REASONS
FOR JUDGMENT
Russell J.
Introduction:
[1]
These are reasons for judgment applicable to the
three herein informal procedure appeals of the self-represented Appellant,
Michael Fox, all in respect of director’s liability assessments. The appeals
were heard on common evidence. In each the sole issue is whether the available statutory
“due diligence defence” is applicable.
[2]
The appealed assessments are:
a)
in appeal 2017-928(IT)I, an assessment of the
Appellant as a director of Foxtrot Communications Ltd. (Company), raised May
22, 2015 under the federal Income Tax Act (ITA) for non-remittance by
the Company of employees’ federal and provincial income taxes during the
Company’s 2009, 2010, 2011 and 2012 taxation years, totaling including interest
and penalty $23,794 as of dates between and including April 30, 2010 and April
24, 2013 on which the Minister of National Revenue (Minister) raised eight
non-remittance assessments against the Company. These eight assessments were
for the Company’s 2009 taxation year (one), its 2010 taxation year (two), its
2011 taxation year (two) and its 2012 taxation year (three);
b) in appeal 2017-930(GST)I, an assessment of the Appellant as a
director of the Company, raised May 27, 2015 under the federal Excise Tax
Act (ETA), for non-remittance by the Company of net goods and services
tax/harmonized sales tax (GST/HST) within the period April 1, 2010 to September
30, 2012, totaling including interest and penalty $40,047 as of dates between and
including October 20, 2011 and July 8, 2013 on which the Minister raised
against ten non-remittance assessments against the Company; and
c)
in appeal 2017-932(IT)I, an assessment of the
Appellant as a director of the Company, raised May 22, 2015 under the ITA, the Canada
Pension Plan (Canada) (CPP) and Employment Insurance Act (Canada)
(EIA) for non-remittance by the Company of employment insurance premiums and CPP
contributions for the Company’s 2009, 2010, 2011 and 2012 taxation years,
totaling including interest and penalty $26,249 as of dates between and
including January 18, 2010 and April 24, 2013 on which the Minister raised
against ten non-remittance assessments against the Company.
Minister’s Assumptions of Fact:
[3]
In the Respondent’s three Replies are pleaded the
assumptions the Minister made in raising the three appealed director’s
liability assessments. The three sets of assumptions are identical in
substance. In summary they are that the Company was incorporated June 2, 2000;
its fiscal year was the same as the calendar year; the Appellant was the sole
director and directing mind of the Company; during the relevant period the
Company paid its employees wages net of the source deductions required to be
withheld and remitted and also generated net GST/HST that was to be remitted;
the Company did not remit various of these amounts; the Appellant did not make
reasonable efforts to prevent the Company’s failure to remit the withheld
amounts; the Appellant decided that the Company would pay the Company’s
suppliers and other creditors prior to the deductions or other amounts required
by law to be withheld and remitted during the applicable period; the non-remitted
amounts are as particularized in the preceding paragraph.
[4]
The Minister’s pleaded assumptions are here set
out as jurisprudence has established that they are presumed correct absent the particular
appellant taxpayer establishing a prima facie case otherwise.
[5]
In each of the three notices of appeal the Appellant
has pleaded entitlement to the benefit of the available statutory due diligence
defence in respect of the said non-remittances.
Evidence:
[6]
The Appellant testified that he was
self-employed and had been the sole shareholder and director of the Company,
incorporated in 2000. The Company was in the publishing business. In September
2008 it purchased from another publishing company the on-going publications, Independent Times and
The Prospector News (Prospector News). The purpose of Prospector News
was, the Appellant said, to help junior mining companies tell their stories so
as to attract investors. Two weeks later, in mid-September, what is known as
the 2008 market crash commenced. This led fairly promptly to a 40 to 60% drop
in value in the junior mining industry shares, he testified. He said the
Company’s revenue from Prospector News was closely tied to market performance in
the resource market sector. The Company’s cash flows in the form of
subscription payments for Prospector News thus suffered.
