[OFFICIAL ENGLISH TRANSLATION]
Date: 20020715
Docket: 2000-3477(GST)I
BETWEEN:
JEAN-MARIE PLAMONDON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers, J.T.C.C.
[1] The appellant is appealing from an
assessment made under the Excise Tax Act (the
"Act") with respect to the Goods and Services Tax ("GST").
The issue dealt with in this appeal is whether the appellant,
Jean-Marie Plamondon, is required to pay an amount of net tax
under subsection 323(1) of the Act with related interest
and penalties given the failure of Bar les yeux bleus inc.
to pay the tax. The assessment dated June 8, 1999, covers the
period from June 30, 1996, to October 31, 1997. It was confirmed
by the Minister of National Revenue (the "Minister") on May
16, 2000.
Facts
[2] The appellant, Jean-Marie
Plamondon, is 71 years old and lives in St-Raymond, Quebec.
He has been retired for six years, that is, since the transfer of
his car business to his son. He had operated that business with
other shareholders since 1970 and, later, with his son alone
until he sold him the business. Before operating this business,
he ran a service station. He managed to raise the sales figure in
that business from $100,000 in the early 1970s to more than $4 to
$5 million in 1995 and 1996.
[3] When he first retired in 1996,
after he sold his interest in that business, he invested part of
his money in a corporation known as Bar les yeux bleus
inc. The corporation operated a bar in Drummondville, Quebec,
about 160 kilometres from his residence. The corporation belonged
to four shareholders, including one Daniel Côté, who
was the brother-in-law of the appellant's son. The appellant made
the acquaintance of Daniel Côté in 1996 and, on July
2 of that year, the appellant and Daniel Côté signed
an agreement to purchase the shares from the other three
shareholders in such a proportion that the appellant and Daniel
Côté became, respectively, holders in equal shares
of all of the shares issued by the corporation Bar les yeux
bleus inc.
[4] The purchase price of these shares
was symbolic. This was undoubtedly due to the fact that the
financial statement attached to the agreement for the purchase of
the shares indicated that the corporation in question, as at
December 31, 1995, had realized a loss of $51,522. In an excerpt
from the minutes of a directors' meeting of the corporation dated
June 7, 1996, it can be read that the appellant was appointed
director on that date, that he held the position of
secretary-treasurer, and that Daniel Côté was the
president.
[5] In the agreement, the new
shareholders agreed to see to it that the shareholder-vendors
were reimbursed by the corporation for what it owed them. The
terms of the repayment were set out for this purpose in the
agreement and included a payment of $18,000 on signing. In
addition, the agreement acknowledged that tax expenses were due
and owing by reason of a deficit arising in the final months of
operation. No amount was indicated, however.
[6] According to the appellant, he and
Mr. Côté were to make equal investments in the
corporation but this did not happen. At the start of his
participation, the appellant invested almost $35,000 in the
corporation. Subsequently, he made a series of investments
totalling $108,665.30 at various intervals. Part of this money
came from his registered retirement savings plan. Those
investments in the corporation allowed it to meet its commitments
to its creditors, including the Minister.
[7] The appellant testified that he
embarked on this venture to assist Daniel Côté. He
thought that tighter management, cutting costs and increasing
sales would ensure a better return. He also thought that Daniel
Côté had the skills required to achieve that
objective because the appellant did not take part in the
day-to-day management of the corporation. In fact, the Bar les
yeux bleus inc. was managed and directed by Daniel
Côté. The appellant testified that everything was
going well until September 1996 when the ministère du
Revenu du Québec (the MRQ), the CSST and SOCAM
(copyrights) claimed what was owed to them.
[8] The corporation's operating funds
were not sufficient to pay the amounts owed to the government
agencies and the appellant had to make further investments so
that the corporation could meet all of its obligations. The
appellant testified that he had frequently contacted the
corporation's accountant, Josée Béchard, to inquire
how the corporation was doing. She reassured him, saying that
things were tight but that the corporation would pull through.
The appellant also went to see Ms. Béchard several times.
