Date: 20111128
Docket: A‑98‑11
Citation:
2011 FCA 331
CORAM: PELLETIER J.A.
TRUDEL J.A.
MAINVILLE J.A.
BETWEEN:
NORMAND BALTHAZARD
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
MAINVILLE J.A.
[1]
This is an appeal of a judgment dated
February 9, 2011, the reasons for which were delivered orally by Justice
Archambault of the Tax Court of Canada. By that
judgment, the appeal of Norman Balthazard (“appellant”) from an assessment in
the amount of $42,925.45, dated August 5, 2008, made under
subsection 323(1) of the Excise Tax Act, R.S.C. 1985, c. E‑15
(the “ETA”) was dismissed on the ground that Mr. Balthazard had not
established, in accordance with subsection 323(3) of the ETA, that he had
exercised the degree of care, diligence and skill required of a director to
prevent Groupe Contact Image Inc. (“GCI”) from failing to remit the net tax as
required by section 228 of the ETA (the “GST‑related net tax” or “net
tax”) for certain periods leading up to the bankruptcy of that corporation.
This net tax is related to the collection of the
Goods and Services Tax (the “GST”).
[2]
For the reasons that follow, I would allow this
appeal in part.
Background
[3]
The appellant is a
businessman and a seasoned investor who, in 2004, became a shareholder and
director of GCI, a corporation then recently incorporated under the Canada
Business Corporations Act, R.S.C. 1985, c. C‑44, specializing in
digital imaging and large‑format printing.
[4]
Since GCI was operating at a
loss, the appellant quickly took on a very active role in this corporation,
initiating numerous measures to turn the business around. The appellant also injected considerable
additional amounts into the business to keep it operating during its periods of
financial difficulty, including $500,000 in early 2005 and an additional $313,000
between June and December 2006.
[5]
The appellant also took
steps to ensure that the employee tax deductions and the GST‑related net
tax were remitted by GCI in accordance with tax laws. As a member of the board of directors, he required that GCI’s
accountants present periodic reports to the board, confirming that these remittances
were made. When the accountants stopped
providing the desired assurances, he personally contacted the tax authorities
to make the required arrangements to pay the remittances by approved instalments.
[6]
Despite the appellant’s
efforts, GCI’s future could not be secured. In early 2007, the appellant therefore took steps to allow
GCI to make a proposal to its creditors under the Bankruptcy and Insolvency
Act, R.S.C. 1985, c. B‑3, and the proposal was presented on
February 23, 2007. The following day, on February 24,
2007, the appellant resigned as director of GCI. The appellant first ensured that GCI would issue cheques to the tax
authorities to cover the final remittances of the employee tax deductions and the
GST‑related net tax. The bank refused to
honour those cheques. The proposal to
creditors was eventually refused, which led GCI to make an assignment in
bankruptcy under the Bankruptcy and Insolvency Act.
[7]
On August 5, 2008, the
following assessment was made in respect of the appellant under
subsection 323(1) of the ETA:
[translation]
|
PERIOD
|
NET TAX
|
INTEREST
|
PENALTY
|
TOTAL $
|
|
From 2006‑10‑01 to 2006‑12‑31
|
13,878.71
|
1,792.05
|
135.63
|
15,806.39
|
|
From 2006‑07‑01 to 2006‑09‑30
|
15,791.65
|
2,307.51
|
492.95
|
18,592.11
|
|
From 2006‑03‑01 to 2006‑06‑30
|
0.00
|
34.01
|
245.11
|
279.12
|
|
From 2005‑07‑01 to 2005‑09‑30
|
6,109.49
|
1,308.72
|
829.62
|
8,247.83
|
|
AMOUNT OF
ASSESSMENT
|
|
|
|
42,925.45
|
[8]
The GST‑related net
tax in the amount of $6,109.49 for the three‑month period ending on
September 30, 2005, resulted from a recalculation by the Minister long
after GCI made its proposal under the Bankruptcy and Insolvency Act and
the appellant resigned as director. The notes in the
record and the evidence filed show that, indeed, both the tax authorities and
the appellant had previously shared the opinion that GCI had remitted all of
the net tax for the three‑month period at issue. The
recalculation for that three‑month period was therefore a “surprise” for
the appellant given that, when he was a director, he had gone to considerable
lengths to ensure that all of the amounts claimed for the three‑month
period in question were indeed remitted by GCI. There are no allegations or
evidence in the record to indicate that this recalculation resulted from
embezzlement or misrepresentations by GCI.
