REASONS
FOR JUDGMENT
Bocock J.
I. Introduction
[1]
This appeal arises from a director’s liability
assessment. In August of 2009, the Minister of National Revenue (the
“Minister”) levied an assessment against the Appellant director in the amount
of $271,801.11 (the “Assessment”). The Assessment, which related to the period
of January 1, 2008 to September 11, 2008 (the “Period”), was issued pursuant to
subsection 227.1(1) of the Income Tax Act (the “Act”) concerning
the unremitted source deductions (the “Source Deductions”) of Quadra Marble and
Granite Inc. (“Marble”).
[2]
The Source Deductions include amounts owing on
account of statutory remittances due under the Act, the Canada Pension
Plan (“CPP”) and the Employment Insurance Act (“EI Act”). No
amounts for Goods and Service Tax (“GST”) were assessed for the Period. The Assessment
also included amounts for penalties and interest. There is no longer any
dispute or contest as to the sufficiency, propriety or quantum of the
Assessment, certificate, writ of seizure and sale or the latter subsequent non-fulfillment
in relation to the Assessment.
[3]
The sole issue before the Court is the Appellant’s
assertion of a due diligence defence under subsection 227.1(3) of the Act.
The deceivingly simple issue is whether the Appellant, as a director of Marble,
exercised the requisite degree of care, diligence and skill to prevent the
failure of Marble to remit the Source Deductions during the Period.
II. Facts
(a) Facts not in dispute:
[4]
Initially, the Appellant, Mr. Maddin, owned and operated
a family wholesale and retail business called Quadra Stone Company Ltd. (“Stone”),
which undertook the distribution, fabrication, sale and installation of marble,
granite and stone. By December 31, 2007, the unremitted source deductions
(“payroll debts”) owing by Stone to the Minister totalled $158,880.13. These
appear to have been paid in 2008.
[5]
On December 31, 2007, Mr. Maddin and two other
individuals, Curtis Barker and Caesar Chang, incorporated, as its first directors,
a new company called Quadra Marble and Granite Inc. (“Marble”).
[6]
On December 31, 2007, the newly incorporated Marble
assumed the operations of the pre-existing Stone which transferred all of its material
assets and employees to Marble.
[7]
Mr. Maddin was also an officer and both chairman
and secretary of Marble, as well as being a shareholder. Mr. Barker (President)
and Mr. Chang (Vice-President) were also officers and equal shareholders of
Marble with Mr. Maddin.
[8]
The business operations of Marble continued in
the same business premises as Stone. There was no executed lease agreement
between Marble and the landlord, Camad Land Corp.(the “Landlord”), a company also
owned and controlled by Mr. Maddin and his family members.
[9]
Mr. Maddin resigned as a director of Marble on
September 11, 2008.
[10]
In October 2009, Marble vacated the business
premises pursuant to an eviction notice issued by the Landlord.
[11]
During the Period, Marble paid its employees
salary, wages, and other remuneration. Marble deducted and withheld the Source
Deductions respecting the amounts paid to its employees, but did not pay same
to the Receiver General.
(b) Additional Finding of Facts by
the Court.
[12]
Mr. Maddin, Mr. Barker and one of the
bookkeepers, Ms. Roberge testified at the four day hearing. Mr. Chang did not
testify although he was on the Respondent’s witness list. Although the Appellant
suggested an adverse inference ought to be drawn from his absence, there was
nothing to suggest that Mr. Chang would have offered anything regarding Mr.
Maddin’s knowledge or actions regarding the Source Deductions since, by
consistent testimony of all three witnesses, Mr. Chang was rarely present at
the premises, no information meetings were held with him and no conversations
were allegedly had between he and Mr. Maddin on the topic.
[13]
As to the nature of the involvement of Mr.
Maddin as a director of Marble during the Period, it was certainly the initial
intention of all that Mr. Maddin would not participate as an active owner/manager
in the operations of Marble, but would provide advice relevant to his
experience, education and factual corporate history of the predecessor
business.
