REASONS
FOR JUDGMENT
V.A. Miller J.
[1]
The Appellant appeals from an assessment dated
May 11, 2011 which imposed liability for unpaid payroll source deductions of
federal and provincial income taxes, Employment Insurance and Canada Pension
Plan premiums, as well as interest and penalties. The total amount of the
assessment was $513,644.70 and the amount assessed pursuant to section 227.1 of
the Income Tax Act (“ITA”) was $151,890.62. The Appellant was
assessed on the basis that he was a director of Canadian Aggregate Co. Ltd.
(the “Corporation”) at the time it failed to make remittances to the Receiver
General in 2002, 2003, 2004 and 2005. He also appeals from an assessment dated
April 27, 2011 made pursuant to section 323 of the Excise Tax Act (“ETA”)
which imposed liability on him for un-remitted net tax, penalty and interest in
the amount of $103,181.60 which the Corporation failed to remit for periods in
2003 and 2004.
[2]
The underlying assessments and the amount of the
assessments are not in dispute. The only issue in these appeals is whether the
Appellant exercised the degree of care, diligence and skill to prevent the
failure that a reasonably prudent person would have exercised in comparable circumstances.
[3]
The Appellant submitted no documents at the
hearing and apparently his list of documents was empty. The Respondent
submitted one document – the Appellant’s affidavit dated August 13, 2001. The
witnesses at the hearing were the Appellant and his father, George Whissell.
[4]
George Whissell gave a brief history of the
circumstances under which the Appellant became the director of the Corporation.
He also described the Whissell family’s participation in the aggregate and
construction business in Alberta.
[5]
George Whissell stated that he, his father and
siblings started to work in the road construction industry in the fall of 1954.
Originally, they did business under the name of Whissell Enterprises Ltd. Over
the years, their business grew so that it became one of the larger construction
companies in northern Alberta. By 1978, the family became involved in the
aggregate business which is the supply of sand and gravel. As the business
grew, George Whissell had new corporations created to carry on various projects
(the “Whissell Group of Companies”). His father and siblings were not involved
in these new corporations.
[6]
When the recession occurred in the early 1980s,
the sales for the Whissell Group of Companies fell from a high of $90,000,000
in 1980 to approximately $20,000,000 in 1982-83. The sales continued to fall
into the 1990s. However, George Whissell continued to have new corporations
incorporated so that by the early 1990s, there were 8 to 10 active corporations
in the construction business within the Whissell Group of Companies. These
corporations scaled back as much as they could but they had problems meeting
their commitments. By the mid 1990s they owed in excess of $20,000,000 to third
parties and their revenue was approximately $25,000,000. George Whissell shut
down the operations in some of his corporations and had the Corporation
incorporated in 1994.
[7]
The only shareholders in the Corporation were
George Whissell’s sons, Brian and the Appellant, who each owed 50% of the
Corporation. Brian was the only director. Apparently, it was only in 2010 that
the Appellant was told that he was a shareholder of the Corporation.
[8]
On October 2, 1995, George Whissell was
petitioned into bankruptcy. He was not discharged from bankruptcy until July
29, 2002. However, throughout this period and after, he continued to have
corporations incorporated and to operate the Whissell Group of Companies.
[9]
In 2001, the Corporation had a GST debt in the
amount of $175,636.79 and on June 6, 2001, the Canada Revenue Agency (“CRA”)
seized equipment from five or six sites where the Whissell companies were
working. Apparently, most of the equipment seized by the CRA belonged to the
Whissell Group but some of it was owned by strangers. When the seizure was
finally resolved, the baliff, the CRA and the Whissell family had to pay for
the storage charges for the equipment.
[10]
In 2001, the Corporation’s bank “asked it to
leave”; that is, it refused to do business with the Corporation. Brian had
resigned as director in 1998 and the Corporation had to open a bank account. It
needed a director who could sign on its behalf. George Whissell asked the
Appellant to be the director of the Corporation. The Appellant agreed and had a
stamp made with his signature which he gave to George Whissell and Laurie Sabatier,
the accountant for the Corporation.
