Date:
20021112
Docket:
2001-190-IT-G,
2001-191-GST-G
BETWEEN:
JAMES
AXFORD,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
McArthur
J.
[1]
These are appeals heard on common evidence from assessments by
the Minister of National Revenue under the director's
liability provisions of the Income Tax Act and the
Excise Tax Act. The Appellant was assessed $19,152 for
non-remitted source deductions and $25,943 in respect of
non-remitted goods and services tax, both amounts owing by Axford
Consulting Inc. (the Corporation).
[2]
The parties filed an Agreed Statement of Facts, which provides as
follows:
1.
The Appellant was at all material times an individual resident in
Canada.
2.
The Appellant became the sole director of Axford Consulting Inc.
(the "Corporation") on October 15, 1983. He continued
as sole director until his resignation on March 1,
1998.
3.
Throughout the period October 15, 1983 to March 1, 1998, the
Corporation operated a home siding and renovation
business.
4.
The Corporation ceased its operations in August of
1998.
5.
The Corporation failed to remit to the Receiver General of Canada
(the "Receiver General") source deductions of its
employees in the amount of $15,969.11, which were owing pursuant
to section 153 of the Income Tax Act. Schedule B of the
Reply to Notice of Appeal 2001-190(IT)G herein, ("the tax
Reply"), accurately sets out the non-remitted amounts as
well as the corresponding periods of time from which they
arose.
6.
The Corporation was assessed for the non-remitted source
deductions as well as corresponding interest and penalties
(cumulatively the "tax amounts owing"), on November 10,
1997, December 8, 1997, June 4, 1998, July 8, 1998, September 1,
1998 and October 29, 1998 as also set out in Schedule B of the
Tax Reply.
7.
The Corporation was liable to pay the tax amounts owing but
failed to remit these amounts except as described in Schedule B
of the Tax Reply.
8.
A certificate for the Corporation's liability was registered
in the Federal Court under section 223 of the Act and
execution for the amount of the liability was returned
unsatisfied in whole on September 28, 1999.
9.
By Notice of Assessment dated October 28, 1999 the Appellant
was assessed in the amount of $19,152.97 as prescribed by
subsection 227.1(10) of the Income Tax Act, for
failure of the Corporation to pay the tax amounts
owing.
10.
The Corporation filed GST returns and reported net income tax
from its commercial activities for the reporting periods set out
in Schedule C of the Reply to Notice of Appeal 2001-191(GST)G
herein, (the "GST Reply").
11.
For the reporting periods as set out in Schedule C of the GST
Reply, the Corporation did not remit to the Receiver General, on
or before the date on which the remittances were required to be
made, the positive amounts of net tax owing to the Receiver
General.
12.
The Corporation was issued assessment notices on May 23, 1997 for
the reporting periods ending September 30, 1996, December 31,
1996 and March 31, 1997, on October 31 1997 for the reporting
period ending June 30, 1997, and on October 9, 1998 for the
reporting periods ending December 31, 1997 and March 31,
1998.
13.
The Corporation failed to remit to the Receiver General the
following amounts of net tax for the following reporting
periods:
a)
31-March-97
0.00
b)
30-June-97
$17,919.57
c)
31-Dec-97
$ 2,384.77
14.
The Corporation failed to pay penalties and interest relating to
the net tax referred to in the previous paragraph, (the "GST
amounts owing"), as required by the provisions of the
Excise Tax Act.
15.
The Appellant was assessed by Notice of Assessment dated October
29, 1999 under subsection 323(1) of the Excise Tax Act in
the amount of $25,943.03 representing the balance of the GST
amounts owing on that date, for failure of the Corporation to
remit GST amounts owing.
16.
On or about March 1, 1998, the Appellant arranged to sell the
Corporation to Mr. Mark Baskin.
17.
On or about March 1, 1998, certain property in the City of Red
Deer, (the "property") was sold for $225,000.00,
pursuant to a resolution of the Corporation dated February 28,
1998 and signed by the Appellant.
18.
The proceeds from the sale of the property were distributed
pursuant to an Order for payment of the Corporation dated March
4, 1998 signed by the Appellant and Mr. Mark Baskin.
