Citation: 2013 TCC 227
Date: 20130712
Docket: 2011-1130(GST)G
BETWEEN:
SATPAL KAUR,
appellant,
and
HER MAJESTY THE QUEEN,
respondent.
REASONS FOR JUDGMENT
Hogan J.
I. Context
[1]
Section 323 of the Excise
Tax Act (the “ETA”) provides that a director may be found liable for a
corporation’s failure to remit goods and services tax (“GST”) unless the
director can show that he or she exercised due diligence to prevent the
failure. The appellant, Satpal Kaur, is appealing a director’s liability
assessment issued against her on December 24, 2009 for a corporation’s
unremitted GST, plus related interest and penalties, for a total of $455,169.64.
II. Factual Background
[2]
The appellant is the
sole director of 644346 BC Ltd. (the “Corporation”). The Corporation was in the
business of building and selling residential properties in British Columbia.
[3]
As a GST registrant,
the Corporation was responsible for collecting GST on all taxable supplies. The
GST in question here consisted of GST collected on the sale of new homes by the
Corporation. Like all GST registrants, the Corporation was able to claim input
tax credits for GST paid or payable on goods and services acquired for use,
consumption or supply in its commercial activities.
[4]
The Corporation was
assessed for net GST payable in the amount of $357,691.66 covering the GST reporting
periods ended December 31, 2004, March 31, 2006, September 30, 2006
and December 31, 2006.
[5]
The appellant testified
that she was a residential real estate agent in Quebec in the mid-1980’s. She
met Mr. Familamiri in Montreal in 1989. Mr. Familamiri, who has an engineering
degree, was active in residential construction in Quebec until he moved to Vancouver in 1995.
[6]
Until she also moved to
Vancouver in 1995, the appellant worked as a real estate agent for a Century
21 real estate brokerage office, owned and operated by Mr. Familamiri. The
appellant arranged construction financing for a few small real estate projects
undertaken by Mr. Familamiri in Quebec. She testified that Mr. Familamiri had
a bad credit record and could not obtain construction financing on his own. These
projects came in on budget and the bank financing was repaid. The appellant
earned sales commission from the sales of those properties.
[7]
The appellant undertook
two real estate projects with Mr. Familamiri in British Columbia beginning in
2002.
[8]
The first project
involved the construction of six townhouses, on a vacant lot, purchased by the Corporation
in East Vancouver (the “Triumph Project”). Two of the townhouses were sold
after completion of the project in 2004. The Corporation was unable to sell the
four remaining townhouses and they were transferred to the appellant in 2006.
The appellant rented out the four townhouses to generate cash flow to fund the carrying
costs of the properties.
[9]
In December of 2004,
the Corporation commenced the construction of a 26‑unit townhouse project
on vacant land that it owned in Port Coquitam, British Columbia (the
“Grant Project”). The construction budget for the Grant Project was established
at $4,976,504. The appellant arranged for the construction financing for the Corporation.
She also guaranteed the construction loan. To reduce the risk of default, the
appellant arranged for the sale of more than half of the units prior to the commencement
of construction.
[10]
The appellant in her amended
notice of appeal describe as follows the circumstances surrounding the Corporation’s
failure to remit the GST collected on the sale of the properties it constructed:
Mr.
Familamiri started several projects in Vancouver and needed assistance with
financing. I signed for several mortgages over the years and he did everything
else on those projects. I helped with finances because of our friendship, but I
left those projects to him. He had experience in property development and
construction. I had no experience. I focused on my real estate career, taking
care of my mother and young son, and providing for my family as the sole
provider.
The
two projects that are the subject of this appeal, the Grant and the Triumph,
were started in Year 2002 and 2003. I signed the purchase agreements and
Mr. Familamiri was to develop townhouses on the properties. We created
644346 BC Ltd. to oversee the projects. I was the sole shareholder and
director of 644346 BC Ltd. Mr. Familamiri P.Eng M.Eng was the General Manager.
I
was not aware of any issues with the projects until late 2005/2006.
Mr. Familamiri informed me that the project had a lot of labour and cash
flow problems, most serious being the framer quit in the middle of the project.
He usually did not inform me of project issues. He kept all operational and
project financial matters to himself. I agreed to that because of my lack of
expertise, knowledge and experience with both financial and administrative in
construction industry.