[9]
The assessment in respect of
the appellant therefore mainly pertains to the last two remittances of GST‑related
net tax that preceded GCI’s proposal on February 23, 2007, under the Bankruptcy
and Insolvency Act, that is, the remittances for the three‑month
periods ending on September 30, 2006, and December 31, 2006, which were
due, respectively, on October 30, 2006, and January 31, 2007.
Reasons of the trial judge
[10]
The trial judge delivered
his reasons orally by telephone conference after reserving judgment on the case.
After describing the appellant’s role in the business and the source of GCI’s
financial woes, the judge concluded that the appellant is a man of integrity
who was not responsible for those difficulties (at page 47 of the
transcript reproduced at page 56 of the Appeal Book):
[translation]
To be perfectly clear, I must note that
Mr. Balthazard’s integrity is not in doubt. There
is no question that Mr. Balthazard was not
responsible for the corporation’s financial difficulties and did not benefit
from the amounts not remitted to the tax authorities. Quite the opposite, he, too, is a victim, having lost his
capital outlay of $1,700,000.
[11]
However, as part of his
analysis of the care, diligence and skill defence under subsection 323(3)
of the ETA, the judge gave no weight to the appellant’s financial contributions
of $500,000 and $313,000 to help GCI fulfill its obligations, or to the
numerous corrective measures the appellant took for GCI, including his
arrangements with the tax authorities that allowed the tax deductions and GST‑related
net tax to be remitted by instalment arrangements.
[12]
Instead, the trial judge
rejected the appellant’s defence, principally on the grounds that (a) the instalment
arrangements negotiated by the appellant are evidence of his liability as a
director and (b) since the GST was paid by GCI’s clients, the considerable
financial advances made and other measures taken by the appellant are
irrelevant to his care, diligence and skill defence.
[13]
The following passages from
the transcript of the reasons for judgment show the trial judge’s reasoning (at
pages 40 and 41 of the transcript, reproduced at pages 49 and 50 of
the Appeal Book):
[translation]
Here, I have no doubt that the amounts of net tax that GCI
did not remit to the Minister were used to finance the operations of the
business. If not, how else
can it be explained that, throughout 2005, 2006 and 2007, GCI was constantly
unable to remit, on the dates set out in the Act, the amounts it had collected
acting as the Minister’s agent?
Mr. Balthazard tried to demonstrate having
acted with diligence by indicating that he had made considerable capital
outlays to GCI. I must note
that it was not necessary to make advances to GCI in order for this corporation
to remit the net GST as required, since that was remitted to it by its clients
when GCI made sales of products and services.
Appellant’s argument
[14]
The appellant submits that the
trial judge erred in law in refusing to consider his grounds for defence,
including his considerable financial contributions, as part of his care,
diligence and skill defence under subsection 323(3) of the ETA. According to the appellant, this error is
threefold.
[15]
The first part of the error
consisted in having improperly interpreted section 228 of the ETA in
asserting that GCI had an obligation to remit to the Crown the amounts paid by
its clients as GST. According
to the appellant, the only obligation created by this article was that of remitting,
to the Crown, the positive amount of net tax for the reporting period, which
includes the balance of the amounts that had become payable and the other
amounts collected during that period (subsection 225(1) “A” of the ETA),
less the input tax credits for that period (subsection 225(1) “B” of the
ETA). Furthermore, nothing in the ETA creates
an obligation for GCI to keep separate the tax collected.
[16]
The appellant therefore
submits that, in law, the amount paid by the clients as GST and the amount that
must be remitted under section 228 of the ETA are in no way equivalent. As a result, the trial judge misdirected
himself in law in concluding that the appellant had the duty to ensure full
remittance of the GST remissions, since that would amount to confusing the
failure to remit with imprudence and to denying the defence set out at
subsection 323(3) of the ETA.
[17]
This incorrect
interpretation of the ETA allegedly led the judge to the second and third aspects
of his error in law, these being his refusal to consider, as part of the care,
diligence and skill defence under subsection 323(3) of the ETA, (a) the
appellant’s financial contributions to ensure continuity of the business’s
operations and (b) the appellant’s efforts to ensure GCI’s remittance of the
GST‑related net tax by, among other arrangements, instalment agreements.
