Date: 20020118
Dockets: 2000-3119-IT-G,
2000-3561-GST-G
BETWEEN:
PETER WOO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Rowe, D.J.T.C.C.
[1]
By Notice of Assessment No. 32950 dated June 23, 1999, the
Minister of National Revenue (the "Minister") assessed
the appellant for net goods and services tax (GST) collected but
not remitted by JPT Enterprises Ltd. (JPT) in the amount of
$80,907.00 together with penalties and interest relating thereto.
The Minister issued the assessment on the basis the appellant was
a director of JPT at all material times and was therefore liable
for the unpaid tax pursuant to the provisions of subsection
323(1) of the Excise Act (the
"Act").
[2]
On June 23, 1999, the Minister assessed the appellant for federal
income tax deducted at source but not remitted by JPT in the
amount of $4,936.10 together with penalties and interest relating
thereto. The Minister issued the assessment on the basis the
appellant was a director of JPT at all material times and was
therefore liable for the unpaid tax pursuant to the provisions of
subsection 227.1(1) of the Income Tax Act
(ITA).
[3]
Counsel for the parties agreed the two appeals would be heard on
common evidence.
[4]
Peter Woo testified he resides in Victoria, British Columbia and
has been employed by the British Columbia Ferry Corporation for
the past 32 years. He began working as a galley helper but is now
a Chief Officer, in charge of crew for loading and unloading and
conduct of the ship. He left school after Grade 10 but later went
to Camosun College in 1986 and again in 1992 when he obtained his
Coastal Navigation ticket. In 1997, he qualified for a Master
Local Voyage Certificate. At one point in his career, he was
Master of the Thetis Island ferry but currently serves as
second-in-command on the Spirit of Vancouver Island, one of the
modern Superferries (not to be confused with the so-called fast
ferries). The appellant stated that the corporation - JPT
- purchased and operated a restaurant called Coffee
Mac's on Gorge Road in Esquimalt. His mother had worked in
that business for 22 years and his brother - Jerry -
had been employed there for 15 years. When the café
came up for sale, his mother and brother approached him with the
proposition that he participate in the purchase of the business
with the idea it would continue to be operated by the Woo family.
The appellant agreed to join the venture and arranged for a
mortgage - up to a maximum of $175,000 - on his principal
residence in order to finance the purchase and Jerry Woo made
arrangements with a lawyer practicing in Sooke, B.C. to handle
the legal details. JPT was incorporated and the appellant held
49% of the issued shares and Jerry Woo held the balance. The
name - JPT - was based on Jerry and Peter's
initials and Theresa, Jerry's wife. The appellant stated he
was aware that Jerry - holding 51% of the shares -
was in a position to have "the final say". As a
consequence of either winning - or losing - a coin toss held in
the office of their solicitor, the appellant stated he became
Secretary of the corporation and Jerry assumed the position of
President. At that point, Peter Woo stated he was not aware he
had also become a director of JPT as there had been no discussion
on that subject or explanation of the role, duties or
responsibility of serving as a director of the corporation and he
first learned he was a director of JPT only two months before the
company ceased operations at the end of October, 1996. In
carrying out the purchase of the business, Peter Woo stated he
became aware of a problem relating to obtaining title to the land
upon which the building and business was situate but understood
JPT - somehow - was purchasing the business separately. The
appellant stated his work schedule at BC Ferries was based on
certain shifts and - depending on the time - he could drive
his mother to work and then spend two hours in the restaurant
working - as a cook - before going to his job. He
stated he did not participate in the hiring or firing of any
staff and did not prepare payroll or other cheques but was
required to sign them since he and his brother had signing
authority on the bank account and both signatures were required.
