Brown v. The Queen, docket 96-748-GST-G

Date: 19980616

Docket: 96-748-GST-G

BETWEEN:

RANDALL J. BROWN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Beaubier, J.T.C.C.

[1] This appeal pursuant to the General Procedure was heard in Vancouver, British Columbia on June 5, 1998. The Appellant testified and called Maurice Jones, C.G.A.,, the accountant who prepared the annual statements of O.E.M. Hardware Inc. ("O.E.M."). The Appellant was assessed for liability for unpaid GST of O.E.M. of $42,012.52. He appealed.

[2] The assumptions read:

6. In so assessing the Appellant, the Minister relied on, inter alia, the following assumptions:

a) the facts stated and admitted above;

b) the Appellant was, at all material times, a director of OEM;

c) OEM was registered under Part IX of the Act, was assigned Goods and Services Tax ("GST") No. 103957827, and was at all material times required to collect and remit G.S.T. on taxable supplies on a quarterly basis;

d) OEM's GST payable, input tax credits (ITCs) and net tax due for the periods in issue were as follows:

QUARTER ENDED	GST PAYABLE	ITCs	NET TAX DUE
January 1991	4,966.62	2,612.20	2,354.42
April 1991	15,597.12	6,222.35	9,374.77
July 1991	11,631.44	7,181.11	4,450.33
October 1991	15,436.79	5,461.80	9,974.99
January 1992	10,794.25	-359.71	11,153.96
April 1992	10,543.64	6,000.45	4,543.19
July 1992	1,755.07	2,899.63	-1,144.56
	70,724.93	30,017.83	40,707.10
Less Filed Return	4,966.62	2,610.10	2,356.52
TOTAL	65,758.31	27,407.73	$38,350.56

e) a Notice of Assessment No. 11GU0000009 and dated December 22, 1992 was issued to OEM in the amount of $44,383.90 ("OEM's Assessment") in respect of unremitted net tax for the audit period of January 1, 1991 to July 31, 1992, including penalties and interest calculated to December 16, 1992, detailed as follows:

Adjustments to GST	$65,758.31
Adjustments to Input Tax Credits	-27,407.73
Total Adjustments for Assessment Period	$38,350.58
Penalty	2,739.96
Interest	3,293.36
Other Penalty	0.00
Total Assessment for the Period	$44,383.90

f) OEM failed to remit to the Receiver General net tax in the amount of $38,350.58 plus interest of $3,293.36 and penalties of $2,739.96 as calculated to December 16, 1992;

g) a Certificate for OEM's liability for GST, interest and penalty was registered at the Federal Court of Canada on September 1, 1994;

h) a Writ of Fieri Facias was issued September 1, 1994 and returned wholly unsatisfied on October 13, 1994; and

i) the Appellant did not exercise the degree of care, diligence and skill to prevent the failure to remit the said amount by OEM that a reasonably prudent person would have exercised in comparable circumstances.

[3] The only GST return filed and tax paid by O.E.M. was for its first quarter ending which was January 31, 1991, the end of its fiscal year.

[4] O.E.M. was incorporated federally in 1980. It was registered to carry on business in British Columbia on August 15, 1983. Mr. Brown was a director and president of O.E.M. from January 24, 1980 to November 10, 1980. On January 31, 1988 he again became a director and was also president and secretary of O.E.M. until it was wound up. Mr. Brown testified that he resigned as a director after July, 1992, but the corporate register does not record the resignation. He is, and has been, an officer in a number of other corporations. He is 47 years old and did not attend high school. After a variety of work, he became a salesman and worked in Saskatchewan, Alberta and British Columbia. Eventually he settled into the industrial fastener business and he founded O.E.M. During the periods in question O.E.M. carried on sales in that business. He was active in all aspects of the corporation but eventually concentrated on marketing. In 1990 O.E.M. had 12 employees; in 1991, 6 employees; and, in 1992, 6 employees. At the material times, its bookkeeper was Ms. Gill. For the periods in question, Mr. Brown was the sole director and the majority shareholder of O.E.M.

