Date: 20100415
Docket: A-100-09
Citation:
2010 FCA 102
CORAM: LÉTOURNEAU J.A.
PELLETIER J.A.
TRUDEL J.A.
BETWEEN:
PIERRE BORDUAS
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
LÉTOURNEAU J.A.
Issue
[1]
This is an appeal of a decision by the Tax Court
of Canada in which Madam Justice Lamarre (the judge) dismissed the appeal
of an assessment under section 323 of Part IX of the Excise Tax Act,
R.S.C. 1985, c. E‑15, as amended (the Act). In so doing, she held
the appellant personally liable for the tax that the corporation, of which he
was the director, failed to remit to the Government of Quebec.
[2]
He challenges this finding on the ground that he
should have benefitted from the exemption described in subsection 323(3) of
the Act. Under this subsection, a director can, in short, avoid liability by
demonstrating that he or she has exercised the degree of diligence that a
reasonably prudent person would have exercised in comparable circumstances to
prevent the failure by the corporation to remit the tax.
[3]
Section 323, reproduced below, governs the
liability of the directors of a corporation owing an amount of net tax. It makes
them jointly liable for the payment of this tax, as well as any interest and
penalties, if the corporation fails to remit the amount in question:
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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.
Limitations
(2) A director of a corporation is not
liable under subsection (1) unless
(a) a certificate for the amount
of the corporation’s liability referred to in that subsection has been
registered in the Federal Court under section 316 and execution for that
amount has been returned unsatisfied in whole or in part;
(b) the corporation has commenced
liquidation or dissolution proceedings or has been dissolved and a claim for
the amount of the corporation’s liability referred to in subsection (1) has
been proved within six months after the earlier of the date of commencement
of the proceedings and the date of dissolution; or
(c) the corporation has made an
assignment or a bankruptcy order has been made against it under the
Bankruptcy and Insolvency Act and a claim for the amount of the corporation’s
liability referred to in subsection (1) has been proved within six months
after the date of the assignment or bankruptcy order.
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.
Assessment
(4) The
Minister may assess any person for any amount payable by the person under
this section and, where the Minister sends a notice of assessment, sections
296 to 311 apply, with such modifications as the circumstances require.
Time limit
(5) An assessment under subsection (4) of
any amount payable by a person who is a director of a corporation shall not
be made more than two years after the person last ceased to be a director of
the corporation.
Amount recoverable
(6) Where execution referred to in
paragraph (2)(a) has issued, the amount recoverable from a director is
the amount remaining unsatisfied after execution.
Preference
(7) Where a director of a corporation
pays an amount in respect of a corporation’s liability referred to in
subsection (1) that is proved in liquidation, dissolution or bankruptcy
proceedings, the director is entitled to any preference that Her Majesty in
right of Canada would have been entitled to had the amount not been so paid
and, where a certificate that relates to the amount has been registered, the
director is entitled to an assignment of the certificate to the extent of the
director’s payment, which assignment the Minister is empowered to make.
Contribution
(8) A director who satisfies a claim
under this section is entitled to contribution from the other directors who
were liable for the claim.
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Responsabilité des administrateurs
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.
Restrictions
(2) L’administrateur n’encourt de
responsabilité selon le paragraphe (1) que si :
a) un
certificat précisant la somme pour laquelle la personne morale est
responsable a été enregistré à la Cour fédérale en application de l’article
316 et il y a eu défaut d’exécution totale ou partielle à l’égard de cette
somme;
b) la
personne morale a entrepris des procédures de liquidation ou de dissolution,
ou elle a fait l’objet d’une dissolution, et une réclamation de la somme pour
laquelle elle est responsable a été établie dans les six mois suivant le
premier en date du début des procédures et de la dissolution;
c) la
personne morale a fait une cession, ou une ordonnance de faillite a été
rendue contre elle en application de la Loi sur la faillite et
l’insolvabilité, et une réclamation de la somme pour laquelle elle est
responsable a été établie dans les six mois suivant la cession ou
l’ordonnance.
Diligence
(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.
Cotisation
(4) Le ministre peut établir une
cotisation pour un montant payable par une personne aux termes du présent
article. Les articles 296 à 311 s’appliquent, compte tenu des adaptations de
circonstance, dès que le ministre envoie l’avis de cotisation applicable.
