Citation: 2014 TCC 216
Date: 20140717
Docket: 2012-4884(GST)I
BETWEEN:
BENTON ANTIFAIFF,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR JUDGMENT
[1]
This is an appeal from a director’s liability
assessment made against the appellant pursuant to section 323 of the Excise
Tax Act (the Act). The Minister of National Revenue (Minister) assessed the appellant for unremitted goods
and services tax (GST) and related interest and penalties totalling $53,575.74
owing by FIS Financial Information Systems Inc. (FIS)
in respect of its reporting periods ending between September 30, 1996 and
September 30, 2000.
Issues
[2]
The issues in this appeal are as follows:
i) whether the Minister properly applied certain credits to amounts
owing by FIS;
ii) whether the Minister correctly calculated the late-filing penalties
and failure to remit penalties owing by FIS under the Act;
iii) whether FIS was entitled to additional input tax credits (ITCs) in
respect of its reporting periods ending between October 1, 1998 and
September 30, 2000;
iv) whether the appellant acted with due diligence to prevent the
failures by FIS to remit the net tax owing; and
v) whether the appellant was entitled to any relief because of the
delay by the Minister in assessing him for the GST liability of FIS.
Facts
[3]
FIS was incorporated in Saskatchewan on May 20,
1993. It operated a computer consulting business. At all times, the appellant
was the sole shareholder and director.
[4]
FIS was struck off the Saskatchewan corporate
register on October 31, 1997, apparently for failing to file its annual
returns. However, it continued to carry on business until late 2000.
[5]
The evidence showed that FIS was regularly late
in filing its GST returns, and did not remit any net tax with any of its GST
returns.
[6]
A summary of FIS’s GST filings and the
adjustments made by the Canada Revenue Agency (CRA) to the amounts reported by
FIS in its returns is set out in Appendix A to these reasons.
[7]
The last GST reassessments for FIS’s reporting
periods ending between September 30, 1994 and March 31, 1998 were made on
September 16, 1998. Those reassessments resulted in a significant increase in
net tax payable by FIS. FIS did not object to those reassessments.
[8]
The GST returns filed by FIS for its reporting
periods ending between June 30, 1996 and September 30, 2000 were all assessed
by the Minister as filed. FIS did not object to those assessments.
[9]
On November 10, 2005, the Minister certified and
registered FIS’s unpaid GST liability related to its reporting periods ending
between September 30, 1996 and September 30, 2000 in the Federal Court pursuant
to section 316 of the Act.
The amount of the debt was $53,575.74, made up of unremitted GST of $22,335.79,
interest of $13,325.43 and penalties of $17,914.52. The particulars of the debt
are set out in Appendix B to these reasons.
[10]
A writ of seizure and sale issued by the Federal
Court was executed and returned nulla bona on January 27, 2006.
[11]
On December 6, 2007 the Minister assessed the
appellant as director of FIS for the unremitted tax and interest and penalties
owing by FIS under the Act.
Issue 1: Application of credits
(i) Failure to apply certain credits
[12]
The appellant submitted that the Minister failed
to credit FIS for refunds of net tax for its reporting periods ending March 31,
1998, June 30, 1998, and September 30, 1998. According to Appendix A, FIS was
entitled to credits of $7007.75, $452.47 and $510.27 for these periods,
respectively.
[13]
However, evidence adduced by the Respondent
showed that all of these amounts were applied against amounts payable by FIS
for various periods prior to December 31, 1996 (per Affidavit of Lori Boussad,
subparagraphs 12 (e) to (g) and Supplemental Affidavit of Lori Boussad,
paragraphs 6 and 7.) Those refunds were credited against amounts owed by
FIS as follows:
|
Reporting period
in which refund arose
|
Refund
amount
|
Reporting
period to which refund applied
|
Tax owing before
refund
applied
|
Portion of
refund
applied
|
Tax payable remaining
after refund applied
|
Amount applied
against
interest
|
Amount applied
against penalties
|
Refund
remaining
|
|
98/03/31
|
7,007.75
|
|
|
1,870.41
|
|
1,870.41
|
|
5,137.34
|
|
98/03/31
|
|
|
|
2,616.76
|
|
|
2,616.76
|
2,520.58
|
|
98/03/31
|
|
95/03/31
|
245.32
|
249.66
|
-
|
2.10
|
2.24
|
2,270.92
|
|
98/03/31
|
|
95/12/31
|
1,518.52
|
1,988.49
|
-
|
193.83
|
276.14
|
282.43
|
|
98/03/31
|
|
96/03/31
|
721.68
|
282.43
|
439.25
|
|
|
-
|
|
98/06/30
|
452.47
|
96/03/31
|
439.25
|
446.29
|
-
|
3.11
|
3.93
|
6.18
|
|
98/06/30
|
|
96/09/30
|
777.69
|
6.18
|
771.51
|
|
|
-
|
|
98/09/30
|
510.27
|
96/09/30
|
771.51
|
510.27
|
261.24
|
|
|
-
|
[14]
The appellant did not challenge this evidence,
and I accept that FIS was given credit for the refunds of net tax.