[7]
The Appellant did not challenge the amounts
pleaded by the Respondent as not having been remitted. Two staff of the Company
were cut in early 2009. The Appellant testified that he paid Company employees
from his own resources, drawing on personal lines of credit. He went to his
bank to seek to extend his credit line but was turned down plus the bank closed
the credit line he did have. Then in June/July 2009 his computer failed. In
2010 the computer apparently again malfunctioned and with these failures the
Appellant testified he had no mechanism to keep track of the Company’s
obligations as to source deductions and net GST/HST remittances due.
[8]
In September 2010 Canada Revenue Agency (CRA)
contacted the Appellant about the non-remittances. The Appellant testified that
throughout 2010, 2011 and 2012 he tried to satisfy CRA while he was in debt and
seeking financing options. He unsuccessfully sought to borrow $100,000 to pay
CRA, pay off his lines of credit and become and remain current with remittances
due CRA on a go-forward basis. The mining industry market was on a long, slow
downturn, until mid-2016. Prospector News subscribers were leaving the mining
business. The Appellant tried without success to interest various acquaintances
in acquiring an interest in the Company.
[9]
In dealing with CRA from September 2010 forward,
director’s liability was referenced by a CRA Collections officer to the
Appellant on August 30, 2011, per CRA diary records known as “T2020s”. The Appellant sought to mortgage his
Vancouver condo, but was turned down in May 2012. He said that by the end of
2012 he was out of financial options. In 2013 his bank accounts were seized. In
the 2010 to 2012 period he had laid-off several Company staff, and had shut
down the Company’s entertainment publication called City Reels.
[10]
In cross-examination the Appellant testified
that while he was seeking to obtain financing, the Company had to be continuing
in business as a going concern. He said he was doing the barest minimum to move
the Company forward. He testified he used all personal funds and access to personal
credit to pay employees. Business dropped 65% from 2007. He never resigned as
director. He tried to settle with CRA.
[11]
For the Respondent, CRA Collections officer
Crystal Isaac testified. She took over CRA’s collection file regarding the
Company in mid-2013. She caused the appealed assessments to be raised. There
was in total a $2,600 payment for non-remitted net GST/HST. She testified that
paying CRA was not a priority of the Appellant. She caused writs of seizure and
sale to be issued against the Company in respect of certificates filed in
Federal Court in August 2014 for $48,048 ITA debt plus interest, and for
$40,259 ETA debt plus penalty and interest. The writs were sought to be served
at the Company’s address in early November 2014, but there was no response when
the bailiff attended at that address. The writs were returned to CRA endorsed, “unable to locate exigible assets”.
[12]
The Appellant’s Ex. A-14, being a CRA memorandum
dated May 13, 2015 from Ms. Isaac to another CRA individual, stated
as being for the purpose of requesting authorization to assess the Appellant
for director’s liability, states in part in respect of “Collection
Activity” that “Voluntary arrangements have been
sought without success.” The memorandum notes also that the Company “is inoperative and without assets.”
[13]
Exhibit A-4, submitted by the Appellant, is a
copy of CRA Collections’ minutes of contacts with the Appellant in respect of
the Company over the period June 24, 2010 to December 6, 2012. It indicates the
Appellant advised a CRA trust examiner in January 2011 that remittances had not
been made “due to serious cash flow problem” and
that there were one or two employees and 2010 had been economically better than
2009 and the Appellant intended to clear this debt in 2011. The Appellant
advised CRA in November 2010 that he was having “problems
with his computer and unable to pay to have it fixed due to difficult times”.
The Company’s GST returns for 2009 had then not yet been filed. The CRA trust exam
was mandatory as there was a history of more than three months of
non-remittances.
[14]
The Appellant was contacted by CRA Collections in
March 2011. He advised a payment could be made in two weeks but he was not sure
what amount. CRA sought monthly payments and in May 2011 the Appellant advised
all remittances and GST/HST would be filed and paid by June 30th. In July 2011
CRA followed up and the Appellant advised, “he had
large computer meltdown in 08/09 which is causing delays. On top of this he is
busy and short staffed and had to do everything himself.” CRA responded to
the Appellant that 2008/2009 computer issues had nothing to do with 2011
remittances. The Appellant also was told that un-paid remittances were due by
July 25 and that GST returns must be filed as soon as possible, and he was advised
that a corporation has to file a T2 whether or not tax was owing. Payments
continued not to be made. In September 2011 CRA requested the Appellant to seek
personal financing based on $158,000 home equity and also unlocking a portion
of his LIRA, and also that he look into factoring the Company’s receivables. Also
there is a comment that a director’s liability assessment would be considered
if there were no acceptance of the foregoing financing steps. In the interim a
monthly payment of $1,200 was agreed to, but it is unclear to what extent this
arrangement proceeded.
