Citation: 2013 TCC 239
Date: 20130726
Docket: 2009-3334(GST)G
BETWEEN:
LESLIE MCKENZIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hershfield J.
[1] The Appellant was
the sole director, officer, employee and shareholder of 731771 Ontario Limited,
a company carrying on business as Associated Car Company (“Associated Cars”).
She was actively engaged in its business relying to a considerable extent on
the employees of a related company: Associated Auctioneers Inc. (“AAI”) to
assist in the operation of Associated Cars.
[2] Associated Cars
failed to collect and remit GST alleged by the Respondent to have been a
failure contrary to the provisions of the Excise Tax Act (the “Act”).
An assessment was issued (the “underlying assessment”), an appeal was filed and
abandoned and Associated Cars failed to pay the amount assessed. The Appellant
was assessed as being liable for the unpaid underlying assessment amount under the
director’s liability section of the Act, namely section 323. Her defence,
commonly known as the “due diligence defence”, is based on her submission that
she acted with the required due diligence in coming to the belief that no GST
was collectible in respect of the supplies at issue by virtue of section 87 of
the Indian Act.
General Background and
the Relevant Provisions of the Act
[3] Associated Cars was
a registered motor vehicle dealer engaged in the business of buying and selling
vehicles in London, Ontario. It was assessed, pursuant to the provisions of the
Act for failing to collect and remit GST on the sale of 572 used cars
between March 1, 1995 and July 31, 1996, (the “relevant period”). The
assessment also denied input tax credits (ITCs) in respect of the GST paid by
it on its purchase of those vehicles. The assessment was in the amount of $1,692,941.10 which included
tax, interest and penalties.
Liability of
directors
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.
The Issues
The Denial of ITCs
[7] The issue of the
denial of ITCs was not pursued at the hearing or in the submissions of the
Respondent. Accordingly, I will not hold the Appellant liable for that portion
of the underlying assessment for which she has been assessed.
GST and Preliminary
Comments on “Notional” ITCs
[8] It is not in
dispute that Associated Cars did not, in fact, collect and remit GST in respect
of the subject sales. Associated Cars took the position, at the time these
sales were completed, that the purchasers were exempt purchasers pursuant to
section 87 of the Indian Act and as such no GST could be imposed. On the
same grounds, the Appellant asserts that she can not be held liable for the
collection and remittance failure.
[9] As well,
recognizing that a director’s liability is more forgiving, the Appellant in
this case relies on the competence of Associated Cars’ agent, AAI, the related
company that carried out, as an unpaid contractor, essentially all of
Associated Cars’ business that was not directly handled by the Appellant.
[10] While the due
diligence issue surrounding the application of section 87 of the Indian Act
might seem pointed enough, the heart of the issue, from the Respondent’s
perspective, is, in fact, coloured by the role Associated Cars played in a
scheme that the Respondent views as misrepresenting the real terms of the vehicle
purchase and sale transactions pursuant to which vehicles were only purportedly
to be delivered by Associated Cars to a First Nation reserve (“Reserve”). The
Respondent, in accordance with published practices, which were set out in
Technical Information Bulletin B-039R dated November 25, 1993) focuses on the
place of delivery of the subject vehicles in respect of the application of
section 87 of the Indian Act without concern over other connecting
factors used in income tax cases to determine the application of that section.
[11] The scheme was to
take advantage of what might be called an unintended gap in the Act
whereby it was possible, using First Nations as intermediaries, for vehicle
dealers to receive unintentional multiple “notional” ITCs. Section 176 of the Act,
as it read in the relevant period, gave vehicle dealers that acquired used cars
ITCs on such vehicles purchased as if GST had been collected by it from the used
car vendor. This was a notional ITC if, in fact, no such GST collections were neither
made nor required to be made. This would be the case where the vendor of the
used cars had acquired them qua consumer and paid GST without receiving an
ITC on the sale of that vehicle to the used car dealer.
[12] In brief, notional
ITCs were intended by Parliament to ensure that GST paid on supplies along the
chain of sales could still be recovered when it came back into the commercial
stream by a consumer selling the property to a commercial buyer.
[13] What was not
contemplated by Parliament, it seems, was that flipping vehicles through a
First Nation would give rise to multiple notional ITCs; i.e. multiple tax
benefits. As a result of the proliferation
of this abuse, the notional ITC was eliminated in 1996 and replaced with a more
limited “trade-in” rule in subsection 153(4).
[14] However, car-flipping
schemes completed prior to that amendment, were still attacked by the Canada
Revenue Agency (“CRA”) on various grounds.
As my analysis will demonstrate, one of the points of attack is to not allow the
application of section 87 of the Indian Act unless the used property was
delivered to a Reserve. As my analysis will also demonstrate, however,
published CRA administrative policies were not always followed.
[15] Before moving on to set
out my factual findings in this case, I wish to note a fact that could
otherwise get lost in the detail. Associated Cars, as a used car dealer, did
not purchase the subject vehicles from consumers and never received the benefit
of notional ITCs. Associated Cars was in a chain of other dealers that
benefited, but was itself, in effect, only a facilitating intermediary. It paid
GST to dealer vendors in all cases and remitted same in respect of each of the
572 used car transactions examined in this appeal. The ITCs it collected were
not notional ITCs - they were ITCs claimed for actual GST paid in the normal
course of its commercial activities of buying and selling used cars from other
dealers.
Background to the Formation of
Associated Cars and Associated Cars’ Role in the Scheme
[16] The Appellant
testified at the hearing. She has a high school education and six months of
nursing studies. After leaving school she worked at various administrative jobs
including being an administrative assistant at a bank. She began working for
AAI in an administrative capacity in 1985 after her husband, a licensed
auctioneer, incorporated AAI. It carried on business as a public auction house
in London, Ontario.
[17] At all relevant
times, the Appellant’s husband was the sole shareholder of AAI. He also
testified at the hearing.
[18] AAI historically would
take personal property on consignment from a variety of customers such as
financial institutions that may have seized various personal property items or
from trustees in bankruptcy who were liquidating the assets of a bankrupt. These
consignments included vehicles. Indeed, although AAI was a general auction
enterprise, vehicles became its primary source of business even though it was not
a licensed motor vehicle dealer and did not employ a registered motor vehicle
sales person.
[19] The growth in the vehicle
auction business was fuelled by licensed dealers who had vehicles in their
inventory to shed and by licensed dealers looking for inventory, so many of AAI’s
auction transactions involved vehicle dealer consignment vendors and dealer
purchasers. The auction was the means by which these sales were facilitated. AAI
would, in the normal course of its business, act as the intermediary in the
case of a successful auction sale by acquiring the vehicle from the consignor
and transferring it to the successful buyer. In the normal course of its
business it took care of all the administrative details of, and paperwork for, these
transactions such as transferring ownership from the consignor vendor to itself
and then from itself to the auction purchaser.
It collected a fee from the purchaser and a commission from the vendor.
[20] However, in its first
few years of business, the Ontario government was threatening to shut down AAI’s
vehicle consignment business because it was not a licensed motor vehicle
dealer. This would cripple a major source of its income. An application by AAI to
be licensed as a motor vehicle dealer was denied; hence the formation of
Associated Cars by the Appellant. Unlike AAI, it was able to obtain the
necessary license. The Appellant also became a registered motor vehicle salesperson
in compliance with a requirement imposed on licensed dealers that they have at
least one such person engaged in dealer sales. At that point, the Appellant
ceased to be an employee of AAI and became the sole employee of Associated
Cars.
[21] While the business
format and structure changed, practically speaking it seems that not much else changed
when Associated Cars first started its business in 1987. The administrative
work continued to be done by AAI personnel and the Appellant much as it had
always been done. The Respondent did not
take issue with this structure between these related, technically unassociated,
entities. It was the company’s operating format for years before it started to engage
in the subject transactions.
[22] In any event, this
business format and structure was in place then when the GST came into force in
1991. Associated Cars was a registrant under the Act and relied on AAI
employees to assist in dealing with GST collection and remittance requirements,
and making ITC claims in respect of Associated Cars’ transactions, including its
large volume of dealer-to-dealer auction sales.
[23] The subject 572 transactions
came about as a result of what was described as an expansion of Associated Cars’
business in 1995.
[24] That expansion came
about as a result of the Appellant’s husband having been approached by a
representative of Canada Auctions with the idea to sell used vehicles directly to
First Nations. The sales were to be pre-ordained, at fixed prices between fixed
buyers and sellers, with Associated Cars acting solely as an intermediary.
Nonetheless, the proposal would enhance sales volume and income and thereby business
value, which were important factors to both AAI and Associated Cars in the
event of a possible sale of their businesses, a possibility also purportedly
raised by this representative of Canada Auctions.
[25] Still, this business
proposal must have raised questions in the mind of the Appellant’s husband. He
sought advice from AAI’s accountant who then met with the CRA to discuss any
issues that would arise with selling used cars to First Nations and not
collecting GST.