[3]
The issue in these appeals is whether the Appellant exercised the
degree of care, diligence and skill that a reasonably prudent
person in comparable circumstances would have exercised, to
prevent the failure by the Corporation to remit source deductions
and GST pursuant to subsection 227.1(3) of the Income Tax
Act and subsection 323(3) of the Excise Tax Act. James
Axford testified on his own behalf and Mark Baskin testified for
the Respondent.
Facts
[4]
The Appellant has been a successful, self-employed entrepreneur
for over 25 years. He has a grade 8 formal education but is
well-educated in the school of hard knocks, to use his
expression. After being an employee in a hardware store, he
eventually purchased it through a Corporation. He subsequently
was the controlling mind of several corporations. The Corporation
operated a home siding and renovation business from 1983 to
August 1998. The Appellant sold his shares in the Corporation to
Baskin and resigned as director in March 1998. The Corporation
appears to have been successful at least until 1996.
[5]
Up until 1997, the Appellant took a full-time active role in the
Corporation. He was involved in all facets of the business
although his expertise was primarily sales. His evidence was
focused on establishing that he understood little to nothing in
the field of accounting and he hired competent people to do the
bookkeeping, accounting and office management.
[6]
In 1995, the Appellant on behalf of the Corporation hired Mark
Baskin to replace the Corporation's existing bookkeeper. Mark
was a self-trained bookkeeper with general office management
experience. It was a two-person office overseen by the Appellant
who no doubt was the boss. He was in the office almost daily up
to January 1997 overseeing the operation although, by far, most
of his time was devoted to sales.
[7]
In 1996, he got involved in an operation, Usana, a pyramid
marketing business which took up most of his time and attention.
In January 1997, he directed Baskin to take over the day-to-day
office management of the Corporation. He immersed himself into
his new business spending much of his time on the road developing
customers in Saskatchewan, Alberta and British Columbia. Usana
became very profitable for him while the Corporation continued to
struggle.
[8]
Mr. Baskin was an impressive witness and I accept his evidence
over that of the Appellant when their versions are in
conflict.
[9]
The Appellant portrayed himself as a salesman with no
understanding of bookkeeping and finances. He testified that he
hired Mr. Baskin to look after the financial affairs because he
did not understand it nor could he interpret a financial
statement. He added that he knew nothing of employee deductions,
GST filings and remittances. While the Corporation cheques
required his signature, he signed them in blank for Mr.
Baskin.
[10] In my
finding of facts, I reject part of the Appellant's evidence.
In attempting to recall the past, he saw events in the light of
his present-day interest. I believe this was done in part
unconsciously, but for the most part, deliberately.
[11] The parties
further agree to the following: (i) the Minister complied with
subsection 323(2) of the Excise Tax Act and with
subsection 227.1(2) of the Income Tax Act; (ii) at all
material times, the Appellant was the sole director of the
Corporation and he was assessed within the time periods set out
in both Acts; and (iii) it was properly assessed for
failure to remit GST and source deductions.
[12] Again, the
question is whether the Appellant exercised due diligence to
prevent the Corporation's failure to remit payroll deductions
and GST. There are many relevant instances of conflicting
evidence from the two witnesses. I will attempt to refer to some
of those.
(a)
The Appellant stated and implied that he had little or nothing to
do with office management particularly after January 1, 1997. He
stated that he was very seldom in the office and gave Mark Baskin
a free hand to do everything.
(b)
Baskin stated that from the outset of his employment in 1995, the
Appellant was in the office almost everyday until January 1997.
From then until March 1998, the Appellant was seldom in the
office but telephoned Mr. Baskin almost everyday to be brought
up-to-date. He was aware of the day-to-day operation.
(c)
The Appellant testified that the Corporation was operating
smoothly and paying its expenses up to the sale of his shares to
Mr. Baskin in March 1998. He added that he had no idea that the
Corporation was not meeting its financial obligations and the
first time he heard that money was owing to Revenue Canada was
when he was assessed in October 1999.
(d)
Baskin was not present when the Appellant gave his evidence and
he related that the Corporation began having difficulty meeting
its obligations in mid-1996 when it appears to have first failed
to remit payroll deductions and GST. The Appellant instructed Mr.