[5] In its fiscal year ending January 31, 1991, O.E.M. was profitable and paid income tax. It had a line of credit of $150,000 with The Toronto-Dominion Bank ("T-D") on Georgia Street in Vancouver which was fully secured and personally guaranteed by Mr. Brown. In February, 1990 Mr. Brown asked T-D to increase the line of credit to $200,000 or $210,000. T-D's officer handling the account was positive and allowed O.E.M. extra overdrafts while the application was processed. O.E.M. carried out is plans to expand into the United States while waiting for formal approval. In the fall of 1990 T-D formally refused the application for a larger line of credit. O.E.M. was then $40,000 over its limit and T-D demanded that the excess be paid down immediately. O.E.M. closed its warehouse in Blaine, Washington and began laying off staff, collecting receivables and reducing inventory. It slowed its payments to suppliers. After January 31, 1991, O.E.M. also stopped paying GST and filing GST reports.

[6] From the fall of 1990 until February, 1991, Mr. Brown had to report to T-D on the amount of each cheque issued and sometimes the name of the payee. After the beginning of February, 1991, he had to give T-D full detail of each cheque O.E.M. issued. Sometimes T-D refused to allow clearance of Mr. Brown's paycheque. Mr. Jones testified that he not only did O.E.M.'s annual statements, but he also did monthly statements for it. In its second quarter of 1990 (ending April 30), he told Mr. Brown to pay the GST and he repeated that warning periodically thereafter.

[7] In March, 1992 Mr. Brown and Mr. Jones met with officers of T-D at the bank's premises on Georgia Street in Vancouver. T-D proposed that Mr. Brown put more cash into O.E.M. or find another bank, or wind up. On February 5, 1991, Mr. Brown had loaned O.E.M. $10,000 and on August 19, 1991 he loaned it another $14,000. He did not loan it any more money but T-D refused O.E.M. the right to issue some paycheques to Mr. Brown. O.E.M. applied to two other banks to transfer its account and was refused. Mr. Brown found a new investor, Mr. Lantry, who offered $120,000 capital for a majority of O.E.M. but T-D refused to continue its loans. On July 23, 1992, T-D called O.E.M.'s loans. On August 5, 1992 receivers appointed by T-D attempted to secure O.E.M.'s assets and were resisted by Mr. Brown. O.E.M. closed in August, 1992. On October 16, 1992 T-D's lawyers made a formal demand on Mr. Brown's guarantee of O.E.M.; litigation ensued which was settled on November 16, 1993. On June 7, 1994 O.E.M. was struck from the register and on August 29, 1994 it ceased to carry on business in British Columbia.

[8] The evidence is clear that O.E.M. was financing itself in part by not paying GST remittances to the knowledge of Mr. Brown. He was the operating officer in a very small business and had full knowledge of this course of action by O.E.M. He signed all of O.E.M.'s cheques. Mr. Brown testified that he could not allocate funds for payment, presumably without T-D's approval. He stated that he never received approval from T-D to pay the GST.

[9] Mr. Brown's position is not as strong as that of the Appellant in Harvey Kalef v. The Queen, (F.C.A.) 96 DTC 6132. In that case a receiver was appointed and Mr. Kalef had no power over the assets of the business. Despite this, the Federal Court of Appeal found Mr. Kalef liable for withholdings as a director. In O.E.M.'s case, Mr. Brown expanded the business without waiting for T-D's approval of the additional line of credit. As the sole director of O.E.M. he could have had O.E.M. pay the GST as it became due and waited for T-D's approval before expanding. Instead, he used O.E.M.'s GST funds to finance O.E.M.'s expansion. Even after T-D's refusal in the fall of 1991, he could have required O.E.M. to wind down immediately and pay the outstanding GST. Instead, O.E.M. did not pay the outstanding GST and incurred further liability. At all times Mr. Brown knew that the GST was due and payable.

[10] Mr. Brown was the operating manager and sole director of O.E.M. at the times material to this appeal. He knowingly directed O.E.M. to finance its operation with GST funds. Mr. Brown did not merely fail to prevent O.E.M.'s remission of GST. He caused O.E.M. not to pay the GST as it became due.

[11] The Appellant's evidence did not refute the assumptions.

[12] On this basis his appeal is dismissed. The Respondent is awarded party and party costs.

Signed at Ottawa, Canada this 16th day of June 1998.

"D.W. Beaubier"

J.T.C.C.