Respondent’s argument
[18]
The respondent submits that
the care, diligence and skill defence set out at subsection 323(3) of the
ETA mainly raises a question of fact. Therefore, this Court should not intervene on appeal except
in the event of a palpable and overriding error by the trial judge. The respondent submits that the judge made no such error,
since the evidence shows that GCI was managing the arrears in its remittances
of GST‑related net tax and had adopted a curative rather than preventive
attitude toward the remittances.
[19]
Therefore, the arrangements
negotiated by the appellant to allow GCI to remit its net tax by instalments are
evidence of the curative approach taken by both GCI and the appellant with
regard to these remittances.
[20]
Since the only issue in the
case at bar is whether the appellant acted with care, diligence and skill to
prevent the failure to remit this net tax, and since the evidence accepted by
the judge did provide him with a basis to conclude that the means used were
curative rather than preventive, the appeal should be dismissed.
Issues
[21]
This appeal raises the following issues:
a.
Did the trial judge err in refusing to take into
account the grounds raised by the appellant as part of his care, diligence and
skill defence under subsection 323(3) of the ETA?
b.
Does the evidence in the record support a care,
diligence and skill defence under subsection 323(3) of the ETA, given the
legal framework applicable to such a defence?
Standard of
review
[22]
Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, sets
out the appropriate standard of review for appeals of Tax Court of Canada
judgments. The standard of review on a question of law is correctness, while
findings of fact are not to be disturbed unless it can be established that the
trial judge made a palpable and overriding error. The application of a legal
standard to a set of facts is a question of mixed fact and law that also
requires deference unless an extricable question of law can be identified.
[23]
The first issue raised by
this appeal requires interpreting the nature of the remittance obligation under
section 228 of the ETA, with regard to the scope
of the care, diligence and skill defence set out at subsection 323(3) of
the ETA. This is principally a question of law reviewable on a standard of
correctness.
[24]
The second issue entails the
identification of the appropriate legal rules and standards for a care,
diligence and skill defence, and the application of this legal framework to the
facts. The identification of
the appropriate legal rules and standards is a question of law reviewable on a
standard of correctness. However, deference is
required in respect of the application of these rules and standards to
the facts at issue.
Analysis
First issue: Did the trial judge err in
refusing to take into account the grounds raised by the appellant as part of
his care, diligence and skill defence under subsection 323(3) of the ETA?
[25]
In the trial judge’s
opinion, the appellant’s defence under subsection 323(3) of the ETA is
without merit, given that the GST amounts are remitted by the clients of GCI,
which thus has the funds required to make the quarterly remittances under
section 228 of the ETA. Thus,
as the judge saw it, it was not appropriate to take into account the appellant’s
grounds of defence since the corporation at issue received the funds to make
the remittances of GST‑related net tax. I
cannot agree with this approach.
[26]
The trial judge’s reasons
were delivered before this Court’s decision in Canada v. Buckingham,
2011 FCA 142 (“Buckingham”). I am satisfied that if the trial judge had had the
advantage of this Court’s reasons in that file, he would have made a different
decision in the appellant’s case.
[27]
The trial judge who
delivered the first judgment in Buckingham was also of the opinion that,
since GST is paid by third parties, it was very difficult, if not impossible,
to use the standard of care, diligence and skill defence under subsection 323(3)
of the ETA. This Court
rejected that approach on the ground that it would convert the liability of
directors under section 323 of the ETA into an absolute liability, which
was not the intention of Parliament in light of subsection 323(3): Buckingham
at paragraphs 47 and 52.
[28]
The GST is a value‑added
tax levied at every stage in the manufacturing and marketing of goods and
services. It is payable by
the recipient, who is also the debtor of the tax obligation to the Crown:
subsection 165(1) of the ETA. Even
so, the supplier of a product or service is still responsible for collecting
and remitting the tax: subsection 221(1) of the ETA. However, the ETA sets out, for each stage in the supply of
a product, a system of input credits. Those credits correspond to the taxes
that each supplier has remitted to its own suppliers: subsection 169(1) of
the ETA. Thus, the remittance obligation for a
reporting period applies to the net tax corresponding to the amounts of tax “that
became collectible and all other amounts collected” less the input tax credits
and other authorized deductions: subsection 225(1) of the ETA. The net tax calculations may therefore be carried out on
the basis of the amounts collectible but not actually collected, or even, in
some circumstances, lead to a refund request for a reporting period.