[26] The accountant met
with a CRA officer, Mr. Arner, who testified at the hearing. There is little dispute
as to the cautionary comments made by Mr. Arner which were passed on to the
Appellant’s husband by the accountant and emphasized again to the Appellant’s
husband at another meeting. This second meeting was between the Appellant’s
husband and Mr. Arner where the caution was repeated. The caution was that
there must be GST charged on sales to First Nations unless the vehicles were
delivered to a Reserve and proof of such delivery could be established by
appropriate “almost perfect” records.
[27] Mr. Arner testified
that he tried to discourage the Appellant’s husband from entering into these
transactions. However, his testimony did not suggest that he explained the abuse
associated with car-flipping schemes using First Nation buyers, a scheme about
which the CRA was then already concerned. Nor did his testimony suggest that he
warned of the likelihood of an audit as the reason for suggesting that their
records be “almost perfect”. He did testify that he offered to review their
documentation to help ensure that there would be no issues in respect to
relying on section 87 of the Indian Act.
[28] The Appellant
testified that she was not aware of Mr. Arner’s discouraging comments or offer
to assist, but she acknowledged meeting with her husband and AAI’s bookkeeper
to determine how to proceed. On the other hand, her testimony made it clear
that she knew that the subject vehicles were required to be delivered to a Reserve
both contractually and for GST purposes. Her testimony did not speak of a
discussion at this meeting with her husband and AAI’s bookkeeper, as to how AAI
was to proceed and to ensure that this requirement was met. She said that she
was knowledgeable about documentation procedures but she did not express any
particular knowledge of delivery procedures.
[29] Indeed, the evidence
suggests that deliveries were normally the responsibility of the buyer since
the inception of the business and before the introduction of the subject
transactions. Even after the introduction of such transactions, they only constituted about 20% of Associated Cars’ total
vehicle business during the relevant period. That is, during the relevant
period, some 80% of Associated Cars’ total vehicle sales were auction sales. Most
of the latter business was likely dealer-to-dealer transactions given that this
was the primary source of the vehicle business conducted by Associated Cars and
AAI. In that context, deliveries were the responsibility of the buyer. If
Associated Cars or AAI arranged a delivery to Toronto, an additional fee of $75 was charged. This was not charged in the
case of the subject transactions. This led the Respondent to suggest that there
were, in fact, no deliveries of the subject vehicles to Reserves.
[30] On the other hand, R.W.A.
Inc. (“RWA”), a transport enterprise that delivered 166 of the 572 subject
vehicles, charged a delivery fee on a COD basis. RWA delivery documents showed
point of origin as Associated Cars (or AAI) and point of delivery at addresses
within the Six Nations of the Grand River Reserve (“Six Nations Reserve”).
[31] In any event, the
business expansion involving First Nation sales went forward and, as noted, 572
used cars were acquired from dealers and resold by Associated Cars during the
relevant period. There were ten used car sellers and five First Nation
purchasers.
[32] The vehicle sellers in this case are as
follows:
a.
Hometown Motors,
located in Gananoque, Ontario.
b.
Code Ford Mercury Sales
Ltd., located in Gananoque, Ontario.
c.
Autocrat Motor Cars
Inc., located in Oakville, Ontario.
d.
Humberview Motors,
located in Toronto, Ontario.
e.
Gus Zeidler Auto &
Boat Sales, located in Orillia, Ontario.
f.
Oakville Motors Sales
& Leasing, located in Oakville, Ontario.
g.
Adnil Holdings, located
in Milton, Ontario.
h.
Rexe Automotive Wmls,
located in Napanee, Ontario.
i.
1159223 Ontario Ltd.,
located in Ganonoque, Ontario.
j.
Bennett Auto Sales,
located in London, Ontario.
[33] The purchasers of the vehicles were:
a.
CTM Wholesale &
Leasing, located in Shannonville, Ontario.
b.
Ojibway Car Sales,
located in Ohsweken, Ontario.
c.
William Wood, located
in Ohsweken, Ontario.
d.
F. Nettagog Sales,
located in Ohsweken, Ontario.
e.
Katharine Hopkins,
located in Thamesville, Ontario.
[34] While I have noted
that Associated Cars acted as purchaser and vendor of all vehicles, and as the
registry agent, for both the auction and First Nation sales, there were notable
differences.
[35] In respect of
auctions, if a bid was successful the vehicle was first transferred and registered
as being acquired by Associated Cars and then Associated Cars transferred and registered
it to the successful bidder.
As I said, delivery was the responsibility of the purchaser. Each vehicle had
its own transaction paperwork. Documentation would be routine and complete,
although not always accurate. If there was a representation problem as to the
vehicle, it could be returned or the price could be adjusted. There would be
more reliance on vendor representations on dealer-to-dealer sales.
[36] In the case of the
subject vehicles all the sales were dealer-to-dealer sales, so the normal
practice of Associated Cars acting as the intermediary registered owner was not
always followed. In some cases, Associated Cars would transfer pre-arranged
sales directly from the seller to the pre-arranged buyer although delivery
remained the responsibility of Associated Cars. Each vehicle still had its own
transaction paperwork. Documentation was to be routine and complete although
that was not always the case. Inaccuracies were not unexpected or abnormal.
[37] The Appellant
testified that some 4,000 automobile auctions were processed during the subject
period in addition to the subject transactions. An Agreed Book of Documents consisting
of 12 volumes and 572 transactions was submitted at the hearing. Each of those
transactions during the relevant period was the subject of the reassessment.
That is, they pertained to vehicles that Associated Cars bought for
pre-arranged sales and delivery to either the Mississaugas of the New Credit First Nation Reserve
(“New Credit Reserve”) or the Six Nations Reserve. Both destinations were in
the order of 100 kilometres from London, Ontario.
[38] It is relevant to
note the pre-arranged sales of all the subject vehicles included naming the
particular buyer, place of delivery and fixing a pre-determined price.
Associated Cars essentially only acted as a registry agent and purportedly
performed a delivery service.
Further Particulars of the Appellant’s
Testimony
[39] The documents
included in respect of each of the subject sales were transaction records
showing who the vendor and purchaser were. Each record showed the purchase
price including GST on the purchase by Associated Cars and the sale price
without GST for the sale to the named buyer. Serial numbers of the particular
vehicle acquired and received by Associated Cars were noted on each transaction
sheet. For every such transaction sheet there was a delivery document which
identified, by matching serial numbers, the vehicle acquired by Associated Cars
as the vehicle resold by it and purportedly delivered by Associated Cars to the
pre-arranged buyer at a particular location.
[40] In the case of
deliveries by AAI drivers, delivery locations were not identified by address
but rather were identified more generally. For example, some 380 vehicles said
to be delivered by AAI drivers to Hagersville were acquired from two dealers in
Gananoque and sold to different buyers and had shipping documents that showed
the delivery address as “New Credit Reserve”. These shipping documents showed
AAI as the point of origin.
[41] Other shipping
documents showed a carrier as having delivered the vehicles. That is, there are two distinct types of delivery
documents that the Appellant used as evidence: 1) shipping documents when AAI
drivers were purportedly used, and 2) shipping documents when a carrier was
used. The only carrier identified on the shipping documents was RWA.
[42] The 406 shipping documents that do not have
a carrier have, for the most part, a signature by a Walter Sault who appears to
have signed as the agent of AAI. Those shipping documents, for the most part, are
also stamped by a Randy Walter Sault or a Margaret Sault. The stamps of Randy
Walter Sault are initialled whereas the stamps of Margaret Sault bear her
signature.
[43] The stamp has the following description if signed
by Randy Walter Sault:
Randy
Walter Sault, a Commissioner, etc,. County of Brant and the Regional Municipality of Haldimand-Norfolk, while Band Administrator of the Mississaugas of the
New Credit First Nation. Expire March 15, 1997.
[44] If the stamp was signed by Margaret Sault it
had the following description:
Margaret
Sault, a Commissioner, etc,. County of Brant and the Regional Municipality of Haldimand-Norfolk, while Membership/Lands Officer of the Mississaugas of the New
Credit First Nation. Expire March 15, 1997.
[45] Also, the shipping documents usually had a second
stamp that appeared in one of two forms:
MISSISSAUGAS
OF THE NEW CREDIT FIRST NATION R.R. #6 HAGERSVILLE, ONTARIO N0A 1H0
or
AUTOMOBILE
RECEIVED AT NEW CREDIT RESERVE CON. 1 LOT 2 & 3 R.R. 1,
HAGERSVILLE N0A 1H0 OFFICIAL NEW CREDIT COUNCIL
[Emphasis
added.]
[46] No signatures
appeared with these latter stamps. The shipping documents without a stamp signed by either Randy Walter
Sault or Margaret Sault all had the received at the New Credit Reserve
stamp, again without signatures. For the purposes of these Reasons, I will
refer to the shipping documents having the received stamp as those
having “Receipt Stamps”. The other stamps do not speak expressly to the issue
of delivery at a Reserve.
[47] At this point, I
should note that Associated Cars was paid at the lowest end $56 and at the
highest end $432 as a commission fee from the vendor and the buyer paid a fee
of between $100 and $300 in respect of the subject sales. I also note that while
no allegation was expressly made that the purchases and sales did not take
place in a legal sense, the Respondent, having done a partial search, found a
number of instances where no registration transfers were found. The Appellant’s
husband testified that not all transfers were registered. Documentary proof of
registered transfers was provided for 195 of the subject vehicles. The registrations
being referred to are registered transfers from the initial vendors to
Associated Cars and then from Associated Cars to the buyer.
