Date: 20020218
Docket: 2001-393-GST-I
BETWEEN:
JOHN ARIE VANDERPOL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Amended Reasons for Judgment
Sarchuk J.
[1] This is an appeal by John Arie
Vanderpol from a goods and services tax assessment no. 31217 made
pursuant to subsection 323(1) of the Excise Tax Act (the
"Act") in respect of the failure of Allard's
Home Centre Ltd. (carrying on business as Jonathan Interiors)
(the "company") to file GST returns and remit the
appropriate tax for the reporting periods from September 1, 1994
to June 30, 1995.
[2] The following facts are not in
dispute. The company was incorporated in the province of British
Columbia on March 4, 1976. It was registered under Part IX
of the Act effective January 1, 1991 and was assigned a
GST registration number. As such it was required to file its GST
returns monthly. It operated a retail furniture store and
provided in-home decorating services under the name Jonathan
Interiors and collected or was required to collect GST on its
taxable supplies. Prior to January 1, 1991, the Appellant became
a director of the company and at all times material to this
proceeding continued to act both as director and officer of the
company.
[3] The company failed to file GST
returns for the reporting periods from September 1, 1994 to June
30, 1995. On or about July 18, 1995, it made a proposal to its
creditors under the Bankruptcy and Insolvency Act (the
proposal).[1] At
that time, the company was in default of its filing and
remittance obligations under the Act. On September 6,
1995, the creditors defeated the proposal deeming the company to
have made an assignment into bankruptcy as of July 18, 1995.
Following defeat of the proposal, the Royal Bank, which had a
general security agreement over all of the company assets,
appointed Earl Sands, a licensed trustee in bankruptcy, to act as
a receiver.
[4] By notices of assessment issued on
September 20, 1995, the Minister of National Revenue
("Minister") assessed the company in the amount of
$66,954.17 representing estimated tax, interest and penalties in
respect of the company's failure to file and remit net tax as
required under the Act for the reporting periods from
September 1, 1994 to May 31, 1995.[2] On the same date, the Minister filed
a proof of claim with the trustee in bankruptcy for the amount of
$65,880.31 in respect of unremitted GST owing by the company for
the periods from September 1, 1994 to July 18, 1995.[3]
[5] In October 1995, the receiver,
Sands, asked Revenue Canada for assistance in reviewing the
records to enable him to fulfil his responsibility to file the
requisite GST returns for the periods September 1, 1994 to July
18, 1995. Colleen J. Browne was assigned to the task. She
testified that their examination of the records disclosed that
the first four returns for September, October, November and
December, 1994 had been prepared by someone and formed part of
the corporate records. Those returns were accepted as prepared.
With respect to the period from January to July, they reviewed
what documents were available in an attempt to determine the
total GST payable as well as the total input tax credits (ITCs)
allowable. At the conclusion of this exercise, Sands signed off
on each of the pre-bankruptcy returns and on October 31,
1995, the company's GST returns were filed for the reporting
period September 1, 1994 to July 18, 1995. Total net tax of
$172,128.34 was reported.[4] As a result of the foregoing on March 19, 1996, the
Minister submitted an amended proof of claim to the trustee in
bankruptcy for the amount of $177,806.62 in respect of the
company's liability for unremitted GST.[5]
[6] It is not disputed that the
Minister was an unsecured creditor and that ultimately, the
trustee in bankruptcy reported that the administration of the
company's bankruptcy was complete and that there were no
funds available to issue a dividend to the Minister. The company
did not object to the assessment by the Minister for unremitted
GST, interest and penalties. In due course, the assessment made
pursuant to subsection 323(1) of the Act against the
Appellant as director followed.