[29]
Therefore, there is no
direct correlation between the amounts of GST collected by a supplier from its
clients and the amount of net tax that must be remitted for a reporting period. In this regard, Justice LeBel stated the
following in Quebec (Revenue) v. Caisse populaire Desjardins de
Montmagny, 2009 SCC 49, [2009]
3 S.C.R. 286:
[24]
This mechanism [of the ETA] is designed
to implement a direct tax that is also a tax on the value added at each stage
of the production and marketing of the good or service until it is acquired by
its ultimate recipient. In such a system, as Duval Hesler J.A. noted, [translation] “[t]he dollar collected is
not the dollar remitted” (para. 52).
[25] First of
all, the collection mechanism does not require separate invoices for the GST
and the QST. These taxes are indicated and included in the invoice or other
document given to the recipient (s. 223 ETA; s. 425 AQST).
Next, the tax amounts collected by suppliers are remitted in accordance with
the accrual, not cash, method of accounting. At periodic intervals, which vary
depending on the individual supplier’s sales and sometimes on the nature of the
business, suppliers remit to the tax authorities amounts corresponding to the
tax amounts that have been billed for and are collectible during the reporting
period in question even if these collectible amounts have not in fact been
collected from the recipients. When sending remittances, suppliers deduct from
the amounts being remitted credits corresponding to their own inputs, that is,
to the taxes they have paid to their own suppliers. Thus, they remit net tax
amounts based on the difference between the taxes they have collected and the
taxes they themselves have paid (s. 228 ETA; s. 437 AQST).
At times, under this system, they can obtain rebates.
[30]
Parliament has decreed that
directors are jointly and severally, or solidarily, liable for their
corporations’ failure to remit GST‑related net tax or overpayments of refunds
their corporations have received. However, Parliament has also provided that this liability
is not absolute; rather, it is subject to a care, diligence and skill defence.
In fact, the language of subsections 323(1) and
(3) of the ETA is as follows:
|
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.
(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.
|
323. (1) Les
administrateurs d’une personne morale au moment où elle était tenue de
verser, comme l’exigent les paragraphes 228(2) ou (2.3), un montant de taxe
nette ou, comme l’exige l’article 230.1, un montant au titre d’un
remboursement de taxe nette qui lui a été payé ou qui a été déduit d’une
somme dont elle est redevable, sont, en cas de défaut par la personne morale,
solidairement tenus, avec cette dernière, de payer le montant ainsi que les
intérêts et pénalités afférents.
(3) L’administrateur
n’encourt pas de responsabilité s’il a agi avec autant de soin, de diligence
et de compétence pour prévenir le manquement visé au paragraphe (1) que ne l’aurait
fait une personne raisonnablement prudente dans les mêmes circonstances.
|
[31]
The trial judge therefore had
to consider all of the evidence filed in support of that defence. He could not exclude the appellant’s grounds
of defence from his deliberations on the ground that clients remitted GST to
the corporation of which the appellant was a director. In doing so, he converted the liability of directors under
subsection 323(1) into an absolute liability. Given the language of subsection 323(3) of the ETA,
that conclusion is an error of law reviewable by this Court.
Second issue: Does the evidence in the record support a care,
diligence and skill defence under subsection 323(3) of the ETA, given the
legal framework applicable to such a defence?
Legal framework
[32]
In Buckingham, this
Court recently summarized the legal framework applicable to the care, diligence
and skill defence under subsection 323(3), as follows:
a.
The standard of care, skill and diligence
required under subsection 323(3) of the Excise Tax Act is an
objective standard as set out by the Supreme Court of Canada in Peoples
Department Stores Inc.(Trustee of) v. Wise, 2004 SCC 68, [2004] 3 S.C.R.
461. This objective standard has set aside the common law principle that a
director’s management of a corporation is to be judged according to his or her own
personal skills, knowledge, abilities and capacities. However, an objective
standard does not mean that a director’s particular circumstances are to be
ignored. These circumstances must be taken into account, but must be considered
against an objective “reasonably prudent person” standard.
b.
