in Toronto at the material times; Warden lived in Acton, Ontario and at the time of trial lived in Cambridge, Ontario; and Frank Ruggles and Franklyn respectively lived and carried on business in Grimsby, Ontario. There is no evidence of even casual contact between Warden and Frank Ruggles or, for that matter, between Warden and Ronald.

[13] Warden must satisfy the Court that, so far as Franklyn is concerned, he exercised the degree of care, diligence and skill to prevent the failure to remit the amount in issue by the corporation that a reasonably prudent person would have exercised in comparable circumstances. The evidence is clear that Frank Ruggles and Ron Jeffrey acted as though they were the only directors of Franklyn. Any agreements in evidence respecting Franklyn were only signed by the two of them and its signatories were either of those two.

[14] On the evidence, Warden's situation is similar to that of John Schultheiss, Sr. in John Schultheiss, Sr. et al. v. The Queen, 97 DTC 863. Warden was only nominally a director and officer. He is a factory worker with a grade 10 education who had no idea of what was going on in Franklyn. He did not know anything about Franklyn's affairs, never inquired, and was never told by either Ronald or Frank about what was going on. Nor did he, or Ron, or Frank think that it was any of his business. He never signed anything and took no part in any affairs of Franklyn whatsoever. Nor could he have influenced the course of events. He did not receive any financial statements of Franklyn and there is no evidence that he received any other records or documents of Franklyn.

[15] Warden was a nominal director who was, at best, an "outside" director of Franklyn. He did not obtain any information or become aware of any facts which might lead one to conclude that there was or could be a potential problem with remittances by Franklyn until a letter from Revenue Canada in 1995. His father, Ron, received a similar letter and stepped in to Franklyn's affairs.

[16] For these reasons, Warden's appeal is allowed. He is awarded party and party costs respecting this appeal.

Signed at Toronto, Canada this 20^th day of September, 1999.

"D.W. Beaubier"

J.T.C.C.