Citation: 2014 TCC 46
Date: 20140328
Docket: 2011-3344(GST)G
BETWEEN:
ABDERRAHMANE ATTIA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1]
This is an appeal from
an assessment, the notice of which is dated September 29, 2010, and bears the
number F-027420, made in respect of the appellant under subsection 323(1)
of the Excise Tax Act (ETA). At issue is whether, as a director of Shan Cha
Investissements Inc. (the corporation), the appellant should be held solidarily
liable, together with the corporation, to pay $13,617.66, being the amount of
net tax the corporation failed to remit, plus interest, for the periods from
January 1, 2007, to January 31, 2007, from April 1, 2007, to October 31,
2007, from December 1, 2007, to January 31, 2008, from April 1, 2008, to April
30, 2008, and from June 1, 2008, to August 31, 2008 (the periods at
issue).
[2]
It should be noted
right away that the only issue in this case is whether the appellant is
entitled to exemption from directors’ liability under section 323 of the ETA. Indeed,
under the provisions of subsection 323(3) of the ETA, a director may escape
solidary liability if the director shows that he or she exercised the degree of
care, diligence and skill to prevent the failure that a reasonably prudent
person would have exercised in comparable circumstances. In other words, it
falls to be determined in this case whether the appellant exercised reasonable care,
diligence and skill in the circumstances to prevent the failures attributed to
the corporation.
Parties’ positions
[3]
The appellant is of the
view that the care, diligence and skill defence set out in subsection 323(3)
of the ETA applies to him given that, because of the state of his health, his cognitive
abilities were impaired. Even so, in his capacity as a director he acted with
prudence and in good faith by delegating his duties to a competent manager. The
respondent does not believe that the appellant took concrete and positive steps
to prevent the corporation’s failures.
Summary of the evidence
[4]
The appellant
testified. Dr. Caroline Morin and Dr. Hélène Poupart also testified in support
of the appellant’s position. Sonia Bergeron and Abdoulrahman Syradin testified
in support of the respondent’s position.
[5]
The highly credible
testimony of Dr. Morin, a general practitioner, reveals essentially the
following facts:
(i)
The appellant has been her
patient since July 26, 2004.
(ii)
On September 7, 2005,
she observed that the appellant was suffering from major depression and
prescribed at that time antidepressants. She also later referred him to another
doctor for a psychological follow-up, having noted that, in the circumstances,
medication alone was not sufficient to cure the appellant.
(iii)
She treated the
appellant for his major depression until December 4, 2009.
(iv)
Although she had
prescribed antidepressants for the appellant from the outset, he did not start
taking them until July 6, 2007. The appellant stopped taking the medication on
December 4, 2009.
(v)
The appellant’s illness
has certainly had an impact on his professional life (see also Exhibit A-1, Tab
4A, pages 1 and 3).
[6]
The testimony of Dr.
Hélène Poupart (a general practitioner who practises solely as a
psychotherapist), whose credibility is not in doubt, revealed essentially the
following facts:
(i)
The appellant was referred
to her by Dr. Morin.
(ii)
She treated the
appellant during the period from October 12, 2007, until January 2011.
(iii)
When she first saw the
appellant, on October 12, 2007, he told her that he had been suffering from insomnia
since 2003, had no appetite, had memory loss, could no longer concentrate, was
crushed by fatigue, experienced anxiety and irritability, was tormented by the
obligations related to his business and, lastly, no longer wanted to get up in
the morning. Dr. Poupart accordingly confirmed her colleague Dr. Morin’s
diagnosis of major depression, which Dr. Poupart described as mild to moderate.
(iv)
During the period from
October 12, 2007, to January 2011, she regularly treated the appellant.
(v)
The appellant’s illness
has certainly had an impact on [Translation]
“his functioning at work”.
[7]
For his part, the
appellant, whose credibility is not in doubt, gave the following testimony.
(i)
He founded the
corporation in 1994, and he was its only director and shareholder.
(ii)
The corporation
operated a coffee shop [Translation]
“under the Second Cup banner”.
(iii)
Before the periods at
issue, the corporation had always met its tax obligations, but sometimes was
late remitting the tax (some cheques bounced).
(iv)
In 2003, he lost his
father.
(v)
In 2004, the Second Cup’s
parent company informed him that it would take away his franchise in five
years.
(vi)
These two events caused
his depression.
(vii)
Since he was no longer
in any state to run his business, which was his only source of income, he hired
Sonia Bergeron around April 16, 2007, to manage his business in his place.
(viii)
Sonia Bergeron had powers
of attorney to sign the corporation’s cheques starting on August 1, 2007, and
to represent it in its dealings with the Agence du revenu du Québec starting on
November 12, 2007.
(ix)
The corporation was no
longer a Second Cup franchise around August 2008, which also ended Ms.
Bergeron’s mandate.
[8]
For the respondent,
Sonia Bergeron testified as follows:
(i)
She had been a food
service industry consultant since 2004.
