Citation: 2008TCC234
Date: 20080424
Docket: 2007-2539(IT)I
BETWEEN:
RICHARD FERDINAND MOLL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller, J.
[1] This is an appeal from an assessment made
under section 227.1 of the Income Tax Act (“Act”). The Appellant
was assessed by notice dated August 16, 2006 on the basis that he was
a director of MFS Automation Ltd. (“MFS”) when it failed to remit source
deductions to the Receiver General from January 1, 2002 to March 31, 2003. The
amount of the assessment was $69,916.71 which included unremitted source
deductions in the amount of $41,660.98 and interest and penalties thereon in
the amount of $28,255.73.
[2] The Appellant takes the position that he
resigned as director of MFS on January 23, 2003 which was more than two years
prior to being assessed under section 227.1 of the Act.
[3] The Respondent takes the position that in
accordance with section 119 of the Ontario Business Corporations Act, R.S.O.
1990, c. B.16, s. 56 (“OBCA”) the Appellant’s resignation is not
effective.
FACTS
[4] The Appellant’s background is that of a
general machinist. He has a license as a machinist and he graduated from
college. MFS was incorporated on April 24, 1995 under the OBCA.
The Appellant was the sole shareholder and the sole director of MFS. MFS built
machinery for various companies both in Canada and in the United States. The Appellant stated that it required great outlays
of cash to build the machinery and it always took a while to collect the
accounts receivable. As a result, all payments of source deductions to the
Canada Revenue Agency (“CRA”) were sporadic.
[5] The Appellant stated that much of the
financial difficulties of MFS can be traced to the downturn in the economy
after September 11, 2001. It was his evidence that MFS lost most of its
business with companies in the United
States. Prior to September
11, 2001 MFS had sales of $85,786 with companies in the United States and after September 11, 2001 sales to the United States were $125. The Appellant also stated that from 2001
to 2003 there were many customers who failed to pay MFS.
[6] It was the Appellant’s evidence that he had
made an agreement with CRA in 2002 that MFS’s outstanding debt would be paid
off prior to MFS ceasing to operate. He stated that at that time MFS owed CRA
$32,000. MFS sold a machine to Conros Corporation (“Conros”) for $54,000. It
was the Appellant’s evidence that CRA said it would collect the amount from
Conros. He stated that he learned two and one half years later that CRA had not
received the amount from Conros. At that time CRA started to pursue him for
MFS’s debt.
[7] The Appellant submitted three documents (Exhibit
A-1) to support that he had resigned as director of MFS:
1. a photocopy of a page entitled
Directors’ Register. It shows that the Appellant was elected as director on
April 24, 1995 and that he retired on January 23, 2003. No
corporation is named on this document;
2. a photocopy of a page entitled “Officers’
Register”. It as well shows that the Appellant held the office of President
from April 24, 1995 to January 23, 2003. No corporation is named on this
document;
3. a letter from the Appellant to MFS
dated January 23, 2003 wherein he wrote the following:
Richard Moll 290
Brock Road
Dundas
Ontario L9G 2Y8
January 23 2003
MFS Automation Ltd.
11 garden Ave unit #4
Stoneycreek Ontario
L8E 2Y8
Dear : MFS Automation Ltd.
IT is with deep regret that I am
resigning after 16 years as Director of MFS Automation. This day January 23,
2003 following the complete closure of Mfs Automation Ltd. Which will never
again open it’s doors for business. I have done the best I could to maintain
this company it’s now time to quit.
Sincerely,
Richard Ferdinand Moll
Now former Director of MFS
[8] Leeanne Feltrin, a Collections Officer with
CRA, gave evidence on behalf of the Respondent. She stated that MFS had seven
employees in 2002 and two employees in 2003. MFS ceased to operate in February
2003. She stated that since November 1995, MFS had a history of not remitting its
source deductions in a timely fashion. She outlined the history of MFS’s
source deduction account with CRA; the contacts made by CRA to the Appellant;
the contacts made by CRA to MFS’s accountant; and the assessments issued to
MFS. Her evidence disclosed that remittances of source deductions to the CRA
were only made after MFS was contacted by CRA. MFS made most of its payments to
CRA by way of post-dated cheques some of which were not honoured by the bank.
