Citation: 2013 TCC 386
Date: 20131205
Docket: 2011-3520(IT)G
BETWEEN:
DANDAN QIAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Favreau J.
[1]
This is an appeal
against an assessment dated July 15, 2010 bearing number 1085086 (the
“Assessment”) made by the Minister of National Revenue (the “Minister”) under
subsection 227.1(1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp.), as amended (the “Act”).
[2]
By way of the Assessment,
the Minister assessed the appellant, as director of Goldstaff Personnel Inc.
(“Goldstaff”), for unpaid federal income tax, provincial income tax, Canada
Pension Plan contributions and employment insurance premiums deducted from
salaries and wages paid to the employees of Goldstaff (collectively the “source
deductions”) and for interest and penalties payable by Goldstaff for the 2008
and 2009 taxation years in the amount of $110,578.66.
[3]
In determining the
appellant’s liability as a director of Goldstaff, the Minister assumed the
following facts, set out in paragraph 11 of the Reply to the Notice of Appeal:
a) the
facts admitted above;
b) Goldstaff was incorporated under the British Columbia Company
Act, under the number BC0807380 on November 1, 2007; (admitted)
c) Goldstaff was originally registered under the company
name of 0807380 B.C. Ltd., and changed its name on November 23, 2007;
(admitted)
d) Goldstaff carried on business as a staffing agency;
(admitted)
e) the Appellant was employed by Goldstaff as an accountant
in November 2007; (admitted)
f) the Appellant became a director of Goldstaff on June 15,
2008; (admitted)
g) at all material times, the Appellant was a director and
shareholder, and performed accounting for Goldstaff; (admitted)
h) at all material times, the Appellant regularly
participated in telephone meetings with the other directors of Goldstaff;
(denied as written)
i) from June 15, 2008, the Appellant knew or ought to have
known that Goldstaff was in financial difficulties; (denied)
j) Goldstaff was required to withhold source deductions
from the remuneration it paid to its employees; (admitted)
k) Goldstaff failed to remit as and when required the source
deductions it withheld from the remuneration it paid to some of its employees;
(admitted)
l) at all material times, the Appellant knew or ought to
have known that Goldstaff had failed to remit to the Receiver General as and
when required all of the source deductions it withheld from the remuneration it
paid to some of its employees; (admitted)
m) the Appellant failed to take positive steps to ensure that
the source deductions were being remitted to the Minister; (denied)
n) Goldstaff failed to remit to the Receiver General source
deductions it withheld from the remuneration it paid to some of its employees
for the 2008 and 2009 taxation years, as detailed in Schedule “A”, attached
hereto and forming part of this Reply; (admitted)
o) on April 8, 2010, Goldstaff owed the Receiver General
source deductions and interest, of not less than $123,106.16; (admitted)
p) on April 22, 2010, a Certificate for Goldstaff’s
liability in the amount of $123,106.16 plus interest was registered in the
Federal Court under section 223 of the Act; and (admitted)
q) Goldstaff’s liability relating to the above-noted
Certificate was returned unsatisfied in whole on June 21, 2010. (admitted)
[4]
The issue to be decided
is whether the appellant exercised the degree of care, diligence and skill to
prevent the failure to remit the amount of the source deductions as required by
Goldstaff that a reasonably prudent person would have exercised in comparable
circumstances.
[5]
The appellant testified
at the hearing with the assistance of a Mandarin interpreter. She essentially
confirmed the relevant material facts that were submitted to the Canada Revenue
Agency's (the “CRA”) Appeals Officer by her solicitor in a letter dated May 4,
2011. The relevant material facts, as set out in the May 4, 2011 letter sent by
Ms. Kathy Wang of McMillan LLP to Mr. J.P. Mise of the CRA Appeals Division are
as follows:
1. The Taxpayer immigrated to Canada in July 2004. She holds
a bachelors degree in engineering and previously worked as an engineer in China. Upon immigrating to Canada, the Taxpayer encountered great difficulties in finding a
job. She attended the British Columbia Institute of Technology (“BCIT”) full
time for one year to learn basic accounting in the hopes of finding employment
opportunities in this field.
2. The Taxpayer joined Goldstaff as an accountant in
November 2007. Prior to this, she had been employed as a junior accountant for
less than a year but had lost the job. This had been her only work experience
in Canada up to this point. The Taxpayer did not and does not presently hold
any accounting designations (i.e. CA, CGA,CMA).