[48] It does not seem to
be in dispute that the buyer paid by cheque payable to Associated Cars and such
amount was deposited in Associated Cars’ account. From that account Associated
Cars would pay the initial vendor. Based on such evidence, the Appellant relies
on her testimony that all legal formalities were observed.
[49] I note here, as well,
that Respondent’s counsel undertook to provide a complete cross-reference of
relevant facts pertaining to each of the subject sales. This resulted in a
spreadsheet exhibit that Appellant’s counsel viewed and approved. The
spreadsheet allowed the Court to more readily see the course that each
transaction followed as well as assisting the Respondent in highlighting some
of the discrepancies on which reliance was placed.
[50] Indeed there are questionable aspects, if not discrepancies,
on the face of many of the shipping documents. For example, in the case of AAI
driver deliveries many delivery documents do not have the date of shipping and
virtually none have the name of the driver or a specific address for delivery.
[51] As well, in the
case of AAI driver deliveries there are many shipping documents that show the
purported delivery of vehicles to have occurred days prior to the sale of or
payment for the vehicles. There are also shipping documents that showed the purported
delivery of the vehicles to have occurred days before Associated Cars was
registered as the owner of vehicles. At the hearing, the Appellant testified
that the discrepancies in dates were due to the fact that AAI conducts auctions
on Tuesdays and Thursdays and auction sales were dated accordingly. Since
Associated Cars relied on AAI staff for both its auction sales business and the
subject vehicle sales, the documentation for the subject vehicle sales was dated
on a Tuesday or Thursday even if that was not the actual sale date.
[52] The shipping
documentation also raises odometer reading questions which the Appellant acknowledged
in written submissions. On 99 of AAI’s sale forms, the reading of the odometer
on the vehicles exceeds the mileage of what was reported by the purported driver
on the shipping documents. On 74 of the vehicles, the mileage of what was
reported by the purported driver on the shipping documents exceeds the reading
of the odometer on AAI’s sale forms. Mr. McKenzie’s testimony provided an explanation for
such discrepancies at least in relation to the auction business. AAI’s staff was not required to personally observe the
odometer reading upon the receipt of a vehicle from a seller as any discrepancy
pertaining to mileage of the vehicle would be raised by the ultimate buyer.
[53] The Respondent
submits that the number of mistakes on the odometer readings are highly
improbable and that the information may well have been provided by a third
party because there was in fact no physical inspection of the vehicle by AAI on
behalf of Associated Cars. The Respondent infers that the lack of physical
inspection is a result of the vehicles not ever being physically located at AAI’s
premises.
[54] To the contrary,
Mr. McKenzie testified that Associated Cars would rely on dealer vendors to supply
relevant vehicle information such as model and year and odometer readings. If
there was a mistake of any significance, the buyer could return the vehicle or
negotiate a new price. The inference of the testimony was that Associated Cars was
the intermediary in these transactions putting the responsibility on the
initial vendor. In effect, it was suggested that it was common in the industry
in dealer transactions for the initial vendor to warrant the vehicle specs
relieving the intermediary, such as Associated Cars, from having to maintain meticulous
and careful inspection records. Discrepancies,
he said, were the norm in the industry of auction sales. Indeed, he
testified: “I would say that 99 percent of the odometer readings are incorrect
at every auction throughout the country.” He also said that things are “far
more accurate today than it was back then”.
[55] Other testimony
confirmed or asserted the following additional particulars:
·
AAI received
no compensation for any of the services that it provided to Associated Cars;
·
Such
services included, for example, an AAI yard employee accepting delivery of a
vehicle acquired by Associated Cars. An AAI employee would record vehicle
particulars and attend to the delivery of the vehicles, in respect of the
pre-arranged sales, to the purchaser once the paperwork was completed. Such
paperwork, including the vehicle transfer registrations, was done either by the
Appellant personally or by AAI’s employees including its bookkeeper. The only
difference in documentation amongst types of transactions was dependent on
whether sales were dealer-to-dealer. If they were, one less sales document
needed to be completed;
·
The
Appellant attended at the premises of AAI on a full-time basis as an employee
of Associated Cars. When she did not personally attend to the preparation of
documents relating to the purchases and sales undertaken by Associated Cars,
she said she personally reviewed all of the documentation prepared by AAI staff;
·
The
Appellant said she frequently observed the vehicles that were involved in the
subject sales being delivered to the yard and then being taken away for
delivery once the documentation was complete;
·
The
Appellant said she did not know there was an issue that the subject vehicles had
never been delivered to the reserves. Associated Cars ceased doing that
business as soon as the Appellant learned that the CRA had a problem with deliveries;
·
The
Appellant admitted that she had never been to the Reserves and that she relied
on AAI’s drivers and RWA to make the deliveries and, as well, that she relied
on the Receipt Stamps returned to her by the drivers after deliveries were
made;
·
The
Appellant testified that the bookkeeper for AAI did most of the work relating
to GST and that there had never been a GST issue or problem with any of AAI’s
compliance with the Act since the introduction of GST until late in 1996
or early 1997 when a CRA auditor indicated that there was a problem;
·
The
Appellant said that she relied on the fact that her husband had met with the
CRA, as had AAI’s accountant, to enquire about the Indian Act exemption
and the GST and input tax credit regime that needed to be complied with in the
context of that exemption. She said she also relied on her understanding of the
way in which Associated Cars conducted its business in respect of the subject
sales complied with CRA requirements. Her understanding that the exemption
applied to property delivered to the Reserves led her to believe that the shipping
documents and Receipt Stamps were sufficient.
[56] The Appellant submits that she exercised
the degree of care, diligence and skill necessary to prevent the failure to collect
and remit tax and that she had no reason to believe that the subject vehicles
were not delivered to a Reserve and thereby exempt from taxation:
a.
She was aware that for
GST to be exempt for a sale of a vehicle, it would have to be sold to a First
Nation and then delivered to a Reserve.
b.
She took all the
reasonable steps to ensure that the purchaser was a First Nation by requiring
the purchaser to produce an Indian status card which was copied and filed with
Associated Cars as proof of status.
c.
Associated Cars relied
upon common practice and forms to evidence delivery to a Reserve.
d.
The Appellant had no
reason not to rely on the documents relating to proof of delivery presented to
her by AAI and the representations of Mr. McKenzie.
e.
The sale of vehicles to
First Nations was not special except that each transaction required proof of
delivery, and in respect of the subject transactions, they were not through a
public auction house.
f.
The Appellant would
match the shipping document to the corresponding sale document to ensure that sales
to First Nations had proof of delivery to a Reserve.
g.
The Appellant submits
that from the particulars of the shipping documents, despite the deficiencies,
a reasonable person would conclude that delivery to a Reserve had taken place.
[57] The Respondent submits that the Appellant
did not exercise the degree of care, diligence and skill to prevent the failure
to remit tax that a reasonably prudent person would have in the circumstances:
a.
With respect to the
subject sales, the Appellant reduced her handling of the transactions below her
normal practice compared to the documentation for Associated Cars’ day-to-day
operation.
b.
The Appellant provided
no evidence of delivery fees charged to the buyer.
c.
There were too many
problems with the shipping documents to support the required delivery, i.e., in
the case of AAI driver deliveries - missing driver or carrier name, shipping
address, and so on.
d.
The Appellant should
not have simply relied on shipping documents from unknown individuals
purporting to be First Nations.
e.
The Appellant should
have taken additional precautions with these “special” transactions.
[58] The Respondent submits that an adverse
inference should be drawn from the fact that no key witnesses were called to
clarify their role in the transactions.
[59] The Respondent also submits that on a
balance of probability the delivery of vehicles did not occur at all.
Analysis
[60] My analysis will
proceed under the following headings:
1. The Notional ITC –
Legislative Policy and Abuses
2. The Application of
Section 87 of the Indian Act to GST
Authorities
and Administrative Practices
3. The Due Diligence
Defence
(a) Onus of
Proof and Underlying Corporate Liability
(b) The
Context for Analyzing the Appellant’s Due Diligence Defence: (i) The Appellant’s Reliance
(ii)
A Prudent Person’s Reliance
4. Conclusions
1. The
Notional ITC – Legislative Policy and Abuses
[61] When the GST came
into force in 1991, subsection 176(1) provided as follows:
176. (1) Acquisition
of used goods -- Subject to this Division, where
(a) used tangible
personal property is supplied in Canada by way of sale after 1993 to a
registrant, tax is not payable by the registrant in respect of the supply, and
the property is acquired for the purpose of consumption, use or supply in the
course of commercial activities of the registrant, or
(b) used tangible
personal property is supplied in Canada by way of sale before 1994 to a
registrant, tax is not payable by the registrant in respect of the supply, and
the property is acquired for the purpose of supply in the course of commercial
activities of the registrant,
for the purposes of
this Part, the registrant shall be deemed (except where the supply is a
zero-rated supply or where section 167 applies to the supply) to have paid, at
the time any amount is paid as consideration for the supply, tax in respect of
the supply equal to the tax fraction [7/107ths] of that amount.