[15]
These Collections notes continue in this vein. By
October 2012 the Appellant was, “hoping to find new
investors to inject cash into the business.”
[16]
The Company’s 2002 registration in British
Columbia was cancelled, ostensibly on the Appellant’s initiative, effective
January 1, 2014. CRA thereafter had the Company’s dissolution date extended by
two years while it continued its review of the company’s unremitted source
deductions and net GST/HST.
Issue and Parties’ Positions:
[17]
As stated the issue for each of the three
appealed director’s liability assessments is whether the available statutory
due diligence defence is applicable. For the assessment of the Appellant for
un-remitted income tax, a director’s liability is established per subsection
227.1(1) of the ITA and the due diligence defence is per subsection 227.1(3). These
two provisions provide as follows:
Liability of
directors for failure to deduct
227.1 (1) 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.
…
Idem [due
diligence defence]
(3) 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.
[18]
For the assessment for un-remitted net GST/HST,
the director’s liability is established per subsection 323(1) of the ETA, and the
due diligence defence is articulated at subsection 323(3). These two provisions
provide:
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.
…
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.
[19]
Similarly, subsections 21.1(1) and (2) of the
CPP provide for a director's liability and due diligence defence as follows:
Liability
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.
Application of Income
Tax Act provisions
(2) Subsections
227.1(2) to (7) of the Income Tax Act apply, with such modifications as the
circumstances require, in respect of a director of a corporation referred to in
subsection (1).
[20]
And, subsections 83(1) and (2) of the EIA
provide for a director’s liability and due diligence defence as follows:
Liability of
directors
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.
Application of Income Tax Act provisions
(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.
[21]
The Appellant submits that the Appellant did
take sufficient steps to render applicable the due diligence defence in
response to the director’s liability assessments against him. He particularly
cites as a supportive precedent the decision of this Court in William
Campbell v. R., 2010 TCC 100. The Respondent’s position is that the
Appellant is not entitled to the due diligence defence, the assessments against
the Appellant are appropriate and these three appeals should be dismissed.
Analysis:
[22]
The Federal Court of Appeal (FCA) decision of R.
v. Buckingham, 2011 FCA 142 remains the lead case regarding applicability
of the due diligence defence in director’s liability assessment appeals. Buckingham
established, in light of the Supreme Court of Canada decision of Peoples
Department Stores et al. v. Wise, 2004 SCC 68, that the “objective subjective” test the FCA previously had set
out in Soper v. Canada, [1998] 1 FC 124 (CA) for measuring the standard
of care, diligence and skill required by the statutory due diligence defences
had evolved into a purely “objective” standard. This
permits “stricter standards” to be applied in
determining application of the defence (Buckingham, para. 38). Still, “…the particular circumstances of a director…must be taken
into account, but…[now]…against an objective ‘reasonably prudent person’
standard.” (para. 39).
[23]
Also Buckingham emphasized that the
defence only applies in respect of efforts to ensure the remittances are made
on a timely basis, and it does not extend to efforts to repay missed
remittances. At para. 56:
[56] A
director…cannot justify a defence under…subsection 227.1(3) of the [ITA] where
he condones the continued operation of the corporation by diverting employee
source deductions to other purposes. The entire scheme of section 227.1 of the [ITA],
read as a whole, is precisely designed to avoid such situations. In this case,
though the respondent had a reasonable (but erroneous) expectation that the
sale of the online course development division could result in a large payment
which could be used to satisfy creditors, he consciously transferred part of
the risks associated with this transaction to the Crown by continuing
operations knowing that employee source deductions would not be remitted. This
is precisely the mischief which subsection 227.1 of the [ITA] seeks to avoid.
