Bâtiment Fafard International Inc. v. R., [1999] 4 CTC 2723, [1999] DTC 1206

McArthur T . C.J.:

Facts:

The Minister of National Revenue (“the Minister”) has moved for the dismissal of the appeal under subsection 58(3) of the General Procedure Rules. The appellant went bankrupt on April 15, 1997, and the firm of Lussier, Tull et associés was appointed trustee in bankruptcy. The appellant’s director and president, Jules Fafard, wishes to continue in his own name the proceedings instituted in this Court.

The appellant had appealed from an assessment made by the Minister for the 1992, 1993, 1994 and 1995 taxation years. On May 2, 1996, a notice of confirmation was issued in respect of the assessment.

In the notice of assessment, the Minister referred to section 227 of the Income Tax Act! [1] (“the Act”). He assessed the appellant for the arrears of source deductions owed by 130360 Canada Inc. (“130360”).

In assessing the appellant, the Minister relied on certain facts. The appellant is a corporation that operated in the construction industry. The Minister claimed that 130360 was related to the appellant. No tax returns had been filed by 130360 since 1989. It did not have any assets during the period at issue. It was also run by Jules Fafard. According to the Minister, 130360 was related to the appellant. It was basically a management company that did nothing but pay wages. On a few occasions, it remitted source deductions that were paid directly by the appellant. The appellant is thus required to remit the source deductions owed by 130360. It also owes the penalties provided for in subsections 227(8) and (9) of the Act and interest as provided for in subsection 227(8.3) of the Act.

The appellant argued only that 130360 was not related to it. It also submitted that 130360 ceased operating at the end of 1995 and was dissolved on January 23, 1996.

Jules Fafard brought a motion in the Superior Court of Quebec to force the trustee to continue the proceedings pending in this Court. The motion was granted on August 25, 1997. However, during a proceeding before this Court on September 4, 1998, the Minister moved to dismiss the appeal. The trustee had clearly stated that it would not continue the proceedings despite the order by the Superior Court of Quebec. This Court therefore adjourned to allow the trustee to comply with the order.

On December 4, 1998, the Minister again appeared before this Court to ask that the appeal be dismissed. By that time, Mr. Fafard, through his counsel Mr. Bérubé, had obtained a correction of the judgment of August 25, 1997 rendered by the Superior Court on the motion. The judgment dated October 29, 1998, authorized Mr. Fafard to continue the proceedings pending in this Court. The issue is whether Mr. Fafard has the capacity to continue the proceedings in his own name.

Our legal system operates as a two-party adversary system. A case necessarily involves two parties with opposing ideas and opinions, the object being to find an answer or solution to the problem. Our system is based on a fundamental idea, that of a dialectic.

However, it is also fundamental to our system that justice be done, and it is accordingly true to say that there are exceptions to every rule. Our legal system thus provides for situations in which more than two parties may have an interest in a case. For example, the civil law of Quebec provides for situations in which a person may intervene in a case if that person proves that he or she has an interest therein (article 208 of the Code of Civil Procedure). That article goes even further: it authorizes a person to represent a party who is incapable of acting. However, the impact of that provision is uncertain in the case at bar, since Mr. Fafard is not acting as an intervener but would like to be substituted for or to replace the appellant.

In the civil law, a person can bring legal proceedings or an action if he or she has the required interest. This rule is set out in articles 55 and 56 of the Code of Civil Procedure of Québec, which read as follows:

55. Whoever brings an action at law, whether for the enforcement of a right which is not recognized or is jeopardized or denied, or otherwise to obtain a pronouncement upon the existence of a legal situation, must have a sufficient interest therein.

56. A person must be able to fully exercise his rights to be a party to an action in whatever form it may be, saving contrary provisions of law.

A person who is not able to fully exercise his rights must be represented, assisted or authorized, in the manner provided by the laws which govern his status and capacity or by this Code.

In the case at bar, Mr. Fafard has obtained the authorization referred to in article 56 of the Code of Civil Procedure. However, this Court is not bound by the Superior Court of Quebec’s authorization, since this Court does not have inherent powers and its jurisdiction is limited. The rules of this Court include a special rule authorizing the “transfer” of interest. Section 29 of the General Procedure Rules provides as follows:

29. (1) Where at any stage of a proceeding the interest or liability of an appellant or a taxpayer referred to in section 173 or 174 of the Income Tax Act or section 310 or 311 of the Excise Tax Act is transferred or transmitted to another person by assignment, bankruptcy, death or other means, a proceeding shall be stayed until the Registrar is notified of the transfer or transmission and the particulars thereof.

