REASONS
FOR JUDGMENT
Paris J.
[1]
These are appeals from three assessments made
against Donald Andrew as director of Andrew Paving and Engineering Ltd. (“Andrew Paving”) and 1555223 Ontario Inc. (“155”). Mr. Andrew was the president and CEO and the
sole director of each corporation.
[2]
By notice dated April 23, 2008, Mr. Andrew was
assessed pursuant to section 323 of the Excise Tax Act (“ETA”) for Goods and Services Tax (“GST”) which Andrew Paving allegedly failed to remit for
its reporting periods ending between September 30, 2000 and September 30, 2006.
The amount of this assessment is $190,413.45, inclusive of interest and
penalties.
[3]
By notice dated December 13, 2007, Mr. Andrew
was assessed pursuant to section 323 of the Excise tax Act (“ETA”) for GST which 155 allegedly failed to
remit for its reporting periods ending June 30, 2003 September 30, 2003 and
December 31, 2003. The amount of this assessment was $112,807.03 inclusive of
interest and penalties.
[4]
By notice dated April 23, 2008, Mr. Andrew was
assessed pursuant to section 227.1 of the Income Tax Act (“ITA”) for
source deductions which Andrew Paving allegedly failed to remit for the years
2005 and 2006. This assessment was for $166,591.81, inclusive of interest and
penalties.
[5]
The issues in this appeal are:
i) whether the amounts of the underlying
liabilities of Andrew Paving and 155 for which the Minister seeks to hold Mr.
Andrew liable are correct;
ii) whether the respondent has the onus to prove
the amount of the underlying corporate liabilities; and
iii) whether Mr. Andrew exercised due diligence
to prevent any failures by Andrew Paving and 155 to remit the amounts in issue.
Witnesses
[6]
The appellant testified on his own behalf and
three collections officers from the Canada Revenue Agency (“CRA”), Jay Schafer, Ron Jarman and Rocco Locantore,
gave evidence on behalf of the respondent.
Facts
The corporations
[7]
Andrew Paving was incorporated in the early
1960’s and carried on the business of paving and road-building in the Toronto area. It operated in conjunction with a related company, Meld Development Inc. (“Meld”) which was set up around the same time as Andrew
Paving.
[8]
Mr. Andrew explained that Meld was set up to own
the equipment that was used by Andrew Paving in the business, and that this
arrangement was intended to protect the equipment from seizure by creditors in
the event that Andrew Paving ran into financial difficulties.
[9]
According to Mr. Andrew, prior to 2003,
Andrew Paving and Meld split the revenue and expenses from the operation of the
paving business and each reported a share of the GST and input tax credits (“ITCs”) from the business. Most,
if not all of the billing was done by Andrew Paving, although Mr. Andrew
said that Meld may have had a few paving contracts that it completed on its
own.
[10]
After August 2003,
Andrew Paving began reporting all GST and ITCs in respect of the activities of
both companies and Meld reported nothing. Mr. Andrew said that he was
advised to proceed in this fashion by Jay Schafer, a CRA collections officer he
dealt with in August 2003. Mr. Schafer, however, unequivocally denied having
ever advised Mr. Andrew to consolidate the GST reporting under the name of
Andrew Paving. According to Mr. Andrew, Andrew Paving and Meld still filed
separate income tax returns after 2003.
[11]
The third company
in issue, 155, was set up in December 2002 when Mr. Andrew was planning to
transfer the paving business to his son. It appears that the plan was to
transfer the equipment and paving business of both Meld and Andrew Paving to
155 and to transfer the shares of 155 to Mr. Andrew’s son. The shares of 155
were never transferred, because Mr. Andrew said that at some point in 2003, he
became aware that his son, who worked for Andrew Paving, had improperly appropriated
hundreds of thousands of dollars of payments that were due to the company.
[12]
Mr. Andrew said that
another reason that the transfer did not take place was because his accountant advised
that if the paving business was transferred to 155, Andrew Paving would lose
its ability to use the tax losses it was carrying forward. Even though 155 was
apparently already operating, he said that his accountant told him that those
operations should be treated as the business of Andrew Paving rather than of 155.
Mr. Andrew recalled that employee source deductions had already been remitted
under the name of 155 and that this could not be reversed but that all other
aspects of the transfer were cancelled and that Andrew Paving reported everything
else for income tax purposes.
[13]
The evidence shows,
though, that 155 filed GST returns for the reporting periods ending June 30,
2003, September 30, 2003 and December 31, 2003 and it reported total net GST
due of $78,250.82. No payments were remitted with those returns and no amounts
have been paid on that account subsequently.
[14]
In
cross-examination, Mr. Andrew conceded that the GST returns had been filed by
155 and that it owed GST which was assessed pursuant to those returns and that
the amount owing by 155 did not relate to employee source deductions.
Financial Difficulties
[15]
Mr. Andrew testified that the paving business
was seasonal in nature. During the winter months, there would be little paving
work but expenses would still be incurred due to the need to repair and
maintain equipment and to purchase materials for next season. During the
construction season, cash flow was also often an issue. Customers were slow to
pay and this became worse as time went on.
[16] In 2003, the business took a downward turn. Andrew Paving
encountered serious problems collecting for work it did on the Sheppard subway
line. It took several years to collect about $800,000 that it had billed in
2003. The company also faced financial difficulties because of the improper
diversion of funds by Mr. Andrew’s son.
[17] As a result, and because Mr. Andrew’s son, who was a key employee of
Andrew Paving left the company, Mr. Andrew decided to get out of the business.
He began to wind down the operations of Andrew Paving and Meld in 2005 but said
that the companies worked through 2006 with reduced staff in order to collect
amounts that were due. By the end of 2006, operations had virtually ceased. In
2007, 2008 and 2009, Mr. Andrew spent his time collecting payments from various
clients and negotiating payments of his companies’ bills. He used the amounts
he collected from clients as well as money he received from his mother’s estate
and other personal funds to pay creditors other than the Minister of National
Revenue.
Dealings with the CRA
[18] Mr. Andrew testified that Andrew Paving and Meld ran into problems
with their GST filings soon after the GST was introduced in 1991. He said that
although the corporations filed GST returns showing they were entitled to a
refund because their ITCs exceeded the GST collected, no refund was received
and no credit to their accounts was posted by the CRA
apparently because the CRA had no record of having received those returns. Mr.
Andrew testified that the CRA kept asking for returns his companies had already
submitted as CRA had no record of those returns having already been submitted.
[19] Later, when the corporations filed returns showing net tax payable, they
did not submit any payment with those returns on the expectation that the
previous credit returns would balance against the amounts due. Mr. Andrew said,
though, that the previous credits were not applied and penalties and interest
were charged on the net tax due because the CRA did not process the credit
returns it had filed.
[20] Mr. Andrew said he became personally involved with the GST filings
in about 1995 when he realized it became too complicated for the bookkeeper who
had been responsible for the returns up to that point. He was certain that the
corporations were being overcharged interest and penalties and said he spent a
great deal of time trying to sort out the problems with the GST. He also felt
that the problem was compounded by the application of payments made by the
corporations to those penalty and interest amounts rather than to the net tax
that the corporations were required to remit. This, in turn caused further
penalties and interest to accrue.
[21] In the fall of 1996, the Minister issued arbitrary GST assessments against
Meld totalling $144,861.82 because it had failed to file GST returns for nine
reporting periods ending between June 30, 1994 and June 30, 1996.
[22] Mr. Andrew testified that in December 1996, he met with a
collections officer named C. Addorisio from the CRA and that they arrived at an
agreement concerning Meld’s outstanding GST liabilities at that time. He said
that Mr. Addorisio agreed that Meld owed only $21,150 rather than $144,861.82.
Mr. Andrew produced a copy of a letter dated December 11, 1996 addressed to
Meld and signed by both him and Mr. Addorisio. I will refer to this as the “Meld letter.”
[23] The Meld letter refers to “section 323 liability
of directors” and sets out that the Minister agrees to release a
requirement to pay which was issued to Meld’s bank in respect of Meld’s GST
liability and that, in return, Mr. Andrew undertakes not to use the fact of the
release as a defence in any action arising out of the application of section
323 of the ETA. The first sentence of that letter originally read as
follows:
Whereas, I am a
Director of the above captioned corporation and which corporation is at this
date indebted to Her Majesty on account of unremitted Goods and Services tax,
in the amount of $144,861.82 as assessed under the Excise Tax Act.