[62] As noted at the
outset of these Reasons, this subsection as it read in the relevant period gave
used car dealers ITCs on used cars purchased as if GST had been collected from
the dealer by the vendor and remitted out of the total price paid, where, in
fact, no collections, payments or remittances were required to be made. Such grant
of a notional ITC to a purchaser of used goods, who was in the business of
reselling such goods, was conceptually pure. It was intended to ensure that GST
originally paid on supplies of new property was recovered from the government when
a consumption purchaser resold the property into the commercial stream and the
commercial buyer was then required to collect and remit GST again. That resale
would not generate the ITC for the consumption purchaser that a normal,
uninterrupted, commercial stream of transactions would have allowed. Section
176 gave the lost ITC to the buyer who brings the used property back into the
commercial stream. This was an outright tax benefit given to the buyer that
Parliament might have believed would be passed onto the purchaser by decreasing
the sale price. This is reflected in the July 1997 explanatory notes published by the Minister
of Finance. There it is stated that the notional ITC was a mechanism “intended
to notionally remove the portion of the current fair market value of the used
goods representing tax that was originally paid on the goods and not
recovered”.
[63] At the Standing Senate Committee on
Banking, Trade and Commerce, to which Bill C-70 (1997) was to amend the Excise
Tax Act, Mr. Paré speaking for the Recreational Dealers Association of
Canada, addressed his concerns over the elimination of the notional ITC. He
noted that the notional ITC was implemented to establish equity in that it
seeks to remove an element of double taxation that would otherwise exist. He
further stated that it acts as a counterbalance in allowing dealers to better
compete with private sellers of vehicles that do not charge GST on the sale.
That again reflects the belief that the notional ITCs would be passed onto the
purchaser who acquired a vehicle from a dealer.
[64] Still, the notional
ITC was repealed due to the abuse. The illustration cited in the course of removing
the notional ITC was of the scheme using First Nations as temporary buyers. The
illustration was, simply, as follows:
New car
dealer à First Nation = NO GST
First Nation à same dealer = NO GST; Dealer gets Notional ITC
[65] In this illustration,
the fisc never received any GST but gave the notional ITC to the dealer
regardless. This result does not reflect the government’s policy behind the
notional ITC. Hence, it was recognized as an abuse that needed to be corrected.
The express target was sales to First Nations at a time when the application of
the GST to them was uncertain but for CRA administrative practices. Still,
illustrating an abuse that needed to be corrected, going forward, should not
distract from the analysis in this case.
[66] For example, the CRA
traced the vehicles that were involved in the subject transactions and found
some at least were flipped more than once ostensibly through a Reserve creating
multiple notional ITCs thus each creating a loss to the fisc.
[67] Consider the
following somewhat modified illustration of an exhibit tendered at the hearing:
Status Indian A acquires a new vehicle - no GST
A sells to used car dealer X - no GST - Notional ITC
X sells to Associated Cars
- GST collected from Associated Cars
- X Gets ITC
Associated Cars sells to Status Indian B -
No GST
- Associated Cars Gets ITC
B sells to used car dealer Y – no GST - Notional ITC
[68] The result here is
that GST is collected once and ITCs are given three times. The process can
still be repeated over and over so that the same vehicle will give rise to
multiple transactions and multiple ITCs to recover taxes never paid. Using such
examples, the Respondent suggested that such car-flipping schemes have led to
criminal prosecutions.
[69] However, the car-flipping
schemes that led to criminal prosecutions were alleged and found to be
fraudulent, leading to convictions for conspiracy to defraud the government
through the GST system. See R. v. Prokofiew. No such allegations
were made here. Indeed, to say that GST should have been paid and collected in
this case requires the Respondent to insist that the transactions were legally
effective and not a sham. As I said, the insinuations of criminality are
nothing but a distraction in my view.
[70] Still, it is worth
noting some of the factual findings of the trial court judge in Prokofiew.
There was a finding in Prokofiew
of false invoices and forged documents. While the Respondent seems to have also
played on the reliability of the shipping documents and the like, if not their
genuineness, I can not find anything other than the documentation in this case
is less than perfect.
[71] It is also worth
noting that the evidence accepted by the trial judge in Prokofiew in
large measure supports the testimony of the Appellant and her husband. In
wholesale used car deals it is not uncommon that the dealers never see the vehicles
and that they are often pre-sold and never reach the vendor’s lot. Also, in large
volume wholesale used car deals, it is not uncommon that dealers take each
other’s word as to vehicle specs without actually inspecting the vehicles. As well, vehicle registration
dates or even the absence of vehicle registrations is not determinative of actual
dealer-to-dealer sales. While this is not
evidence in the case at bar, in fairness to the Appellant, such findings of
another court, in my view, can not be ignored in terms of assessing the
credibility of the Appellant, or more particularly that of her husband, given
the need here to credibly identify comparable circumstances.
[72] All this is to say that
the inferences here, and the examples of abuse and discrepancies, have been
given little weight. As to the discrepancies, the Appellant’s husband’s
un-coached testimony in this area was, in my view, credible.
2. The Application of
Section 87 of the Indian Act to GST
Authorities and
Administrative Practices
[73] In Union of New Brunswick Indians v. New
Brunswick (Minister of Finance), the issue before the Supreme Court of Canada was
whether Indians in New Brunswick were required to pay Provincial Sales Tax on
goods purchased off the reserve for consumption on the reserve. The court had
to decide whether paragraph 87(1)(b) of the Indian Act applied to
the tax levied under the former New Brunswick Social Services and Education
Tax Act.
[74] While the court stated that the purpose of section 87
was to “preserve the entitlements of Indians to their reserve lands and to
ensure that the use of their property on their reserve lands was not eroded by
the ability of government to tax, or creditors to seize”, it concluded that section 87 does not exempt Indians from all sales
taxes on property used on reserves just because of such use.
[75] In drawing its conclusion, the court stated
that the tax levied by the province on a retail sale is not a consumption tax
but a sales tax that is imposed at the time of sale (a point of sale test) on
property off-reserve. Using a point of sale test obviates the need to be
concerned about where the property is used. This approach allows Indians living
off-reserve to purchase goods tax-free on reserve regardless of where the goods
are to be used. The court does note that delivery of goods to a reserve may
partially offset this problem.
[76] Regardless of this decision
of the Supreme Court of Canada, in the Prokofiew decision referred to
earlier in these Reasons (which was heard some six years after Union of New Brunswick Indians) Templeton J. appears to have relied
on CRA testimony as to CRA’s policy on the application of section 87 of the Indian
Act with respect to sales to Indians. That policy was said to
be that the CRA had to be comfortable that the goods or services were consumed
on reserve and that documentation that showed delivery to the reserve was usually
sufficient. There was also testimony that the sale had to be to an individual residing
on reserve but that different auditors had different views as to whether
goods – vehicles – had to be used on the reserves or had to stay on the reserve.
[77] Such evidence of the
practices of different auditors does not coincide with the CRA’s published
practices at that time. The relevant Bulletin on its administrative practices
regarding the application of GST to Indians is the one issued in 1993. That was years before Union of New Brunswick Indians, but, in one
aspect, was reflective of the decision by the Supreme Court of Canada in that
case. The stated administrative policy was that Indians do
not pay GST on property “acquired on reserve”. Presumably, “acquired on a reserve”, means “the point
of sale was on a reserve”. Neither
residence nor place of use were, or are today, criteria for the application of
this policy exemption under section 87.
[78] The Bulletin, however,
acknowledged that further relief would be given under section 87 for off-reserve
purchases by Status Indians if the property was delivered to a reserve. This policy might be said to have
anticipated the statement in Union of New Brunswick Indians that a place
of delivery test might resolve some issues.
[79] Yet,
regardless of one real similarity between policy and the finding in Union of
New Brunswick Indians, regarding the point of sale test for on Reserve
purchasers, the evidence heard by Templeton J, in Prokofiew,
heard years later
demonstrates that the law in this area was totally confused. CRA’s own
administrative practices, which never changed, do not seem to have been known to all
auditors or applied by its auditors on a uniform basis.
[80] Forgive me if I say this
sounds alarming, but it is. Evidence of CRA audit practices heard in Prokofiew
bore no resemblance to its published policy at the time. For
example, as I said, the stated administrative policy made it clear that neither residence nor place of use are criterion for
the application of the policy exemption under section 87. Templeton J. in Prokofiew heard evidence to the
contrary.
[81] One might conclude then that a clear understanding of, and the relevance of,
administrative practices is difficult to assess even though in the case at bar it
may have been all that a reasonably prudent person would have had to rely on in
the circumstances. A further difficulty arises for me given that this case was
argued by both parties on the basis the sole issue was whether there was
delivery to a reserve or not. Limiting the issue, even to one that is
potentially irrelevant, based on agreement of the parties who have accepted a
stated administrative practice, strikes me as unacceptable. However, a highly
respected judge of this Court has accepted such a limitation in the past.