He relied on her to assess the corporation's profitability. She
faxed him the house financial statements and, on the October 1996
statements, the amounts claimed by the MRQ, CSST and SOCAM were
clearly less than what they ultimately demanded. Ms.
Béchard was a member of an accounting firm that was
independent from the corporation and her mandate was to keep the
corporation's books and file the GST and QST returns on a monthly
basis.
[9] The amounts owed to the MRQ
related to a debt that had arisen before the appellant purchased
the shares. The appellant knew that the GST and QST returns had
to be made every month and, according to him, they were prepared
by the accountant. In fact, he states that all of the returns
were filed because the corporation was invoiced by Ms.
Béchard for this work, as is shown in a set of invoices
for professional fees relating to the filing of GST returns from
July 1996 to July 1997 and produced in evidence as Exhibit
A-19.
[10] In December 1996, the appellant and
Daniel Côté met with the Minister's representatives
to negotiate, on behalf of the corporation, the terms and
conditions for the repayment of the debt. They agreed that an
initial payment of $1,300 would be made on January 23, 1997, and
that a series of eleven cheques of $2,500 each, cashable each
month thereafter, would be applied against the balance. The
appellant testified that, after December 1996, from time to time
the accountant made some verifications to ensure that the
internal cash corresponded to the information reported in her
monthly GST and QST returns. The GST returns produced in evidence
by the appellant concerned the months of February, March and May
of the year 1997, and the GST refund cheques produced in evidence
concerned the period from January to May 1997. According to
Pierre Lévesque, a tax collection officer with the
Department, GST returns were filed until June 1997. Even though
the appellant had cheque-signing authority for the GST repayment
cheques, the cheques were all signed by Daniel
Côté.
[11] On cross-examination, the appellant
reiterated his satisfaction with the corporation's performance as
reflected in the October 1996 financial statement. He stated that
it was the unanticipated invoice of $25,000 from the MRQ that had
disconcerted them. He said he had advised Daniel
Côté at that time to stop giving premiums to the
customers. His confidence in Daniel Côté was not
affected since the cause of the financial problems predated 1996.
He accordingly continued to rely on him. He stated, however, that
such confidence in others had already cost him $25,000, an amount
that he had invested in a restaurant belonging to his son-in-law,
which he had eventually lost.
[12] The corporation wound up its activities
in November 1997. Pierre Lévesque, tax collection officer,
explained what the Department had done to recover the amounts
owed by the corporation including for GST and QST. When he
received the file in February 1997, the corporation was late but
everything was settled as a result of the agreement of December
1996 and January 1997. Subsequently, there were no other late
payments. The agreement was respected, the monthly returns were
filed and the cheques were cashed until the end of the summer of
1997. Since the July and August 1997 returns had not been filed,
he proceeded with an application for security to put an end to
the agreement. He explained that the Department had obtained a
judgment against the corporation and had conducted an audit. A
new judgment against the corporation was obtained following the
audit, and the Department attempted unsuccessfully to seize the
corporation's assets.
[13] The Department's audit showed that the
corporation had not paid GST on the premiums offered to the
customers. Consequently, the amount of the GST owed increased
significantly.
[14] On cross-examination, counsel for the
appellant tried to cast doubt on the amount assessed by the
Department and, above all, on the period covered by the
assessment. He also wanted to raise doubts on the meaning the
notices of assessment and other documents could have had for the
corporation since the name of the corporation appearing on those
documents could give rise to some ambiguity. However, the
attempts of counsel for the appellant were unsuccessful. I am
satisfied that the Minister's assessment covers only the period
where the appellant was a director of the corporation, that the
judgment of the Federal Court was issued against the corporation
in question and that there were no more corporate assets to be
seized. The amount of the assessment and the amounts awarded by
the court against the corporation were not challenged by it, and
no evidence to the contrary was introduced.