At some point, Jerry Woo's wife - Theresa - was
added as a signing authority. The restaurant was staffed by Jerry
Woo and his mother, and they were assisted by two kitchen
helpers, one head waitress and 7 servers. The bookkeeping was
done by Theresa Woo and a person named Brent Wilson. The
appellant explained that Coffee Mac's Restaurant was a
well-established, well-known, 24-hour business, extremely
popular with residents of Greater Victoria. He stated that in the
early stages of his participation in the business as a
shareholder of JPT, he would drive his mother to work and then
attend at the JPT office - within the restaurant premises - in an
attempt to access the computer in order to gain information
concerning financial affairs of the business. In addition, he
inquired of his brother and Brent Wilson as to the state of
affairs relating to the operation of the restaurant. He also
spoke to Theresa and requested a print-out of daily sales and
expenses. That demand and other inquiries led Theresa to respond
- angrily - by telling him his presence in the JPT
office was "invading her space". She instructed him not
to attempt to open files in the computer and further informed him
that she had recently been diagnosed with Multiple Sclerosis and
his constant quest for financial information was aggravating her
serious medical condition. In an attempt to resolve this problem,
the appellant and his brother went to see the corporate solicitor
but no progress was made in that regard. The appellant stated
there was one occasion upon which a supplier demanded cash prior
to delivering a particular product. As a result, the appellant
spoke to his brother who explained that although JPT had missed a
payment, the matter had since been cleared up and there was no
real problem. The appellant stated that he trusted his brother
and accepted his word at that time as he had done throughout
their business relationship. He stated he had not considered
resigning from the company since he had never been aware of any
problem concerning GST or any other financial matter. When he had
re-arranged his work schedule in order to devote more time to the
business - as a cook - he was met with increased
hostility from his sister-in-law. At one point, Jerry Woo
arranged a meeting with the former owner in an effort to
determine whether the business could merely be transferred back
on the basis the food and supplies remaining in inventory could
be left on the premises and applied to extinguish the one-month
arrears in rent. The total purchase price had been in the sum of
$250,000 and one half - $125,000 - was still outstanding
when operations ceased. Jerry Woo moved to Alberta and the
appellant stated he later heard his brother had filed for
bankruptcy and received a discharge. When the appellant spoke to
his brother about a month prior to the hearing of this appeal -
with a view to having him testify - Jerry Woo responded by
stating he was busy driving truck in Alberta and would not be
attending at Victoria for that purpose. After October 31, 1996,
the appellant stated he received a telephone call from an
official at the provincial Employment Standards Branch concerning
unpaid wages for employees. At that point, he was informed that,
in his capacity as a Director of JPT, he was personally
responsible for that debt. As a consequence, he arranged to
satisfy the outstanding amount owed on wages by making payments
according to a schedule worked out with the official. The
appellant stated he undertook that course of action - apart
from any legal responsibility - because he felt it was a
moral obligation to ensure the workers were paid in full. Turning
to the assumptions of fact contained in the Amended Reply to the
Notice of Appeal (2000-3561(GST)G) - at paragraph 6
- the appellant stated he did not work at the business
premises on a regular basis - as stated at paragraph 6(f)
- because he worked a maximum of two hours a day only
if his particular shift at BC Ferries permitted. He pointed out
the first mortgage on his residence was a floating charge in the
sum of $140,000. In addition, he had obtained a loan - in
the sum of $50,000 - secured by a second mortgage and also owed
$15,000 on a personal line of credit, all pertaining to his
participation in JPT. The appellant denied the assumption -
at paragraph 6(i) that he was aware - at all material times
- the corporation was in financial difficulty. In fact, he
emphasized he had never been aware of any financial problems
until just before the end of operations on October 31, 1996. He
accepts the assumptions of fact as stated in paragraphs 6(k) to
6(o), as follows:
(k)
the Corporation's liability for the Amount results from
its failure to file GST returns or remit GST for the period
from July 1, 1995 to October 31, 1996;
(l)
on December 23, 1997, the Corporation was assessed
with respect to its liability for net GST due and payable
on October 31, 1995, January 31, 1996, April 30, 1996, July
31, 1996, October 31, 1996, and December 2, 1996,
penalties and interest;
(m) a
certificate in the amount of $98,202.64
representing the Corporation's liability for net
GST, penalties and interest, was registered in the
Federal Court of Canada on May 28, 1998 under
section 316 of the Excise Tax
Act, R.S.C. E-13, s. 1, as amended (the
"Act");
(n) a
writ of execution corresponding to the certificate was issued on
August 14, 1998, and was returned wholly unsatisfied on
August 19, 1998;
(o)
from December 23, 1997 to June 23, 1999, interest
had accrued on the Corporation's unpaid GST
liability; and
[5]
The appellant does not agree with the so-called assumption of
fact - at paragraph 6(p) (that seems to be fairly obvious
as otherwise he would not be appealing the assessments). The
irrelevant "assumption" purporting to transform a
finding - in law - into a statement of fact, prior to any
finding by the Court at the conclusion of all the evidence, is as
follows:
(p)
the Appellant did not exercise the degree of care, diligence and
skill to prevent the failure by the Corporation to remit the
Amount that a reasonably prudent person would have exercised in
comparable circumstances.
[6]
In cross-examination, the appellant stated the corporation was to
be named JP Enterprises Ltd. but his brother wanted to add T -
for his wife Theresa - to the official name. Marv Halgren,
practicing in Sooke, British Columbia, was the solicitor chosen
to carry out the necessary legal work. The appellant reiterated
he had not been aware that he was a Director of JPT, although he
knew he held 49% of the issued shares in an arrangement whereby
the corporation was used to carry on business - with his brother
- in a form of partnership. He understood that there were two
officers of the company, a President and a Secretary. He stated
he signed various documents in the appropriate places but was not
aware of his duties as Secretary. He also signed other documents
placed in front of him but cannot recall their nature. Only he
and his brother were present during the meeting with their
solicitor. Later, when they were operating the restaurant -
through JPT - he was assigned his work shifts at BC Ferries
sufficiently in advance so he could work mornings in the business
for two hours a day amounting to between 10 and 15 hours per
week. Other times, his duty assignments at BC Ferries were such
that he was unable to work at the restaurant during a particular
rotation. The appellant stated he was paid an hourly wage for his
work at the restaurant but never received a share of any profits.