[9] She outlined the following contacts between
the Appellant and CRA in 2003 and 2004:
April 2003 – a follow-up examination was
conducted with respect to the missing information for 2002 and 2003. There were
no books and an arbitrary assessment was raised based on the prior numbers. The
new balance was approximately $70,000. The Appellant gave the examiner three
post-dated cheques. Each cheque was for the amount of $1,500. It was at this
time that the Appellant advised CRA that the business had ceased to operate in
February 2003.
September 2003 – CRA contacted the
Appellant and he promised to provide more payments. He advised that he had
problems collecting the accounts receivable.
September 2003 – Post-dated cheque returned
and marked non-sufficient funds (NSF).
November 2003 – The Appellant went to the
Tax Services Office to give CRA six post-dated cheques. Each cheque was for the
amount of $1,500 and they were dated for the period December 2003 to May 2004.
November 2003 – A prior post-dated cheque
was returned NSF.
January 2004 – A post-dated cheque was
returned NSF.
January 2004 – CRA called the Appellant and
left a message.
January 2004 – CRA sent requirements to pay
to all banks where MFS had accounts. All requirements were returned as there
were no funds available.
February 2004 – The remaining three post-dated
cheques were returned to the Appellant as all previous cheques were returned to
CRA marked NSF.
February 2004 – The pre-assessment letter
was issued to the Appellant.
[10] Ms. Feltrin stated that CRA had never
received any indication that the Appellant had resigned as director of MFS. As
well, she stated that the Appellant’s statement that MFS’s financial difficulty
was as a result of September 11, 2001 is unsupported. MFS had
difficulties remitting source deductions in a timely fashion prior to this
date.
LEGISLATION
[11] Section 227.1 of the Act reads as follows:
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.
(2) A director
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 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) A director
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.
(4) No action
or proceedings to recover any amount payable by a director of a corporation
under subsection (1) shall be commenced more than two years after the director
last ceased to be a director of that corporation.
ANALYSIS
[12] There was nothing to support the Appellant’s
statements that there was any type of agreement between him and CRA with
respect to the outstanding debt of MFS. Regardless, the question is whether the
Appellant resigned as director of MFS more than two years prior to the
assessment dated August 16, 2006. If not, then did the Appellant exercise the
degree of care, diligence and skill to prevent the failure that a reasonably
prudent person would have exercised in comparable circumstances?
[13] It is clear from the jurisprudence that to
determine when a director ceases to hold office one must examine the
incorporating legislation. See The Queen v. Kalef, [1996] 2
C.T.C. 1 (F.C.A.) at paragraph 10:
The Income Tax Act neither defines the
term director, nor establishes any criteria for when a person ceases to hold
such a position. Given the silence of the Income Tax Act, it only makes
sense to look to the company's incorporating legislation for guidance. …
[14] MFS was
incorporated under the OBCA and section 121 outlines when a director
ceases to hold office as follows:
121. (1) A director of a corporation
ceases to hold office when he or she,
(a) dies or, subject to
subsection 119(2), resigns;
(b) is removed in
accordance with section 122; or
(c) becomes
disqualified under subsection 118(1).
(2) A resignation of a director
becomes effective at the time a written resignation is received by the
corporation or at the time specified in the resignation, whichever is later.
[15] It is the Appellant’s position that he
resigned as director of MFS on January 23, 2003 in accordance with subsection
121(2) of the OBCA. The letter was addressed to MFS. The Appellant was
the President, sole director and sole shareholder of MFS. The Appellant gave
the letter to himself; I assume as shareholder of MFS.