[11]
The Corporation operated until 2005. No income
tax returns were ever filed by the Corporation. It did file some GST returns.
No financial statements were ever produced for the Corporation. No business
records existed for the Corporation. When it ceased to operate, its business
was carried on by Keephills Aggregate Company Ltd. (“Keephills”), another
corporation in the Whissell Group. Keephills had been incorporated on December
12, 2001 with the Appellant as the only director.
[12]
According to George Whissell, whenever there was
a fear that a piece of equipment was going to be seized or that “someone would
pull the plug”, the resources were diverted so that the business could
continue. I have interpreted this to mean that the equipment was transferred to
another corporation or the business was continued under another corporate name
or the Corporations funds were diverted and hence the reason for incorporating
numerous corporations. There was evidence that the Appellant opened several
business bank accounts during this period.
[13]
It was George Whissell’s evidence that he and
Laurie Sabatier ran the Whissell Group of Companies. He did not advise the
Appellant about any liabilities the Corporation owed to the CRA.
[14]
It was the Appellant’s evidence that he started
to work in the family business shortly after he completed high school. He
always worked as a labourer. His first experience with business financing
occurred in 2001 when he incorporated Canadian Transportation Systems which
purchased three GMC pickup trucks for use in the Corporation’s business.
[15]
In 2001, the Appellant lived with his parents
and he worked at a gravel pit for the Corporation.
[16]
The Appellant described a situation which
occurred on June 6, 2001, the day CRA seized equipment belonging to the
Whissell Companies. He stated that he went to the Corporation’s office and
tried to ask questions. He was excluded from the meeting which was taking
place.
[17]
It was his evidence that he only became a
director of the Corporation so that he could open a bank account for it as
requested by his father. He became the Corporation’s director on June 21, 2001.
He thought that initially he had signed some cheques for the Corporation but
later he had a signature stamp made which he gave to George Whissell or Laurie
Sabatier so that they could run the Corporation’s business.
[18]
The Appellant stated that at that time he did
not know what it meant to be a director. He completely trusted his father and
Laurie Sabatier who was like a mother to him. He did not know the financial
circumstances of the Corporation and he did not ask but he thought the business
was viable. He knew that CRA had seized the Corporation’s equipment and he
assumed the CRA had also seized its bank account. However, he thought that the
problem with the CRA was in the past.
[19]
The Appellant stated that he was a labourer with
the Corporation. He supervised the other labourers who worked at the gravel pit
with him and he signed off on their timesheets. He was not involved in the payroll
or any financial decisions with respect to the Corporation. Laurie Sabatier and
George Whissell ran the businesses of the Whissell Group of Companies. His
father was the controlling force in the Corporation’s business.
[20]
It was the Appellant’s evidence that he was just
a “trustworthy soldier” for his family who did whatever his family asked of
him.
[21]
In 2007, the Appellant started to take over some
of his father’s duties and he began to meet with the CRA with respect to the
tax liability of 20 or 25 corporations within the Whissell Group of Companies.
He stated that by 2011 he was in control of all the corporations within the
Group.
The Statutes
[22]
The wording of section 227.1 of the ITA
is almost identical to that in section 323 of the ETA. The relevant
provisions in section 227.1 read:
Liability of
directors for failure to deduct
227.1
(1) Where a corporation has failed to deduct or withhold an amount as required
by subsection 135(3) 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 liable, together with the corporation, to pay that amount and any
interest or penalties relating thereto.
…
(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.
[23]
The relevant provisions in section 323 of the ETA
read:
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.
…
Diligence
(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.