[82] In 3258688 Canada Inc. v. R., Justice Dussault at paragraph 43 states that: “at first glance at
least, the decision of the Supreme Court of Canada in Union of New Brunswick Indians v. New Brunswick (Minister of Finance) seems to me to apply with
respect to GST”. However, having said that, he goes on in the same paragraph to
say that he would refrain from any final determination as to whether the point
of sale test was the only test where there is a sale of personal property to
persons with Indian status, because the issue presented to him was based on the
delivery test then set out in Bulletin B-039R.
[83] In effect, I am in that same boat except I
am dealing with a director’s liability.
[84] However, Justice Dussault’s comment is a warning that if the
CRA’s administrative practices are challenged, the application of section 87 to
GST may require further judicial consideration. Indeed, as early as
2001 the delivery test seems to have been put in doubt by Justice Archambault
of this Court.
[85] In 9000-6560 Québec Inc. v. Canada, the issue was whether the appellant was
liable to collect tax on vehicles sold to native persons. No tax had been
collected or remitted in respect of such sales. While delivery to a reserve
appears to have been relevant to the decision in that case, there were no
assumptions set out in the reply to the notice of appeal relating to delivery.
Further, there was testimony of the CRA auditor that the assessment was not
based on delivery and that he had assumed that all the sales took place on
reserve and the vehicles where delivered there.
[86] The Crown’s main submission in 9000-6560
was that the appellant was aware that the native persons were not acting on
their own behalf but acted as “mandataries” or “prête-noms”. The transactions
were initiated by non-native third-party purchasers to be delivered to the
native mandataries or prête-noms. As in the case at bar, it was shown that even
before the purchase of the vehicle by the native person, payments by and the locations
of further buyers were pre-arranged. As well, Justice Archambault found that in
the majority of transactions, the intention of the native persons was to resell
them quickly to such other buyers.
[87] Ultimately, Justice Archambault held in 9000-6560
that the appellant was not required to collect GST because he interpreted
section 87 to say that “a native person is entitled to the tax exemption if the
vehicle is situated on a reserve at the time of sale”. In the same paragraph Justice Archambault
states that his interpretation was the same as that of the Deputy Minister of
National Revenue as expressed in a letter. However, the translated portion of
the letter quoted by Justice Archambault said no GST was payable on “purchases
made on a reserve or purchases made off reserve that are
delivered to the reserve.” [Emphasis added.] The emphasized part of this
quote has a footnote that states that this interpretation did not strike
Justice Archambault as consistent with that adopted by the Supreme Court of
Canada in Union of New Brunswick Indians. That is to say, Justice
Archambault does not appear to necessarily accept place of delivery as the
determinative test.
[88] Indeed, he goes on to
quote passages from Union
of New Brunswick Indians.
The passages quoted emphasize the “point of sale” test embraced by the Supreme
Court of Canada in that case. Given the auditor’s concession that he assumed
the sales had been made on reserve, Justice Archambault allowed the appeal.
[89] Another point that I
wish to note about Justice
Archambault’s decision in 9000-6560 is that in applying the point of
sale test in Union of New Brunswick Indians, he found that the use of
the purchased goods by the Status Indian on reserve was irrelevant to the
question of the application of section 87. Whether the use was personal or
business – including a business of quick flips financed by third parties to pre-arranged
buyers on pre-arranged terms - section 87 applied. However, if it was a
business, the Status Indian could be subject to the Act’s collection and
remittance obligations on the sale to a person not entitled to the exemption.
[90] A similar point can
be found in the case of Tusket Sales & Service Ltd. v. Canada. In that case Mr. Pictou, a Status Indian, acquired
vehicles from the Tusket Sales & Service Ltd. (Tusket) by using trade-in vehicles
as consideration. Mr. Pictou did not charge Tusket GST on the trade-ins. The
issue was whether Tusket could claim a notional input tax credit pursuant to
former subsection 176(1) of the Act on sales to Mr Pictou. Pursuant to
subsection 240(1) of the Act, Mr. Pictou would have to charge GST if he
made a taxable supply to Tusket (the trade-ins) in the course of a commercial
activity and consequently Tusket would not be entitled to claim the notional
input tax credit. Ultimately, the court held that Tusket was entitled to claim
the notional ITC because Mr. Pictou was found to have used all the vehicles as
personal-use vehicles.
[91] All this is to say that the uncertainty in
this area has
been fuelled by CRA’s inconsistent administrative views that have been met by
this Court with hints of potential resistance to the CRA’s published guidelines
and to the application of Union
of New Brunswick Indians to the GST.
[92] My view is that while
delivery can be a practical test to administer (although proof of compliance can
raise difficulties as seen in the case at bar), it is wholly outside the
inherent principles that have guided the application of section 87 of the Indian
Act in income tax cases. Further, as I have ventured to suggest in footnote
26, the GST is, in my view, a consumption tax to the end-user, so, if the sale
is to a consumer Union of
New Brunswick Indians may be of no application. The test might be to resort to a
connecting factors test in relation to the application of section 87 of the Indian
Act in GST cases as used in income tax cases. That is, if the sale of property is to a Status Indian for
personal use, and that person and that use warrants a tax exemption under the connecting
factors test, then no GST would be applicable.
[93] On the other hand, I
have suggested in footnote 26 that a sale
by a value adding supplier is not a consumption tax so, in the case at bar, the
point of sale test in Union
of New Brunswick Indians would
apply. On that basis, it strikes me then that there is not a lot to be said
for a delivery test in the context of the case at bar. Indeed, while there is
yet no consensus as to the application of section 87 of the Indian Act to
the GST, the delivery test has been seemingly questioned, if not rejected, by
both Justice Archambault and Justice Dussault. In any event, this Court has not
received adequate submissions to venture definitive answers.
3. The Due Diligence
Defence
(a) Onus of Proof and
Underlying Corporate Liability
[94] It is commonly accepted,
as re-iterated in Canada v. Buckingham, that directors
have the onus to prove
that the conditions required to successfully plead a due diligence defence have
been met.[31]
[95] On the other hand, it strikes me that the onus could
shift if the underlying corporate assessment can be attacked by the Appellant.
Indeed, in my view, the Appellant can pursue such an attack. In any event, in spite of the failure of Associated
Cars to appeal the underlying assessment, we have no admitted underlying failure. Indeed,
by putting the delivery of the vehicles at issue, the Respondent has
reintroduced the issue that likely faced Associated Cars. If I accept that
delivery of the subject vehicles to a Reserve is sufficient to establish an entitlement
to rely on section 87 of the Indian Act, as it appears I must, then that broadens the Appellant’s
line of defence to include, in effect, fighting Associated Car’s appeal.
However, for the onus to be on Associated Cars in respect of the underlying
assessment, there would have to have been an assumption by the CRA that there
was no delivery. If that assumption was not made by the CRA, the onus shifts to
the Crown. Similarly, if an assumption was not made that sales were not to non-Status
Indians, the onus would shift to the Crown on that point.
[96] In fact, I might be
inclined, subject to submissions that I do not have, to suggest that, in cases
like the one at bar, the assumptions of the CRA made in the underlying
corporate assessment that are material to the assessment under subsection
323(1) of the Act must be set out in the Respondent’s reply
to an appeal of an assessment against a director. How else can a person be assessed
under subsection 323(1) direct their attention to a material fact at issue?
[97] It should go without
saying that assumptions of
critical importance to any appellant in any appeal should be clearly set out as
a matter of natural justice. A director’s liability case should not be an
exception unless the underlying assessing assumptions have been mutually
acknowledged or that the findings of the court in the adjudication of the
underlying assessment reveal and deal with them. The due diligence defence of a
director would then be limited to a more traditional analysis without allowing
a re-trial of a factual issue. This is not a question of ignoring a failure of
the underlying company to pursue an appeal. It is a question of knowing what assumptions
the Respondent can rely on as being proven.
[98] In this case, as in
other subsection 323(1) cases that have come before this Court, no assumptions relating
to the underlying assessments have been set out in the Reply to the Appellant’s
Notice of Appeal. However, there can be no doubt, based on Mr. Arner’s
testimony and that of the Appellant’s husband, that the underlying assessment
and that against the Appellant have always been based on the issue of delivery.
There has been no complaint as to the lack of an expressly stated assumption in
the Respondent’s Reply, nor has there been a submission by the Appellant suggesting
that the onus here has shifted to the Crown. Indeed, the Appellant agreed at
the commencement of the hearing that the underlying assessment would not be put
in issue. These factors, taken together, suggest that it is not open for me to find
that the onus has shifted in this case. I will proceed then on the basis that
the Appellant has the onus of proof.
[99] Still, I can not help
but point out that the Respondent having put delivery to a Reserve at issue in
this appeal, regardless that it was almost certainly the issue in the underlying
corporate appeal, permits the Appellant to bring evidence to satisfy me that on
a balance of probability, the subject vehicles were so delivered to a Reserve. That
is, I can not find that the Appellant was not diligent to prevent a failure
that never occurred.