Apparently
there was a high demand for skilled labour in 2005/2006 and it created a labour
shortage. The Treasury Board of Canada Secretariat stated in its
publication “DPR 2005-2006 Western Economic Diversification”:
British Columbia
The
construction sector represented 35 per cent of provincial employment
gains
last year; however, like the mining and retail sectors, the sector is
facing
a shortage in skilled labour that could soon prove a drag on overall
economic
performance.
Mr.
Familamiri found it very difficult to find contractors to replace and correct
the deficiencies. In the end, due to severe shortage of trades, Mr. Familamiri
had no choice but to hire regular labour and carpenters to finish the work on
an hourly basis. Expenses due to the abandonment of the contractors increased
the cost of the projects by approximately $456,790.
During
this time the projects were also unexpectedly faced with significant cost
increases in almost every trade, material and labour in the industry. As a
result of the above series of events, by the time the units were completed, the
costs of the projects had increased by $2,386,019. Not only did this give me
zero profit, but most of the units were pre-sold. The customers were pressuring
us to complete the units.
In
order to finance the shortfall, Mr. Familamiri and I used all our personal
resources, such as borrowing additional monies from the banks, borrowing from
friends and relatives, increasing clients’ deposits and taking direct deposits
to the company, and refinancing our own homes and properties to be able to
complete the projects. We managed to gather an additional $1,085,158, which was
less than half the amount needed to deliver the homes. The builder, 494743 B.C.
Ltd. took over the Triumph project properties because 644346 B.C. Ltd. could no
longer support the costs. If the builder had not stepped-in, the mortgage would
have foreclosed on the properties. The Triumph properties were rented-out to
raise funds.
We
were faced with a major dilemma in which we had to make the right decision. We
utilized all our resources and did everything in our power to raise funds. I
personally contributed an additional $800,000 to the projects. I cannot stress
enough how much hardship, stress and suffering we went through by salvaging
what we could to deliver the projects. Our contract with the general
contractor, 494743 B.C. Ltd. remains unfulfilled and our account remains
outstanding by $261,925.69 due to lack of funds.
GST
Remittance Issues
The
first time I became aware of a problem with GST remittances was in late Year
2007. I was called by CRA and told that GST had not been remitted completely in
2005 and 2006. I was surprised. My role on the projects was to gather financing
and sell the properties. I had left all operational matters to Mr. Familamiri
because of his extensive experience. I thought there must have been some
mistake. I told CRA to speak to the company accountant. CRA followed-up some
time later with a letter that confirmed the issue. At that point I realized
that it may not be a mistake and approached Mr. Familamiri.
Mr.
Familamiri indicated that he had had a choice: either complete the project and
pay the pending bills and address the builders liens or abandon the project. He
had chosen to complete the project because of clients deposits they had paid
directly to the company. Had he known then about the heavy financial losses, he
would have abandoned the project which would have triggered financial losses
for clients, suppliers, labour, banks and obviously CRA. There was very little
I could do in 2008 to address the shortfall retroactively. The project staff
was ordered to balance the GST account, and each time this was not possible due
to cash flow shortage. The cheques would go NSF if they were sent to the CRA.
644346 BC Ltd. had no more funds. I was not able to raise any more funds as I
had exhausted all sources of funding to address the labour shortage and cost
increases.
[11]
The appellant and Mr.
Familamiri offered a similar explanation at trial.
III. Issue
[12]
Is the appellant liable
for the Corporation’s unremitted GST or did she satisfy the requirements of the
due diligence defence under subsection 323(3) of the ETA?
IV. Analysis
[13]
Subsection 323(1) of
the ETA outlines the liability of directors where a corporation fails to remit
net tax owed:
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.
[14]
The appellant invokes
the due diligence defence that is available under subsection 323(3) of the ETA
to a director who has been assessed on the basis of liability for a
corporation’s unremitted tax. Subsection 323(3) states the following:
Diligence
323.
(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.
[15]
The appellant believes
that she should escape liability under section 323 because she delegated all
GST oversight to Mr. Familamiri, whom she had reason to trust. The appellant
argues that she should not be held accountable for the Corporation’s failure to
remit GST because the decision to use the collected GST for another purpose was
made by Mr. Familamiri, who acted without her knowledge. She maintains that
when the CRA informed her of the Corporation’s failure the Corporation was
insolvent and had no assets that could be used to cure the deficiency.