[15] A number of documents reporting the
appellant's testimony and the actions of the Minister's officers
to recover the taxes owed by this corporation were submitted in
evidence. The Minister's position was excellently argued by legal
counsel in a memorandum on objection, which the appellant agreed
with, excepting of course the conclusions. A judgment of the
Court of Québec concerning the parties to the agreement to
purchase the shares was also filed. I am not bound by the
conclusions of fact set out in that judgment, but the parties
agreed to file them. I am aware of the difficulties experienced
by the appellant, especially in relation to Daniel
Côté.
Analysis
[16] The relevant statutory provisions
concerning the issue in dispute are found in section 323 of the
Act:
323. (1) Liability of directors - Where a
corporation fails to remit an amount of net tax as required under
subsection 228(2) or (2.3), the directors of the corporation at
the time the corporation was required to remit the amount are
jointly and severally liable, together with the corporation, to
pay that amount and any interest thereon or penalties relating
thereto.
323. (2) Limitations - A director of a corporation 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 316 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 subsection
(1) 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
receiving 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 subsection (1) has
been proved within six months after the date of the assignment or
receiving order.
[17] The appellant relies on the defence of
due diligence under subsection 323(3), which reads as
follows:
323. (3) Diligence - 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.
[18] In his submissions, counsel for the
respondent strongly emphasized the fact that the appellant was a
knowledgeable and experienced businessman. He added that the
appellant had been naïve to rely on the president, Daniel
Côté, and that he had done nothing to prevent the
failure to pay the net tax as required by the Act. I
believe that the appellant's decision to invest in that
corporation was definitely not prompted by what an experienced
and knowledgeable businessman normally looks for, that is, a
reasonable return resulting from the making of profits. The
corporation's financial statements at the time the shares were
acquired by the appellant hardly augured a profitable return.
There is no doubt that the appellant took a significant risk in
purchasing shares in that corporation. The agreement for the
purchase of shares left the door open to all kinds of surprises,
including unidentified and unquantified government charges, which
eventually dealt the fatal blow to what was already a precarious
undertaking. The fact that the business establishment was located
at 160 km from the appellant's residence, that the appellant was
retired and that the corporation had financial obligations to
meet and to pay on the signing of the agreement for the purchase
of the shares are all indications contributing to the risk. The
evidence has not clarified the reasons that led the appellant to
invest in the enterprise, except that Daniel Côté
was his son's brother-in-law.
[19] The appellant therefore chose to invest
in that corporation and he testified before us about his
confidence that Daniel Côté would make it
successful. He told us in fact that the return on investment was
adequate up until the corporation was informed that it owed
substantial amounts to the two Revenue departments, the CSST and
SOCAM. He was aware of the amount of these debts, which appeared
on the financial statements, but did not really realize the scope
of the amounts until after the shares were purchased. Despite all
this, the appellant personally intervened to settle this debt and
he negotiated a repayment agreement with the Department. In
addition, he made further investments in the corporation so that
it could meet its financial obligations. He became aware of the
corporation's difficulties in making its GST and other payments
in December 1996, or barely five months after becoming
shareholder and director.
[20] He testified that on several occasions
he had contacted Josée Béchard, an independent
accountant retained by the corporation, to inquire about the
corporation's financial status and to ensure that the GST and QST
returns were prepared, submitted and paid, and that the
corporation was meeting its financial obligations to all its
creditors.
[21] He continued to make personal and
regular investments, not only in the fall of 1996 but also in
1997, that is, from January to July and again in October 1997.
The corporation had in fact been invoiced by the accountant for
producing the corporation's GST returns beginning on the date
that the appellant's participation began until the cessation of
the business' activities. The appellant had therefore no reason
to suspect that Daniel Côté was not providing the
accountant with all the information needed to produce the GST and
QST returns. In fact, it was only after the audit by the
Department's auditors that he realized that the GST had not been
paid and that it primarily related to the premiums offered to the
customers by Daniel Côté.
[22] Because of his contacts with Daniel
Côté and the accountant, the accountant's
verification of the invoices and the regular investments that he
was making, the appellant was satisfied that the GST returns were
filed and that the remittances were made. The returns were in
fact produced and the net tax was paid up to the end of June
1997.