[24] The last part of that sentence was amended by inserting in
handwriting the following underlined words so that the sentence now reads:
Whereas, I am a
Director of the above captioned corporation and which corporation is at this
date indebted to Her Majesty on account of unremitted Goods and Services tax,
in the amount of $144,861.82 as arbitrarily assessed under the Excise
Tax Act and re-assessed at $21,150 plus penalty and
interest up to period ending 96-06-30.
[25] Mr. Andrew stated that he and Mr. Addorisio had reviewed Meld’s
account and the returns that Meld had filed shortly before the meeting for the
periods covered by the arbitrary assessments and that Mr. Addorisio had agreed
to reduce the assessed amount which was set out in the Meld letter. However,
Mr. Andrew said that Meld’s liability has never been reduced despite his
repeated requests to have it done. Mr. Andrew maintains that Meld was entitled
to a credit of approximately $123,000 as a result of the agreement he made with
Mr. Addorisio, and said that he has been attempting for many years to have the
CRA honour that agreement.
[26] Mr. Andrew said that, after the agreement was made with Mr.
Addorisio, whenever any CRA collections officers contacted him about amounts
owing by either Meld or Andrew Paving, he would explain that the CRA owed the
companies money because the $123,000 credit had not been processed.
[27] He referred to certain letters from different CRA collections
officers to Andrew Paving between July 2000 and October 2002, and testified
that he called the officers on the file and explained about the Meld credit and
that the collections officers simply “went away”
after the calls.
[28] Sometime in 2000, the CRA began a GST audit of both Meld and Andrew
Paving for the period from April 1, 1996 to June 30, 1999. The audit resulted
in reassessments in September 2002 for additional GST of $65,362, penalty of
$23,530.64 and interest of $17,402.34 for Andrew Paving and additional GST of
$48,005.00 for Meld (the amount of penalty and interest on the assessment
issued to Meld is not in issue). Andrew Paving had also been reassessed
separately in June 2002 to disallow ITCs of $41,246 for its reporting period
ending September 30, 2001.
[29] In January 2003, Andrew Paving and Meld each filed a notice of
objection to the reassessments. The grounds for Andrew Paving’s objection were
that the assessment did not include credits to its account for payments made
and for credits claimed on its GST returns, and did not take into account ITCs
(presumably the disallowed amount of $41,246 for the period ending September 30,
2001.)
[30] In July 2003, Mr. Andrew met with Jay Schafer (the CRA collections
officer) who had contacted Mr. Andrew about the outstanding GST debts of Andrew
Paving and Meld. According to Mr. Andrew, he met with Mr. Schafer twice and
reviewed the accounts of both Meld and Andrew Paving with him. They arrived at
an agreement on how much GST both Meld and Andrew Paving owed and Mr. Andrew
agreed to file all overdue GST returns for Andrew Paving and to provide
post-dated cheques sufficient to pay the amounts owing for all reporting
periods up to that point.
[31] Mr. Andrew also undertook to make a fairness application for a
cancellation of penalties and interest, and agreed to write a letter to the Director
of the Toronto North Tax Services Office regarding the agreement he said was
set out in the Meld letter.
[32] Mr. Andrew wrote to the Director of the Toronto North Tax Services Office
of the CRA on August 5, 2003 to request the credit for the $123,000 that he
felt was due to Meld from 1996. A confirmation of receipt of the letter was
sent to Mr. Andrew by the Assistant Director of that office on August 21, 2003.
[33] On August 18, 2003, Mr. Andrew provided Mr. Schafer with post-dated
cheques totalling $342,000 for both companies, as well as GST returns and net
tax due for Andrew Paving’s reporting periods ending between March 2002 to June
30, 2003. Mr. Andrew said that he expected to receive penalty and interest
relief for both Meld and Andrew Paving and a credit for $123,000 respecting the
Meld letter and that as a result, he thought that the CRA would not need to
cash all of the post-dated cheques.
[34] On September 5, 2003, Mr. Andrew wrote to Lisa Kelly, the CRA
appeals officer assigned to handle the objections previously filed by Andrew
Paving and Meld, and advised her that, after reviewing Andrew Paving’s GST account
with Mr. Schafer, he was satisfied that all credits for the reporting periods
from April 1, 1996 to June 30, 1999 had been properly accounted for. The
only item left outstanding at that point concerned the ITCs disallowed to
Andrew Paving for the period ending September 30, 2001. (Those ITCs were
ultimately allowed by Ms. Kelly.)
[35] On November 18, 2003, Mr. Andrew prepared the fairness application
for each company and set them to the CRA.
[36] On April 30, 2004, both Meld’s and Andrew Paving’s fairness applications
were granted in part. Penalties and interest were reduced by approximately
$56,691 for Meld and by approximately $14,910 for Andrew Paving. The letter
from CRA collections to Andrew Paving which granted the relief, provided the
following details of interest and penalties that had been assessed to Andrew Paving
for all of its reporting periods ending from March 31, 1991 on:
The accrued penalty
and interest charges on your account total approximately $77,998.56. Of this
amount, $14,910.19 has accrued on the audited periods, and $3,540.26 has
accrued on periods in which notional assessments were raised and later replaced
by you in November of 1996. The remaining $59,548.11 pertains to periods in
which you filed or paid returns late.
. . .
Relief for the
audited periods will be granted in full, resulting in the cancellation of
approximately $14,910.19. Periods in which notional assessments were raised
will not receive relief as the change in penalty and interest charges would be
minimal. I should caution you that the cancelled amount is approximate, and
total cancellation will not be available until the appropriate adjustments are
completed.
[37] The penalties and interest which were cancelled related to the
audited period of April 1, 1996 to June 30, 1999.
[38] Mr. Andrew testified that he continued to wait to hear from the
Director of the Toronto North Tax Services Office regarding the Meld letter but
that he never received a response.
[39] Mr. Andrew said that because he believed that there were credits
owing by the CRA to Meld and Andrew Paving, including the $123,000 relating to
the Meld letter, and because he could not get a response from anyone at the CRA
about those credits, he decided not to pay any more tax amounts that were due
by Andrew Paving or 155 until the matter was sorted out. In his view, if the
amounts he believed to be owing to Meld and Andrew Paving were credited to them,
there would have been sufficient funds available to offset any tax owing by
Andrew paving and 155.
[40] Mr. Andrew said that the CRA collections section continued to pursue
Andrew Paving and 155 for unpaid amounts, but that each time the companies were
contacted by collections officers, he sent them a letter advising them that those
companies did not owe anything. He said that he referred them to the Meld
letter and to his request to the Director to acknowledge the credit owing to
Meld and that each time he sent this information to the various collections
officers, he said that he did not hear back from them. He also said that he dealt
with between 15 and 20 collections officers during this period. The CRA
collections diary, however, showed that far fewer collections officers handled
the file after Mr. Schafer.
[41] The first of those CRA collections officers sent a demand for
payment to Andrew Paving on June 9, 2005 for GST arrears of $167,957.90. Mr.
Andrew replied by letter dated July 7, 2005, stating that the account had been
paid in full up to June 2003 and that the amounts owing to Meld and Andrew
Paving would eliminate the balance owing for subsequent reporting periods.
[42] In that letter and in a subsequent letter, he claimed that Andrew
Paving and Meld had been granted additional relief from penalties and interest
in the amount of $9,810 and $16,302.53, respectively, in June 2004 in respect
of a second fairness review, but that neither company had received credit for
those amounts.
[43] Mr. Andrew was not asked about this claim at the hearing and there
was no reference to a second fairness review in any CRA letters or documents.
[44] The next contact with CRA collections occurred in March 2006 when
collections officer Kevin Bailey called Mr. Andrew who followed up with a
letter setting out his position that Andrew Paving, Meld and 155 did not owe
any tax. Mr. Andrew said that Mr. Bailey suggested that he get a lawyer to
assist him with the matter. Mr. Andrew testified that he then hired a lawyer to
deal with the CRA.
[45] In June 2006, Andrew Paving was audited and assessed for unremitted
employee source deductions and penalty and interest in the amount of
$142,335.98 for 2005 and $1,365.05 for the months of January to May 2006. Mr.