[24]
Several months later the FCA had occasion to
echo Buckingham, in Balthazard v. R., 2011 FCA 331. In this case
the FCA particularly noted (para. 37) that the director appellant, “concerned himself with [the corporation’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.” These included requiring the
corporation’s chief of financial arrangements to report regularly to the board
of directors that tax deductions and remittances of GST-related net tax were
carried out on time. Also, when difficulties did arise, the director personally
took charge of discussions with CRA to ensure remittances were made by
instalments to ensure complete payment by June 30, 2006.
[25]
But there was in the view of the FCA a lapse of
time of three months when the director apparently did little or nothing to stem
the continued corporate failure to make remittances. The FCA found this “show[ed] a lack of due diligence” (para. 51), for
which period the Court accordingly did not permit the appellant the benefit of
the due diligence defence. The FCA however noted (para. 56) that for other
relevant periods:
…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 [the corporation’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 tax was remitted in
full for [a] period...
[26]
The Respondent cited also the 2012 Tax Court
decision of Kevin D’Amore v. R., 2012 TCC 373. In D’Amore the
director appellant acknowledged he had paid creditors to keep the corporate
business “afloat”. The director did not let the
corporation make source deductions and net GST/HST remittances. He injected
$22,000 to pay for business supplies (“no liquor, no
food – no business”), rather than to pay remittances. Justice C. Miller
did not find this conduct sufficient to allow the director to avoid the
director’s liability assessment against him by virtue of the due diligence
defence, because of the director’s efforts to continue the business
notwithstanding the continuing failures to remit. The Court cited Buckingham
and Balthazard in so finding. And, at paras. 27 and 28 the Court considered
the above-cited Campbell decision as follows, distinguishing it on the
basis that the director in that case was focused at least in part on “trying to meet CRA remittances”:
[27] I was
not made aware of any case in which a director successfully relied on a due
diligence defence in circumstances where the director of a corporation in
financial difficulties intentionally had the corporation pay creditors, other
than the CRA, to keep the business afloat, in the hope that the business will
ultimately turn profits and then be in a position to pay Government
remittances. I put this to the Appellant’s counsel and he referred me to the
case of Campbell v. The Queen. With respect, that case is not close to
the situation before me. The following describes what steps the director took
in Campbell:
42. … At this point, the
Appellant proposed a further informal arrangement in which CRL would pay $1,000
three times monthly. This was accepted by Jim Fitzgerald, a collections officer
at CRA. The Appellant testified that he was in constant contact with CRA, and
particularly Mr. Fitzgerald, throughout this period. To honour some of these
cheques, the Appellant testified that he engaged in a strategy in which he
would ensure that client payments to CRL were deposited to the corporate
account on the same day that payment to CRA would be clearing. This ensured
that the bank would not have time to stop the payment on the cheques earmarked
for CRA. Up until the time that the bank stopped this practice, the Appellant
testified that this practice included watching and hoping for bad weather so
that the planes carrying the cheques to a Nova Scotia clearing house would be
delayed by the weather which frequently occurred in the province. This provided
a further day's grace period to ensure CRA's cheques cleared. Steve Lawlor
confirmed this practice as well as the ongoing involvement of the Appellant in
ensuring that CRA was paid. In addition, the Appellant stated that he assisted
CRA by proposing that a requirement to pay be placed against one of CRL's
larger debtors, likely the Hibernia account. In addition, he ensured that CRL
facilitated CRA's efforts to collect directly from other third-party accounts
of the company.
43. In a further attempt to
ensure priority to CRA, the Appellant testified that CRL maintained a separate
account for its source deductions, number 106-2017, which was closed in
December, 2000. Generally, funds would be deposited into CRL's general account
and then transferred immediately to the account designated for remittances.
According to the Appellant, the bank, however, would not permit transfers to
this account unless the company was current with its loan obligations.
44. During 1995, the Appellant
convinced CRL's account manager at the Royal Bank to allow the company to go
into an overdraft in order that source deductions could be made. Later, in
1996, the bank's auditors put a stop to this and converted the overdraft to a
secured loan. The bank suggested that CRL seek professional accounting advice,
which it subsequently did. However, CRL was unable to continue those services
due to the higher fees which were being charged to CRL.
…
46. The Appellant also
considered having cheques being paid to CRL from its customers endorsed
directly over to CRA, but because the bank was monitoring the company
receivables so closely, the Appellant felt the bank would simply stop this
practice if it were to be initiated.
