Date: 20060713
Docket: A-331-05
Citation: 2006 FCA 257
CORAM: LÉTOURNEAU J.A.
SEXTON J.A.
MALONE J.A.
BETWEEN:
HARALD RALF KERN
ELKE KERN
Appellants
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
LÉTOURNEAU J.A.
[1] The appellants were both directors of 457189 B.C. Ltd. (the Corporation), a corporation that owned and operated, at a loss, a hotel that had a restaurant as well as a beer and wine store. Eventually, foreclosure proceedings were instituted by the bank against the Corporation. In January 2000, a Receiver was appointed.
[2] The Corporation was reassessed for unpaid income taxes as well as goods and services taxes. There were also unremitted source deductions relating to unemployment insurance and the Canada Pension Plan. Pursuant to section 227.1 of the Income Tax Act and section 323 of the Excise Tax Act, the appellants were assessed as directors of the Corporation by the Minister of National Revenue (Minister).
[3] Miller J. of the Tax Court of Canada found that the appellants were negligent in the management of the Corporation. He concluded that, although they were aware of its financial difficulties, they had failed to establish systems or procedures to safeguard the interest of government in receiving source deductions and GST payments. Consequently, he found them liable as directors. He dismissed the appellants' appeal against the assessments under the Income Tax Act. However, he granted in part their appeal against the assessments under the Excise Tax Act.
[4] The appellants who are self-represented do not attack the Tax Court's finding regarding their liability as directors. Rather, in relation to the assessments made pursuant to the Income Tax Act, they challenge the amount of the taxes claimed on the basis of a Notice of Assessment dated February 28, 2002 and an apparently conflicting Notice of Confirmation issued by the Minister on May 16, 2003.
[5] The Notice of Assessment fixes the total amount of the debt at the sum of $39,292.27 while the Notice of Confirmation establishes the amount at $25,736.29. The appellants submit that the Tax Court decision should have retained this last amount as the extent of their debt owed to the government.
[6] While I can understand the appellants' confusion, the fact remains that there is no discrepancy between the two Notices. The first one, the Notice of Assessment, states the Corporation's overall liability under the Federal Income Tax Act, the British Columbia Income Tax Act, the Canada Pension Plan, and the Unemployment as well as the Employment Insurance Act. The amount of $39,292.27 represents the unpaid deductions, interests and penalties that were payable by the Corporation and that were now claimed from the appellants.
[7] In contrast, the Notice of Confirmation was issued pursuant to subsection 165(3) of the Income Tax Act which requires the Minister, upon receipt of a Notice of Objection, to reconsider and vacate, confirm or vary the Notice of Assessment. It sets out only the amount of the federal tax due, along with the interests and penalties: see appeal book, vol. 1 at pages 52 and 55, particularly paragraph 6 of the Reply. One covers the federal and provincial taxes and the other social charges due. The other covers only the federal income tax under the Income Tax Act. The appellants' liability pursuant to section 227.1 is, however, not limited to that of the unpaid federal income tax.
[8] In respect of the Tax Court's judgment covering the GST, the appellants raised before us an argument that the assessment in the amount of $51,000 for the 1997 year was made out of time, i.e. out of the four-year limitation period found in paragraph 298(1)(a) of the Excise Tax Act.
[9] With respect, the limitation period regarding assessments made pursuant to section 323, as in the present instance, is found in subsection 323(5). In a nutshell, the period is two years from the date that the person assessed last ceased to be a director of the Corporation.
[10] Unfortunately for the appellants, there is, in this case, no evidence on record that they had ceased to be directors of the Corporation.
[11] Indeed, the appellants were without legal representation and proceeded before the Tax Court by way of informal procedure, notwithstanding the substantial amounts involved. The Tax Court judge complained that he was presented a less than satisfactory record from which he had to work. At paragraph 37 of his decision, he wrote:
In summary on the GST assessments, if this result appears to the parties as a rough and ready solution, they are absolutely right, but they have left me no other option. In a suit with in excess of $200,000 at stake for the Appellants, neither side chose to take the general procedure, where exchange of documents and examinations for discovery would have afforded both sides a much greater opportunity to establish what truly happened. Instead, they chose to role the dice by putting limited information before me, much of which I have found inaccurate. This is an informal procedure case; it is not an audit, and I am not an auditor. I have decided based on what makes the most commercial sense from the sketchy evidence provided, with no apologies for what might be perceived as rough edges.
[12] In the absence of evidence that the appellants had ceased to be directors, the limitation period did not start running.
[13] The appellants also submit that there was insufficient disclosure by the respondent regarding the GST assessment for the 1997 taxation year. They claim that they had not realized that the amount assessed was for the whole year and not merely for the last month of the year as they say they were led to believe. Had they been told that the assessment was for the whole year, they claim that they would have brought to the Tax Court, and provided to the Tax Court judge, bank account statements to show that the GST had been paid for the period of January 1997 to November 1997. They claim that the respondent's behaviour amounts to an abuse of process. I do not agree with this last contention.
[14] The respondent's auditor testified at the hearing. He explained that the assessment was for the whole year, but that it was posted in December 1997 to the last quarter of that year: see appeal book, vol. 2, tab 1, pages 120, 123 and 142.
[15] He proceeded in this way because there were no records of the Corporation available to him. He had to make a global assessment for the 1997 year. He did so from "the bank deposits analysis that the provincial sales tax had completed": id., at page 106. His view was that the assessment of the amount due would have been much higher, up to $67,000 or $68,000 instead of the $48,000 assessed, if he had projected the revenue summary of the last quarter to the preceding three quarters: ibidem.
[16] The purposes of the audit and of the assessment were to establish the amount of GST owed or payable, calculated on the amounts of sales. The appellants are not precluded, at the collection stage, from proving that the whole or part of the amount assessed has already been paid and then from obtaining relief accordingly.
[17] Finally, the appellants contend that they were unjustly penalized for a failure to file a GST return for the last quarter of 1999. They were unfairly treated, they say, because, pursuant to a British Columbia Supreme Court order, they lost possession of all their books and records to the appointed Receiver on January 24, 2000. It made, according to them, the filing of the return impossible.
[18] I do not think that there is merit in this argument. It is true that the appellants had until January 31, 2000 to file their GST return. However, they were aware of the court order sought and they had ample time to file that return before the order issued.
[19] In addition, by Mr. Kern's own evidence, he still had, after the Receiver was appointed, a limited ability to run the accommodation part of the business under the control of the Receiver: see the appeal book, vol. 2, tab 1, at page 19. I fail to see how and why the Receiver would not have assisted the appellants in, or would have prevented them from, fulfilling their legal obligation under the Excise Tax Act to file a tax return.
[20] In any event, it is undisputed that there were unremitted net taxes under the Excise Tax Act for the last quarter of the year 1999. The learned Tax Court judge limited the appellants' liability to that last quarter: see his judgment dated May 5, 2005.
[21] For these reasons, I would dismiss the appeal with costs.
"Gilles Létourneau"
"I agree
J. Edgar Sexton J.A."
"I agree
B. Malone J.A."
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