[23] I conclude that the appellant was an
outside director of the corporation, that he was a financial
backer and not the managing director. The liability of an outside
director was determined by Mr. Justice Robertson of the Federal
Court of Appeal in Neil Soper v. Her Majesty the Queen,
[1998] 1 F.C. 124. At pages 160 and 161, he describes
that obligation as follows:
Accordingly, an outside director cannot be required to go to
the lengths outlined above. As an illustration, I would not
expect an outside director, upon appointment to the board of one
of Canada's leading companies, to go directly to the
comptroller's office to inquire about withholdings and
remittances. Obviously, if I would not expect such steps to be
taken by the most sophisticated of business-persons, then I would
certainly not expect such measures to be adopted by those with
limited business acumen. This is not to suggest that a director
can adopt an entirely passive approach but only that, unless
there is reason for suspicion, it is permissible to rely on the
day-to-day corporate managers to be responsible for the payment
of debt obligations such as those owing to Her Majesty. This
falls within the fourth proposition in the City Equitable
case: see discussion supra, at page 146-147. The question
remains, however, as to when a positive duty to act arises.
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. Put differently, it is indeed
incumbent upon an outside director to take positive steps if he
or she knew, or ought to have known, that the corporation could
be experiencing a remittance problem. The typical situation in
which a director is, or ought to have been, apprised of the
possibility of such a problem is where the company is having
financial difficulties. For example, in Byrt (H.) v.
M.N.R., [1991] 2 C.T.C. 2174 (T.C.C.), an outside director
signed financial statements revealing a corporate deficit and
thus he knew, or ought to have known, that the company was in
financial trouble.
He adds at pages 162-163:
... In each case it will be for the Tax Court Judge to
determine whether, based on the financial information or
documentation available to the director, the latter ought to have
known that there was a problem or potential problem with
remittances. Whether the standard of care has been met, now that
it has been defined, is thus predominantly a question of fact to
be resolved in light of the personal knowledge and experience of
the director at issue.
[24] In the case at bar, the appellant did
not really become aware of the seriousness of the problem of the
corporation's payments until the fall of 1997, when the
Minister's officers informed him of the real amount of the
arrears, which were greater than what was indicated on the
financial statements at the time the shares were purchased. It is
at this time that he made arrangements to pay back the amounts
owed and personally invested the funds needed in the corporation
so that it could meet its obligations even though the debts had
arisen before he became a shareholder of the corporation.
[25] He checked with the accountant to
ensure that the GST returns were filed and that the tax was paid.
He was satisfied of this after communicating with the accountant
and Daniel Côté. The returns were indeed filed and
the taxes were paid. For the appellant, the question of the debt
was settled. It was only after the audit by the Minister's
officers that the issue of the GST payments on the premiums for
the customers was raised. The appellant's understanding of the
problem for the corporation with respect to the premiums was that
Daniel Côté had given out too many premiums. He
did not know that the GST on these premiums was not paid. The
accountant did not note this omission either.
[26] I conclude that the appellant was an
outside director without special knowledge of the activities of
this corporation; one who, by making regular investments, wanted
to ensure that the corporation met its financial obligations to
all the creditors, including payment of the GST. He undoubtedly
thought that in time, the corporation's performance would improve
and, during the brief time that he was a director, he had reason
to believe that the GST returns were filed and that the
remittances were made, which was the case. He discovered the
failure after the Department's audit. It was impossible for him
at that time to do anything to remedy the situation. For these
reasons, I conclude that the appellant exercised the degree of
care, diligence and skill to prevent the failure referred to by
the Act, that is, the failure to remit the net tax, that a
reasonably prudent person would have exercised in comparable
circumstances.
[27] The appeal is allowed, and the
Minister's assessment against the appellant is vacated.
Signed at Edmundston, New Brunswick, this 15th day of July
2002.
J.T.C.C.
Translation certified true
on this 21st day of October 2003.
Sophie Debbané, Revisor
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