3. As a condition of her employment, the Taxpayer was
effectively required to purchase shares in Goldstaff. Despite her limited
financial means, she purchased 5% of the shares of Goldstaff for an investment
of $1,250 because she could only secure her job by doing so.
4. As noted in the Notice of Objection, the directors,
officers and shareholders of Goldstaff in November 2007 were:
a. Rachel
Stafford (“Stafford”)
President,
CEO, and director
40%
ownership
b. John
Goldsmith (“Goldsmith”)
Director
30%
ownership
c. Tanya
Shewchuk (“Shewchuk”)
25%
ownership
d. The
Taxpayer
5%
ownership
5. In June 2008, Goldsmith resigned as a director of
Goldstaff. He owned 30% of the shares of Goldstaff and stated that he wanted to
sell his shares or would otherwise close the Vancouver office. Under pressure
from Stafford and Shewchuk, the Taxpayer reluctantly agreed to purchase another
10% interest in Goldstaff for $2,500, believing that failure to do so would
render her unemployed.
6. Around the same time, the Taxpayer's manager, Stafford,
asked the Taxpayer and Shewchuk to become a director of Goldstaff following the
resignation of Goldsmith because Stafford did not want to be the sole director.
At this point, the Taxpayer had been in Canada for less than four years. She
had never served as a director or officer and lacked full understanding of what
the position entailed. She possessed no previous business or management
experience outside of her work experience as an accountant. However, fearing
that her job was in danger, she consented to become a director on June 15,
2008. Shewchuk also consented to become a director around the same time.
7. During her tenure as a director of Goldstaff, the
Taxpayer's duties remained limited to her pre-existing duties as Goldstaff's
accountant. At times she also assumed the duties of the office receptionist,
who had been laid off. She was never informed of nor attended any meetings of
the directors and did not sign or consent to any corporate acts in her capacity
as a director. Furthermore, she lacked the ability to exercise any management
or control over the conduct of business affairs of Goldstaff as this remained
in the hands of Stafford. She came to realized that she effectively had no
realistic scope to exercise the normal duties of a director. The Taxpayer's
lack of control or influence over Stafford is evidenced in the following:
a. Stafford was solely responsible for determining the hiring,
work hours, salary, training for all staff;
b. On
numerous occasions, the Taxpayer suggested that changes be made to ensure the
continuing viability of the Goldstaff business, including setting personal
targets for sales staff, curtailing extra commissions, reducing staff salaries,
including her own salary. However, she had no power or influence over Stafford's decision-making and lacked any authority to effect any changes;
c. Stafford alone decided to hire Doreen Thibault, an ex-employee who had previously been laid
off, and she was able to do so despite the protests of the Taxpayer and Shewchuk
that Ms. Thibault added no value to Goldstaff and had a history of poor
performance.
8. Goldstaff employed both temporary and regular staff and a
system was in place for payroll deductions and remittance.
a. Regular staff payroll was processed through ADP, which
automatically made the source deductions and remitted same to the CRA on a
bi-monthly basis. Since ADP fully remitted the source deductions for
Goldstaff's regular staff, the arrears presently in dispute should relate only
to payroll deductions for the temporary staff.
b. Payroll deductions and remittances for temporary staff were
done manually. The Taxpayer prepared a cash flow report daily containing all
outstanding payables. This was sent to Stafford who then advised as to who
should be paid. Once the payees were confirmed, the Taxpayer prepared the
cheques which were then signed by Stafford. Goldstaff’s policy was that all
payments must be authorized by Stafford. This was communicated to the Taxpayer
on her first day of employment and the practice continued until her
termination. The Taxpayer did not have authority at any time to make direct
payments to any of the anticipated payees, including the CRA.
9. Following various changes in personnel and the downturn
in the economy, Goldstaff began to experience financial difficulties in August
2008. At around this time, Goldstaff began to experience problems in making its
payroll remittances.
10. In order to monitor Goldstaff’s financial situation and to
alert Stafford of Goldstaff’s financial responsibilities, including its
responsibility to make remittances to the CRA, the Taxpayer prepared daily cash
flow reports for Stafford and Shewchuk, which included all outstanding source
deductions and their due dates. A copy of a sample cash flow report is attached
to this letter. When a source deduction became due, the Taxpayer always
requested payment authorization from Stafford, who consistently refused to
provide the required authorization. On a daily basis, the Taxpayer advised the Stafford and Shewchuk verbally and through e-mail of the source deductions due to the CRA.