Prescription
(5) L’établissement d’une telle
cotisation pour un montant payable par un administrateur se prescrit par deux
ans après qu’il a cessé pour la dernière fois d’être administrateur.
Montant recouvrable
(6) Dans le cas du défaut d’exécution
visé à l’alinéa (2)a), la somme à recouvrer d’un administrateur est celle qui
demeure impayée après l’exécution.
Privilège
(7) L’administrateur qui verse une somme,
au titre de la responsabilité d’une personne morale, qui est établie lors de
procédures de liquidation, de dissolution ou de faillite a droit au privilège
auquel Sa Majesté du chef du Canada aurait eu droit si cette somme n’avait
pas été versée. En cas d’enregistrement d’un certificat relatif à cette
somme, le ministre est autorisé à céder le certificat à l’administrateur
jusqu’à concurrence de son versement.
Répétition
(8) L’administrateur qui a satisfait à la
réclamation peut répéter les parts des administrateurs tenus responsables de
la réclamation.
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Decision of the Tax Court of Canada
[4]
At the end of the hearing, in reasons delivered
orally, the judge rejected the appellant’s arguments that he was an outside
director and that he had, in the circumstances, exercised the diligence
required to benefit from the exemption in subsection 323(3).
Analysis of the
judge’s decision and grounds of appeal
Was the
appellant an inside director?
[5]
It is generally recognized that it is much more
difficult for an inside director, who is involved in the day-to-day management
of the corporation and who influences the conduct of its business affairs, to establish
the defence of due diligence than it is for an outside director, participating
sporadically, who may rely on the inside directors to pay any debts owing to
the government: see Soper v. Canada, [1998] 1 F.C. 124 (F.C.A.); Cadrin
v. R., 99 D.T.C. 5079 (F.C.A.). As an outside director, the appellant would
only be liable if he knew or should have known that the corporation was having
difficulty remitting its taxes; hence his interest in being characterized as
such.
[6]
In my view, it was open to the trial judge to
find, based on the evidence, that the appellant was an inside director, given
his day-to-day availability and involvement in the corporation’s affairs and
the degree of control and influence he exercised: see the testimony of the
appellant himself and Rachel Guay, one of the persons who had held the position
of comptroller, Appeal Book, Vol. 2, at pages 198 to 201, 224, 225, 258,
259, 266, 274, 279 and 282.
[7]
Substituting our own understanding of the
evidence on this point for that of the judge would be a cavalier assumption of
a power that is not ours to exercise, as we have neither seen nor heard the
witnesses: R. v. Van der Peet, [1996] 2 S.C.R. 507, at paragraph 81.
The defence of
due diligence
[8]
The appellant submits that the judge committed
three errors of law, as well as palpable and overriding errors, in weighing the
evidence related to the defence of due diligence set out in subsection 323(3).
Imposing a duty not provided for in the Act to assess the
appellant’s conduct
[9]
The appellant argues that for the defence of due
diligence, the judge required the appellant to establish that he was not in a
position to detect the omission, namely, the corporation’s failure to remit the
tax. In so doing, she altered the test, which is limited to exercising
diligence to prevent the failure.
[10]
With respect, the appellant’s claim does not
accurately reflect the Tax Court of Canada proceedings or the reasons for
judgment. It was the appellant himself who raised before the judge the defence
that he was not in a position to detect the failure. She was simply responding
to the appellant’s argument on this point. It is clear from reading her reasons
that she applied the correct test. At page 5, she writes the following
regarding the appellant:
[translation]
He has not
demonstrated, on a balance of probabilities, that he was unable to
prevent the failure; in other words, he had the authority to verify the
remittances when confronted with facts, as described above, that could lead him
to believe that such failures existed.
[Emphasis added.]
[11]
The facts to which the judge refers are the
corporation’s financial difficulties, the appellant’s involvement in its
management, the repeated omissions, and even the failure to pay the amounts due
upon the late filing of the reports required by the Act.