[14]
Whether this was ultimately fulfilled or not is
dependant upon factual occurrences during the Period. Mr. Maddin attended the
business premises of Marble for approximately 2–3 days a week for most of the
day. Mr. Maddin was familiar with the business structure, its banking
information and operations, the bookkeeper during the period from January 1st
through to March 31st, 2008 (the “2008 winter period”) and the inherited
computer and accounting systems. As to the computer systems themselves, Mr.
Maddin was concerned during the 2008 winter period with the obsolescent of the existing
computer system which he had sold to the business, its need for replacement and
his heightened concern over its non-replacement during that critical period. At
various times, Mr. Maddin executed letters on behalf of Marble, including a
termination letter in late January of 2008.
[15]
As to the initial business documentation
reflecting the transfer of the undertaking and assets from Stone to Marble, the
documents may be best described as incomplete, if not inchoate. There was and
would be no written lease, no signed agreement of purchase of sale and no
shareholders’ agreement among the parties. The entire transaction seems to have
been concluded as a result of instructions given by Mr. Maddin to his solicitor.
The terms were reflected on a signed term sheet which left certain issues outstanding,
including the extent of the demised premises, an issue which prevented the
conclusion of a lease agreement.
[16]
In terms of Mr. Maddin’s relationship with the
initial bookkeeper, Ms. Roberge, it is one that may be described as trusting
and longstanding. Ms. Roberge was the bookkeeper for Mr. Maddin and his related
companies both prior, during and after the period of Marble’s existence. It is
clear that Ms. Roberge was aware of the Source Deductions issue from the very
outset. She testified that as the bookkeeper she would prepare the payroll
including Source Deductions calculations and was cognizant that such amounts
were not being paid. She testified that she advised Mr. Maddin during the 2008 winter period of
various accounting issues and challenges surrounding the computer system and
the slow payment of bills generally. Ms. Roberge received Mr. Maddin’s requests
for payments in respect of rental arrears and other monies which were owing to
either he or Stone from Marble. In short, the two of them communicated
regarding accounting and financial matters generally during the 2008 winter
period.
[17]
With respect to bookkeeping, in early March 2008,
the mother of Mr. Barker (now deceased) was hired by Marble to presumably learn
the bookkeeping system and ultimately, as it turns out, replace Ms. Roberge as
bookkeeper. It is clear that Mr. Maddin knew of this event from the outset, was
advised on almost a daily basis by Ms. Roberge about the incompatibility she
had with Ms. Barker and about Ms. Roberge’s suspicions that Ms. Barker failed
to understand bookkeeping systems.
[18]
Mr. Maddin and Ms. Roberge testified that Mr.
Maddin did not specifically inquire about the Source Deductions during the 2008
winter period and that any attempts of him to informally call meetings of the
directors went unheeded. The term sheet reflecting the sale transaction,
although under-documented, revealed that there would be no inventory payment on
account of inventory transferred by Stone to Marble for a period of six months,
January 2008 would be a base rent free period and a large $4 million contract,
which had been unfulfilled at the commencement of the transaction, would
provide cash flow. This was acknowledged in the term sheet executed by all of
the directors of Marble. During the 2008 winter period, Mr. Maddin was advised
weekly if not daily, either by Ms. Roberge or Mr. Barker, that the $4 million
contract was becoming more and more tentative as time passed.
[19]
Some time in April of 2008, the bank branch of
Marble was changed to a location closer to the business. Mr. Maddin was not
advised of this branch location change. In terms the other two directors’
presence at the business, their attendance in the offices of Marble was never
equal to the frequent attendances of Mr. Maddin. There were no regular meetings
of directors, if any at all. Mr. Barker was away from the office attempting to
procure and enhance business for Marble and Mr. Chang, in his capacity as
fabricator and installer, was present only briefly in the mornings or the afternoons
at the business premises.