Counsel for the Minister argued that only a taxpayer may appeal a decision by the Minister and institute an appeal to this Court. In Nova Ban-Corp Ltd. v. Tottrup (1989), 89 D.T.C. 5489 (Fed. T.D.), Strayer J. of the Federal Court — Trial Division stated the following principle:

Nor does the Income Tax Act [S.C. 1970-71-72, c. 63] authorize anyone but the taxpayer to challenge a tax assessment.^ [2]

This principle derives from the wording of subsection 169(1) of the Act, which reads as follows:

169. (1) Appeal — Where a taxpayer has served notice of objection to an assessment under section 165, the taxpayer may appeal to the Tax Court of Canada to have the assessment vacated or varied....

That provision refers to a “taxpayer”, which is a term defined in subsection 248(1) of the Act. A taxpayer is “any person whether or not liable to pay tax”.

In Nova Ban-Corp Ltd. supra, the appellant was a creditor of the taxpayer and was objecting to the Minister’s assessment. Strayer J. concluded that the appellant, as a third party, did not have the necessary capacity to appeal such an assessment. He noted that the fundamental principle involved is to maintain taxpayer confidentiality.

As well, reference should be made to another line of cases that seems to authorize a director of a corporation to contest an assessment against the corporation. The decisions in question all involve challenges to assessments based on unpaid taxes.

495187 Ontario Ltd. v. R. (1992), 92 D.T.C. 6311 (Fed. T.D.); affirmed by the Federal Court of Appeal, (1993), 94 D.T.C. 6229 (Fed. C.A.), deals with the capacity of a director to continue in his or her own name proceedings brought by a dissolved corporation. Reed J. wrote the following at page 6313:

In the present case, Mr. Hadi Sarraf was the only shareholder and the only director of the plaintiff company. It is he, to the extent that he holds any property of the company, who would have an obligation to pay the tax assessed under the reassessment. In my view, the correct plaintiff is Mr. Hadi Sarraf in his capacity as shareholder and director of 495187 Ontario Limited at the time of its dissolution. An order will issue amending the style of cause accordingly. [Emphasis added.]

Although that case related to a dissolved corporation, the same logic can be applied in the case at bar. At the time of the assessment, Mr. Fafard was a director of the appellant. The appellant’s bankruptcy did not remove him from his position as a director. The Bankruptcy and Insolvency Act? [3] is silent as to the status of directors after a corporation goes bankrupt. The statute under which the appellant was incorporated must therefore be examined. In the instant case, no mention has been made of the legislation under which the appellant was incorporated. Regardless of that omission, the Canada Business Corporations Act* [4] and the Companies Act [5] set out the conditions under which a director holds office. Section 108 of the Canada Business Corporations Act states the circumstances in which a director ceases to hold office. It reads as follows:

108. (1) [Ceasing to hold office] A director of a corporation ceases to hold office when

(a) he dies or resigns;

(b) he is removed in accordance with section 109; or

(c) he becomes disqualified under subsection 105(1).

Thus, a director can lose his or her position only for the reasons referred to above. Subsection 105(1) of the same statute provides that a bankrupt is disqualified from being a director, but it does not deal with the situation in which a corporation goes bankrupt. In the same vein, section 123.73 of the Companies Act provides that an undischarged bankrupt cannot become a director of a company; it says nothing, however, regarding the case in which a company goes bankrupt.

In this respect, it is my view that Mr. Fafard never ceased to be a director of the appellant. This is an important conclusion, since in the case at bar the Minister is assessing the bankrupt appellant for taxes that were not paid by another corporation. The Minister generally begins by assessing the corporation for unpaid taxes. However, section 227.1 of the Act provides that directors are jointly and severally liable to pay unpaid taxes. Mr. Fafard could therefore be assessed for the appellant’s unpaid taxes. If Mr. Fafard has the capacity to continue the proceedings pending in this Court and is able to convince the Court that the assessment is unfounded, his liability as a director will not come into play, since the initial assessment against the corporation will have been held to be unfounded.

The primary purpose of section 227.1 of the Act has been described as follows:

The justification for the imposition of vicarious liability is simple. The directors of a company are its directing mind. They are the persons responsible for insuring that the corporation fulfils its financial obligations.^ [6]

In Kalef v. R. (1996), 96 D.T.C. 6132 (Fed. C.A.), the Federal Court of Appeal held that a director does not cease to hold that position as a result of the corporation’s bankruptcy. The director remains jointly and severally liable for the corporation’s unpaid taxes. In that decision, the Federal Court of Appeal looked at the provisions of the Ontario Business Corporations Act, which are virtually identical to those of the Canada Business Corporations Act. Writing for the court, McDonald J.A. found that Mr. Kalef had not ceased to act as a director, since the statute governing the corporation’s incorporation did not provide that a director ceased to be such when the corporation went bankrupt and a trustee in bankruptcy was appointed.