…
49. Throughout this period, the
Appellant invested over $140,000 of his personal savings into the company to
meet CRA remittances and loan payments and, in addition, made attempts to
obtain funding from other sources. The Appellant also testified that he
voluntarily did not take a salary from CRL so that priority again could be
given to the CRA remittances. The Appellant's name is not in fact present on
any of the corporate payroll lists for 1996 (Exhibit A-1, Tab 7), 1997 (Exhibit
A-1, Tab 15), 1998 (Exhibit A-1, Tab 17) and 1999 (Exhibit A-1, Tab 23).
[28] The
last paragraph quoted is most significant. The director in the Campbell case
injected funds "to meet CRA remittances". Mr. D’Amore acknowledged
that he injected funds to pay other creditors. This is the very mischief the
Federal Court of Appeal described in the Buckingham case that the provision in
the Act and the ETA are designed to address. No, Mr. D’Amore, during the second
period, took no steps to prevent the failure but intentionally continued the
company’s failure to remit. It is clear from his lawyer’s letter in August 2008
that Mr. D’Amore indeed acknowledged this responsibility and ensuing liability.
[27]
The above-cited portions of Campbell
describe a variety of initiatives made by the director in that case, “to meet CRA remittances”, as highlighted by that
Court. They include providing a series of post-dated cheques, ensuring that
client payments would be deposited to the corporate account on day of receipt
so as to help ensure the bank could not block the money being used for
remittances, watching for bad weather which could provide an extra day before
client cheques went to bank’s clearing–house in Nova Scotia, advising CRA to
place a requirement to pay against one of the pertinent company’s larger
debtors and other third party accounts, maintenance of a separate account for
source deductions, and convincing the bank to allow the corporate account to go
into overdraft so that source deductions could be made.
[28]
The Appellant argued that Campbell is an
apt precedent for the case at bar. In his submission, in both cases external
factors created the cash-flow challenge, in both cases corporate records were
inadvertently destroyed, in both cases the director contributed personal funds,
in both cases corporate staff were reduced and expenses controlled, in both
cases the director took no salary, in both cases the directors sought to
negotiate a bank loan (in Campbell the director was successful). The
Appellant urged that in both cases the directors “did
everything reasonably possible”.
[29]
The Respondent submitted that the Company had a
history of delayed GST/HST filing and T2 corporate tax filing, and that the
Appellant’s first priority was to keep the Company operating. There was no
evidence the Appellant took any steps to stop failures to make remittances. The
Respondent said this was not due diligence. There were no separate accounts for
remittances in the case at bar, unlike in Campbell. The saved money
through non-remittances in the case at bar was used to keep the Company
running. In the case at bar there were no net GST/HST payments other than for
$2,600 total.
[30]
I am in agreement with the Respondent that here
the Appellant has not established entitlement to the available defence of due
diligence in response to the director’s liability assessments against him. Citing
Buckingham and Belthazard, I do not observe the general focus of
the Appellant as seeking to stop non-remittances, as opposed to continuing with
non-remittances while keeping his Company going so that in the longer term
someone might buy the Company or invest in it and thus provide funding to
presumably reimburse CRA. Reading the Collections minutes in respect of the
Appellant shows that CRA was seeking to contact and generally pursuing the
Appellant for solutions and payments well more than the Appellant was engaged
in initiatives seeking to satisfy CRA regarding continued non-remittances. In
this regard the efforts made by the director in Campbell, noted above,
compare quite more favourably in terms of self-initiative in engaging in
actions to curb non-remittances, that at least somewhat placated CRA.
[31]
Furthermore, insofar as the Appellant prominently
cites and relies upon Campbell, in fact that decision shortly preceded
the FCA’s seminal decision of Buckingham, which included language
encouraging “stricter standards” to be utilized
in applying the defence to due diligence in director’s liability cases. Buckingham
is the governing jurisprudence - not Campbell.
[32]
On the basis of the foregoing I find that the
Appellant has been unsuccessful in establishing entitlement to the due
diligence defence in any of these three appeals, heard on common evidence.
Signed at Ottawa, Canada, this 28th
day of February 2018.
“B. Russell”
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