Andrew said that he was unaware of the audit and that the matter would have
been handled by “the office.” He said that he thought
that the company was up-to-date on its source deductions. However, a T-4
Summary report filed by Andrew Paving for 2005 that was included in the source
deduction audit papers filed at the hearing showed that Andrew Paving had
reported a balance owing for source deductions of $164,377.21 for that year. The
amount of the unremitted source deductions for 2005 was reduced to $124,377.21 by
the auditor, exclusive of penalties and interest. Mr. Andrew admitted that he
instructed personnel in Andrew Paving’s office not to remit source deductions
because he believed that Andrew and Meld had overpaid their taxes.
[46] In the spring of 2007, the CRA collections files for Andrew Paving,
Meld and 155 were assigned to a collections officer named C. Andrews, and then,
in the fall of 2007, to Ron Jarman.
[47] Mr. Andrew and his lawyer met on at least two occasions with Mr. Jarman.
It was Mr. Jarman’s recollection that Mr. Andrew was only disputing the CRA’s
accounting in Meld’s GST account, in particular with respect to the $123,000
Meld letter amount and with respect to three payments made to the Meld's account
by cheque from Andrew Paving.
[48] Mr. Andrew testified that Mr. Jarman attempted to find where the three
payments had been applied to but that he was unable to do so.
[49] Mr. Jarman, on the other hand, testified that he reconciled the three
payments, one of which had taken some time to trace. Parts of one payment had
been applied to three different reporting periods and therefore the statement
of account did not show a credit in an amount that matched the payment. Mr. Jarman
was therefore able to show that the entire amount of that payment as well as
the two other contested payments had in fact been credited to Meld’s account.
[50] In cross-examination, Mr. Andrew acknowledged that Mr. Jarman had
been able to reconcile the payments in question to Meld’s account, but was
upset that without Mr. Jarman’s assistance, he would not have been able to tell
how the one payment that was split up, had been applied.
[51]
In a letter dated April 23, 2008 to Mr. Andrew’s
lawyer, Mr. Jarman also explained the CRA’s position that there was no $123,000
credit owing to Meld. Mr. Jarman wrote that:
Secondly, there has been on-going confusion on Mr. Andrew’s part
regarding the letter of December 11, 1996. This letter was issued as the result
of a Requirement to Pay issued on Meld’s bank. As of that date, Meld was
arbitrarily assessed in the amount $144,861.82. This amount was for the unfiled
returns for periods ending 1994-06-30, 1994-09-30, 1994-12-31, 1995-03-31,
1995-06-30, 1995-09-30, 1995-12-31, 1996-03-31 and 1996-06-30. As standard
Agency practice, Meld would have had to file these outstanding returns before
release of the Requirement to Pay would be entertained. I am attaching a
schedule of Meld’s returns for these periods:
|
Period End Date
|
GST Collected
|
Input Tax Credit
|
Period Total
|
|
30-Jun-94
|
13,180.00
|
7,623.00
|
5,557.00
|
|
30-Sep-94
|
15,481.00
|
8,201.00
|
7,280.00
|
|
31-Dec-94
|
17,822.00
|
8,607.00
|
9,215.00
|
|
31-Mar-95
|
650.00
|
5,157.00
|
-4,507.00
|
|
30-Jun-95
|
11,857.00
|
7,789.00
|
4,068.00
|
|
30-Sep-95
|
19,602.00
|
12,080.00
|
7,522.00
|
|
31-Dec-95
|
24,075.00
|
14,690.00
|
9,385.00
|
|
31-Mar-96
|
0.00
|
5,100.00
|
-5,100.00
|
|
30-Jun-96
|
12,600.00
|
6,100.00
|
6,500.00
|
|
Totals
|
115,267.00
|
75,347.00
|
39,920.00
|
The figures set out in Mr.
Jarman’s letter were taken from a complete statement of Meld’s GST account
which Mr. Jarman subsequently sent to Mr. Andrew’s lawyer on May 6, 2008. That
statement confirmed that the GST collectable and ITCs available to Meld for the
periods covered by the returns referred to above, were assessed in the amounts reported
by Meld in the returns the company filed with the CRA.
[52]
Mr. Jarman also wrote in the April 23, 2008
letter that:
During our meeting on
March 6, 2008, Mr. Andrew agreed to the balances owing on Andrew and 1555223.
As such I am unable to grant your request to release the Requirements to Pay
issued.”
[53] The GST director’s liability assessments against Mr. Andrew were
issued on April 23, 2008. The source deduction director’s liability assessment
had been issued previously on December 13, 2007.
The Appellant’s Position
[54] The appellant submits that as a director of these corporations, he
exercised the degree of care, diligence and skill required to prevent the
failure of these remittances that a reasonably prudent person would have
exercised in comparable circumstances. He maintains that he had a reasonable
belief that the CRA owed Meld more money than what Andrew Paving and 155 owed
the CRA and that his attempts to have this debt recognized was all a reasonably
prudent director could have done in the circumstances to prevent Andrew
Paving’s and 155’s failure to remit.
[55] The appellant also disputes the correctness of the underlying
corporate assessments and submits that given the circumstances of the case, the
Minister bears the burden of establishing the correctness of the assessments.
He argues that the Minister failed to do so.
The Respondent’s Position
[56] The respondent submits that the appellant did not exercise due
diligence. Instead, he intentionally caused the corporations’ failure to remit.
He used these remittances to operate the business and then to pay creditors.
The appellant’s belief that Meld was owed a refund and that the Minister had
misapplied or improperly calculated credits did not relieve him of his duty to
prevent failures to remit source deductions and GST.
[57] The respondent also submits that while the postings to the GST
account for Andrew Paving may be confusing, the underlying corporate
assessments are correct and easily understood. The assessments are based on
returns filed by the corporations. The appellant chose to deal with the account
issues himself, despite having no accounting training and despite having an
accountant and a bookkeeper. As well, the CRA met and spoke with the appellant
on many occasions and provided account information when requested. The CRA
officers called to testify provided cogent explanations of the statements of
account, and the appellant did not show any errors with respect to the
underlying assessments.
Statutory Provisions
Income Tax Act
[58] Subsections 227.1(1) and (3) provide:
227.1(1) Where a
corporation has failed to deduct or withhold an amount as required by
subsection 135(3) or 135.1(7) or section 153 or 215, has failed to remit
such an amount or has failed to pay an amount of tax for a taxation year as required
under Part VII or VIII, the directors of the corporation at the time the
corporation was required to deduct, withhold, remit or pay the amount are
jointly and severally, or solidarily, liable, together with the corporation, to
pay that amount and any interest or penalties relating to it.
. . .
(3) A director is
not liable for a failure under subsection 227.1(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.
Excise Tax Act
[59] Subsections 323(1) and (3) provide:
323.(1) If a
corporation fails to remit an amount of net tax as required under
subsection 228(2) or (2.3) or to pay an amount as required under
section 230.1 that was paid to, or was applied to the liability of, the
corporation as a net tax refund, the directors of the corporation at the time
the corporation was required to remit or pay, as the case may be, the amount
are jointly and severally, or solidarily, liable, together with the
corporation, to pay the amount and any interest on, or penalties relating to,
the amount.
. . .
(3) 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.
Analysis
Onus
[60] The appellant’s counsel argued that, on the particular facts of this
case, the onus of establishing the correctness of the underlying tax
assessments against Andrew Paving and 155 should be shifted to the respondent.
The circumstances that in the appellant’s view result in reversing the normal
onus in this case are that the GST statement of account for Andrew Paving do
not reflect adjustments agreed to by the CRA, that amounts assessed include
interest and penalties in respect of periods for which credit balances ought to
have existed based on the net tax assessed, that the collections officers did
not verify the correctness of the underlying corporate assessments and that the
account statements were not comprehensible on their face.
[61] The appellant argues that Simon v. Her Majesty the Queen, [2001]
T.C.J. No. 526 stands for the proposition that the Minister
bears the onus of establishing the correctness of the underlying assessments in
a director’s liability case. In Simon, Archambault J. stated at paragraph 74:
We are dealing here
with a "derivative" assessment, as Rothstein J.A. put it in Gaucher,
supra, and the approach adopted by the courts must take into account the fact
that at issue are two separate assessments made by the Minister against two
different taxpayers. Accordingly, where the SD amount in an assessment against
a director is challenged, it is necessary to call as a witness the auditor who
made the assessment against the corporation that failed to remit the SDs
pursuant to section 153 of the Act, which assessment served as the basis for
the assessment made against the director. It is not enough for a collection
officer who assessed the director to state that he relied on the assessment
made against the corporation by the SD auditor, just as it would not be enough
merely to file that corporation's assessment. The Court cannot act on blind
faith by assuming that all the audit work concerning the corporation was done
in accordance with good practice and that the relevant documents were reviewed
in making the assessment against the corporation.