[100] The evidence before me does
raise questions as to whether or not the subject vehicles were delivered to a
Reserve. However, the Respondent’s view of the answer to this question is inevitably
slanted. It is slanted by virtue of the Respondent’s disapproval of the
facilitator role played by Associated Cars in this car-flipping scheme designed
to abuse a loophole in the Act. I will deal with my decision on the
delivery issue, as and if necessary, since, while a decision that on a balance
of probability the vehicles were delivered to a Reserve would absolve
the Appellant of liability, a contrary finding is by no means fatal to the
Appellant’s reliance on the due diligence defence.
[101] The Appellant stands in
a better position than Associated Cars even though she is clearly an inside
sole director. Indeed, Associated Cars is her alter ego in every sense
of that concept except to permit a piercing of the corporate veil in the context
of section 323 of the Act. Still, the due
diligence defence allows her more room. She does not have to prove delivery. She
only has to prove that she acted reasonably. More specifically, she can rely on
her belief that the subject vehicles were delivered to Reserves and that this
was sufficient to relieve her of liability if a reasonably prudent person, exercising the skill and
diligence required of a director in comparable circumstances, would also have
formed a similar belief and, relying on that belief, would have done nothing
more.
[102] Put this way, the due diligence test is not at odds with the
purely objective test set out in Buckingham.
In Buckingham,
Mainville J.A. opines that the objective standard in Peoples Department
Stores Inc.(Trustee of) v. Wise is to be used for subsection 323(3) of the
Act. In Peoples, the focus of the inquiry is subsection 122(2) of
the Canadian Business Corporations Act, RSC 1985, c C-44 (“CBCA”) which
also addresses the “exercise of due care, diligence, and skill that a
reasonably prudent person would exercise in comparable circumstances”. While
the court acknowledges the different focus of the CBCA, it still comes to the
conclusion that the objective test applied in subsection 122(2) of the CBCA
should also govern the application of subsection 323(3) of the Act under
the principle of presumption of coherence between statutes.
[103] Relying on Peoples, Mainville J.A distinguished, if not
rejected, the test in Soper v. Canada. In Soper dealing with an identical
due diligence defence provision in the Income Tax Act, the court held
that the proper test was an objective-subjective one.
[104] Mainville J.A
emphasizes that the objective standard encompasses the factual aspects of the
circumstances of the director whereas the former test considered subjective
motivations. The court at paragraph 39 states the proper test to be employed
is:
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.
[105] Such an objective test
is said to impose a stricter more stringent standard on inactive or outside directors.
That is, reliance on one’s own inaction will not assist a director if a reasonably
prudent person appointed in that position would, in the circumstances faced by
the assessed director, have acted differently to prevent a failure that
resulted in a liability to the corporation.
[106] It strikes me then
that, most authorities preceding Buckingham will no longer assist directors who plead reliance on others due to
their own personal lack of experience or knowledge. That is, a lack of experience or knowledge, in itself, would not
qualify as part of a relevant context. On the other hand, reliance on the
historical competence of staff and systemic compliance can be seen as a relevant
context that needs to be assessed in the objective light of what a reasonably prudent
person would do.
[107] Similarly, the ability
to rely on one’s own highly qualified skill set, one’s own personal experience
and substantial direct involvement, is also a relevant context that needs to be assessed in the objective
light of what a reasonably prudent person would do.
[108] That is, while under Buckingham inactive, outside directors who only
have superficial knowledge of, and involvement in, the affairs of the
corporation can no longer rely on passive participation to relieve them of
liability whereas a highly qualified and experienced active, inside director will
not likely avoid a higher standard of care. Their liability will no doubt be assessed
in the light of what a highly qualified reasonably prudent and active inside person,
with similar knowledge of the circumstances, would do. This should not be seen
as adding a subjective element to the test. Rather, it should be seen as a
relevant circumstance. As well, assessing the credibility of a director may
turn on the improbability of asserted reliance on asserted events which could
bring a subjective element into the analysis.
[109] In any event, aside
from labelling the nature of the analysis of the due diligence defence, it
remains of prime importance to identify the context in which to apply the
relevant test. That context includes the Respondent’s not so subtle inferences
here, that the Appellant knew or ought to have known that there was a CRA perception
that Associated Cars was facilitating a scheme to misuse the Act, and
that to avoid being assessed for the GST care had to be taken to see that the subject
vehicles were in fact delivered to a Reserve. I agree. What the Appellant knew
or ought to have known in this regard, is a very relevant and necessary
contextual finding to make. That is, while I have discounted the Respondent’s
insinuations of the Appellant’s role in a car-flipping scheme as a reason to
discredit her, determining the environment facing the Appellant is a relevant
part of the context required to apply an objective test.
(b) The Context for
Analyzing the Appellant’s Due Diligence Defence
[110] The context of the due diligence defence analysis requires an examination of
the following issues:
1.
Did the
Appellant rely on a CRA officer’s assurance that, or have other knowledge of
CRA’s policy that, delivery to a Reserve per se, with supporting
evidence, would ensure the application of section 87 of the Indian Act, and
was such reliance relevant to determining the application of the due diligence defence?
2.
If so, would a reasonably prudent person, exercising the skill and
diligence required of a director in comparable circumstances, have relied on
delivery to a Reserve as the sole requirement to ensure the application of section 87 of the
Indian Act, and if so would such person have done more to verify or satisfy oneself that there was no failure to
deliver the subject vehicles to a Reserve?
(i) The Appellant’s Reliance
[111] Under this heading, I will address the Appellant’s
understanding that
delivery to a Reserve would be sufficient to ensure the application of section
87.
[112] Putting aside the Indian Act for the moment, it
should be noted that assessing the requirements of the Act, itself, have
led to considerable litigation. That is to say: considering the Act as
whole, liability for GST is not always an easy question. Yet, Parliament has
seen fit to require vendors of goods and services to make such determination at
their peril.
[113] Regrettably, this has, in my view, led to some injustices.
For example, consider where a supplier has followed guidance from the CRA as to
whether a supply was a taxable supply, perhaps by telephone with a CRA officer,
or even from a CRA publication. The supplier might rightfully believe an
injustice has been done when an assessment is issued that contradicts the
guidance given and followed, and the supplier is then told by this Court that
such guidance was not binding (even though it was likely well intended).
[114] I make this point to distinguish it from the case of a director’s
reliance on guidance from the CRA. While a corporate supplier can not rely on
guidance from the CRA as a safe harbour, that is not the case in respect of the
operation of the due diligence defence afforded to directors.
[115] As well, I make this point to draw an analogy between a
director’s reliance on guidance from the CRA in respect of the Act and
such guidance in respect of the application of section 87 of the Indian Act.
While a taxpayer can not necessarily rely on guidance from the CRA in respect
of section 87 of the Indian Act, indeed it did not suffice in 9000-6560,
a director must be able to rely on such guidance in respect of the operation of
the due diligence defence afforded to directors. An independent legal opinion
might be preferable and safer in some cases; however, such recourse should not,
in my view, be imposed as a necessary precaution on businesses. On the other
hand, directors have a fiduciary duty and there will be circumstances where
directors might well be liable for the imprudence of not getting legal counsel.
[116] Returning then to the question of whether the Appellant had knowledge of CRA’s practices,
that delivery to a Reserve, with supporting evidence, would be sufficient to
ensure the application of section 87 of the Indian Act, I find that she
did.
[117] She testified that, among other things, she relied on RWA’s
shipping documents and the Receipt Stamps on AAI driver documents as being
sufficient to warrant not collecting and remitting GST on the sale of the
subject vehicles. That is, she was clearly aware of and understood CRA’s position
as to the need for deliveries to a Reserve and to have documentary evidence of
such deliveries in order to ensure the application of section 87 of the
Indian Act. I accept that she relied on such understanding and that she
believed that her actions and responses to such understanding were consistent
with her duties as a director and a sufficient exercise of those duties. Applying
the objective test, this finding leads to the question of whether a reasonably
prudent person would have relied on such an understanding and have believed
that the Appellant’s actions and responses to such understanding were
consistent with the duties of a director and a sufficient exercise of those
duties to prevent a failure to collect and remit GST.
[118] Importantly, I note here that while I have concluded that
the Appellant knew of the CRA’s delivery requirement, I have doubts as to whether her
husband revealed all the details of his talks with Mr. Arner to his wife. I question what, if anything, she
knew of the CRA’s reasons for its warning to be cautious or its view of the
need for “almost perfect” records or what would constitute “almost perfect” records.
She would not have knowledge of
the uncertainties that haunt the issue of when section 87 of the Indian Act
operates to exempt native persons from paying GST. Further, I do not find as a
fact that the Appellant knew of CRA’s offer to assist in the documentation.
Indeed, I have concerns about suggesting that she or a reasonably prudent
director would go along with that offer. It did nothing but add to the
problems of the appellant in 9000-6560. On the other hand, she had to be
aware that the subject transactions were going to be watched over closely.