[20]
Evidence was also provided as to the previous
and ongoing other business circumstances of Mr. Maddin. He had a previous
history of payroll debts with the Canada Revenue Agency related to the business
of Stone and was previously convicted in 2008 of a dozen or so counts for
failing to file T1 and T2 tax returns.
III. The
Law
[21]
The combination of paragraph 153(1)(a)
and subsection 227.1(1) of the Act provides for the requirement of
Marble to remit the Source Deductions and also for Mr. Maddin’s liability as a
director where such Source Deductions are not remitted. Subsections 227.1(2)
and (3) of the Act provide for the limitations on that liability. They
are reproduced below in excerpted format:
153. (1) Every person paying at any time in a taxation year
(a) salary, wages or other remuneration, other than amounts
described in subsection 115(2.3) or 212(5.1),
…
shall deduct or withhold from the payment the amount determined in
accordance with prescribed rules and shall, at the prescribed time, remit that
amount to the Receiver General on account of the payee’s tax for the year
under this Part or Part XI.3.
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.
(2) A director is not liable under subsection 227.1(1), unless
(a)
a certificate for the amount of the corporation’s liability referred to in that
subsection has been registered in the Federal Court under section 223 and
execution for that amount has been returned unsatisfied in whole or in part;
(b)
the corporation has commenced liquidation or dissolution proceedings or has
been dissolved and a claim for the amount of the corporation’s liability
referred to in that subsection has been proved within six months after the
earlier of the date of commencement of the proceedings and the date of
dissolution; or
(c) the corporation has
made an assignment or a bankruptcy order has been made against it under the
Bankruptcy and Insolvency Act and a claim for the amount of the corporation’s
liability referred to in that subsection has been proved within six months
after the date of the assignment or bankruptcy order.
(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
[22]
Provisions within subsections 21.1(1) and (2) of
the CPP and within subsections 83(1) and (2) of the EI Act provide for analogous
director liability for unremitted Source Deductions and incorporate by reference
the due diligence defence found within subsection 227.1(3) of the Act.
[23]
Until the decision of the Federal Court of
Appeal in Buckingham v R, 2011 FCA 142, there was some debate concerning
the perspective of the standard to be applied. In Buckingham, Mainville
J.A., clarified the objective standard to be used at paragraphs 37, 38, 39 and
40. The same appeal judge then summarized such clarity in the subsequent case
of Balthazard v R, 2011 FCA 331 at paragraph 32, where the Court states:
In Buckingham, this Court
recently summarized the legal framework applicable to the care, diligence and
skill defence under subsection 323(3), as follows:
a. The standard of
care, skill and diligence required under subsection 323(3) of the Excise Tax
Act is an objective standard as set out by the Supreme Court of Canada in
Peoples Department Stores Inc.(Trustee of) v. Wise, 2004 SCC 68, [2004] 3
S.C.R. 461. This objective standard has set aside the common law principle that
a director’s management of a corporation is to be judged according to his or
her own personal skills, knowledge, abilities and capacities. However, an
objective standard does not mean that a director’s particular circumstances are
to be ignored. These circumstances must be taken into account, but must be considered
against an objective “reasonably prudent person” standard.
b. The assessment of
the director’s conduct, for the purposes of this objective standard, begins
when it becomes apparent to the director, acting reasonably and with due care,
diligence and skill, that the corporation is entering a period of financial
difficulties.
c. In circumstances
where a corporation is facing financial difficulties, it may be tempting to
divert these Crown remittances in order to pay other creditors and thus ensure
the continuity of the operations of the corporation. That is precisely the
situation which section 323 of the Excise Tax Act seeks to avoid. The defence
Page: 14 under subsection 323(3) of the Excise Tax Act must not be used to
encourage such failures by allowing a care, diligence and skill defence for
directors who finance the activities of their corporation with Crown monies,
whether or not they expect to make good on these failures to remit at a later
date.
d. Since the
liability of directors in these respects is not absolute, it is possible for a
corporation to fail to make remissions to the Crown without the joint and
several, or solidary, liability of its directors being engaged.
e. 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 amounts at
issue.