[62] This statement, however, must be read alongside Archambault J.’s
earlier comment at paragraph 68 of his decision that
when a derivative assessment is based on the taxpayer’s own filings, the
Minister would not bear the onus of proving the correctness of the assessments.
I added that it was
not enough to produce the primary tax debtor’s notice of assessment unless the
amount established by the Minister in that assessment corresponded to that
indicated by the tax debtor in his or her tax return.
[63] Also, at paragraph 41 of my decision in Mignardi v Her
Majesty the Queen, 2013 TCC 67,
[2013] T.C.J. No. 66, I held that the onus to
prove an underlying tax liability did not shift to the Minister in every appeal
from a derivative assessment:
I return now to the
proposition that appears to flow from the Gestion Yvan Drouin Inc. case that
the Minister bears the onus to prove the underlying tax liability in every
appeal from a derivative liability assessment under subsection 160(1) or
section 227.1 of the ITA or sections 323 or 325 of the ETA. I agree with
respondent's counsel that such a conclusion is inconsistent with the decisions
of the Supreme Court and Federal Court of Appeal to which I have referred. It
is only where the facts concerning the underlying tax debt are exclusively or
peculiarly within the knowledge of the Minister that the burden will be
shifted. Each case will turn on its own facts. Although there may be situations
where the tax liability of the original tax debtor is something that is solely
within the knowledge of the Crown, more often a taxpayer will have access to
that information from the original tax debtor. It should be recalled that one
of the bases on which a person is assessed under those provisions is his or her
relationship with the tax debtor, either as in this case as a director of the
debtor corporation or as a party not dealing at arm's length with the tax
debtor. As a result of this relationship, a taxpayer may very well already have
or be able to obtain the information required to verify the existence or amount
of the underlying liability.
[64] In Mignardi, I recognized that in exceptional circumstances,
the burden of proof may be shifted from the taxpayer to the Minister. However,
this will occur only where the facts concerning the underlying tax debt are “exclusively or peculiarly within the knowledge of the
Minister.” In the context of a director’s liability assessment, this
might occur when a taxpayer does not have and cannot obtain the information
required to verify the existence or amount of the underlying tax liability.
[65] I disagree with the appellant that the onus of proof of the
underlying corporate assessments should be shifted to the respondent in this
case because I am not satisfied that the appellant has demonstrated, as the
appellant in Mignardi did, that the underlying assessments of Andrew
Paving and 155 are exclusively or peculiarly within the knowledge of the
Minister.
[66] First, both Mr. Jarman and Mr. Locantore testified that the amounts
of net tax assessed to Andrew Paving and 155 under the ETA for the periods
relevant to the director’s liability assessments were the amounts of net tax
reported on the returns filed by those companies. Mr. Andrew confirmed this as
well. Since Mr. Andrew, according to his own testimony, was personally
involved in the filing of all of the GST returns, it would follow, in my view,
that Mr. Andrew would be in the best position to what errors, if any, the
underlying assessments contained. It is also clear that, while employees in the
office of Andrew Paving handled source deductions, this was done under Mr.
Andrew’s authority and that all information concerning source deductions by
that company was available to him. As well, there is evidence that Andrew
Paving itself reported that it owed source deductions for the 2005 year in
excess of the amount assessed to the appellant.
[67] Therefore, I find that there are no circumstances like those in Mignardi,
whereby Mr. Andrew has been denied access to the records of either Andrew
Paving or 155. In fact, the evidence suggests that Mr. Andrew would have been
in a position to retain possession of all of the files and records of both
companies after they ceased operations, and that this would include all files
and records pertaining to GST and source deductions.
[68] The fact that the underlying assessments were based on the
corporations’ own filings would also mean that verification of those
assessments by the collections officer who raised the director’s liability
assessments would not be necessary.
[69] Next, contrary to the appellant’s submission, it also appears that
the CRA was responsive to Mr. Andrew’s requests for an explanation or
reconciliation of the GST liabilities of Andrew Paving and Meld. He admitted
that on at least two occasions, in 2003 and 2008, CRA collections officers
provided reconciliations of those accounts. The evidence shows that Mr. Andrew
appeared satisfied with the 2003 reconciliation, telling the appeals officer
handling notices of objection filed by Andrew Paving and Meld that Mr. Schafer
had demonstrated that all credits for the period under objection had been applied.
He also said that after meeting with Mr. Schafer, they had come to an agreement
on what is owed by Meld and Andrew Paving up to that point, except with respect
to Mr. Andrew’s claim regarding the Meld letter. In 2008, Mr. Jarman dealt with
each of the specific cheques that the appellant felt had not been credited to
the companies’ accounts and demonstrated where the credits had been applied.
There is no evidence to show that Mr. Schafer and Mr. Jarman were unable to
account for any payments made by the companies or unable to answer any of the
appellant’s questions relating to those accounts.
[70] While it is true that the Director of the Toronto North Tax Services
Office and some of the collections officers that Mr. Andrew dealt with did not
respond to his request to look into the Meld letter situation, the CRA’s
position on the issue was ultimately communicated to him by Mr. Jarman in his
letter of April 23, 2008. By the time Mr. Andrew was assessed as Director
of Andrew Paving and 155, he had been provided with the details of the
assessments made against Meld for the reporting periods for which Mr. Andrew
believed Meld was entitled to the $123,000 credit. No evidence was led to show
that the explanation provided by Mr. Jarman was incorrect.
[71] For these reasons, I am unable to conclude that Mr. Andrew lacked
the information necessary for him to determine the correctness of the
assessments against Andrew Paving, 155 and Meld, or that the CRA failed to
provide information to Mr. Andrew concerning the GST accounts of those companies.
[72]
The appellant also submitted that in this
case, the CRA documents that set out the calculation and application of various
credits and the interest and penalties were “not
comprehensible on their face or without the explanation of a collections officer.”
The testimony from the CRA collections officers confirmed that it would take an
auditor’s report to gain a complete understanding of what had happened at
various times.
[73]
However, the
appellant brought no evidence that suggested he did not have access to the
corporations’ books and records and no evidence that he would not have had
access to the audit reports or any of the other information required to verify
the existence or amount of the underlying tax liability. He also appears to
have received assistance from the CRA in reconciling various payments and
credits made to corporations’ accounts.
Alleged errors in underlying GST assessments
of Andrew Paving
[74]
As I noted above, a taxpayer who has been
assessed under section 227.1 of the ITA or section 323 of the ETA
is entitled to challenge an underlying assessment or assessments made against
the corporation of which he was a director on any basis that the corporation
could have challenged that assessment.
[75] The appellant alleges that the Minister’s calculation of the total
net tax, interest and penalty owing was too high. I assume that the appellant
is referring to the amounts the Minister says are owing by Andrew Paving under
the ETA, since none of the alleged errors, to which I will refer below,
relate to the GST account of 155 or to the source deductions account of Andrew
Paving. Furthermore, Mr. Andrew agreed with the amounts that were assessed
against Andrew Paving for unremitted source deductions and against 155 for
unremitted GST.
[76] Prior to dealing with the particular errors that the appellant
alleges were made on Andrew Paving’s GST account, I note that most of them
relate to reporting periods not included in the director’s liability assessment
against the appellant. For example, the appellant submits that certain credits
arising from net credit returns (i.e. ones where the ITCs claimed by the
taxpayer exceeded the GST collectable for the period were not applied to Andrew
Paving’s account in a timely manner). While counsel did not specify the reporting
periods for which the relevant net credit returns were filed, it appears that
credit returns were filed after the return due date for each of the following
reporting periods: March 31, 1991, March 31, 1992, March 31, 1993, March 31,
1996, March 31, 1998, March, 1999, March 31, 2004 and March 31, 2006. In the
appellant’s view, this led to excess penalties and interest being charged.
[77] All but two of the periods for which the credit returns were filed
pre-dated the reporting periods of Andrew Paving that are covered by the
director’s liability assessment against the appellant, and the credits were
applied to earlier periods as well. In this case, the appellant had been
assessed for net tax that Andrew Paving failed to remit for reporting periods
commencing in 2000.