The assessment of the director’s conduct, for
the purposes of this objective standard, begins when it becomes apparent to the
director, acting reasonably and with due care, diligence and skill, that the
corporation is entering a period of financial difficulties.
c.
In circumstances where a corporation is facing
financial difficulties, it may be tempting to divert these Crown remittances in
order to pay other creditors and thus ensure the continuity of the operations
of the corporation. That is precisely the situation which section 323 of
the Excise Tax Act seeks to avoid. The defence under
subsection 323(3) of the Excise Tax Act must not be used to
encourage such failures by allowing a care, diligence and skill defence for
directors who finance the activities of their corporation with Crown monies,
whether or not they expect to make good on these failures to remit at a later
date.
d.
Since the liability of directors in these respects
is not absolute, it is possible for a corporation to fail to make remissions to
the Crown without the joint and several, or solidary, liability of its
directors being engaged.
e.
What is required is that the directors establish
that they were specifically concerned with the tax remittances and that they
exercised their duty of care, diligence and skill with a view to preventing a
failure by the corporation to remit the amounts at issue.
[33]
The trial judge failed to
apply these legal standards to the appellant’s care, diligence and skill
defence. In these
circumstances, this Court could refer the file back to the Tax Court of Canada
for reinvestigation and rehearing. Assessing
the facts of each case is, in fact, the task of the Tax Court of Canada judges,
and, to the extent that the applicable legal standards are taken into account
in the factual analysis, this Court will but rarely intervene in the assessment
of those facts, and only when a palpable and overriding error may be
identified.
[34]
However, this Court may make
the required decision when conducting a reinvestigation and rehearing serves no
purpose or is impractical and when there is already sufficient evidence in the
record: Sharbern Holding Inc. v. Vancouver Airport Centre Ltd., 2011 SCC
23, [2011] 2 S.C.R. 175 at paragraph 94; Masterpiece Inc. v. Alavida
Lifestyles Inc., 2011 SCC 27, [2011] 2 S.C.R. 387 at paragraphs 102
and 103; Hollis v. Dow Corning Corp., [1995] 4 S.C.R. 634 at
paragraph 33.
[35]
Given that it would be
impractical to refer this matter back to the Tax Court of Canada and that all
of the evidence is already in the record, this Court may make the necessary decision,
as permitted, moreover, by subparagraph 52(c)(i) of the Federal
Courts Act, R.S.C. 1985, c. F‑7.
[36]
For the purposes of applying
the legal rules and standards to the facts at issue, it is useful to
distinguish between the remission periods at issue.
Periods for the year ending
June 30, 2006
[37]
The evidence in the record
shows clearly that the appellant concerned himself with GCI’s tax remittances
as soon as this business began having financial difficulties and that he made a
number of arrangements, both to turn the business around and to ensure that the
GST‑related net tax was remitted.
[38]
In fact, at board of
directors meetings, the appellant demanded attestations from GCI’s chief of
financial operations confirming that the tax deductions and remittances of GST‑related
net tax were carried out on time.
[39]
In early 2006, no longer
receiving those attestations, the appellant personally took charge of
discussions with the tax authorities to ensure that the remittances were made
by instalments. Various
agreements were indeed reached with the persons in charge of the file for the
tax authorities, which enabled GCI to remit in full the GST‑related net
tax for all of the periods at issue ending on June 30, 2006.
[40]
In addition, the appellant
took serious corrective actions during this period to ensure the continuity of
GCI’s operations, including making a sizeable capital advance. An amount of $500,000 was injected in
early 2005 and, although it was not intended solely for the tax authorities,
this advance surely facilitated the remittances of the amounts owing as source
deductions and GST‑related net tax deductions for the periods at issue.
[41]
Although these remittances
resulted in part from the instalment agreements negotiated by the appellant and
were made behind schedule, the appellant cannot reasonably be blamed for having
made arrangements that enabled the tax authorities to obtain full payment of
the remittances of net tax owing for the periods at issue.