[16] The Respondent has relied on subsection
119(2) of the OBCA to assert that the Appellant as sole director of MFS
could not resign. Subsection 119(2) reads as follows:
119. (1) Each director named in the
articles shall hold office from the date of endorsement of the certificate of
incorporation until the first meeting of shareholders.
(2) Until the first meeting of
shareholders, the resignation of a director named in the articles shall not be
effective unless at the time the resignation is to become effective a successor
has been elected or appointed.
[17] Subsection 119(2) of
the OBCA refers to the first directors, those named in the Articles of
Incorporation (“Articles”). I do not know if the Appellant was named as a
director in the Articles as they were not tendered as an exhibit in this
appeal.
[18] It is clear from the jurisprudence that a
sole director can resign from a corporation by giving written notice to the
corporation. In Netupsky v. The Queen, [2003] G.S.T.C. 15,
Justice Bell (as he then was) found that a sole director had resigned and in
fact subsection 131(3) of the Company Act (British Columbia)
contemplated a situation in which a corporation has no directors. Subsection
115(4) of the OBCA as well contemplates the situation where all of the
directors of a corporation have resigned or have been removed. However, this
subsection deems the person who manages or supervises the management of the
business to be the director of the corporation. Subsection 115(4) reads as
follows:
115. (4) Where all of the directors
have resigned or have been removed by the shareholders without replacement, any
person who manages or supervises the management of the business and affairs of
the corporation shall be deemed to be a director for the purposes of this Act.
[19] If the Appellant did
resign as director on January 23, 2003 (I will speak to the letter of resignation later in these reasons.), then because he
was the person who managed the affairs of the corporation after January 23,
2003 he is deemed to continue as director of the corporation. After January 23,
2003 the Appellant is deemed to be a director and did not cease in this
capacity when MFS ceased operations as he continued to hold himself out as
director.
[20] In the appeal of Charles
Bremner v. The Queen, 2007 TCC 509, Mr. Bremner admitted that he was a
de facto director and deemed director as described in subsection
115(4) of the OBCA. Associate Chief Justice Rip had
to decide when a de facto or a deemed director ceased to be a
director. He said this at paragraph 26:
[26] There is no fixed
rule to determine when a de facto or a "deemed" director
ceases to be a director. However, to paraphrase Mr. Justice Potter Stewart, one
may know when a person ceases to be a director when one sees it. The course of
conduct of the person is important.[11] There will be something missing in the
relationship between the individual and the corporation. As any director, a de facto
or a "deemed" director will cease to be a director when the
shareholders elect his or her replacement or if he or she resigns. Until that
time a director remains in office. A de facto and a "deemed"
director may also cease to be a director by giving notice to the corporation
and actually stop managing or supervising the management of the company.
In the appeal at bar the director's bond between Mr. Bremner and Excel was not
broken. I acknowledge that it may be difficult for a person who is the only
shareholder of a corporation to divorce himself or herself from activities
normally carried on by a director but if that person is performing functions of
a director, he or she is a director. In the appeal at bar, the following facts,
for example, favour a finding that Mr. Bremner continued to be a de facto
director after September 1 and into October, 2000: he was the sole shareholder
of Excel and the only person who has ever managed and supervised Excel; there
is no evidence that he informed third parties, creditors or others, except
perhaps his son, who did not testify, that he was no longer holding himself out
as a director of Excel; and he continued acting for Excel after September 2000;
for example, payments were made on behalf of Excel against its GST arrears.
[27] In his letter of
April 10, 2001, Mr. Bremner informed the tax authority that he "was"
employed by Excel as manager and requested that the CCRA correct its records.
The fact that he wrote to the tax authority suggests that he was still managing
or supervising the management of Excel's actions, however minimal such actions
may have been.