Baskin to pay in priority: (i) the Appellant's personal
credit card bills; (ii) insurance; (iii) his mother's
nursing home; and (iv) suppliers. Mr. Baskin added that in 1997,
the Appellant was well aware that the Corporation was not paying
its suppliers and in particular, Mr. Murphy, a long-time,
close friend of the Appellant. The Corporation owed Murphy at
least $60,000 and he was very concerned. Both Murphy and his wife
spoke to the Appellant. The Appellant made no mention of the
Murphy indebtedness.
[13] Many
suppliers would only sell to the Corporation on a cash on
delivery basis. Mr. Baskin recalls specifically discussing the
Revenue Canada remittance problems they were having and advising
the Appellant that he had received a call or calls from Revenue
Canada demanding immediate payment. The Appellant advised Mr.
Baskin to do what he could. Mr. Baskin recalls another
conversation he had with the Appellant in February 1998 when they
were discussing the purchase and sale of shares. He advised the
Appellant that arrangement for the arrears to Revenue Canada had
to be made before any sale could be completed. The Appellant gave
Baskin the authority to negotiate an arrangement for payments to
Revenue Canada. Baskin also spoke of the considerable efforts the
Appellant made to raise funds for the troubled Corporation in
1997, including considering a second mortgage on his home and
finally settling on a high rate risk capital loan of $30,000. The
Appellant did not mention this in his evidence.
[14] Perhaps the
most startling contrast in their versions of events was the
following. The Appellant testified that to make the purchase
easier for Mr. Baskin, he would take over the warehouse real
property personally. He believed it was owned by the
Corporation. At this point, he
stated that a supplier out of the blue, made an acceptable offer
to purchase the commercial building.
[15] Mr. Baskin
stated that John Murphy and his wife, Jean, had been pressing the
Appellant to settle the large debt. The Appellant made
considerable efforts to satisfy his friend and finally, he
approached Murphy in February 1998 with an offer to sell the real
property to him for $225,000. The agreement reflected a deposit
of approximately $40,000. Mr. Murphy did not pay the deposit. The
Corporation's debt to Murphy was reduced by the amount of the
deposit. Baskin stated that this was a solution the Appellant
came up with to resolve the issue with his friends. This was the
largest debt outstanding of the Corporation. The remaining
proceeds of the sale were paid as follows: the payout is
approximately $170,000 leaving $55,000 unaccounted for. This is one of several
instances where I find that the Appellant deliberately attempted
to mislead the Court.
[16] The
Appellant portrayed himself as an outside director not knowing
that the Corporation was not up-to-date with required remittances
to Revenue Canada. In accepting Baskin's evidence, I have no
difficulty in finding he was an inside director. I do not accept
the Appellant's contention that financial statements were of
no use to him because he could not understand them. I accept
Baskin's evidence that the Appellant went over the
Corporation's statements with his accountants annually and he
had Baskin prepare interim statements that he took to the bank
during the latter part of 1997 seeking financing. The Appellant
knew or ought to have known that in late 1997 and early 1998, the
Corporation was on the brink of bankruptcy. There is no doubt he
was aware of the remittance arrears prior to the sale of his
shares.
[17] During
cross-examination, Baskin stated that the Corporation had other
directors prior to 1996. These directors were salesmen for the
Corporation. Appointing them directors was part of a plan to
avoid paying Worker's Compensation for them. Apparently, it
did not work.
Analysis
[18] The due
diligence subsections of both the Income Tax Act and the
Excise Tax Act, 227.1(3) and 323(3) are identical. The
cases that consider either provision are interchangeable. Both
parties referred to Soper v. Canada which case is of
great assistance in determining if a due diligence defence has
been established. Robertson J. described at page 5409 what gave
rise to imposition of director's liability:
...
Faced with a choice between remitting such amounts to the Crown
or drawing on such amounts to pay key creditors whose goods or
services were necessary to the continued operation of the
business, corporate directors often followed the latter course.
Such patent abuse and mismanagement on the part of directors
constituted the "mischief" at which section 227.1 was
directed ...
Liability
is not dependent simply on whether a person is an inside or
outside director. At page 5417, he went on to say:
... it
is difficult to deny that inside directors, meaning those
involved in the day-to-day management of the company and
who influence the conduct of its business affairs, will have the
most difficulty in establishing the due diligence defence. For
such individuals, it will be a challenge to argue convincingly
that, despite their daily role in corporate management, they
lacked business acumen to the extent that that factor should
overtake the assumption that they did know, or ought to have
known, of both remittance requirements and any problem in this
regard. In short, inside directors will face a significant hurdle
when arguing that the subjective element of the standard of care
should predominate over its objective aspect.