[119] With those exceptions, I accept that the Appellant knew as
much as her husband about the cautions warned of by the CRA and AAI’s
accountant. While this should not be an automatic assumption considering that
it is not contested that she was not at meetings where such cautions were
discussed, in this case it is apparent to me that the Appellant is intimately
familiar with the operations of both the businesses that Associated Cars took
over and the business of AAI as well. She knew and understood the business
structure imposed by her formation of Associated Cars. She knew why it was
formed and how it was to be operated. She knew the delivery procedures differed
for each of Associated Cars’ two distinct businesses. Delivery of vehicles
acquired by auction was the responsibility of the buyer. Delivery of the
subject vehicles acquired for pre-arranged sales to Status Indians were
Associated Cars’ responsibility. She may not have been at the meetings where
GST cautions were discussed in respect of vehicles acquired for pre-arranged
sales to Status Indians, but she knew of the GST collection and remittance
requirements that went hand-in-hand with Associated Cars’ other business.
Almost certainly she would have enquired why the subject vehicles would be exempted
from that regime and would have been alerted to being cautious.
[120] This fills out the context in which the actions of a
reasonably prudent director are to be compared to those of the Appellant. The
issue then is to determine what a reasonably prudent person’s actions and
responses would have been in these circumstances.
(ii) A Prudent
Person’s Reliance
[121] First, I find that our hypothetical director in comparable circumstances, would also have relied on an understanding of
CRA policies that
delivery to a Reserve with supporting documentation would be sufficient to
ensure the application of section 87 of the Indian Act.
[122] As well, I find that our hypothetical director would
proceed with some caution in dealing with First Nations claiming protection
from taxation pursuant to the Indian Act. The issue of liability under
the Act has all but been eclipsed in this case by the question of the
application of the Indian Act. Indeed, the law on the application of section
87 of the Indian Act is very complex and ever evolving. Even an expert in this area might be
hard pressed to give an unqualified opinion. As such, would our hypothetical
director, even with working knowledge of the business practices of the
underlying corporation, including GST compliance, and who had access to
professional accounting advice, done more than familiarize themselves with CRA
guidelines? In my view, the answer is a qualified “no”. While the circumstances
of this case seem to beg for further enquiry, a reasonably prudent person
should not presume or even be suspicious of fraud or forgeries just because the
CRA is concerned with the reliability of imperfect shipping documents
reflecting deliveries to a Reserve. The thought of that is disturbing. However,
some enquiry is appropriate and the question remains as to whether a reasonably
prudent director would have acted differently.
[123] Any enquiry by a director, short of getting a legal
opinion, would have, at the least, resulted in being more informed about CRA
practices as to the requirements for the application of section 87 of the Indian
Act. That enquiry, most practically made though AAI’s accountant, would
have led to the discovery of publicly available information such as Technical
Information Bulletin B-039R, dated November 25 1993, dealing with the
“Application of the GST to Indians” (the “Bulletin”). It sets out the
administrative practices of the CRA on the application of GST to Indians as
they were during the relevant period.
[124] Relevant portions of the Bulletin are attached to these
Reasons as Appendix 1.
[125] The Bulletin highlights the following two administrative
requirements: that the vendor must
maintain proof of Indian status; and, the delivery must be to a Reserve. There is no indication as to
the need for the vendor who delivers the property to document a specific
address. On the other hand, where delivery is made by a vendor’s agent, a Reserve
address appears in the Bulletin as an example of proof of delivery although other
evidence could suffice. Such distinction can only bear to the reliability of a
delivery by an agent. Regardless, I prefer to accept that the CRA can not
insist on an administrative policy that requires proof of delivery to a
particular on-reserve address. In any event, I note that the Bulletin is not precise as to
what constitutes delivery and even the evidence said to be required to satisfy
compliance with the delivery directive, can not be said to be all encompassing.
[126] Having said this, I emphasize
I am not embracing administrative practices without qualification. It is well established that CRA polices
“are not determinative but are entitled to weight and can be an important
factor in cases of doubt about the meaning of legislation”. That is, while administrative practices are certainly not binding, this Court has been reluctant to ignore an
administrative practice that assists a taxpayer in cases where the legislation
is ambiguous.
[127] My approach then is to compare the Appellant’s
and the hypothetical director’s approach to resolving the questions of what
constitutes delivery and what constitutes sufficient evidence to prove
delivery. The circumstances facing the Appellant set the context for this
approach.
[128] At the risk of repeating myself
somewhat, I would list the circumstances facing the Appellant as follows:
·
The Appellant
is a sole director of Associated Cars responsible for the day-to-day management
of its affairs. Further, she was knowledgeable in respect of Associated Cars’ business,
and experienced and involved in the day-to-day management of its affairs. The
extent of day-to-day involvement might be sufficiently relevant to warrant more
discussion;
·
There were
warning signs that there may be an issue in not charging GST to First Nations.
As stated above, the Appellant’s testimony satisfies me she recognized such
warning signs. This circumstance requires a fuller discussion as it is at the heart
of the Bulletin compliance issue raised above;
·
There
were warning signs
that an audit might follow. I must find that she knew or ought to have known
that there was a high probability of this;
·
There were cautions
and insinuations known to the Appellant that should have caused her to impose a
more meticulous documentation regime on Associated Cars so as to avoid the
discrepancies and arguably suspicious circumstances of acting as facilitator on
pre-arranged sales to a Reserve. I am reluctant to give such circumstance much
weight in light of my comments on Prokofiew;
·
There
was reliance on driver shipping
documents with Receipt Stamps, and on RWA shipping documents. Such reliance requires a
fuller discussion as they are not free of potentially relevant issues;
·
There
was reliance on the Appellant having seen a number of the subject vehicles
arriving at and being moved about and from the lot. This testimony was weak at
best, if not dubious, and I have given it no weight;
·
There
was reliance on AAI’s staff and experience in attending to much of the
documentation and deliveries. This warrants further discussion;
·
While
the only proof of the Indian status of vehicle purchasers was the sworn
testimony of the Appellant, I take it that the assumptions in the underlying
assessment did not take issue with the registered Indian status of the
purchasers;
·
There
is no evidence that Associated Cars, responsible for deliveries, had any
responsibility to bear the cost of deliveries. This too warrants further
discussion.
[129] I will address the
circumstances listed above that warrant further discussion as follows:
1. The extent of day-to-day
involvement in the affairs of Associated Cars;
2. Warning signs of section 87 issues
and Bulletin
compliance;
3. Reliance on AAI’s staff
and experience in attending to much of the documentation and deliveries;
4. Reliance on driver documents,
Receipt Stamps and RWA shipping documents;
5. The Cost of Deliveries.
1. The extent of day-to-day
involvement in the affairs of Associated Cars
[130] As I said, the Appellant was very
involved in the day-to-day management of Associated Cars. She knew GST must be
collected and remitted on the sale of vehicles. She knew failure to collect and
remit would cause Associated Cars to be liable to pay GST unless there was an
exception in the law to its normal obligation to collect and remit. She would have
known, or ought to have known, that a liability to remit where there had been
no collection would result in a large indebtedness with little opportunity to
get reimbursed from even five purchasers who would have relied on section 87
protection.
[131] Not collecting GST on any
transaction would alert a reasonably prudent director to get a good understanding
as to why GST need not be collected. I do not find that the Appellant did
enough in this case to alert herself as to how to act to prevent a failure.
That does not in itself mean what she ended up doing, and relying on, were not
sufficient due diligence to save her from liability, but it is a factor that
weighs against her.
2. Warning signs of section 87
issues and Bulletin compliance
[132] The Appellant’s testimony satisfies
me that she understood the need not only that the delivery of the subject vehicles
be to a Reserve but that the sale be to a Status Indian.
[133] While the Appellant
produced no evidence that the five purchasers were Status Indians, I accept
that they were. Neither the pleading nor submissions make an issue of this. I
noted earlier, in these Reasons, that I do not know the assumptions made in
respect of the underlying assessment. While I was ready to accept an assumption
of no delivery to a Reserve, I am not inclined to accept an assumption was made
that the purchasers were not Status Indians. Further, the Respondent, knowing the
particulars of the five purchasers, could readily have brought evidence
questioning their status if that had been an issue in the underlying
assessment. Again, I make the point that it is necessary for the Respondent to
set out the assumptions made in respect of the underlying assessment when it
proceeds against a director under section 323 of the Act.
[134] As to the delivery
requirement, I am of the view that while the Bulletin sets out a practical and somewhat
lenient administrative regime, it does not present a narrow picture of what
constitutes “delivery” to a Reserve in the context of section 87 of the Indian
Act. As I read the Bulletin, any credible indication of the subject
vehicles being taken to a Reserve would suffice.
[135] I ask then, what
evidence was put before the Court to support the Appellant’s testimony that she
believed the vehicles were all delivered to a Reserve?
[136] She suggested that she could see many of the subject
vehicles arriving and departing from AAI’s yard, which added confidence to her
belief that they were being delivered as required. As well, she trusted AAI’s experience
and good business history to comply with both the contractual and section 87 requirements
respecting delivery of the subject vehicles to Reserves. These factors would
contribute to her reliance on Receipt Stamps and on RWA shipping documents as
proof that the vehicles were delivered as required.