[12]
The appellant, as sole director of the
corporation, could not have been unaware of its financial difficulties, given
that it had never been profitable since its acquisition in December 2000,
had poor cash flow and was incurring substantial losses: see the appellant’s
letter dated June 17, 2003, to the ministère du Revenu du
Québec, Appeal Book, Vol. 1, at page 143. Added to
this are the reservations expressed by the lending bank, which was concerned that
a substantial portion of the line of credit had been used, and which, when that
line of credit was renewed in March 2002, demanded that the corporation at
issue be sold: ibid. He was aware of these difficulties and refused to
have a representative of the accounting firm Samson Bélair and others appointed
to represent the bank regarding the business and to review its management and
finances. It was not until the bank began exerting pressure (refusing to honour
personal cheques in the appellant’s name, issuing a notice of intent to exercise
a security interest) that the appellant acquiesced. The bank’s representative
began auditing the financial statements and required that all future cheques be
approved by him before being issued.
[13]
When a corporation is in financial difficulty, the
above is a very strong indication that that payments are being made preferentially
to some debtors at the expense of others. Experience generally shows that, at
such times, directors tend to allocate available resources to pay providers of
goods and services that keep the corporation operating from day to day, in the
hope that it will become profitable again or at least stay afloat until it is
sold.
[14]
When companies are struggling, the government is
not always high on the list of prior or preferred creditors. Unfortunately,
experience also shows that, more often than not, preferential payments, rather
than breathing new life into the corporation, do little more than prolong the
agony and put off the inevitable, as was the case here, with the consequences
now being faced by the appellant.
[15]
When a discussing a corporation’s precarious
financial situation, it is not necessarily legal heresy to refer, as did the
appellant himself as a defence and the judge in response to this, to an ability
or inability to detect, in order to prevent, a possible, or even probable,
failure to remit taxes owing.
[16]
In his testimony, the appellant emphasized the
importance for a director of delegating his administrative duties to facilitate
the sound management of a corporation and keep it running efficiently. He
described the general structures put in place for these purposes.
[17]
But such a delegation of duties is not an abdication
and does not exonerate the delegator from liability. The appellant, who was
aware of the corporation’s financial difficulties, has provided no evidence of
any concrete steps he might have taken to ensure that the legal duties imposed
by the Act were respected.
[18]
This was the judge’s finding. I can find no
error therein.
Did the judge err in law in holding the
appellant to a higher standard of care than that required by the Act and the case
law?
[19]
Again, the appellant is essentially arguing that,
as a director, he was required to delegate certain administrative tasks and was
entitled to rely on his delegates to perform the tasks honestly and correctly.
He cites Soper v. Canada, [1998] 1 F.C. 124, paragraph 27; Polsinelli
v. The Queen, 2004 TCC 186, paragraphs 18 and 19; Smith v. Her Majesty
the Queen, 2001 FCA 84; Mariani v. Her Majesty the Queen, 2002 G.T.C.
266.
[20]
I do not disagree with this statement of
principle. But in each of these cases, the scope of the statement is limited by
adding that it applies “unless there is a reason for suspicion” (Soper and
Mariani), unless the corporation is in financial difficulty (Smith)
or unless the directors were not given “any indication that anything was wrong”
(Polsinelli).
[21]
In this case, to use the terms of the preceding
paragraph, something was wrong, as the corporation was in constant financial
difficulty, and there was reason for suspicion. This was the judge’s finding, according
to her reasons for judgment. There was sufficient evidence, in my view, to
allow her to reach such a conclusion.
Did the judge err in law by transforming
the appellant’s prima facie burden of proof into a burden of persuasion?
[22]
This claim from the appellant’s Memorandum of
Fact and Law has two aspects. On one hand, he submits that the judge imposed on
him a burden of persuasion rather than a mere initial burden to demolish, but
no more, the assumptions on which the Minister had based his assessment. On the
other hand, he submits that she erred in drawing a negative inference from the
fact that the appellant did not call as witnesses the corporation’s
comptrollers, who were responsible for verifying the GST returns and, where
applicable, signing the remittance cheques.
[23]
In support of the first claim, the appellant
cites the Supreme Court of Canada’s decision in Hickman Motors Ltd. v. The
Queen, [1997] 2 S.C.R. 336, in particular the following excerpt from
paragraphs 92 and 93:
92 . . . The Minister, in making assessments,
proceeds on assumptions (Bayridge Estates Ltd. v. M.N.R., 59 D.T.C. 1098
(Ex. Ct.), at p. 1101) and the initial onus is on the taxpayer to “demolish”
the Minister's assumptions in the assessment (Johnston v. Minister of
National Revenue, [1948] S.C.R. 486; Kennedy v. M.N.R., 73 D.T.C.