Appellant’s Position
[24]
Counsel for the Appellant submitted that the
standard of care contained in subsections 227.1(3) of the ITA and 323(3)
of the ETA is an objective one. However, in deciding whether the
Appellant has exercised the requisite standard of care, I must also have regard
for the circumstances that existed at the time the Corporation failed to remit
monies to the Minister of National Revenue. A contextual approach to these
subsections requires me to consider the “prevailing socio-economic conditions”.
Counsel relied on paragraphs 63 and 64 of People’s Department Stores Ltd
(1992) Inc, Re, 2004 SCC 68 as follows:
63 The standard of
care embodied in s. 122(1)(b) of the CBCA was described by Robertson
J.A. of the Federal Court of Appeal in Soper v. R. (1997), [1998] 1
F.C. 124 (Fed. C.A.), at para. 41, as being “objective subjective”.
Although that case concerned the interpretation of a provision of the Income
Tax Act , it is relevant here because the language of the provision
establishing the standard of care was identical to that of s. 122(1)(b)
of the CBCA. With respect, we feel that Robertson J.A.'s characterization of
the standard as an “objective subjective” one could lead to confusion. We
prefer to describe it as an objective standard. To say that the standard is
objective makes it clear that the factual aspects of the circumstances
surrounding the actions of the director or officer are important in the case of
the s. 122(1)(b) duty of care, as opposed to the subjective motivation
of the director or officer, which is the central focus of the statutory
fiduciary duty of s. 122(1)(a) of the CBCA.
64 The contextual
approach dictated by s.122(1)(b) of the CBCA not only emphasizes the
primary facts but also permits prevailing socio-economic conditions to be taken
into consideration…
[25]
Counsel argued that the socio-economic
conditions in the present case are that the Appellant did not disregard his
responsibilities; if he was asked to do something like open a bank account, he
did it. He did whatever his family and close advisors asked him to do. He
didn’t abdicate his duties. He was just unaware of his responsibilities as a
director.
[26]
The circumstances which existed at the time were
that the CRA had seized equipment from the Whissell Group of Companies but the
equipment was later released. The Corporation, CRA and the baliff were required
to pay the storage costs and the Appellant was under the impression that the
CRA was picking on George Whissell. The Appellant did not know that remittances
were not being made and he thought that the tax debt had been taken care of
because the Corporation’s equipment had been released.
Respondent’s Position
[27]
The Respondent submitted that the Appellant did
nothing to prevent the Corporation’s failure to remit source deductions and GST
net tax. There was no evidence that the Appellant made any decisions; there was
no evidence that the Appellant asked any questions. There was evidence that the
Corporation had financial difficulties in 2001 and the Appellant still did not
make any enquiries or turn his attention to preventing the failure to remit.
The Appellant did nothing and that cannot satisfy the obligation to prevent the
failure to remit source deductions and GST net tax.
Analysis
[28]
In Buckingham v R, 2011 FCA 142,
Mainville J.A. thoroughly analyzed the decision in People’s Department
Stores as it applied to subsections 227.1(3) of the ITA and 323(3) of the ETA.
He compared these subsections to paragraph 122(1)(b) of the Canada
Business Corporations Act, R.S.C. 1985, c. C-44 and stated:
31 Though similar,
the provisions of paragraph 122(1)(b) of the CBCA and of subsections
227.1(3) of the Income Tax Act and 323(3) of the Excise Tax Act
have fundamentally different purposes. The different purposes to which these
various provisions relate must inform the application of the standard of care,
diligence and skill in each case.
[29]
At paragraph 37 of his decision, Mainville J.A.
concluded that the standard of care, skill and diligence required under
subsections 227.1(3) of the ITA and 323(3) of the ETA is an
objective standard. He further stated:
38…Consequently, a
person who is appointed as a director must carry out the duties of that
function on an active basis and will not be allowed to defend a claim for
malfeasance in the discharge of his or her duties by relying on his or her own
inaction: Kevin P. McGuinness, Canadian Business Corporations Law, 2nd
ed. (Markham, Ontario: LexisNexis Canada, 2007) at 11.9.