[78] Two other errors that the appellant alleges were made by the CRA in
accounting for payments or credits also relate to periods that preceded those
contained in the director’s liability assessments. The appellant says that an
adjustment for Andrew Paving’s reporting period ending September 30, 1996 to
increase ITCs was not processed for five years and five months after a CRA
auditor determined that Andrew Paving was entitled to them. Also, the appellant
takes issue with the adjustments made to interest and penalty as a result of
Andrew Paving’s fairness application. Those adjustments relate to reporting periods
ending before July 1999.
[79] In challenging the underlying corporate liability for unremitted net
tax, the appellant is limited to those arguments that the corporations could
have raised in an appeal of the underlying assessments.
[80] In an assessment relating to a particular reporting period, I do not
believe that this Court has jurisdiction to consider how the CRA applied
credits or payments in respect of other reporting periods because it would not
affect the amount of tax assessed for the particular reporting period. Under
the ETA, net tax is assessed for each particular reporting period, per paragraph 296(1)
which reads:
296. (1)
Assessments — The Minister may assess
(a)
The net tax of a person under Division V for a
reporting period of the person…
[81] In my view, it is not open for the appellant to challenge the
director’s liability assessments against him on the basis of alleged errors
made in assessing net tax, interest or penalties for reporting periods other
than those which underlie the director’s liability assessments because the
corporations themselves would not have been able to make those arguments if
they had appealed the underlying assessments. Accounting for payments made on a
taxpayer’s account for periods other than those assessed, is a collections
matter and is outside the jurisdiction of the Court: see Neuhaus v. The
Queen 2002 FCA 391, [2002] F.C.J.
No. 1480. For the same reason, it is also not
open to the appellant to challenge the assessments on the basis of alleged
errors in applying payments to amounts owing for other reporting periods.
[82] Even if this Court had jurisdiction to deal with these matters, I
would have found that the appellant did not show that errors were in fact made
in accounting treatment of the items listed above.
[83] First, the appellant’s counsel submitted that credits reported on
credit returns were not applied to the corporation’s debt until the date the
return was received by the CRA rather than the date the return was due. She
said that this led to excess interest and penalty charges under
subsection 280(1) of the ETA because in cases where a credit return
was filed later than the due date for the return, the credits were not applied
to the appellant’s account as soon as the appellant became entitled to the
credits.
[84] The appellant’s counsel argued that the net credits reported on
those returns should have been available to be applied to any amount owing by
the taxpayer as of the date the return was due to be filed, rather than as of
the date the return was actually received by the CRA, which was after the due date
in those cases.
[85] The appellant’s position runs contrary to the decision of this Court
in Paquin v. The Queen,
2004 TCC 597. In Paquin, former Chief Justice
Garon came to the conclusion that the right to an ITC does not arise until it
is claimed. After reviewing sections 169 and 225 of the ETA, he stated
at paragraphs 17 and 18 of his decision that:
The above indicates
that this right to input tax credit does not exist until it is claimed. The
legislation does not set out that this right is retroactive to the period when
it could have been validly claimed by the taxpayer in his return for a
preceding period. Furthermore, it is not set out in the legislation that, when
calculating the interest and penalties on the net tax payable, the amounts
representing input tax credit must be taken into account as of the time this
credit could have been validly claimed. In this respect, I am referring in
particular to section 280 of the Excise Tax Act.
. . . In
addition, when calculating the interest and penalties on the amount of the net
tax, the Minister could take into account amounts representing input tax credit
only as of the time the right to input tax credit arose. For this case,
that time began when the return claiming the input tax credit was filed and the
net tax was remitted.
[86] The finding that the entitlement to a credit does not arise until
the credit is claimed is also consistent with section 229 of the ETA
which provides that interest on a refund due in respect of a credit return
becomes payable starting 30 days after the later of the day the return is
filed or the day following the last day of the reporting period. Therefore, in
the case of a late-filed credit return, interest on the credit would not begin
to run until the return is filed.
[87] The appellant maintains that the Paquin decision should not
be followed because the Court did not consider the application of subsection 296(2)
of the ETA. That section deals with unclaimed ITCs and requires the
Minister, in assessing, to take into account any ITC available to a supplier in
calculating net tax that has not yet been claimed by the supplier and which
would have been allowed if claimed by the supplier in a return for the
particular reporting period.
296 (2) Where, in
assessing the net tax of a person for a particular reporting period of the
person, the Minister determines that
(a) an amount (in this subsection referred to as the “allowable credit”) would have been allowed as an input
tax credit for the particular reporting period or as a deduction in determining
the net tax for the particular reporting period if it had been claimed in a
return under Division V for the particular reporting period filed on the day
that is the day on or before which the return for the particular reporting
period was required to be filed and the requirements, if any, of
subsection 169(4) or 234(1) respecting documentation that apply in respect
of the allowable credit had been met,
(b) the allowable credit was not claimed by the person in a return filed
befor the day notice of the assessment is sent to the person or was so claimed
by was disallowed by the Minister, and
(c) the allowable credit would be allowed, as an input tax credit or
deduction in determining the net tax for a reporting period of the person, if
it were claimed in a return under Division V filed on the day notice of the
assessment is sent to the person or would be disallowed if it were claimed in
that return only because the period for claiming the allowable credit expired
before that day,
the Minister shall
take the allowable credit into account in assessing the net tax for the
particular reporting period as if the person had claimed the allowable credit
in a return filed for the period
[88] Where an ITC is allowed under subsection 296(2), “subsection 296(5) deems it to have been claimed in a
return and deems the offset to net tax to have been paid. The effect of
subsection 296(2) is not only that the ITC is allowed, but that it is
allowed in the same period as the tax assessed. Thus, no interest and penalty
accrue under subsection 280(1) on the unpaid tax to the extent it is
offset by the ITC, because the offset applies retroactive to the application of
the tax.” (David Sherman: GST Commentary, section 296).
[89]
The appellant submits that once the Minister
determined the ITCs were due for the periods that credit returns were filed by
Andrew Paving and the Minister accepted the returns in accordance with
subsection 296(2), the credits should have been available as if they were
claimed in a return filed for the period and no later than the date the tax was
assessed for the later periods.
[90] The first difficulty with this argument is that Andrew Paving
claimed the ITCs in returns it filed with the Minister for the periods in which
the ITCs arose and the Minister allowed the ITCs for those periods prior to
Andrew Paving filing returns for the periods in which net tax was due.
Therefore, the condition in paragraph 296(2)(b) would not be met
because the ITCs had already been claimed and allowed. In Pawlak v. Her
Majesty the Queen, 2012 TCC 355,
[2012] T.C.J. No. 289, this Court noted at
paragraph 19 that:
. . . the purpose of the condition in paragraph 296(2)(b) of the ETA
is to ensure that a person has not already been allowed the benefit of such
ITCs in determining that person's net tax for any reporting period. Therefore,
the condition in paragraph 296(2)(b) of the ETA will be satisfied as long as the
ITCs had not been previously allowed as ITCs in computing the net tax of the
person for any reporting period. . . .
[91] The appellant also relied on the case of Humber College v. Her Majesty the Queen, 2013 TCC
146, [2013] T.C.J. No. 117, which dealt with the application of subsection 296(2.1) of the
ETA. Subsection 296(2.1) provides for an allowance for an unclaimed
rebate. The appellant in Humber College was assessed interest in
respect of the late GST payment that it was required to self-assess and remit
on the purchase of real property. Since the appellant was a public college, it
was entitled to a public service body rebate of 67% or the GST payable on the
purchase of the real property. The question before the Court was whether the
Minister correctly imposed interest on the full amount of GST due before taking
into account the rebate or whether the interest on the late payment was only
payable on the net amount of GST due after setting off the rebate. Campbell Miller
J. held that interest on a late payment of GST was to be calculated on the net
amount of GST owing.
[92] However, that case did not, as the appellant’s counsel contends,
deal with a claim for ITCs. In fact in Humber College, Campbell
Miller J. was careful to distinguish between the entitlement to rebates and the
entitlement to ITCs. At paragraph 17 he stated:
Mr. Cheung, the
Respondent's counsel, argues that former Chief Justice Garon's decision in
Claude Paquin v. Her Majesty the Queen1 is dispositive of this Appeal. I
disagree. Former Chief Justice Garon was dealing with late filed remittances
claiming Input Tax Credits ("ITC's"), which were only allowed as of
the time of the late filing. Interest was charged accordingly on the full tax
owed, without retroactively crediting the ITC's against the tax. Interestingly,
subsection 296(2) of the Act was never mentioned. Clearly, credit for ITC's was
not applied at the point when the taxpayer would have been entitled to claim
them, only when the taxpayer did claim them. However, entitlement to ITC's is not
the same as entitlement to rebates, given the contextual and purposive
interpretation of the legislation surrounding rebates. ITC's are not
inextricably linked to the transaction giving rise to the GST. They are not
specific to clearly identified special public organizations, granted special
treatment.