[24]
Conjunctively then, a director must focus upon
the Source Deductions issue and exercise due diligence directed to preventing a
failure to remit same. These dual obligations are to be consistent, omnipresent
and invariable; a creative or alternative business plan, no matter how
plausibly economic or lucrative, which diverts or attempts to divert resources
away from remitting Source Deductions to the Crown will end availability of the
due diligence defence: Buckingham at paragraph 57. The circumstances (ie:
the factual particularities) are to be considered, but viewed against the objective
standard of a “reasonably prudent person”.
IV. Appellant’s
Submission
[25]
Factually, Mr. Maddin has submitted that the following
factual conclusions may be drawn in this appeal in order to support the due
diligence defence:
a) Mr. Barker was in charge of management operations of Marble,
including all financial operations and the payment of the remittances to the
government;
b) Mr. Maddin was an inactive director, not a manager, supervisor or boss
and was simply present there to provide advice when necessary;
c) sometime in March 2008, without consulting with Mr. Maddin, Mr. Barker
and Mr. Chang hired Ms. Barker, changed the locks to the accounting office and
fired Ms. Roberge;
d) Mr. Barker was fully aware of the unremitted payroll deductions, at
the latest, in February or March 2008;
e) Mr. Maddin was not aware of the unremitted payroll deductions until after
March 31, 2008;
f) at the end of March, Marble’s bank account was changed, and Mr.
Maddin was not informed as to the new branch location; and
g) commencing in April 2008, Mr. Maddin took various and numerous steps
to obtain Marble’s financial information, including the status of the Source
Deductions, but all of his efforts were thwarted by Mr. Barker and his mother.
[26]
In summary, Appellant’s counsel argues that,
during the 2008 winter period, Mr. Maddin had a reasonable expectation that
remittances were being made on behalf of Marble. Mr. Maddin had no knowledge
that Marble was in financial difficulty until Ms. Roberge advised him of Marble’s
arrears of Source Deductions, coincidentally on her last day of work: March 31,
2008. In fact, it is argued by the Appellant that the opposite was true: Mr.
Maddin had every reason to think that Marble was doing well. Mr. Barker was
working long hours, $4 million in contracts were coming from a single customer,
Marble did not have to pay for any inventory for 6 months, and Marble was
getting a one month grace period on its rent at the premises.
[27]
Additionally, Mr. Maddin’s counsel contends that
following the dismissal of Ms. Roberge by Mr. Barker and Mr. Chang, Mr. Maddin
continued demanding financial information, including the information relating
to the Source Deductions from Marble’s new bookkeeper, Ms. Barker and Messrs.
Barker and Chang. All of Mr. Maddin’s requests for this information were denied,
rebuffed or avoided.
[28]
As a result, Mr. Maddin was thwarted in his
efforts to prevent Marble from failing to comply with its statutory obligations
with respect to the remittance of the Source Deductions.
V. Analysis
(a) During the 2008 Winter Period
[29]
The issue is, during this period and in the
circumstances, whether Mr. Maddin acted reasonably and with due care, diligence
and skill in observing, querying and assessing the financial situation of
Marble?
[30]
While it is true that Mr. Barker was ostensibly
the manager of the business during the relevant period in 2008, the reasons for
retaining Mr. Maddin as a director were his experience, knowledge and ownership
interest in Marble. While Mr. Maddin may have intended to be an inactive
director and shareholder, the evidence does not display the usual hallmarks of
such a pattern. Mr. Maddin’s lawyer exclusively documented the sale transaction,
created the company and advised on the establishment of the new business
structure. All of the familiar and known business systems, material employees,
outstanding inventory and contracts (with the exception of the $4 million
dollar contract) were placed in use for Marble.