The Taxpayer did not have authority to make the payments herself.
11. Realizing that she was unable to convince Stafford to give
authorization to make the remittances and to make other changes to the
business, the Taxpayer enlisted the help of Shewchuk (who acted as the Branch
Manager of Goldstaff’s Edmonton office) by telephoning her numerous times to
explain Goldstaff’s financial situation and the daily cash flow reports. Together,
they pleaded with Stafford to reduce all of their salaries, including
Goldstaff’s payment of commissions, car allowance and RRSP contributions for Stafford in order to enable Goldstaff to make its remittances. At all relevant times, Stafford refused to authorize the suggested changes.
12. After finally realizing that she had no influence over Stafford’s continued mismanagement of Goldstaff’s business conduct and failure to meet its
tax liabilities even with the help of Shewchuk, the Taxpayer resigned as a
director on February 26, 2009. Shewchuk resigned on February 28, 2009.
[6]
No one testified on
behalf of the appellant to corroborate her version of the facts. Ms. Stafford had
accepted to testify at the hearing but, on the date of hearing, she could not
make it as she was very sick fighting a cancer in terminal phase. Mr. Mark
Sheaffer, a former employee of Goldstaff had also agreed to testify but, on the
date of the hearing, he was in Australia. He sent an e-mail which was not admissible
in Court as it was not part of the appellant’s list of documents.
[7]
In terms of documentary
evidence, the appellant filed in Court a Shareholders' Agreement of Goldstaff
dated November 30, 2007 (Exhibit A-1) to which was attached a copy of the
opening balance sheet of Goldstaff as of November 21, 2007. This opening
balance sheet was prepared because Goldstaff purchased the Vancouver and Edmonton assets and assumed certain liabilities from Coape Management Network LLC t/a
Coape Staffing Network, effective November 21, 2007. The opening balance sheet
shows that Goldstaff had total assets of $224,366.96 and total liabilities of
$196,866.96, including payroll liabilities of $105,282.18.
[8]
The appellant also
filed the Central Securities Register of Goldstaff (Exhibit A‑2)
which shows that the appellant became a shareholder of Goldstaff on January 24,
2008 when she acquired 1 250 common shares of Goldstaff at a price of $1
per share. The appellant acquired 2 500 additional common shares of
Goldstaff on July 31, 2008 at a price of $1 per share. On June 15,
2008 the date on which the appellant became a director, the shareholding of
Goldstaff was as follows:
|
|
Class A
Common Shares (1 vote)
|
Class B
Common Shares (10 votes)
|
|
Apple Core Enterprises Inc.
|
17 500
|
2 500
|
|
Dandan Qian
|
1 250
|
|
|
Tanya Roy Shewchuk
|
6 250
|
|
|
Rachel C. Stafford
|
Nil
|
|
|
Total
|
25 000
|
2 500
|
On July 31, 2008,
the shareholding of Goldstaff was as follows:
|
|
Class A
Common Shares (1 vote)
|
Class B
Common Shares (10 votes)
|
|
Apple Core Enterprises Inc.
|
Nil
|
2 500
|
|
Dandan Qian
|
3 750
|
|
|
Tanya Roy Shewchuk
|
8 750
|
|
|
Rachel C. Stafford
|
12 500
|
|
|
Total
|
25 000
|
2 500
|
[9]
The appellant also
filed in Court a sample of her daily cash flow report dated April 14, 2009
(Exhibit A-3) that she was presenting to Rachel Stafford and Tanya Shewchuk
which included the following information:
- the balance of each bank account;
- the accounts payable (payroll, taxes, etc.);
- the anticipated cash balance at some future dates;
- the accounts receivable aging summary;
- the unpaid bills details; and
- the upcoming CRA taxes details.
The appellant did not have access to her daily cash
flow reports because Goldstaff had closed its doors.
[10]
The appellant filed her
resignation letter as director of Goldstaff effective February 26, 2009
(Exhibit A-4), her notice of objection dated September 10, 2010 (Exhibit A-5)
and the letter of representation from her solicitor, Kathy Wang, dated May 4,
2011 (Exhibit A-6).