[93] For these reasons I find that subsection 296(2) would not have
been available to Andrew Paving to challenge any of the interest and penalties
that were assessed.
[94] The appellant’s counsel also argued that the Minister had failed to
credit Andrew Paving with interest on a refund that was due for its reporting
period ending September 30, 2001. Andrew Paving had claimed ITCs of $41,246 in
its return for that period which was received by the CRA on November 22, 2001.
The ITCs were disallowed by the Minister on June 6, 2002 but subsequently
allowed in a lesser amount, which still resulted in a credit balance of
$2,074.96 for the period. That credit was applied to Andrew Paving’s tax owing
for another period, but only with an effective date of June 6, 2002 rather than
November 22, 2001, the date that the return was received by the CRA. Mr. Jarman
and Mr. Locantore were not able to say whether any interest for the period
between November 22, 2001 and June 6, 2002 was ever credited in respect of the
$2,074.96, and there was no entry on the account that appeared to relate to
interest for that amount for that period. However, at another point in his
testimony, Mr. Locantore stated that audit adjustments could also contain amounts
in respect of interest and penalty without identifying them as such in the
adjustments shown on the account. Since the entries related to the disallowance
and subsequent allowance of the ITCs were identified as audit adjustments, it
would be necessary to refer to the audit records to determine what the amounts
shown on the account consisted of. The onus of proof of the alleged error is on
the appellant, it would incumbent on him to produce sufficient evidence to
satisfy the Court that the adjustment amounts did not include the interest in
question. I am not convinced that Mr. Locantore or Mr. Jarman were in a
position to confirm that no interest was allowed as a credit to Andrew Paving
in these circumstances, and in the absence of any definitive proof of what was
done by the auditor, I find that the appellant has not shown that an error was
made in this regard.
[95] Interest credit for another similar audit adjustment for the period
ending September 30, 1996 was also put in issue by the appellant. No questions
on this point were put to either Mr. Jarman or Mr. Locantore and no other
evidence was presented. Therefore, I decline to find that an error was made in
this respect either.
[96] At this point, I would point out that these particular alleged
errors, like those I set out below, were not specifically pleaded by the
appellant nor was there evidence that they were raised at the examination for
discovery of Mr. Locantore or communicated to the respondent prior to the
hearing. As such, although the matter of interest would normally be within the
knowledge of the Minister, the respondent cannot be faulted for not having
information available to refute the particulars of the claim.
[97] The appellant also alleged that payments were posted to Andrew
Paving’s account for the periods ending March 31, 2002 to September 30, 2003
rather than to the oldest outstanding balance at the time those payments were
made, thereby causing extra interest and penalties to accumulate. The
appellant’s counsel also said that the payments for the March 31, 2002 to
September 30, 2003 periods were only applied to some of the amounts due for
each period, with the result that each period maintained an amount outstanding
on which interest and penalties continued to accumulate.
[98] The simple answer to this argument is that the payments made to
those periods, were made as directed by Andrew Paving in a letter to Mr.
Schafer dated August 18, 2003. Mr. Andrew provided cheques to Mr. Schafer for
the outstanding net tax for each of these periods and according to CRA policy,
the payments were applied as directed, even though there were outstanding
balances owing for previous periods. Since the returns for those periods were
late filed, interest and penalties were charged, which increased the balance
owing for the period beyond what was reported and paid by Andrew Paving.
Therefore, small balances remained outstanding for those periods after applying
the payments made by Andrew Paving on August 18, 2003.
[99] The appellant maintains that there were errors in the accounting for
fairness relief granted to Andrew Paving on April 30, 2004 in respect of the
periods ending June 30, 1996 to June 30, 1999. Counsel stated that there do not
appear to be any credits applied to other periods with an effective date of
April 30, 2004, which should be the case if credits previously applied to
the audit period were transferred to other periods as a result of the reduction
of interest and penalties granted by the fairness committee. Counsel also said
that the collections' diary did not reflect a reduction in the total amount
outstanding between April 27, 2004 and April 30, 2004. If there had been a
downward adjustment to interest and penalties effective April 30, 2004, one
would expect the account balance to drop.
[100]Mr. Locantore testified that he had reviewed the accounting for the
interest and penalty relief that was granted to Andrew Paving and that he
satisfied himself that all amounts had been properly accounted for. He was never
asked specifically about why no entries with an effective date of April 30,
2004 appear on the account, but he did testify that under the accounting system
used by the CRA at the time, reductions of interest and penalties that were
granted under the fairness legislation did not appear as entries on the account.
At the time, adjustments were made to stop interest and penalties from
accumulating for the periods covered by the relief, effectively backing out the
interest and penalties as if they had not been charged from the outset. This
meant that adjustments for interest and penalties did not show up on the
account. This may also explain why there are no entries for payment transfers
relating to the relief that was granted. The appellant’s failure to question
the CRA officers on this point, leaves it open to speculation as to how the
accounting was done to reflect the fairness relief. In the absence of any
evidence on this point, I accept Mr. Locantore’s evidence that he reviewed
the accounting that was done and was satisfied that the adjustments were
credited to Andrew Paving. Likewise, none of the CRA officers were questioned
about the balance showing in the collections' diary around April 30, 2004 and
so it is not possible to draw any conclusion from what was shown. I do note,
though, that the collections' diary does show a substantial reduction in the
total owing by Andrew Paving by May 4, 2004.
[101]The appellant also maintains that the GST amount assessed to Andrew
Paving after 2003 included the GST liabilities of Meld, and that Meld’s portion
of the GST liability should be subtracted from the director’s liability
assessment against the appellant.
[102]However,
Mr. Andrew was unable to give any specifics on the proportion of GST and ITCs
each company reported in 2005 and 2005, at one point saying that in 2005, very
little of the amount would relate to Meld, then that the shares might have been
equal, then that Meld’s share may have been less than 40% but that it was difficult to say. No evidence whatsoever was led to show what
specific amount of GST, if any, that Andrew Paving reported on behalf of Meld.
[103]In the absence of any proof of the actual amount of Meld’s post-2003
GST liability that was reported by Andrew Paving, the appellant’s submission
cannot succeed. Only he is in a position to provide evidence on this point, and
he has failed to do so.
[104]The appellant also submitted that the director’s liability
assessments should be reduced by $21,564.67 which was the total of three
amounts that were paid by the Minister to Meld in 2010 as a refund of credits
owing for periods prior to 2004. However, these amounts related to Meld and not
to Andrew Paving or 155, and the appellant has not shown any reason why the
director’s liability assessments should be reduced to account for those
refunds.
[105]For these reasons, I find that the appellant has not shown that
errors were made in determining amounts owing by Andrew Paving under the ETA.
Due diligence
[106]The last question to be determined is whether Mr. Andrew exercised
the degree of care, diligence and skill to prevent the failures to remit by
Andrew Paving and 155 that a reasonably prudent person would have exercised in
comparable circumstances.
[107]In Buckingham v. The Queen, 2011
FCA 142, 2011 DTC 5078, the
Federal Court of Appeal held that in order to make out a defence of due diligence
under subsection 227.1(3) of the ITA and subsection 323(3) of the ETA,
a director must prove that he was specifically concerned with the tax
remittances, and that he exercised care, diligence and skill to prevent a
failure to remit. Relying on the decision of the Supreme Court of Canada in Peoples
Department Stores Ltd. v. Wise, 2004 SCC 68, [2004] 3 S.C.R. 461, the Court of Appeal found
that the applicable standard of care, diligence and skill was an objective
rather than subjective one:
An objective
standard does not however entail that the particular circumstances of a
director are to be ignored. These circumstances must be taken into account, but
must be considered against an objective “reasonably prudent person” standard. (at
paragraph 39)
[108]The Court of Appeal also confirmed that, in order to succeed in a
due diligence defence, a director must be found to have taken positive steps to
prevent the failure to remit.