An analogy may be drawn with that case. If a director does not cease to hold that position as a result of a corporation’s bankruptcy, that director will remain jointly and severally liable for the bankrupt corporation’s unpaid taxes. Since Mr. Fafard did not cease to be a director, I would adopt reasoning similar to that of Reed J. in 495187 Ontario Ltd. supra. Mr. Fafard therefore has the capacity to be a party to proceedings in his own name.

Moreover, as I noted above, in civil matters, the only applicable criterion for determining whether a person can be a party to proceedings is sufficient interest. In the case at bar, Chabot J. of the Superior Court of Quebec authorized Mr. Fafard to continue the proceedings pending in this Court. He held that Mr. Fafard had the required interest. I am aware that interest is not a determining factor in tax matters. However, given the comments of Reed J. in 495187 Ontario Ltd. supra, I am not prepared to accept that a director’s interest in proceedings is irrelevant. The director of a corporation is responsible for tax liabilities originating with the corporation. In the instant case, it seems to me that Mr. Fafard obtained authorization to continue the proceedings in accordance with the provisions of the Bankruptcy and Insolvency Act.

Moreover, if I denied Mr. Fafard the right to continue the pending proceedings, the result would be unfair. The appellant would not be represented, since the trustee is refusing to act. What would then become of the adversary process, one of the pillars of our entire legal system? Injustice would be the result: the appellant could not appear before the Court since there would be no one who could represent it. Trustees often refuse, for whatever reason, to continue pending proceedings. If the directors do not have the capacity to be parties to proceedings after a corporation’s bankruptcy, many proceedings will remain pending or will simply be dismissed because of a lack of representation. In the case at bar, proceedings had been instituted in this Court before the appellant even went bankrupt. It would be unfair not to allow Mr. Fafard to continue them. Moreover, authorizing Mr. Fafard to do so is the most effective way to dispense justice expeditiously. The Court will first determine whether the assessment against the appellant is correct, which will determine the validity of any assessment against Mr. Fafard.

In this regard, I need only refer to Leith v. Minister of National Revenue (1990), 70 D.T.C. 1144 (Can. Tax App. Bd.), where Board member Fordham stated the following:

I do not think that deeming the trustee to be the agent of the bankrupt precludes the latter from acting on his own behalf when the trustee prefers to remain aloof. In prosecuting this appeal the appellant has only spent the negligible sum of $15 and will incur no further costs before the Board. What he is doing may prove of benefit to the estate — it certainly can do no harm — in that, if he succeeds, the estate will be considerably better off than if the re-assessment involved were to be disregarded and the Minister thereby enabled to obtain judgment by default for the large amount claimed by him. [7]

Counsel for the Minister argued that that decision is not applicable to the case at bar since the appellant is a bankrupt corporation. I cannot accept that distinction. Directors are the directing mind of a corporation. The corporation is merely an artificial, intangible legal entity. It is therefore appropriate to give Mr. Fafard permission to continue the proceedings in this Court.

A few comments must be made about the principle set out in Nova Ban- Corp Ltd. supra, that only a taxpayer may challenge a tax assessment. Under section 160 of the Act, a transferee is jointly and severally liable with the transferor for the amounts the transferor owes the Minister. The question of whether the transferee may challenge the validity of the transferor’s assessment has been considered by this Court on several occasions. In Thorsteinson v. Minister of National Revenue (1980), 80 D.T.C. 1369 (T.R.B.), Judge Taylor wrote the following at page 1372:

It is open to a transferee assessed under section 160(2) of the Act to challenge the bona fides of the Minister’s claim that the liability for tax of the transferor actually existed at a particular point in time. The assessed transferee has available all the rights of any taxpayer, including the opportunity, indeed the obligation, to dislodge the basis for the liability, not merely to challenge the mechanics of the assessment of the transferor.

Finally, Judge Bowman took the same approach in Sarrafv. Minister of National Revenue (1994), 94 D.T.C. 1506 (T.C.C.), where he stated the following at page 1508:

It is of course open to the transferee to challenge the correctness of the assessment against the transferor even if the transferor has failed to do so, or is, as is the case here, precluded from doing so: Thorsteinson v. M.N.R., 80 DTC 1369; Ramey vThe Queen, 93 DTC 791.