Appellant's position
[7] (a)
The Appellant contends that paragraph 323(2)(c) of the
Act provides that a director of a corporation is not
liable under subsection 323(1) where a corporation has made an
assignment under the Bankruptcy and Insolvency Act unless
the corporation's liability referred to in subsection 323(1)
has been proven within six months after the date of its
assignment. The Appellant's submission is that the phrase
"proved within six months" set forth in paragraph
323(2)(c) is to be determined having regard to the
provisions of and requirements of the Bankruptcy and
Insolvency Act. The Appellant concedes that the Respondent
submitted a proof of claim to the company's trustee in
bankruptcy within six months of the date of its deemed assignment
into bankruptcy, but says that such proof of claim, which was in
the amount of $65,880.31, did not meet the requirements of the
Bankruptcy and Insolvency Act. Specifically, the
Appellant pleads that the Respondent's Proof of Claim was
deficient in that:
(i) it did not include a Notice
of Assessment or was based on an arbitrary assessment; and
(ii) in preparing same, the
collections officer did not have knowledge of "all the
circumstances connected with the claim" notwithstanding his
assertion to the contrary.
(b) The Appellant also pleaded that
the proof of claim was, by its terms, "subject to contingent
liability" and therefore could not be treated as a proven
claim until properly assessed by the Respondent or made subject
to a determination by the trustee in bankruptcy under subsection
135(1.1) of the Bankruptcy and Insolvency Act.
(c) In the alternative, the Appellant
says and the fact is that the amount of tax, net tax, rebate,
interest and penalty of the company has not been properly
determined by the Respondent.
Analysis
[8] The relevant provision of the
Bankruptcy and Insolvency Act is subsection 124(4)
which reads:
124(4) The proof of claim shall contain or refer to a
statement of account showing the particulars of the claim and any
counter-claim that the bankrupt may have to the knowledge of the
creditor and shall specify the vouchers or other evidence, if
any, by which it can be substantiated.
I am satisfied that the proof of claim filed by Revenue Canada
does refer to a statement of account showing the particulars of
the claim.[6] With
respect to the Appellant's assertion that the proof was
deficient because it did not include the assessment, there is no
requirement in the Bankruptcy and Insolvency Act that a
notice of assessment be attached. Furthermore, with respect to
the Appellant's submission that it was deficient because it
followed an arbitrary assessment, reference must be made to
subsection 299(1) of the Act which provides:
299(1) The Minister is not bound by any return,
application or information provided by or on behalf of any person
and may make an assessment, notwithstanding any return,
application or information so provided or that no return,
application or information has been provided.
299(2) Liability under this part to pay or remit any
tax, penalty, interest or other amount is not affected by an
incorrect or incomplete assessment or by the fact that no
assessment has been
made.
(emphasis added)
It is settled law that an arbitrary assessment like any other
assessment establishes a debt legally enforceable pursuant to the
Act. As well, the evidence before me establishes that in
this particular situation it was quite appropriate for Revenue
Canada to have analysed the taxpayer's history of returns and
made an arbitrary assessment on that basis.
[9] The Appellant's argument that
the collection officer did not have knowledge of "all the
circumstances connected with the claim" must also fail.
Aside from the fact that no evidence was adduced to support the
position advanced, the fact is that on the date the proof of
claim was submitted by the collection officer, an assessment had
been issued against the company. The amount assessed is identical
to the amount referred to in the statement of account attached to
the proof of claim. The logical conclusion is that the collection
officer was aware of the assessment and the fact that it
represented an amount due and owing to the Crown.
[10] With respect to the Appellant's
submission that the Minister's claim was not a "proven
claim", I note that subsection 135(1.1) of the Bankruptcy
and Insolvency Act was added by amendment 1997 c.12 s. 89(1)
and (2) and applies to bankruptcies of which proceedings are
commenced after September 1997. Thus the section and the
Appellant's pleading in this regard is not applicable to the
present appeal. Had I ruled otherwise I would have found that the
company's debt for unremitted taxes, penalty and interest was
not in fact a contingent liability. In Wawang Forest Products
Ltd. v. The Queen,[7] the Court observed:
The generally accepted test for determining whether a
liability is contingent comes from Winter and Others
(Executors of Sir Arthur Munro Sutherland (deceased)) v. Inland
Revenue Commissioners, [1963] A.C. 235 (H.L.), in which Lord
Guest said this (at page 262):
I should define a contingency as an event which may or may not
occur and a contingent liability as a liability which depends for
its existence upon an event which may or may not happen.
...