[16]
Unfortunately, the
appellant’s due diligence defence fails for the reasons enumerated by the
Federal Court of Appeal in Buckingham v. Canada. In that
case Mainville J.A. noted:
37 . . .
I conclude that the standard of care, skill and diligence required under
subsection 227.1(3) of the Income Tax Act and subsection 323(3) of the Excise
Tax Act is an objective standard . . . .
38 . . .
Consequently, a person who is appointed as a director must carry out the
duties of that function on an active basis and will not be allowed to
defend a claim for malfeasance in the discharge of his or her duties by
relying on his or her own inaction . . . .
39 An
objective standard does not however entail that the particular circumstances of
a director are to be ignored. These circumstances must be taken into account,
but must be considered against an objective “reasonably prudent person”
standard. . . .
[Emphasis added.]
[17]
In Buckingham, the
Federal Court of Appeal compared the aforementioned provisions with paragraph
122(1)(b) of the Canada Business Corporations Act, which requires
directors and officers to “exercise the care, diligence and skill that a
reasonably prudent person would exercise in comparable circumstances.” Mainville
J.A. wrote:
40 The
focus of the inquiry under subsections 227.1(3) of the Income Tax Act
and 323(3) of the Excise Tax Act will however be different than that
under paragraph122(1)(b) of the CBCA, since the former require that the
director’s duty of care, diligence and skill be exercised to prevent failures
to remit. In order to rely on these defences, a director must thus establish
that he turned his attention to the required remittances and that he
exercised his duty of care, diligence and skill with a view to preventing a
failure by the corporation to remit the concerned amounts.
[Emphasis added.]
[18]
To establish a due
diligence defence, the director must show that he or she took positive action
to prevent the corporation’s failure to remit the amounts in question. The
director’s oversight duties with respect to the GST cannot be delegated in
their entirety to a subordinate, as was done in the present case.
[19]
At trial, the appellant
admitted that she was aware of the Corporation’s financial difficulties by the
end of December 2005, when Mr. Familamiri advised her that a subcontractor had
abandoned work on the Grant project to take more lucrative work elsewhere. She also
knew at that time that she would have difficulty repaying the construction loan
for the Triumph project because four out of the six townhouses remained unsold.
In these circumstances, the appellant was required to take proactive steps to
ensure that the Corporation would meet its GST collection and remittance
obligations.
[20]
The appellant also asserts
that, had she been made aware of the Corporation’s financial shortfall on the
sales of the townhouses, she could have walked away. If she had done so, she
would not have been liable for the Corporation’s failure to remit GST. In my
opinion, this argument is without merit. The appellant admitted that she
personally guaranteed the Corporation’s construction liens. If the appellant had
abandoned the Grant project, the bank likely would have used its security interest
to complete the sales. The GST would have been remitted. The bank would have
used part of the proceeds of sale to discharge the construction liens. In that case,
the appellant would have owed the bank an amount equal to or greater that the GST
amount used by the Corporation to discharge the construction loans. The
appellant would not have been, as she contends, in a better position had she
abandoned the project. She would have been indebted to the bank rather than the
government. The CRA would have received the GST collected in trust from the
purchasers. In summary, the actions taken by the Corporation benefited only the
appellant by allowing the bank financing to be repaid, thus freeing the
appellant from her personal guarantee.
[21]
The appellant submitted
during her oral argument four cases for my review. Each of
these cases was decided prior to Buckingham and relied
on the Federal Court of Appeal’s decision in Soper v. Canada. In Buckingham, the
Federal Court of Appeal confirmed that an objective standard must be applied in
considering a director’s due diligence defence under subsection 323(3) of the
ETA. That decision set aside the objective-subjective standard enunciated in
the earlier decision in Soper.
[22]
Applying the objective
standard enunciated in Buckingham, I conclude that the appellant did not, after
learning of the Corporations’ financial difficulty in late 2005 or early 2006,
exercise the care, diligence and skill a reasonably prudent person would have
exercised to prevent the Corporation’s failure to remit the GST collected from
its clients.
[23]
For all of these
reasons, the appeal is dismissed.
Signed at Magog, Québec, this 12th day of July 2013.
“Robert J. Hogan”
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