[31]
Most importantly and by his own testimony, Mr.
Maddin attended the offices (his offices) at Marble 2 to 3 days a week.
Marble’s bookkeeper during the 2008 winter period was also an employee of Mr.
Maddin and Ms. Roberge continues to act in such capacity to this day. She was
well experienced in the payroll debts of Stone, the predecessor company which
frequently avoided its own payroll debts to the Crown.
[32]
Given their longstanding history, the suggestion
that Mr. Maddin had never asked Ms. Roberge regarding payroll deductions
remittances during the 2008 winter period rings hollow for several reasons.
During the 2008 winter period, there was uncontroverted evidence that Mr.
Maddin required payments by Marble to Stone in respect of rent, utilities for
the premises and other amounts. He expressed his dissatisfaction of late
payments of the vendor take back debt retained by Stone to Ms. Roberge and Mr.
Barker. Mr. Barker was rarely present at Marble’s premises even during the 2008
winter period. By comparison, Mr. Maddin was present 2 to 3 business days a
week with his bookkeeper of many years also on site each day who, in turn, possessed
the most detailed and critical information concerning the Source Deductions. He
testified that he never inquired of Ms. Roberge specifically regarding the
Source Deductions. As Mr. Maddin indicated many times, he had no reason not to
believe the money was available and paid.
[33]
This is the exact point where Mr. Maddin due
diligence defence fails. A director is not entitled to rely upon his
expectations independent of reasonable inquiry and assessment in the
circumstances: Balthazard at paragraph 32(b) supra. Mr. Maddin’s
testimony is that he had every reason to believe all was well financially with
Marble: its prospective order book was full, it had a one month rent free
period, a six month inventory payment hiatus and a brand new start. He contends
that he believed there was ample cash flow for the purposes of paying the
Source Deductions. However, the availability of a due diligence defence
requires a reasonable inquiry and assessment be made that such funds are generally
available and that the corporation will act to honour its requirement to
deduct, withhold, remit and pay the amount in default of which the directors
are, as the section mandates, “liable together with the corporation to pay the
amount”.
[34]
In addition and relevant to Mr. Maddin’s belief
of Marble’s fiscal well-being, his frequent inquiries regarding money owed to
him and related companies and his requirement that the lease be completed together
with the start-up nature of a new business all, on balance, indicate that he
could not have reasonably perceived such fiscally blue skies during this 2008
winter period. When coupled with his unconstrained accessibility to Marble’s bookkeeper
during the 2008 winter period and given his own payroll debt history, a direct
and simple question as to whether the Source Deductions had been paid would
have been a logical, reasonable and prudent act in the circumstances.
[35]
Mr. Maddin’s other reasonable business concerns,
actions and pre-occupations stand in contrast to the pleaded steady silences
and aversion to any discussion with Ms. Roberge relating to the status of the
Source Deductions payments. Either the omission was advertent and therefore
unreasonable in the circumstances or inadvertent and therefore not meeting the
requirement of a director to make reasonable inquiries and assessments in the
circumstances as to payment in order to illustrate “that [he was] specifically
concerned with the tax remittances”. Other circumstances which reasonably ought
to have heightened Mr. Maddin’s concern and prompted a question of Ms. Roberge during
the 2008 winter period were also present: the hiring of a new bookkeeper in
early March of 2008 (quite apart from her contrary allegiance described below);
the conflict between the new and existing bookkeepers; the reticence of Mr.
Barker to abide by Mr. Maddin’s advice and replace the almost non-functional
obsolete accounting system; the frequent absence from the outset of Mr. Barker
from the business office; and Mr. Barker’s reluctance to attend to all
unfinished transactional documents such as vehicle transfers (which ultimately
occurred April 1, 2008).