Returning to the Winter test, the correct question to
ask, in determining whether a legal obligation is contingent at a
particular point in time, is whether the legal obligation has
come into existence at that time, or whether no obligation will
come into existence until the occurrence of an event that may not
occur. ...
The fact is that the assessment created a legal obligation
which was in existence at the point of time the proof of claim
was filed.
[11] The last issue relates to the amount of
tax payable. The evidence before the Court is that the arbitrary
assessment dated September 20, 1995 in the amount of $65,880.31
was based on the estimated tax the company would have reported
for that period of time. Subsequently, based on the returns filed
by the trustee the net tax due was amended to $172,128.34.[8] During the
objection process[9] further documentation was provided to the auditor. As
a result, additional ITC's of $46,154 were allowed and the
company was reassessed tax in the amount of $131,651.72. Prior to
trial, further consideration was given by the Respondent to
Canada Customs K84 statements with the result that a further
$102,410.70 in ITCs was allowed. According to counsel for the
Respondent as a result of the foregoing, the tax, interest and
penalty due and payable by the company (and thus the liability of
the directors) is $73,869.32.
[12] With the exception of the tax relating
to the periods from June 1 to June 30 and July 1 to July 18,
1995, the Appellant agrees with the amounts of tax assessed. He
argues that the returns and remittances should (and only could)
have been attended to by Deane Gurney who had been appointed to
act as monitor during the period July 18 to September 6, 1995.
The Appellant's position is that once Gurney was appointed
the directors lost control of the finances and, therefore, the
failure to file the returns and make the remittances in the
amounts of $6,111.61 and $10,807.55 for those periods cannot be
attributed to them.
[13] The evidence does not support the
Appellant. Gurney described his role under the Bankruptcy and
Insolvency Act as different than that of a receiver in
bankruptcy. More specifically, he was required to monitor the
company's activities. To do so, he instructed that a daily
cash report be set up which set out the daily receipts as well as
the disbursements and which included all cheques written during
that period of time. This list, prepared by the company
accountant, Harold Jensen, was examined to ascertain whether
there were any unusual items. Gurney noted that no controls were
placed by him on the company's ability to write cheques nor
did he have any power to interfere with the cheques being
written. He indicated that if he concluded that a particular
cheque should not be issued, he as trustee would say so and if
the company declined the matter would have been reported to the
creditors and the superintendent in bankruptcy. Gurney also
testified that at a meeting he specifically told the directors
that they remained responsible for the appropriate filings and
remittances and that they might be personally liable if they did
not. The evidence does not support the Appellant's position
that the directors had lost control during this period.
Accordingly, the amounts of $6,111.61 and $10,807.55 were
properly included in the calculation of the tax due and payable
by the directors.
Director's Liability
[14] In the course of his examination and
cross-examination of the witnesses, the Appellant elicited
evidence clearly directed at the due diligence issue. He made
particular reference to the role of the company's accountant
Jensen and the fact that he was competent in the performance of
his duties and could be relied upon "by a director like
myself" to have prepared the documents properly and "to
have filed all the returns". The Appellant also directed his
examination of Gurney to establish that during the period July 18
to September 16, 1995, the Royal Bank as primary creditor had
control and was "restrictive in the ability" of the
company "to update the GST payments".[10]
[15] The Appellant in his Notice of Appeal
did not raise the issue of due diligence, and given the fact that
it had been drafted and filed by his solicitor, it cannot be
argued that it was an inadvertent oversight. Counsel for the
Respondent submitted that as a result of the Appellant's
failure to do so in his pleadings the issue was not canvassed in
his examination and cross-examination of witnesses. This, he
argued, was sufficient to dispose of this aspect of the appeal
without further comment. I am unable to agree. Although the
Notice of Appeal did not directly raise the issue, it is arguable
that the sections of the Act giving rise to the assessment
in a sense themselves raise the issue. They read:
323(1) 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 or jointly and severally liable,
together with the corporation, to pay that amount and any
interest thereon or penalties relating thereto.
323(3) A director of a corporation is not liable for a
failure under subsection (1) where the director exercise a degree
of care, diligence and skill to prevent the failure that a
reasonably prudent person would have exercised in comparable
circumstances.