[109]In Buckingham, the director was assessed in respect of
failures by the corporation to remit source deductions for the months of
October 2002 to August 2003 and GST in March and June 2003. The Tax Court found
that, starting in 2002, reasonable business measures had been taken by the
corporation to address its financial difficulties and to avoid the failures to
remit up to February of 2003. Those business measures consisted of various
attempts to raise additional operating capital. The Tax Court held that up to
February 2003, the director had a reasonable expectation that the efforts to
obtain funding would succeed in avoiding the failures to remit taxes and that
he had thereby met the standard of care required of a director under subsection
227.1(3) of the ITA.
[110]In arriving at this conclusion, the Tax Court relied on the Federal
Court of Appeal decision in Worrell v. The Queen, 2000 DTC 6593, [2001] 1 C.T.C. 79. In that director’s liability case, efforts had been undertaken on
behalf of a corporation to find a new investor after the corporation had run
into financial difficulties. During the time that the search for an investor
was being conducted, the corporation failed to make certain tax remittances.
Although no investor was ultimately found, the Court considered that it was
reasonable of the directors to believe that, had an investor been found, the
failures to remit might have been prevented. Therefore, the Court held that the
directors had made reasonable efforts to prevent the failures to remit.
[111]In the present case, the appellant maintains that his efforts to
recover overpaid GST in respect of the GST accounts of both Meld and Andrew Paving
were as reasonable as the directors’ efforts in Buckingham and Worrell
to secure additional capital. Counsel submits that the appellant had a
reasonable belief that Meld’s and Andrew Paving’s accounts would be corrected
and reconciled and that the credits available would be paid and applied against
any future liability. Counsel also says that the appellant could not reasonably
have anticipated that no one at the CRA would review the accounts despite his repeated
requests that they do so.
[112]I agree with the appellant that if a director reasonably believed
that a corporation had a credit balance available in its GST account, this
would amount to a reasonable belief that the corporation had sufficient funds
available to pay future GST remittances as they came due, or even that the
future remittances had in effect already been satisfied. Like in Worrell
and Buckingham, relevant efforts of a director to prevent a failure to
remit would include steps taken to have funds available to pay remittances on
time. That those funds would be obtained by means of a credit for prior
overpayments of tax rather than by means of a capital investment by an investor
is immaterial.
[113]I am not satisfied, however, that the appellant has shown that his
belief that Meld and Andrew Paving were entitled to additional GST credits was
objectively reasonable.
[114]First, the evidence shows that it is unlikely that a credit of
$123,000 was due to Meld for the period up to June 30, 1996. The appellant says
that the credit arose as a result of the Meld agreement dated December 11, 1996
which he alleges obliged the Minister to reduce by approximately $123,000
amounts which had been arbitrarily assessed to Meld. The arbitrary assessments
covered Meld’s GST reporting periods ending June 30, 1994 to June 30, 1996. The
appellant says that Meld was never reassessed to reduce the GST due for those
periods. However, this position is contradicted by the statement of Meld’s GST
account provided by Mr. Jarman to the appellant in 2008, which shows that the
total net tax assessed by the Minister for those reporting periods was $39,920.
The statement of account indicates that those assessments were made on December 13,
1996. Furthermore, the evidence shows that the assessments were based on
returns filed by Meld itself in the fall of 1996 after the arbitrary
assessments had been issued. In his letter dated August 5, 2003 to the Director
of the Toronto North Tax Services Office concerning the Meld agreement, the
appellant confirms that the returns for those periods were filed in the fall of
1996 after arbitrary assessments had been issued.
[115]It is noteworthy that in the appellant’s letter to the Director
concerning the Meld agreement, he was not claiming a credit of $123,000.
Instead, he referred to an amount of $78,859.12 of payments and credits he said
had been wrongly applied by the CRA to reporting periods ending prior to June
30, 1996. The details of how the appellant calculated this latter amount were
not included in the letter, and it is not apparent from a review of the Meld
account statement that there were credits and payments totalling anywhere close
to that amount applied after 1996 to the reporting periods ending up to June
30, 1996. The claim for a credit of $123,000 does not appear until 2005, in
the appellant’s letter dated July 7, 2005 referred to earlier in these
reasons.
[116]I also find that it was not reasonable for the appellant to believe
that the Meld letter obliged the Minister to reassess Meld or constituted a
binding agreement with respect to Meld’s GST liability. The letter deals with
the release of a requirement to pay that had been issued to Meld’s bank. I find
it difficult to believe that the appellant thought that the handwritten note on
the letter referring to a liability of $21,150 plus penalty and interest would
displace assessments made in accordance with the returns filed by Meld shortly
before. It seems to me that if Meld felt that the assessments that were issued
on December 13, 1996 were wrong, based on the Meld letter, it would have
objected to the assessments. There was no evidence that Meld did so.
[117]There is no evidence that the appellant sought any legal advice or
assistance in relation to enforcing the alleged agreement in the Meld letter at any point in the years after it
was allegedly entered into. This is surprising, given that the appellant now
says that he believed that Meld was owed $123,000 and that the Minister refused
to acknowledge the alleged agreement.
[118]This apparent absence of professional advice is another factor that
leads me to conclude that the appellant’s belief that the Minister owed Meld
$123, 000 in relation to the Meld letter was not objectively reasonable.
[119]The appellant says that he also believed that the amounts assessed
to both Meld and Andrew Paving were too high for reporting periods ending prior
to 1996 due to improper application of credits and payments. According to the
appellant, Andrew Paving and Meld filed credit returns that were not
acknowledged by the Minister and had to be re-filed, and as a result, penalty
and interest charges were imposed for reporting periods when net tax was due.
According to the fairness request prepared by Mr. Andrew for Andrew Paving, the
penalty and interest amounts erroneously imposed were $28, 953.69 up to that
point. No amount was set out in Meld’s fairness request.
[120]A cursory review of Andrew Paving’s GST account statement casts
substantial doubt on the appellant’s position that the Minister lost or failed
to acknowledge its credit returns prior to 1996. According to the CRA
witnesses, the dates corresponding to the entries “GST/HST Collectable” and
“Input Tax Credits” on the statement of account were the dates the GST returns
were received by the Minister. According to Andrew Paving’s GST statement of
account, Andrew Paving’s first GST return was a credit return that was
processed on February 9, 1993. Andrew Paving’s returns for the next six
reporting periods were processed at the beginning of March, 1993 and included
one credit return. Andrew Paving’s returns for the next six reporting periods
were processed on December 20, 1994 and included two credit returns. The next
five returns were processed on January 12, 1996. None of those returns were
credit returns. Therefore, it appears that except for the first return filed, Andrew
Paving filed its returns in batches. The credit returns in those batches bore
the same processing dates as the returns in which Andrew Paving reported net
tax due. This would lead me to conclude that credit returns were not lost or
and that they were processed by the Minister in a timely fashion. In fact, it
appears that Andrew Paving filed most of its returns late and this is what led
to the substantial interest and penalty charges.
[121]There is no convincing evidence, either, that the Minister
misapplied payments to Andrew Paving’s account.
[122]Therefore, I find that the appellant has not shown that his belief
that the amounts of penalties and interest assessed for reporting periods up to
1996 were too high, was reasonable.
[123]The final alleged error to be addressed concerns two fairness
amounts that the appellant refers to, in his letters to Sylvia Williams and
Kevin Bailey. He claims in those letters that in June 2004, he met with Mr.
Malisani and discussed the fairness relief granted to Meld and Andrew Paving on
April 30, 2004 as well as his letter to the Director of the Toronto North Tax
Services Office to which he had not received a response. In the letters to Ms.
Williams and Mr. Bailey, he says that as a result of that meeting, Meld was
granted additional relief from interest and penalties in the amount of
$16,302.53 and Andrew Paving was granted additional relief of $9,810.63.
However, in his letters, the appellant stated that those amounts had not been
credited to Meld or Andrew Paving. Counsel for the appellant did not address
these amounts specifically in her written submissions and none of the witnesses
were questioned about them. Apart from the appellant’s letters, nothing appears
anywhere else in the documents to show that Meld and Andrew Paving were
entitled to credits in those amounts. Therefore, I find that the appellant has
not shown that his belief that Andrew Paving and Meld were entitled to those
credits was reasonable.