The Law
[11]
The relevant provisions
of the Act for the purpose of this appeal are paragraph 153(1)(a)
and subsections 227.1(1), (2) and (3). In general terms, paragraph 153(1)(a)
provides for income tax withholdings from employee wages, and for the
remittance of these withholdings to the Receiver General.
Subsection 227.1(1) sets out that the directors of a corporation who have
failed to withhold and remit, are jointly and severally, or solidarily, liable
together with the corporation to pay the amount of tax and any related interest
or penalties. Subsections 227.1(2) and (3) provide for certain limitations
on this liability of directors, notably by allowing a defence of care,
diligence and skill. These provisions read as follows:
153.(1)
Withholding [source deduction] —Every person paying
at any time in a taxation year
(a)
salary, wages or other remuneration, other than amounts described in
subsection 115(2.3) or 212(5.1),
.
. .
Shall
deduct or withhold from the payment the amount determined in accordance with
prescribed rules and shall, at the prescribed time, remit that amount to the
Receiver General on account of the payee’s tax for the year under this Part or
Part XI.3, as the case may be, and, where at that prescribed time the person is
a prescribed person, the remittance shall be made to the account of the
Receiver General at a designated financial institution.
. .
.
227.1(1)
Liability of directors for failure to deduct —Where
a corporation has failed to deduct or withhold an amount as required by
subsection 135(3) or 135.1(7) or section 153 or 215, has failed to remit
such an amount or has failed to pay an amount of tax for a taxation year as
required under Part VII or VIII, the directors of the corporation at the time
the corporation was required to deduct, withhold, remit or pay the amount are
jointly and severally, or solidarily, liable, together with the corporation, to
pay that amount and any interest or penalties relating to it.
(2) Limitations on liability —A director is not liable under subsection 227.1(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 223 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 that subsection 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 that subsection has been
proved within six months after the date of the assignment or bankruptcy order.
(3)
Idem—A director is not liable for a failure under
subsection 227.1(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.
[12]
The relevant provisions
of the Employment Insurance Act, S.C. 1996, c. 23, as amended, are
subsections 82(1) and 83(1) and (2):
82.(1) Every employer paying remuneration to a person they employ in
insurable employment shall
(a)
deduct the prescribed amount from the remuneration as or on account of the
employee’s premium payable by that insured person under section 67 for any
period for which the remuneration is paid; and
(b)
remit the amount, together with the employer’s premium payable by the employer
under section 68 for that period, to the Receiver General at the prescribed
time and in the prescribed manner.
[…]
83.(1) If an employer who fails to deduct or remit an amount as and when
required under subsection 82(1) is a corporation, the persons who were the
directors of the corporation at the time when the failure occurred are jointly
and severally, or solidarily, liable, together with the corporation, to pay Her
Majesty that amount and any related interest or penalties.
(2)
Subsections 227.1(2) to (7) of the Income Tax Act apply, with such
modifications as the circumstances require, to a director of the corporation.
[13]
Subsections 21(1)
and 21.1(1) and (2) of the Canada Pension Plan set out similar withholding
and remittance obligations in relation to contributions to the Canada Pension
Plan:
21.(1)
Every employer paying remuneration to an employee employed by the employer at
any time in pensionable employment shall deduct from that remuneration as or on
account of the employee’s contribution for the year in which the remuneration
for the pensionable employment is paid to the employee such amount as is
determined in accordance with prescribed rules and shall remit that amount,
together with such amount as is prescribed with respect to the contribution
required to be made by the employer under this Act, to the Receiver General at
such time as is prescribed and, where at that prescribed time the employer is a
prescribed person, the remittance shall be made to the account of the Receiver
General at a financial institution (within the meaning that would be assigned
by the definition “financial institution” in subsection 190(1) of the Income
Tax Act if that definition were read without reference to paragraphs (d)
and (e) thereof).
21.1(1)
If an employer who fails to deduct or remit an amount as and when required
under subsection 21(1) is a corporation, the persons who were the
directors of the corporation at the time when the failure occurred are jointly
and severally or solidarily liable, together with the corporation, to pay to
Her Majesty that amount and any interest or penalties relating to it.
(2)
Subsections 227.1(2) to (7) of the Income Tax Ac apply, with such
modifications as the circumstances require, in respect of a director of a
corporation referred to in subsection (1).