[42]
If those instalment
agreements had not been followed by the remittance of the amounts owing, the
appellant’s liability under section 323 of the ETA could be more easily
upheld. However, since the
corrective actions and the instalment agreements did indeed make it possible
for the amounts owing to the tax authorities for the periods at issue to be
remitted, nothing supports holding the appellant liable under
subsection 323(1) of ETA for those periods, given that such liability is
only incurred to the extent that the corporation in fact fails to remit the
amounts at issue. Once the amounts are remitted
by the corporation at issue, even belatedly, the director ceases to be liable
under section 323 in respect of those amounts.
[43]
The notice of assessment for
the period from July 1, 2005, to June 30, 2006, pertains mainly to an
amount of net tax of $6,109.49 attributed to the three‑month period from
July 1 to September 30, 2005, to which the related interest and
penalties were added. However,
this amount results from a recalculation by the tax authorities after the GCI’s
bankruptcy, and neither GCI, nor the appellant, nor the tax authorities
suspected that it was owing when the instalment agreements were reached and the
resulting remittances of net tax were made: see the transcript of Norman
Balthazard’s examination at pages 72 and 73 (pages 464–65 of the
Appeal Book) and the [translation]
“List of collection actions” at pages 264–65 of the Appeal Book).
[44]
Although the appellant’s
joint and several, or solidary, liability in respect of this net tax in the
amount of $6,109.49 is engaged by the operation of subsection 323(1) of
the ETA, the care, diligence and skill defence set out at
subsection 323(3) applies in this regard, since a director acting in good
faith and as a prudent person could not prevent the failure to remit an amount
that neither the director, nor his corporation, nor the tax authorities could
reasonably identify, before the business’s bankruptcy, as owing to the tax
authorities. I note, once
again, that the good faith of GCI and of the appellant in respect of the
quarterly net tax reports is not challenged in this file.
[45]
In addition, the appellant
has amply shown that, for the remittance periods leading up to June 30,
2006, he took every appropriate action to have the GST‑related net tax
remitted by GCI, and there is every reason to believe that the amount of
$6,109.49 resulting from the recalculation for the period in issue would also
have been remitted by GCI had that amount been identified during the relevant
period.
Period from July 1 to September 30, 2006
[46]
The appellant’s notice of
assessment mainly pertains to the final remittance periods for GST‑related
net tax leading up to the proposal made on February 23, 2007, under the Bankruptcy
and Insolvency Act, that is, the period from July 1 to
September 30, 2006, and the period from October 1 to
December 31, 2006.
[47]
The record shows that the
appellant made various advances to GCI between June 8 and
December 15, 2006, totalling $313.000. Those advances helped GCI pay off certain debts, but were
not used for the remittance of GST‑related net tax. In fact, although cheques were issued by GCI for those
remittances, the bank did not honour them. Moreover,
it was following these failures to remit that the appellant took the steps required
for GCI to prepare a proposal to its creditors under the Bankruptcy and
Insolvency Act.
[48]
In this case, for the period
at issue from July 1 to September 30, 2006, the appellant (a)
continued to make considerable financial contributions to GCI so it could
continue its operations; (b) attempted, unsuccessfully, to negotiate a new instalment
agreement for the remittance due on October 30, 2006, (c) ensured that GCI
issued cheques to the tax authorities for the remittance due on
October 30, 2006, although those cheques were not honoured by the bank,
and (d) made arrangements for GCI to make a proposal to its creditors.
[49]
The issue raised in this file concerns the delay
of nearly four months between the due date on October 30, 2006, for the remittance
of the net tax for the period from July 1 to September 30, 2006, and
GCI’s proposal to creditors on February 23, 2007.
[50]
In fact, to exempt
themselves from liability by means of a care, diligence and skill defence,
directors must establish that they took the appropriate actions in a timely manner
to limit the amounts at risk for the tax authorities as tax deductions or GST‑related
net tax remittances. A
reasonably prudent director facing the imminent bankruptcy of his or her
corporation would take the appropriate actions to minimize the tax authorities’
losses. Although each case turns on its own
facts and must be analyzed in light of all of the relevant circumstances, the
more a business falls behind in making its tax remittances, the more difficult
it is to argue that the business is not using the sums owing to the tax
authorities to finance its activities. Therefore,
it is important for directors to quickly make the necessary decisions if they
wish to successfully mount a due diligence defence against their joint and
several, or solidary, liability.