[124]Although counsel for the appellant questioned the CRA witnesses at
some length about other possible errors in the GST assessments against Andrew Paving,
those were not ones that the appellant raised at any point in his discussions
or correspondence with members of the CRA collections section and therefore
would not have formed a basis for his belief that tax and interest and
penalties had been overpaid on Meld’s and Andrew Paving’s accounts. The
appellant may not have agreed with what was owing, but a belief that there were
overpayments or mistakes in the CRA’s accounting, without having obtained
accounting assistance from a professional advisor to confirm the overpayments
or mistakes would not be a reasonable basis for not remitting GST and source
deductions due by Andrew Paving and 155. Even at the hearing, the appellant was
unable to point out erroneous entries in Andrew Paving’s GST statement of
account. All he was able to say was that he knew there were errors in it.
[125]For these reasons, I conclude that the appellant has not shown that
he exercised the degree of care, skill and diligence to prevent the failures by
Andrew Paving and 155 to remit GST and the failure by Andrew Paving to remit
source deductions that a reasonably prudent person in comparable circumstances
would have exercised.
Reliability of
Mr. Andrew’s testimony
[126]Before concluding, I believe it is necessary to comment generally on
the appellant’s testimony. Overall, I find that Mr. Andrew, despite his
sincerity, was not a reliable witness. His testimony lacked details and was
often difficult to follow and confused. Previously in these reasons, I have
referred to certain parts of the appellant’s testimony that in my view were not
reliable.
[127]In addition, Mr. Andrew’s explanation of how 155 operated and
accounted for tax made little sense and was at odds with the GST returns filed
by 155. Initially, he said that all tax filings by 155 except employee source
deduction remittances were reversed after he received advice from the company’s
accountant in early 2004 that by transferring Andrew Pavings’s business to 155,
Andrew Paving would no longer be able to use up tax losses from previous years.
In cross-examination, he changed his testimony to say that it was in fact the
GST filings by 155 that could not be reversed, at the point the tax advice was
received. However, the GST statement of account appears to indicate that three
of the GST returns for 155 were not filed until December 2004 whereas the tax
advice was apparently received in early 2004. There is also a reference by the
appellant in material submitted to the CRA income tax auditor Betty Chan in
January 2006 to amounts of income reported by 155 in the year ended December 31,
2003.
[128]I also find that Mr. Andrew’s testimony concerning his dealing with
Mr. Schafer was implausible in a number of respects. For example, Mr. Andrew
said that even though Mr. Schafer told him that he had no authority to confirm
the alleged agreement in the Meld letter, Mr. Schafer said, “you’ll get this money back from the Meld (sic) for that
hundred and twenty-three plus the interest. I can’t see where you won’t, but I
can’t say that because it’s not – I didn’t do it, I didn’t make the agreement
with you.” It is difficult for me to believe that Mr. Schafer would
specifically caution Mr. Andrew that he had no authority to accept the alleged
agreement in the Meld letter but then go on to encourage Mr. Andrew in the
manner suggested. I also note that Mr. Schafer was not asked on
cross-examination by counsel for the appellant about making any assurances that
the $123,000 credit sought by Mr. Andrew would be accepted. In my view, it is
very unlikely that Mr. Schafer would have done so.
[129]Mr. Andrew also said that Mr. Schafer assisted him with the
preparation of the fairness applications, but Mr. Schafer denied this. On this
point as well, I prefer the evidence of Mr. Schafer, as I find it highly
unlikely that Mr. Schafer would have provided such assistance.
[130]Next, Mr. Andrew testified that he understood that the post-dated
payments he made on the accounts of Andrew Paving and Meld in August 2003, covered
all of the amounts owing by Andrew Paving and Meld, including penalties and
interest. Mr. Schafer’s recollection of the arrangement entered into with Mr.
Andrew was that the payments were only for the net tax owing by each company
and not the penalties or interest that had been assessed from 1991 up to 2003,
because Mr. Andrew intended to make a fairness application for cancellation of
all of the penalties and interest.
[131]I find that Mr. Schafer’s recollection of the arrangement is more
reliable since it is consistent with a summary of the agreement that was signed
by both Mr. Andrew and Mr. Schafer on August 22, 2003 for Andrew Paving
concerning the payments to be made by Andrew Paving and it is also consistent
with statements made by Mr. Andrew himself. In a letter to Mr. Schafer dated
July 16, 2003, Mr. Andrew accepted that Meld owes $107,200 of “principal of quarterly reports” and agreed to pay this
amount. In his fairness application dated November 2003, Mr. Andrew wrote that “the balance of Penalty and Interest is not paid as yet but the
amount is agreed as directed by CCRA representative to allow the submission of
request to the Fairness Review Board.” Also, in his letter dated July 7, 2005
to the CRA collections officer, Mr. Andrew referred to “principal amounts
due” having been paid up.
[132]Mr. Andrew also testified, as I have noted earlier in these reasons,
that Mr. Schafer recommended that Andrew Paving and Meld file consolidated GST
returns under the name of Andrew Paving. Again, I accept Mr. Schafer’s evidence
on this point that he did not make this recommendation.
[133]The appellant’s recollection of the source deduction audit of Andrew
Paving in 2006 was also confusing. At first, he said that he was not aware of
it and that it would have been handled by “the office”. Later, he said that he
recalled that Mr. Jarman had sent out an auditor to review the source
deductions and that no amounts were found owing. However, the source deduction
audit took place in June 2006, whereas Mr. Jarman was not assigned the file
until the fall of 2007. Mr. Jarman was not asked about initiating a source
deduction audit and nothing else in the evidence suggests that he did.
[134]Furthermore, despite his insistence that he was never given answers
by the CRA to his concerns that Meld and Andrew Paving had overpaid tax,
starting from the first returns filed in the early 1990s, there is evidence
that Andrew Paving, at its request, was sent a statement of its GST account in
October 2002. In 2003, e met with Mr. Schafer who appears to have provided
explanations concerning amounts owing. In April 2004, the Minister allowed
parts of the fairness requests made by Andrew Paving and Meld and included a
breakdown of the total interest and penalties charged on the accounts since
1991. Subsequent to receiving the fairness relief, the appellant’s complaint
with the tax liability shown for Andrew Paving focused on three items: the Meld
letter amount and two amounts he said should be credited to Andrew Paving’s and
Meld’s accounts in respect of a second fairness review. This is apparent
from his letters to the CRA collections officers in 2005 and in 2006. It was
also Mr. Jarman’s opinion that in 2008, the appellant was not contesting
the amount of Andrew Paving’s GST liability. While counsel for the appellant
referred Mr. Jarman to a letter from the appellant to the CRA that
appeared to show the amount was in dispute, that letter was sent to another
collections officer well before Mr. Jarman was assigned the file. Mr. Jarman
also dealt with the appellant’s concern that certain payments made by Andrew Paving
on Meld’s GST account in 2003 had not been credited to Meld’s account. It was
not disputed that Mr. Jarman was able to show the appellant where the credits
had been applied.
[135]It is apparent, though, that the Director of the North Toronto Tax
Services Office failed to respond to the appellant’s letter regarding the Meld letter
and that no explanation of the Minister’s position on the matter was provided
until 2008. Without a doubt, the Director’s failure to respond was one of the major
causes of the appellant’s frustration in his dealings with the CRA and in these
proceedings. No explanation was ever given why the Director never responded to
the appellant’s letter. This treatment of the appellant is deplorable,
regardless of the strength of the appellant’s claim concerning the Meld letter.
Unfortunately, the conduct of the CRA is not something over which this Court
has jurisdiction: Main Rehabilitation Co. v. Canada, 2004 FCA 403, 247 D.L.R. (4th)
597.
Conclusion
[136]The respondent conceded at the hearing that the amount of $385 in
respect of the assessment of Andrew Paving’s liability for source deductions
should be deleted and that the amount of $100 in respect of the assessment of
155’s GST liability should be deleted as well. These amounts related to costs
incurred in attempting to collect the outstanding balances from the companies
and were not amounts which the companies failed to remit.
[137]Also, the director’s liability assessments relating to Andrew Paving’s
GST liability should be reduced by $1,070, $1,141 and $2,202, plus related
penalties and interest, if any, to reflect payments made on Andrew Paving’s GST
account in May 2008 after the GST director’s liability assessment against the
appellant was issued.
[138]The appeals are allowed in part and the reassessments are referred
back to the Minister for reconsideration and reassessments in accordance with
the two preceding paragraphs. The respondent is entitled to one set of party
and party costs for both appeals.
Signed at Vancouver, Canada, this 2nd day of January 2015.
"B. Paris"
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