For all these reasons, it is my view that Mr. Fafard has the capacity to continue in his own name the proceedings pending in this Court.

The second motion was brought by the respondent to quash a subpoena that the appellant had served on Pierre Gravelle, a former deputy minister of the Department of National Revenue. That subpoena directs Mr. Gravelle to bring with him all relevant documents concerning the appellant’s file.

On June 29, 1995, Mr. Fafard wrote Mr. Gravelle and told him of the seizures carried out by the Minister. He asked Mr. Gravelle to give the appellant’s file to another official, alleging that Mr. Gravelle was in bad faith. Mr. Gravelle answered that letter on July 17, 1995, and then referred the appellant’s file to another official.

Counsel for the appellant had a subpoena served on Mr. Gravelie at a time when Mr. Gravelle was no longer employed by the Department of National Revenue. In an affidavit dated September 3, 1998, Michel Lamarre, counsel for the Minister, described his discussions with counsel for the appellant. Mr. Lamarre explained to counsel for the appellant that Mr. Gravelie was no longer in possession of the appellant’s documents and that his knowledge of the file was limited. He even offered to file Mr. Gravelle’s letter by consent. Finally, he offered to summon other officials of the Minister who might have better knowledge of the file. However, counsel for the appellant maintained his objection to the proposals.

In support of his motion, the Minister argued that, since Mr. Gravelle is no longer employed by the Department of National Revenue, he does not have the documents concerning this case and his knowledge thereof is limited. The subpoena served on Mr. Gravelle is therefore irrelevant to the disposition of this case and is unreasonable.

This Court’s rules do not have anything specific to say about the summoning of witnesses. The provincial rules of civil procedure must therefore be referred to. Article 295 of the Code of Civil Procedure provides that any person competent to testify may be compelled to do so. The same article indicates that all persons are competent to testify if they are in a fit state to report the facts of which they have knowledge. It would seem that such knowledge must be personal. Professor Léo Ducharme has written the following:

[TRANSLATION]

While in theory any person competent to testify may be compelled to do so, in practice the only persons who may be compelled to testify are those who have personal knowledge of the facts involved in the case and who are subject to the jurisdiction of our courts. [8]

With regard to the summoning of a Minister, Professor Ducharme stated the following at the same page:

[TRANSLATION]

Moreover, the reason section 69 of the Act respecting the Ministère du Revenu states that the Minister, the Deputy Minister and assistant deputy ministers are not compellable in proceedings to which the Deputy Minister is a party is that those individuals are normally not able to give useful testimony since they have no personal knowledge of the facts in issue. That is why the same section provides that those individuals must, upon the written application of a party served at least 30 days before the date of hearing and specifying the facts requiring testimony, designate a public servant who is aware of the facts to testify.

Although there is no similar provision in the Income Tax Act, it is well settled that a Minister cannot be summoned unless he or she has personal knowledge of the facts. In Létourneau c. Powers, [1975] C.A. 458 (Que. C.A.), the appellant had served a subpoena on the Minister of Justice and the Solicitor General of Canada. The Quebec Court of Appeal upheld the trial judge’s decision quashing the subpoena. Rinfret J.A. stated the following at page 459:

[TRANSLATION]

Neither the testimony of the Solicitor General of Canada nor that of the Minister of Justice of Quebec can help the Court judge these acts, since they were not present; the reports they might file are not in themselves proof of their content; to have any probative value, they would have to come from the persons concerned, who are already before the Court and can be questioned.

In light of these comments, it is my view that the appellant cannot summon Mr. Gravelle to appear before this Court. Although Mr. Gravelle wrote a letter in his own name, I am not convinced that he has any personal knowledge.

The personal knowledge to which the courts refer involves drawing conclusions and making observations based on what one has seen oneself. At the time the letter was written, the Minister had already begun making seizures. In order to write the letter, Mr. Gravelle therefore relied on the observations of the Minister’s officials. Moreover, in both Mr. Fafard’s letter dated June 29, 1995, and the Reply to the Notice of Appeal, references are made to the Minister’s officials and not Mr. Gravelle. Finally, Mr. Gravelle wrote in his letter that he had had to make inquiries of the officials responsible for the file to learn about the situation. He did not have personal knowledge of the appellant’s file.

Accordingly, it is my view that the subpoena should be quashed.

Application to dismiss appeal dismissed; application to set aside subpoena granted.