In addition, I cannot ignore the fact that the Reply to the
Notice of Appeal specifically refers to the due diligence issue
in clear and unambiguous language.[11]
Analysis
[16] With respect to subsections 323(1) and
323(3), the Federal Court of Appeal in Smith v. The
Queen,[12]
made the following observations:
The Soper decision, supra, established that the
standard of care described in the statutory due diligence defense
is substantially the same as the common law standard of care in
Re City Equitable Fire Insurance Co., [1925] Ch. 407 (Eng.
C.A.). It follows that what may reasonably be expected of a
director for the purposes of s. 227.1(1) of the Income Tax
Act and s. 323(1) of the Excise Tax Act depends upon
the facts of the case, and has both an objective and a subjective
aspect.
The subjective aspect of the standard of care applicable to a
particular director will depend on the director's personal
attributes, including knowledge and experience. Generally, a
person who is experienced in business and financial matters is
likely to be held to a higher standard than a person with no
business acumen or experience whose presence on the board of
directors reflects nothing more, for example, than a family
connection. However, the due diligence defense probably will not
assist a director who is oblivious to the statutory obligations
of directors, or who ignores a problem that was apparent to the
director or should have been apparent to a reasonably prudent
person in comparable circumstances (Hanson v. Canada
(2000), 261 N.R. 79, [2000] 4 C.T.C. 215, 2000
DTC 6564 (F.C.A.)).
In assessing the objective reasonableness of the conduct of a
director, the factors to be taken into account may include the
size, nature and complexity of the business carried on by the
corporation, and its customs and practices. The larger and more
complex the business, the more reasonable it may be for directors
to allocate responsibilities among themselves, or to leave
certain matters to corporate staff and outside advisers, and to
rely on them.
The inherent flexibility of the due diligence defense may
result in a situation where a higher standard of care is imposed
on some directors of a corporation than on others. For example,
it may be appropriate to impose a higher standard on an
"inside director" (for example, a director with a
practice of hands-on management) than an "outside
director" (such as a director who has only superficial
knowledge of and involvement in the affairs of the
corporation).
[17] It was also observed in Smith
that "in certain circumstances, the fact that a corporation
is in financial difficulty and thus may be subject to a greater
risk of default and tax remittances than other corporations, may
be a factor that raises the standard of care. For example, a
director who is aware of the corporation's financial
difficulty and who deliberately decides to finance the
corporation's operation with unremitted source deductions may
be unable to rely on the due diligence defence (Ruffo v.
Canada, 2000 DTC 6317 (F.C.A.)). In every case, however, it
is important to bear in mind that the standard is reasonableness,
not perfection".
[18] In the present appeal, it is obvious
that the company had been in financial difficulties for a
substantial period of time and that commencing in August 1994, it
stopped filing goods and services tax returns and making the
appropriate remittances. It is also a fact that the first four
returns for September, October, November and December, 1994 had
been prepared, likely by the accountant Jensen, and were in the
corporate records. The subsequent returns were neither prepared
nor remitted until after the bankruptcy occurred when the returns
were provided by the trustee. That course of conduct suggests a
deliberate attempt to keep the company alive by using the
remittances to satisfy creditors. Furthermore, although an effort
was made by the Appellant to deflect responsibility onto the
shoulders of Jensen, it is clear that the Appellant as an inside
director, and experienced, knowledgeable and active in the
company's business, should have been, and in my view was
aware, that the company was not, for an extended period, making
its remittances.
[19] The due diligence required by the
Act is to "prevent the failure to remit". No
evidence whatsoever was presented to suggest that any steps had
been taken or even considered to prevent the default. In fact,
the evidence suggests that the failure to remit was a conscious
and deliberate decision made by the directors. I have
concluded that the evidence falls short of establishing that the
standard of care exercised by the Appellant was that what may
reasonably be expected of him for the purposes of subsection
323(1) of the Act.
[20] For the above reasons, the
appeal is allowed on the basis that the assessment in the
amount of $131,651.72 is varied and reduced to
$73,869.32.
Signed at Ottawa, Canada, this 18th day of February,
2002.
J.T.C.C.
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