[36]
Lastly, whatever circumstances may have
prevented Mr. Maddin from inquiring about the Source Deductions during the 2008
winter period these were objectively dispelled in early March by the hiring of
an additional partial and antipathetic bookkeeper. Such an adverse event to his
interests, when combined with the other circumstances, should reasonably have
provoked, minimally at least, one question of Ms. Roberge during the 2008
winter period about the payment of Source Deductions. If it had, a truthful answer
would have been forthcoming, confidentially from a trusted, well known
bookkeeper, who from her own testimony had such knowledge. By not asking such a
question, Mr. Maddin did not reasonably turn his attention to the required payment
of the Source Deductions in circumstances of ostensible managerial, operational
and financial difficulties.
[37]
As to the question never posed to Ms. Roberge,
in the circumstances, it was reasonable (or at least not unreasonable) to ask
this simple, solitary question. At best, not asking arose from inaction and
lack of due attention. At worst, the omission was deliberate because the
response was reasonably certain. Either way, the facts remain that disturbing
and unsettling events were unfolding around Mr. Maddin during the 2008 winter
period on the 2 to 3 days a week when he was present at the very epicentre of
their occurrence, mere feet away from a familiar friendly and discreet source
with the answer. Even when characterized as beneficially as in the first
alternative, neglecting to ask in the circumstances denies the due diligence
defence to a director uniquely placed to act reasonably to inform himself of
the status of the Source Deductions. In such factual circumstances, inaction
and aversion will not suffice: Chell v Her Majesty the Queen 2013 TCC 29
at paragraph 40.
(b) After the 2008 Winter Period
[38]
Mr. Maddin’s counsel admits that Mr. Maddin knew
of the arrears after April 1, 2008, but thereafter all his efforts to see to
the payment of the Source Deductions were thwarted by the avoidance and the diversion
of Mr. Barker and/or Mr. Chang to that direction. Given the finding above,
further analysis of this period beyond the 2008 winter period is not required.
However to complete the analysis, the Court notes the defence of due diligence
would not be available for this subsequent period (once the arrears were admittingly
known by Mr. Maddin) for the following reasons:
a) after the 2008 winter period, Mr. Maddin’s concerns were primarily
directed towards recouping the arrears of rent, protecting his vendor take back
debt and completing the transfer of assets from Marble to Stone (ie to complete
the transaction prior to any operational interruption of Marble);
b) no written note, email or memorandum to anyone reflected any request,
direction or requirement by Mr. Maddin that the Source Deductions be remitted, or
steps be taken to remit, by the corporation or the remaining two directors;
c) Mr. Maddin requisitioned no formal directors meeting either as a
director or as a shareholder of Marble which was his statutory right;
d) factually all of his attempts to contact Mr. Barker were made by
untraceable, unrecorded and unanswered telephone calls, although on one
occasion the call was answered, but there was no evidence adduced that the
subject matter of that call turned to Source Deductions arrears or attempts to
pay them; and,
e) during this period, the evidentiary record has not established a
reasonably prudent course of action designed to prevent a failure to remit the
Source Deductions given Mr. Maddin’s attention to his own debts due from Marble.
[39]
In summary, Mr. Maddin’s actions during the 2008
winter period were insufficient to establish reasonably prudent steps to
discover the Source Deductions arrears under the circumstances: the simple
asking of a discreet and confidential question from a long standing trusted
source. Although moot, upon becoming aware of the arrears, Mr. Maddin has not sufficiently
established through evidence that he took steps to prevent the failure or
continued failure by Marble to pay those arrears for the period after the 2008
winter period. Instead the evidence shows he exhibited a preferred and
exclusive pre-occupation with his other role as a landlord and/or creditor of
Marble.
[40]
For these reasons, the appeal is dismissed. Costs
are awarded to the Respondent on a party and party basis in accordance with the
relevant provisions of the Tariff, however, either party may make submissions
otherwise for consideration by the Court within 30 days of this judgment.
Signed at Edmonton, Alberta, this 18th day of September 2014.
“R.S.
Bocock”
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