5359 (F.C.A.), at p. 5361). The initial burden is only to “demolish” the exact
assumptions made by the Minister but no more: First Fund Genesis Corp. v.
The Queen, 90 D.T.C. 6337 (F.C.T.D.), at p. 6340.
93 This initial onus of “demolishing” the Minister’s exact
assumptions is met where the appellant makes out at least a prima facie case: Kamin
v. M.N.R., 93 D.T.C. 62 (T.C.C.); Goodwin v. M.N.R., 82 D.T.C. 1679
(T.R.B.). . . .
[24]
It would not be out of place to recall, as did
the Supreme Court further above in paragraph 92, that “[i]t is trite law
that in taxation the standard of proof is the civil balance of probabilities
. . . and that within balance of probabilities, there can be varying
degrees of proof required in order to discharge the onus, depending on the
subject matter . . . .” [Emphasis added.]
[25]
At the hearing, in response to a question from
the bench, counsel for the appellant referred to the following passage of the
decision, cited above, which gave rise to the argument based on Hickman.
I repeat it here for ease of reference:
[translation]
He has not
demonstrated, on a balance of probabilities, that he was unable to prevent the
failure; in other words, he had the authority to
verify the remittances when confronted with facts, as described above, that
could lead him to believe that such failures existed.
[Emphasis
added.]
[26]
As the exchanges between the parties’ counsel
and the members of the panel made clear, this excerpt is related not to the
assumptions on which the Minister based the assessment, but rather to the defence
available to the appellant under subsection 323(3) of the Act. This
assumes both a burden to produce evidence of due diligence (an evidentiary
burden) and a burden to persuade the judge on a balance of probabilities (a legal
burden).
[27]
Counsel for the appellant, who was experienced,
acknowledged that the judge had not erred in this respect.
[28]
There remains the allegation that the judge drew
a negative inference from the absence of comptrollers as witnesses. Note that
the appellant claims to have been unaware of the failures to remit the payments
and, accordingly, that he was not in a position to detect the failure to meet
the legal obligation to make the payments.
[29]
Neither the appellant nor the respondent chose
to call the comptrollers as witnesses. The appellant took the risk of
establishing on the sole basis of his testimony his ignorance of the failures
and his inability to detect them. The judge did not believe him, given his
daily contact with the comptrollers. She simply noted that in the absence of
the comptrollers, it would be [translation]
“more difficult [for the appellant] to persuade the Court that he was not in a
position to detect the failure” or that he [translation]
“was unaware of the failure”: see the reasons for the decision at pages 2
and 3. As the judge explained, the risk [translation]
“did not play out in his favour”: ibid, at page 2.
Conclusion
[30]
For these reasons, I would dismiss the appeal
with costs.
[31]
That said, I cannot ignore the fact that both parties
filed their books of authorities the morning of the hearing, in contravention
of Rule 348 of the Federal Courts Rules.
[32]
While it is rare for both parties to be at fault
this way, the same cannot be said, unfortunately, for single parties. All too
often for the members of our Court, who diligently prepare for hearings to make
them as productive as possible, one of the parties is late in filing its book
of authorities. If we refuse to accept it, we are only punishing ourselves.
[33]
I believe the time has come for the Rules
Committee to review Rule 348 to increase its effectiveness and promote
compliance. We could link the book of authorities to the memorandum of fact and
law by requiring that both be filed simultaneously. Or, to promote the filing
of a joint book of authorities, the rule could provide that no application for
a hearing under Rule 347 may be submitted, or hearing date set, before the book
of authorities has been filed. Any party that files late would penalize itself
rather than the Court and would have to explain to the client why the hearing
is delayed; in the case of undue delay, the party would potentially be subject
to a notice of status review.
[34]
A quick review of the rules of practice of other
jurisdictions would no doubt yield further alternatives. But one thing is
certain: the status quo must be replaced.
“Gilles Létourneau”
“I agree.
J.D.
Denis Pelletier J.A.”
“I agree.
Johanne Trudel J.A.”
Certified true
translation
Francie Gow, BCL,
LLB
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