39 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…
…
40 The focus of the
inquiry under subsections 227.1(3) of the Income Tax Act and 323(3) of
the Excise Tax Act will however be different than that under 122(1)(b)
of the CBCA, since the former require that the director's duty of care,
diligence and skill be exercised to prevent failures to remit. In order to
rely on these defences, a director must thus establish that he turned his
attention to the required remittances and that he exercised his duty of care,
diligence and skill with a view to preventing a failure by the corporation to
remit the concerned amounts. (emphasis added)
[30]
The objective standard has set aside the
principle that a director’s actions are “to be judged according to his own personal
skills, knowledge, abilities and capacities”: Buckingham (supra) at
paragraph 38. However, sections 227.1 of the ITA and 323 of the ETA
do not impose absolute liability. Mainville J.A. wrote:
52 Parliament did
not require that directors be subject to an absolute liability for the
remittances of their corporations. Consequently, Parliament has accepted that a
corporation may, in certain circumstances, fail to effect remittances without
its directors incurring liability. What is required is that the directors
establish that they were specifically concerned with the tax remittances and
that they exercised their duty of care, diligence and skill with a view to
preventing a failure by the corporation to remit the concerned amounts.
[31]
Therefore, the Appellant will have established a
“due diligence defence” if he has presented evidence to demonstrate that he
tried to prevent the Corporation’s failure to remit source deductions or net
GST during the relevant periods.
[32]
In this case, the Appellant took no steps to try
to prevent the failure to remit during the relevant period and, it is my view,
that he has not made out a “due diligence defence”.
[33]
The Appellant was 23 years old when he became
director of the Corporation on June 21, 2001. He stated that he knew nothing
about source deductions. In his mind, GST was something one paid at the store
when something was purchased. He knew nothing about the duties of a director
until his counsel advised him concerning director’s liability in “late 2001 or
2002”. However, even after he was advised about his obligations, the Appellant
did nothing. He cannot now rest his defence on the fact that he was just a
labourer. According to his own evidence, his counsel advised him in 2001 and
2002 of his duties as a director.
[34]
The circumstances of this case are that the
Appellant knew that the Corporation had an outstanding tax debt. There was
evidence that the CRA had seized the Corporation’s equipment on June 6, 2001.
There was no evidence with respect to the date that this equipment was
released. However, the Appellant also knew as early as August 13, 2001 that the
Corporation had objected to an assessment of net GST and that the CRA had
issued Requirements to Pay to two of the Corporation’s clients. He signed an
affidavit on that date in support of the Corporation’s application in the
Federal Court to have CRA’s Requirements to Pay quashed. A “reasonably prudent
person” would have enquired about the outcome of the application and the
outcome of the objection to the assessment. Instead, he would have me believe
that he did nothing because he was the “faithful family soldier”.
[35]
It is my view that since the Federal Court of
Appeal decision in Buckingham, a director cannot make out a “due
diligence defence” by stating that he was just a labourer and he relied on
another family member or he just did as he was told. The standard of care is an
objective one of the reasonably prudent person in the circumstances.
[36]
In the circumstances which existed in this case,
it is not sufficient or reasonable for the Appellant to say that he relied on
his father and Laurie Sabatier. A director has a higher duty to ensure
remittances are made when a company is experiencing financial difficulties: D’Amore
v R, 2012 TCC 373 at paragraph 31. Here, the Appellant relinquished all of
his duties as a director and gave a signature stamp to his father to use as he
saw fit.
[37]
The “due diligence defence” is met when a
director establishes that he took positive steps to prevent the failure to
remit. In the present case, the Appellant, by his own evidence, did nothing. He
has not met the standard of care required by subsections 227.1(3) of the ITA
and 323(3) of the ETA.
[38]
The appeals are dismissed with costs.
Signed at Ottawa, Canada, this 21st day of November 2014.
“V.A. Miller”
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