[28] Mr. Bremner held
himself out as director of Excel, even if not called director, and continued to
be a de facto director after September 30, 2000. The fact that Excel
ceased to carry on business in August is not really relevant. Directors of
corporations have duties that survive the cessation of the business previously
carried on. Mr. Bremner took it upon himself to arrange for the orderly
winding-up of the company's business and its affairs that continued into
October 2000.
[21] As in Bremner,
supra, the Appellant held himself out as director of MFS after he
allegedly resigned as director. There was no evidence that he informed anyone,
especially third party creditors, that he was no longer a director; he
continued to act as director after January 23, 2003, for example he continued
to meet with the CRA officials and to give them post-dated cheques as payments
on behalf of MFS. The fact that MFS ceased operation in February 2003 is not
relevant.
[22] My conclusion above is sufficient to
establish that the Appellant continued to be a director of MFS after January
23, 2003. However, I would like to comment on Exhibit A-1. It is my opinion
that the Appellant did not resign on January 23, 2003. I do not accept his
evidence for the following reasons:
a) The pages from the alleged Minute Book are
photocopies and do not refer to any corporation. They raise a suspicion of
their authenticity.
b) The CRA was in
contact with the Appellant on four occasions after January 23, 2003 and at no
time did the Appellant inform CRA that he had resigned. On cross-examination,
the Appellant admitted that he had never told CRA that he resigned as a
director. His letter of resignation was not provided to CRA until the hearing
of this appeal.
c) The Appellant
continued to give post-dated cheques to CRA in 2003.
d) The letter states that the Appellant was
director of MFS for 16 years whereas the evidence disclosed that MFS was
incorporated in 1995.
e) The letter states
that by January 23, 2003, MFS had completely ceased business. Whereas, the
Appellant told CRA that MFS had ceased operations in February 2003.
[23] The last
issue in this appeal is whether the Appellant has made out a defence under
subsection 227.1(3) of the Act.
[24] In
Soper v. Canada (C.A.), [1998] 1 F.C. 124 the Federal Court of
Appeal stated the following:
40 This is a
convenient place to summarize my findings in respect of subsection 227.1(3) of
the Income Tax Act. The standard of care laid down in subsection
227.1(3) of the Act is inherently flexible. Rather than treating
directors as a homogeneous group of professionals whose conduct is governed by
a single, unchanging standard, that provision embraces a subjective element
which takes into account the personal knowledge and background of the director,
as well as his or her corporate circumstances in the form of, inter alia,
the company's organization, resources, customs and conduct. Thus, for example,
more is expected of individuals with superior qualifications (e.g. experienced
business-persons).
41 The standard
of care set out in subsection 227.1(3) of the Act is, therefore, not
purely objective. Nor is it purely subjective. It is not enough for a director
to say he or she did his or her best, for that is an invocation of the purely
subjective standard. Equally clear is that honesty is not enough. However, the
standard is not a professional one. Nor is it the negligence law standard that
governs these cases. Rather, the Act contains both objective
elements-embodied in the reasonable person language-and subjective
elements-inherent in individual considerations like "skill" and the
idea of "comparable circumstances". Accordingly, the standard can be
properly described as "objective subjective".
[25] The Appellant is a
college graduate. He operated MFS since 1995. He was the only director and was
involved in the day-to-day management of the company. He stated that he made
all decisions and was responsible for remittances of source deductions.
[26] During the period
January 2002 to March 2003, MFS did not make any voluntary payments to CRA. It
was only after he was contacted that the Appellant attempted to pay the source
deductions by giving post-dated cheques to CRA. When he was asked if he took
any steps to ensure that source deductions were remitted on time, the Appellant
stated that he tried to screen his customers to those who could pay.
[27] I find that the Appellant has not shown that
he exercised the standard of care that is required by subsection 227.1(3) of
the Act. He took no actions to prevent MFS’s failure to remit source
deductions when they were due.
[28] The appeal is
dismissed.
Signed at Ottawa, Canada this 24th day of April, 2008.
V.A.
Miller, J.
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