(ii)
She was employed by the
appellant from April 12, 2007, until August 2008, to straighten out the
corporation’s operations.
(iii)
Uncustomarily, she also
managed the corporation’s finances because of the state of the appellant’s
health.
(iv)
During her mandate, she
negotiated with Abdoulrahman Syradin, a collections officer at the Agence du
revenu du Québec, in order to try to reduce the corporation’s tax debt, and she
kept the appellant abreast of the discussions.
[9]
Mr. Syradin
corroborated this version of the facts.
Analysis and conclusion
[10]
The legal framework
applicable to the care, diligence and skill defence set out in subsection 323(3)
of the ETA was recently briefly explained as follows by the Federal Court of
Appeal in Canada v. Buckingham
and Balthazard v. Canada:
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 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 [not that they show
that they subsequently corrected the failures].
[11]
By adopting such a criterion
of prudent and diligent conduct, the Federal Court of Appeal hoped to oblige
corporations to improve the quality of decisions of boards of directors and,
especially, to discourage the use of nominees as directors. As noted by Justice
Mainville:
. .
. Stricter standards also discourage the appointment of inactive directors
chosen for show or who fail to discharge their duties as director by leaving
decisions to the active directors. 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 . . . .
[12]
I am not dealing here
with a case of the type that the Federal Court of Appeal was seeking to discourage
by laying down the new test of prudent and diligent conduct, as the appellant
is by no means a nominee director or a director who was unaware of the
responsibilities inherent in his role.
[13]
Indeed, the appellant
was the sole director of the corporation, and until he became ill, the
corporation had always met its tax obligations, even though it had sometimes
been late. In addition, the fact that he appointed a competent manager to
replace him until he got back on his feet shows that he was aware of his
responsibilities.
[14]
The evidence adduced
satisfied me that the appellant suffered from major depression during the
periods at issue, and it is common knowledge that depression is a disabling condition
that affects the family life, the work, the eating habits, the sleep and the general
well-being of those who suffer from it. Although it is not in itself a defence,
I believe that this factor is one that must be taken into account in analyzing
the appellant’s conduct.
[15]
As noted by Judge Bowman
(as he then was) in Cloutier v. M.N.R., to determine whether the due diligence
defence applies, one must ask first and foremost what more a reasonably
prudent person placed in comparable circumstances could have done to try
to prevent the corporation’s failures to remit GST. In this case, I believe
that the appellant has shown a sufficient degree of diligence in delegating his
duties to a competent manager, whose competence and honesty he had no reason to
doubt, and I believe that a reasonable person placed in comparable circumstances
would have done nothing more.
[16]
The appellant took a
concrete and positive step to try to prevent the corporation’s failures to
remit GST. He did not simply let his corporation decline, as was the case with
the appellant in Wiseman v. The Queen. In that case, the appellant was the sole
director of a corporation. However, it was his wife who handled the
administrative and accounting aspects of the corporation. When his wife got
brain cancer, he became anxious and depressed and he no longer took any
interest in his corporation. Justice Little found that the appellant had done
nothing to prevent the corporation’s failures to remit GST and held him jointly
and severally liable for the failures, but recommended nevertheless that the
penalties and interest be reduced.
[17]
It is true that the
usual case law recognizes that a director may delegate his or her duties to a
competent third party only if the delegation of responsibility is accompanied
by appropriate oversight.
[18]
In this case, the
respondent argues that the appellant did not supervise Ms. Bergeron in the
performance of her duties, and thus makes an analogy with Constantin v. The
Queen
in order to hold the appellant solidarily liable for the corporation’s failures
to remit GST. However, that decision is not relevant for our purposes, because
the facts of that case are completely different from those herein. That case
involved the abdication of all decision-making powers in favour of the spouse,
not the delegation of powers. The spouse subsequently accepted the position of
director of the corporation without knowing what it entailed, and she never
assumed any responsibility, which is not the case of the appellant here.
[19]
I do not think that the
duty of oversight should be interpreted too narrowly. As recognized by Justice
Angers in Verret v. The Queen,
which has similar facts to those in this case, one must consider the fact that
the appellant’s health problems led him to rely more on Ms. Bergeron’s
honesty and competence. In addition, in Buckingham and Balthazard,
the Federal Court of Appeal itself has acknowledged that directors’ liability
under subsection 323(1) of the ETA is not absolute.
[20]
I do not think that, in
enacting subsection 323(1) of the ETA, Parliament’s intent was to penalize an
ill person simply because that person did not adequately supervise the person
whom he or she appointed to replace him or her in the exercise of the duties of
director of a corporation. I believe that Parliament’s intent was rather to
penalize directors who were careless and who neglected their role as agents of
the Crown, and I do not believe that the appellant displayed such conduct in
this case.
[21]
For these reasons, the
appeal is allowed with costs.
Signed at Ottawa, Canada, this 28th day of March 2014.
“Paul Bédard”
Translation certified true
on this 27th day of November 2014.
Erich Klein, Revisor
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