[14]
Section 57 of the British Columbia Income Tax Act, R.S.B.C. 1996, c. 215 imposes similar withholding
and remittance obligations and similar liability on directors who failed to
exercise the degree of care, diligence and skill required to prevent the
failure.
Analysis and Conclusion
[15]
In Buckingham v. R.,
2011 FCA 142, the Federal Court of Appeal has clearly stated that the standard
of care, skill and diligence required under subsection 227.1(3) of the Act
is an objective standard,
as set out by the Supreme Court of Canada’s decision in People’s Department Stores Ltd. (1992) Inc., Re 2004 SCC
68, [2004] 3 S.C.R. 461 (S.C.C.), and does not take into account the directors
“personal skills, knowledge, abilities and capacities.” In paragraph 38,
Justice Mainville pointed out that:
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 own personal skills, knowledge,
abilities and capacities.
[16]
However, in
paragraph 39, Justice Mainville recognized that a director’s particular
circumstances are to be considered and measured against a reasonably prudent
person standard:
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”.
[17]
The Court of Appeal
also ruled in Buckingham, supra, that the focus of the “due diligence
defence “is to prevent the failure to remit, not to cure failures to do so”
(para. 51 and 52):
51 It is thus important to note that Worrell did not
modify the focus of the defence of care, diligence and skill, which is to
prevent the failure to remit, not to cure failures to do so.
. . .
52 Parliament did not require that directors be subject to an
absolute liability for the remittances of their corporations. Consequently,
Parliament has accepted that a corporation may, in certain circumstances, fail
to effect remittances without its directors incurring liability. 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
concerned amounts.
[18]
In this case, I
consider that the appellant took all the necessary measures within her power
and under the circumstances, to prevent the failure. She did the best that
anyone could reasonably have done in the circumstances to convince Ms. Stafford
to make the remittances, and she quit when she realized that Ms. Stafford
would simply never agree and given the policies and practices in place at
Goldstaff.
[19]
Considering the fact
that the appellant did not have the necessary authority to herself make the
payments to the CRA, she alerted the other directors, of Goldstaff’s
liabilities on a daily basis and to the remittance requirements as they became
due. The appellant enlisted the help of Ms. Shewchuk, who operated the Edmonton office, to address the company’s financial situation. She suggested numerous
methods to reduce Goldstaff’s liabilities, including a wage cut for herself, by
terminating the receptionist and by cutting Ms. Stafford’s RRSP contribution
and car allowance.
[20]
As director of
Goldstaff, the appellant had no authority, no input as to the direction of
Goldstaff and how the finances should be handled. The appellant neither participated
in the decision not to remit to the Receiver General of Canada the amount of the source deductions nor in the decision to pay a bonus to certain
Goldstaff’s employees at the end of 2008 even though the company was not
profitable. She became aware of the bonus only after it had been paid.
[21]
During the appellant’s
tenure as director of Goldstaff, she did not have any power to manage the
business and affairs of Goldstaff or exercise control over its officers. That
power was exercised by Ms. Stafford. The appellant never signed any documents
as a director and never sat at a board of directors meeting. She did not have the
authority to sign cheques drawn on Goldstaff’s bank accounts.
[22]
Concerning the
particular circumstances of the appellant, consideration shall be given to the
fact that the appellant had cultural and language barriers. At the hearing, the
appellant explained that she was not invited to participate at the various
telephone conversations that were taking place between Ms. Stafford and Ms. Shewchuk.
As those telephone conversations were behind closed doors, the appellant respected
the privacy of these matters. The appellant admitted that she would have had
difficulties following discussions as her English was not good at that time.
[23]
The appellant was, in
2008, a recent immigrant to Canada who had had to obtain new training to make a
significant career change upon moving to Canada. Mr. Goldsmith and Ms. Stafford
took advantage of the appellant’s lack of knowledge of Canadian rules
concerning potential liability of the company’s directors. Ms. Stafford took
full advantage of the appellant’s vulnerable position and of her naivety.
[24]
At the hearing, the
appellant pointed out that Ms. Stafford was not assessed by the CRA because she
had declared bankruptcy.
[25]
For these reasons, the
appeal is allowed with costs and the assessment is vacated.
Signed at Ottawa, Canada, this 5th day of December 2013.
"Réal Favreau"
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