[51]
In this particular case, the
delay of nearly four months between the due date of the remittance on
October 30, 2006, and the proposal to shareholders on February 23,
2007, remains largely unexplained. The appellant contacted the tax authorities on or about
October 30, 2006, to try to agree on instalments, but those discussions
did not lead to an agreement. Throughout November
and December, the appellant could not have been unaware that the business was in
a very precarious situation, and it was therefore up to him to take the
appropriate actions to minimize the tax authorities’ losses. He did indeed make arrangements for a proposal to be made
to creditors, but that proposal was not submitted until the end of
February 2007. That shows a lack of
diligence within the meaning of subsection 323(3) of the ETA, which
affords the appellant no escape from his joint and several, or solidary,
liability for the net tax remittance due on October 30, 2006, for the
period from July 1, 2006, to September 30, 2006.
Period from October 1 to December 31,
2006
[52]
However, a different
approach must be taken regarding the final net tax remittance covering the
period from October 1 to December 31, 2006, which was due on
January 31, 2007.
[53]
I emphasize once more that
the liability of directors under section 323 of the ETA is not absolute. The defence set out at
subsection 323(3) of this statute must therefore be assessed against the
objective standard of “a reasonably prudent person . . . in
comparable circumstances”. Furthermore, the
director’s conduct must be examined for the entire period during which the
corporation was in financial difficulty.
[54]
This is why directors who
concerned themselves with their corporation’s tax remittances, took reasonable
steps to ensure that those remittances were made to the tax authorities, did
not let the tax debts accumulate, and otherwise showed the care, diligence and
skill required for those purposes may often successfully mount a defence under
subsection 323(3) of the ETA with regard to their corporation’s final net
tax remittance.
[55]
As I mentioned above,
allowing tax debts to accumulate may be an impediment to the care, diligence
and skill defence. However,
what of the final remittance period? For that
period, the director’s liability must be assessed in light of his or her
conduct since the beginning of the corporation’s financial difficulties.
[56]
Thus, a number of facts
weigh in favour of such a defence being successful in this case. I note, in particular, the appellant’s
constant concern for his corporation’s tax remittances, his numerous efforts
since the beginning of GCI’s financial difficulties to ensure remittance of the
net tax, his numerous additional capital contributions to support the corporation
throughout the period of its financial difficulties, the fact that the net tax
was remitted in full for the period leading up to June 30, 2006, etc.
[57]
Furthermore, the appellant’s
alleged lack of diligence with regard to the remittance dated October 30,
2006, cannot extend to the remittance of January 31, 2007. The appellant took the necessary action
to stop the corporation’s tax debts from accumulating. Although this action should have been taken sooner, the
fact remains that the action was taken and that it enabled GCI to avoid further
failures to remit the net tax. This effort by
the appellant must be considered even if the action was taken somewhat belatedly.
[58]
Considering all of the
circumstances, the appellant may, in this particular case, make a care,
diligence and skill defence under subsection 323(3) of the ETA with regard
to the final remittance of net tax due on January 31, 2007.
[59]
To conclude, I would add a
general comment. In this case,
the appellant made financial contributions to the corporation of which he was
the director in order to support it during its difficulties. Although these contributions must be considered in the
context of the care, diligence and skill defence under subsection 323(3)
of the ETA, they are not necessary to establish that defence. Since the standard of care, diligence and skill required is
an objective standard, and since a director acting as a “reasonably prudent
person” is not required to contribute financially to the corporation of which
he or she is the director, a defence under this subsection may be established
by a director even if he or she has not contributed financially to his
or her corporation. It is a matter of analyzing the particular facts of each
case in light of the applicable legal standards.
Conclusions
[60]
I would therefore allow the
appeal in part, set aside the judgment of the Tax Court of Canada and,
delivering the judgment that should have been delivered, refer the file back to
the Minister for him to amend the appellant’s notice of assessment dated
August 5, 2008, so that it applies only to the period from July 1,
2006, to September 30, 2006, for a total of $15,791.65, being the net tax
owing, to which will be added the interest and penalties relating to that
amount. Given the outcome of
this appeal, I would make no order as to costs.
“Robert M. Mainville”
“I agree.
J.D. Denis Pelletier J.A.”
“I agree.
Johanne Trudel J.A.”
Certified true
translation
Sarah Burns
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