[137] As to her seeing the subject vehicles on the lot, portions
of her testimony revealed that there were so many vehicles going through the
lot, that she was not sure she could identify the subject vehicles or the
drivers that would have delivered them to a Reserve.
[138] Even though I accept that the
Appellant believed that the subject vehicles were delivered to a Reserve, that is not to say that a
hypothetical reasonably prudent person, who recognized the warning signs respecting the need to deliver the
subject vehicles to a Reserve, would not have done more to corroborate and
demonstrate that such belief was warranted. AAI does not have a history of
vehicle deliveries. Ordinarily, to rely on AAI’s shipping documentation would
be neither prudent nor reasonable in the circumstances. However, considering
that the circumstances include her not knowing of the need for nearly perfect
records and given that industry standards in the dealer-to-dealer used car
business are lax, I am less certain that a reasonably prudent person would have
provided more input and direction over the delivery process, even given the
Bulletin’s emphasis on documentation.
[139] Still, this factor weighs against
the Appellant.
3. Reliance on AAI’s
staff and experience in attending to much of the documentation and deliveries
[140] It is necessary that I make
a finding on the extent that the Appellant relied on AAI’s staff. The first
reliance is in respect of the deliveries themselves and the second is in
respect of the documentation. While the documentation is far from perfect,
perfection is not a requirement. The documentation is
somewhat sloppy but in my view the Receipt Stamps and RWA shipping documents
are reasonable evidence of the deliveries.
[141] On the other hand, as I
noted earlier in these Reasons, the experience and knowledge of the Appellant
form part of the objective context here. She knew that AAI’s staff would not
typically arrange for deliveries and therefore would not have had routine
systems and documents for use in such cases, and any such routines and forms of
documentation would not likely have paid special attention in their use for section
87 and GST purposes. Even if she knew that there was no need for near perfect
documentation, a reasonably prudent person might have done more in the
circumstances to set up verifiable delivery procedures and record maintenance.
A reasonably prudent person in the circumstances might have reviewed, if not
monitored the shipping documentation, more frequently. Had that been done, changes
might have appeared necessary with the result that the documentation would have
not been as sloppily and carelessly filled out as it was. The very existence of
sloppy documentation just reinforces a finding that the Appellant’s conduct was
sub par.
[142] However, to the extent
that it was sub par, it was so in the context of GST record keeping
requirements, not in the context of dealer-to-dealer wholesale used car
industry. As such, I am not inclined to give this factor as much weight as a
factor that would otherwise weigh more heavily against the Appellant. A
reasonably prudent person in the used car business would not likely have seen
the need to change the systemic and documentary approach normally taken in
respect of dealer-to-dealer transactions believing, as did the Appellant, that
industry norms would be acceptable even in the context of sales to First
Nations. In coming to this view, I have, admittedly, de-emphasized the question
of whether an auditor’s warnings would have been better heeded by a reasonably
prudent person. I have considerable discomfort with this aspect of the case
given my view that the warnings were likely made in the context of the CRA’s
looking into the criminality of car-flipping schemes.
4. Reliance on driver
documents, Receipt Stamps and RWA shipping documents
[143] I find these to be helpful
to the Appellant. Even being cautious, I do not believe I can suggest that our
hypothetical director would have believed that the Receipt Stamps were
fraudulent. As an isolated factor, I would lean toward a finding that a reasonably
prudent person would in the circumstances accept a reserve Receipt Stamp as supporting
the delivery to a Reserve requirement.
[144] In this case, there are
some 166 deliveries by RWA and some 406 were purported to be delivered by AAI
drivers. The RWA shipping documents, although not perfect, are adequate proof
of delivery to a Reserve. Of the 406 AAI driver delivered
vehicles, 333 have Receipt Stamps. That is a high enough percentage to
encourage me to find that reliance on the Receipt Stamps would meet the bar set
by a reasonably prudent person in the circumstances of this case.
[145] This factor weighs
heavily in favour of the Appellant.
5. The Cost of Deliveries
[146] It is unclear whether Associated Cars was being paid the
same amount to handle the registration aspect of its business for both the
auctioned vehicles and the subject Reserve destined vehicles. What the evidence
shows is that Associated Cars made from $100 to $300 on each of the subject
vehicles that was AAI driver delivered. The RWA deliveries were all at $100 and
the delivery charges were virtually all COD.
[147] Arguably, one might speculate that
the $100 fee was the handling and registration fee. Any more might have related
to delivery where RWA was not involved. However, the Appellant’s testimony in
this area consisted mostly of “I do not remember”. When she attempted to
recall, she confirmed only that Associated Cars was responsible for deliveries.
She did recall that buyer pick-ups were the norm for AAI’s auction business but
when AAI did a delivery on that side of the business, a delivery fee of $75 to Toronto was charged to the buyer.
[148] The problem here is
that so many years have passed. It is hard to take an adverse inference from a
failure to remember. Still, while considerable time has elapsed, the issues here and the assessments
occurred not too long after the relevant period ended. One might have hoped
that memories and records at that time would have been preserved for as long as
it took to dispose of these matters.
[149] In spite of these
memory issues, I do not find that they are the result of the Appellant trying
to be less than forthright with the Court. She could have said what seemed
apparent, namely that Associated Cars did charge a delivery charge when AAI drivers
did the deliveries as evidenced by the volume of higher charges for AAI driver deliveries
compared to the fixed COD charges shown on the RWA shipping documents. She made
no such self-serving statement.
[150] I find this factor to be of little
over-all influence
4. Conclusions
[151] At the end
of the day, the due diligence issue, in my view, comes down to consideration of
whether the Appellant can be seen as being wilfully blind to her duties as an
inside sole director by relying too much on the experience and business practices
of AAI as well as relying too heavily on the shipping documents as imperfect as
they were. However, as noted earlier, the application of the objective test in Buckingham may not
lower the diligence bar for a director with a high skill set. The greater the
director’s skill set, personal experience and direct involvement in the
business of a corporation, the harder it will be to avoid a finding of wilful
blindness or careless, or imprudent, reliance. If the Appellant was to lose her
appeal, it would have been on the basis that given her skill set and
experience, she could not avoid a finding of wilful blindness. However, after
serious thought and some reservations, that was not a finding I could make in
the circumstances of this case.
[152] The Appellant’s
presence and involvement in the business and the documentation she relied on,
as imperfect as it was, ultimately have saved her from losing her appeal. While
a director could have done more to better evidence delivery to a Reserve, as I
said, perfection is not required.
[153] Still, my comparisons
with the actions of a reasonably prudent person, exercising the degree of
diligence and skill expected of such a person in comparable circumstances, have
been less than clearly conclusive either way. On balance however, I still find
in favour of the Appellant; although, there was a temptation here, given the
closeness of the call, to split hairs and assess a more reasonable penalty for
the Appellant having allowed Associated Cars (that I have called her alter
ego) to be engaged as an intermediary in a business about which serious
cautions had been expressed. I could find that the evidence was sufficient to
find that all the RWA deliveries were to a Reserve and the evidence of
deliveries to a Reserve by an AAI driver was only supported by Receipt Stamps in
respect of 333 such deliveries. Indeed, that may have been a good settlement
position.
[154] However, it would be unreasonable
to find that our hypothetical director could not rely on the adequacy of some
80% of the documentation showing delivery to a Reserve as sufficient to confirm
the probability that all deliveries were to a Reserve. To impose a
higher level of due diligence would, in my view, be unacceptable. Even a more skeptical inside director is not going to
follow 572 vehicles to a destination. Nor is an inside director going to do a
daily detailed audit of the documentation of 572 transactions. The Appellant was
involved and was satisfied with the documentation as being within industry
standards. I can not and do not find that a reasonably prudent director in
comparable circumstances would have necessarily done something different to
enhance the documentation. This goes right to the heart of the objective test.
[155]
I acknowledge
that I made my decision without giving equal weight to all the factors I have
considered to be relevant. For example, a finding that a reasonably prudent
person would, but for industry standards, have done more systemically to ensure
deliveries to a Reserve, was ultimately given less weight than the Appellant’s
reliance on the shipping documents.
[156] While not a
factor in my decision, I question the propriety of a CRA auditor being too
closely involved in a taxpayer’s business affairs where it
could be seen as taking a policing role looking into a suspected criminal
activity. It would
trouble me too much, in these circumstances, to say that a director’s record
keeping duties move from industry standards to nearly perfect. As well, it underlines
the imprudence of insisting on something (evidence of delivery) where
compliance seems dependent on an unreliable CRA administrative practice as
preached by a particular auditor.
[157] As
I said earlier in these Reasons, the applicability of the Act to Status
Indians is far from decided. While I said that I was in the same boat as Justice
Dussault who found it necessary to direct his judgment to the delivery issue
posed by the parties, I make the distinction here that the depth of the analysis,
in a director’s liability case, must be broadened. In doing so, I find in
favour of the Appellant.
[158] Accordingly, the appeal
is allowed in its entirety, with costs. There is no reason to deal with the
underlying assessment issue as to whether the subject vehicles were delivered
to a Reserve.
Signed at Ottawa, Canada this 26th day of July 2013.
"J.E. Hershfield"
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