(ii) Order of application of credits
[15]
The appellant next argued that the Minister
failed to apply credits to the account of FIS in the manner most favourable to
FIS. He maintained that if the credits had been applied first to amounts of net
tax owing rather than to interest and penalties that were due, less interest
and penalties would have accrued on FIS’s account. The appellant submitted that
there is no provision in the Act that requires the Minister to apply
credits to interest and penalties before net tax.
[16]
In my view, the appellant’s argument is
unfounded. There was no proof that FIS’s liability would have been reduced if
the Minister had applied the credits in a different order to amounts FIS owed.
Also, it is well settled in law that in the absence of any direction by a
debtor to a creditor when making a payment as to which account to apply the
payment, the creditor has the right to allocate the payment as he pleases. This
principle is set out by the Federal Court Trial Division in 464734 Ontario
Inc. v. R., 90 D.T.C. 6206 at page 6215:
Where no direction is given by the debtor then
the creditor is free to apply the monies received as the creditor sees fit. The
debtor must expressly authorize how the funds he is paying to the creditor are
to be applied and failure to do so leaves the creditor to decide: Can
Fishing & Tackle Sports Limited v. Dawe [1960] OWN 499, 25 D.L.R. (2d)
487 ; and Re Northern and Central Gas Corp. Ltd. v. Kidd Creek Mines
(1988), 66 O.R. (2d) 11.
[17]
No evidence was led to show that FIS gave any
direction to the CRA regarding the allocation of credits.
Issue 2: Calculation of penalties
[18]
The appellant’s third argument is that the failure
to remit and late-filing penalties assessed against FIS have been miscalculated
by the Minister and exceed the amount due by $4,591.81.
[19]
Prior to April 1, 2007, paragraph 280(1)(a)
of the Act provided for a penalty of 6% per annum for failure to remit
or pay an amount under Part IX of the Act:
280. (1) Subject
to this section and section 281, where a person fails to remit or pay an
amount to the Receiver General when required under this Part, the person shall
pay on the amount not remitted or paid
(a) a penalty of 6% per year, and
(b) interest at the prescribed
rate,
computed for the period beginning on the first
day following the day on or before which the amount was required to be remitted
or paid and ending on the day the amount is remitted or paid.
[20]
Subsection 280(1) was amended, effective
April 1, 2007, to delete the penalty on unremitted or unpaid amounts and the
penalty was replaced by an increase to the interest rate payable in respect of
such amounts.
[21]
Section 280.1 imposes a penalty for failing
to file a return for a reporting period as and when required under Part IX of
the Act. The amount of the penalty is calculated using a two-part
formula: part one is calculated as 1% of the amount of net tax owing and part two
is 25% of the amount in part one for each complete month overdue, to a maximum
of 12 months.
[22]
It was not disputed by the appellant that FIS
was liable for penalties under paragraph 280(1)(a) up to March 31,
2007 and penalties under section 280.1. However, the appellant calculated
those amounts to be lower than what was assessed by the Minister.
[23]
The Minister’s calculation of the combined
penalties is shown in Appendix B, by reporting period.
[24]
The appellant’s calculations are set-out in
Exhibit A-2 as follows:
[25]
The fourth to seventh columns of the appellant’s
calculations set out in Exhibit A-2 relate to the section 280.1 late-filing penalties
and the eighth and ninth columns relate to the paragraph 280(1)(a)
failure to remit penalties.
[26]
It appears though that the appellant has made a
significant error in the calculation of the paragraph 280(1)(a) failure
to remit penalties since he has not accounted for the requirement that the
penalty amounts be compounded daily as required by subsection 124(1) of the Act:
124. (1) Interest computed at a prescribed rate
and any penalty computed at a rate per year under any provision of this Part
shall be compounded daily.
[27]
The appellant uses the daily rate of 0.00016%
for the penalty which amounts to 6% per annum with no compounding. This can be
seen by dividing the rate of 6% per annum by 365 days per year (rounding to 5
decimal places):
.06 =0.00016
365
[28]
The correct formula for calculating an amount
that is required to be compounded daily is:
A = P(1+r)n
where “P” is the beginning amount, “r” is
the interest or penalty rate (expressed as a decimal), “n”
is the total number of compoundings, and “A” is the ending amount: V. Krishna,
“Understanding Financial Statements” (Toronto: Irwin Law Inc. 2013), at 32.
[29]
It is apparent that the failure to account for
the compounding of the penalty is a significant error, and therefore I find
that the appellant’s calculations are not reliable and that he has not shown
that the penalties assessed against FIS were too high.
Issue 3: Claim for
additional input tax credits
[30]
The appellant also submitted that FIS should be
allowed additional input tax credits (ITCs) for the reporting periods ending
between December 31, 1998 and September 30, 2000. No ITCs were claimed by FIS
in its returns filed for those periods, but the appellant maintained that it
was only logical that FIS would have paid GST on taxable supplies it acquired
in the course of carrying on its business during that time. He estimated ITCs
for those periods using a ratio determined for other reporting periods by
comparing ITCs allowed by the Minister to total GST collected by FIS.