[19] An inside
director ought to have known if the corporation was facing
financial difficulties. Robertson J. suggests that when a
director knows of financial difficulties, he or she has a duty to
take positive action to prevent a failure to make remittances. An
inside director has a difficult time to establish not knowing
there were financial problems.
[20] I find that
the Appellant was involved in the Corporation's affairs on
almost a daily basis. It was his Corporation. Certainly he was an
inside director. He was told of the Revenue Canada remittance
delinquency. He struggled to obtain interim financing. He is a
capable businessman with a wealth of experience as a sale
director of five or six personal corporations over the years. On
the balance of probabilities, he must have known of its financial
difficulties. He, over anyone else, had the most influence on the
priority of payments. At page 5418 of Soper, Robertson J.
states:
In my view,
the positive duty to act arises where a director obtains
information, or becomes aware of facts, which might lead one to
conclude that there is, or could reasonably be, a potential
problem with remittances. ...
[21] Applying
this view, the Appellant was under a positive duty to act,
commencing at the latest, in October 1997 when Baskin advised him
that a representative of Revenue Canada was demanding payment of
remittance arrears. The Appellant took no action other than
directing Baskin to do the best he could. At page 5420 of
Soper, Robertson J. added:
...
this case concerns an experienced businessman who took no
positive steps to ensure remittance of employee withholdings
despite the fact that he should have been alerted to a potential
problem in that regard. He did absolutely nothing but close his
eyes. As a consequence, it can hardly be said that the taxpayer
in this case exercised, in his capacity as director of RBI, the
degree of care, skill and diligence required by the
Act.
This
statement applies equally to the present Appellant.
[22] What Mr.
Axford did when he knew of the non-remittances was inadequate for
the purpose of discharging the burden imposed on him by
subsection 227.1(3) of the Income Tax Act and by
subsection 323(3) of the Excise Tax Act. It is not
sufficient to direct the bookkeeper to "do the best you
can" and then impose personal debt priority payments for the
cash-starved Corporation and ignore Revenue Canada.
[23] For the
above reasons, the appeals are dismissed, with costs.
Signed at
Ottawa, Canada, this 12th day of November, 2002.
J.T.C.C.
COURT FILE
NO.:
2001-190(IT)G and 2001-191(GST)G
STYLE OF
CAUSE:
James Axford and Her Majesty the Queen
PLACE OF
HEARING:
Calgary, Alberta
DATE OF
HEARING:
October 24, 2002
REASONS FOR
JUDGMENT BY: The Honourable Judge C.H.
McArthur
DATE OF
JUDGMENT:
November 12, 2002
APPEARANCES:
Counsel
for the Appellant: Jonathan D. Warren
Counsel
for the
Respondent:
Dan Misutka
COUNSEL OF
RECORD:
For the
Appellant:
Name:
Jonathan D. Warren
Firm:
Warren Tettensor
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-190(IT)G
BETWEEN:
JAMES
AXFORD,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on common evidence with the appeal of James Axford
(2001-191(GST)G), on October 24, 2002, at Calgary,
Alberta, by
the
Honourable Judge C.H. McArthur
Appearances
Counsel
for the
Appellant:
Jonathan D. Warren
Counsel
for the
Respondent:
Dan Misutka
JUDGMENT
The appeal from the assessment of tax made under section 227.1 of
the Income Tax Act, notice of which is dated October 28,
1999 and bears number 11823 is dismissed, with
costs.
Signed at
Ottawa, Canada, this 12th day of November, 2002.
J.T.C.C.
2001-191(GST)G
BETWEEN:
JAMES
AXFORD,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on common evidence with the appeal of James
Axford
(2001-190(IT)G), on
October 24, 2002, at Calgary, Alberta, by
the
Honourable Judge C.H. McArthur
Appearances
Counsel
for the
Appellant:
Jonathan D. Warren
Counsel
for the
Respondent:
Dan Misutka
JUDGMENT
The appeal from the assessment of goods and services tax made
under section 323 of the Excise Tax Act, notice of which
is dated October 28, 1999 and bears number 06322 is dismissed,
with costs.
Signed at
Ottawa, Canada, this 12th day of November, 2002.
J.T.C.C.
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