[31]
The appellant’s argument relating to ITCs cannot
succeed because he has not provided the necessary proof of the ITCs.
Subsection 169(4) of the Act requires a registrant to obtain “sufficient evidence in such form containing such information
as will enable the amount of the input tax credit to be determined, including
such information as may be prescribed.” Section 3 of the Input Tax
Credit Information (GST/HST) Regulations, SOR/91-45, sets out the
information that is required to support an ITC claim, including certain details
of the supplies on which the claimant paid GST. The amount of details depends
on the amount paid for the supplies, but at a minimum section 3 requires
the name of the supplier or intermediary in respect of the supply, the date of
the supply or date of the invoice issued in respect of the supply and the total
of the amount paid for the supply.
[32]
The information requirements set out in
subsection 169(4) and the related Regulations are mandatory: Key
Property Management Corporation v. The Queen, 2004 TCC 210 at paragraph 14.
[33]
The appellant has failed to provide any of the
necessary information required to support the claim for additional ITCs for
FIS, and there is no provision in the Act for basing an ITC claim on
estimated amounts. Therefore, he has not shown that FIS was entitled to
additional ITCs during the relevant periods.
Issue 4: Due diligence
[34]
The appellant’s final argument is that he
exercised due diligence to prevent FIS’s failures to remit net tax owing, and
therefore that he should escape liability under subsection 323(3) of the Act.
[35]
With respect to the due diligence defence, the
Federal Court of Appeal in The Queen v. Buckingham, 2011 FCA 142 said,
at paragraph 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. (emphasis added)
[36]
In this case, the appellant testified that FIS
had financial difficulties. He did not elaborate on those problems, except to
state that he was unable to borrow any more money to put into FIS that would
have allowed it to pay its debts. He also testified that he reduced his wages
from FIS in 1998, 1999 and 2000, and worked as hard as he could to make FIS a
success.
[37]
In my view, the appellant has not shown that he
took sufficient specific actions to prevent the failures by FIS to remit GST
collected from its customers. The evidence shows that the failures to remit by
FIS which led to the assessment against the appellant occurred repeatedly over
a period of approximately 4 years. It also appears that FIS was often in
default of its obligation to file timely GST returns from 1994 on, and that no
GST returns for its reporting periods ending from September 30, 1998 to
September 30, 2000 were filed until September 2005.
[38]
It is not clear from the appellant’s testimony what
particular circumstances led to the failure by FIS to file returns and remit
GST as required by the Act, nor is it clear what steps he took, if any,
beyond reducing his salary, to prevent the failures to remit. The appellant’s
testimony relating to the salary reductions is insufficient in itself to
demonstrate that he exercised due diligence since it was not shown that any
savings from the salary reductions were directed to paying remittances of GST.
Overall, there was no indication of any coherent plan to ensure that GST
remittances were made as required. In fact, for the years during which the
appellant took less salary, (as well as all previous periods) FIS did not remit
any amounts of GST at all. All reductions to the net tax payable by FIS were
made by applying refunds of net tax arising in other reporting periods.
Issue 5: Delay in assessing
[39]
At the hearing, the appellant voiced concerns
over the long delay between the time FIS ceased operating in late 2000 and the
time that he was assessed in December 2007. He pointed out that a very
substantial portion of the amount assessed against him consisted of interest
and penalties, which could have been partially avoided if he had been assessed
earlier.
[40]
The time limit for issuing a director’s
liability assessment under the Act is set out in subsection 323(5):
(5) An assessment
under subsection (4) of any amount payable by a person who is a director
of a corporation shall not be made more than two years after the person last
ceased to be a director of the corporation.
[41]
Under section 103 of the Saskatchewan Business
Corporations Act, RSS 1978, c. B-10, a director of a corporation ceases to
hold office when:
(a) he dies or resigns;
(b) he is removed by the shareholders; and
(c) he becomes disqualified.
[42]
In the absence of any evidence that the
appellant ever resigned, was removed or had become disqualified as a director,
it has not been shown that the 2 year limit for a director’s liability
assessment ever began to run.
[43]
In light of the fact that FIS was struck from
the company register, it might be argued that the corporation ceased to exist
at that point and that the appellant ceased to be a director. However,
according to the decision of the Saskatchewan Court of Queens Bench in R. v.
Rasmussen and Saskatoon Salvage Co., (1985) Ltd., 130 Sask. R. 308, a
corporation which is struck from the register in Saskatchewan is not thereby
dissolved and may continue to carry on business. The only consequence of being
struck is that the corporation is no longer capable of commencing or
maintaining an action in respect of a contract made in Saskatchewan. In this
case there is no basis for holding that FIS has ever been dissolved.
[44]
I therefore find that the director’s liability
assessment in issue was not made outside the time limit in subsection 323(5).
Conclusion
[45]
For all these reasons, the appeal is dismissed.
Signed at Vancouver, British Columbia,
this 17th day of July 2014.
“B.Paris”
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