Although Theresa Woo was never a director or shareholder in JPT,
she did the bookkeeping, handled the shift changes and vacation
assignments for servers and - in effect - ran the
front end of the restaurant while her husband - Jerry Woo
- was in charge of the kitchen. In order to operate
24 hours a day, 7 days a week, a total staff of 15 was
required. While Theresa merely made entries of daily sales and
deposits, Brent Wilson was the company bookkeeper and performed
the necessary accounting work by utilizing a computer. The
appellant stated he had "crashed" the computer while
attempting to retrieve some financial information concerning the
affairs of the business and had requested that Theresa provide
him with details of daily sales. His concern was to be aware of
money in - and money out - in order to know how the
business was doing on an ongoing basis. The appellant explained
that when he inquired of Jerry and Theresa Woo about the
state of the business, they refused to speak to him about his
concerns. As a result, he went to Brent Wilson and asked about
the financial health of the restaurant and received the response
that "everything is fine". Peter Woo stated he was not
a businessman and wanted to receive assurance that JPT was
functioning profitably because he was not able to understand the
information contained in various statements or computer
print-outs. He never saw any financial statements or corporate
tax returns relating to JPT although he was aware these documents
were prepared by an outside accountant - named Brian - whom
he had never met. At one point, the appellant stated a meeting
was arranged by Theresa whereby discussions concerning the
operation of the business would be held at the office of their
solicitor in Sooke. In his opinion, Theresa Woo was not pulling
her weight within the business and, even though he did not want
to participate in managing the business on a day-to-day basis, he
wanted to have some input into the ongoing operation of the
restaurant. He was concerned that there were too many persons
involved in the process of keeping the books and records of JPT.
Peter Woo related an incident when Theresa had decided to order
new tablecloths, napkin holders and wall decorations for the
restaurant. He did not agree with this expenditure and expressed
his opinion to Theresa which caused a total breakdown in
communications between them. In addition, Jerry Woo and Theresa
had decided to install a juke box and a new pizza oven without
consulting him. Later, they explained to him that the juke box
was placed in their premises on the basis of a profit-sharing
arrangement with the owner and that it was "good for
business". In view of this atmosphere among family members,
the appellant contacted the former owner who held a mortgage on
the business - in order to secure the unpaid balance - but was
unable to obtain a release from liability. To make things worse,
Jerry Woo and Theresa Woo did not have any funds with which
to buy out his interest in the business. Throughout the relevant
period, the appellant explained his participation in the
day-to-day operation of the restaurant extended only to the
requirement that he sign payroll cheques but he undertook no
calculations in that regard and did not understand the method by
which it was done except he was aware a software program called
Simply Accounting was used for that purpose. With regard to GST,
the appellant stated he did not know how JPT dealt with that
issue and had absolutely no sense - at all - of the workings of
the GST system as it applied to the business or otherwise.
However, he knew that his brother had worked there for 13 years
and was well experienced in all aspects of the business. The
appellant agreed he had also signed cheques payable to suppliers
but stated he had never met with any agents or representatives
except on one occasion and even then Theresa had commented
to the effect that his presence was interfering with the meeting
she was in the process of holding with a supplier. The appellant
recalled having to take cash out of the till in order to pay for
an order of Coca-Cola because he had been informed by the
delivery person that the account was in arrears. After this
incident, Jerry Woo explained away the matter by admitting that a
couple of payments had been missed while assuring the appellant
the cash flow had since improved. On one occasion, the appellant
knew Jerry Woo had borrowed money from the bank - on a
personal line of credit - in order to pay some trade accounts.
The appellant stated that when he was able to see the reports on
daily sales - during Theresa's absence in the office
- the amounts seemed to be consistent throughout the entire
period of operation.
[7]
Counsel for the appellant submitted the standard test for due
diligence combined both subjective and objective elements and
suggested the evidence had clearly demonstrated the appellant was
an individual - inexperienced in business - who had never before
functioned as an entrepreneur. Instead, the appellant had agreed
to assist his brother and sister-in-law to purchase a business
familiar to them and one which had employed his brother - for 15
years - and his mother for 22 years. Counsel submitted that
even though the appellant was present at the restaurant on a
regular basis when his work schedule permitted, he still only
functioned - part time - as a cook and his
participation in financial matters was limited to signing payroll
cheques prepared by others. Although Peter Woo was naive, counsel
pointed out the evidence had established he had not merely
ignored the situation but was either rebuffed or assured that all
was well each time he sought financial information. Counsel
referred to the appellant's evidence that when JPT was
incorporated, there had been no explanation provided concerning
any responsibilities or duties of a director and he had not been
aware - until troubles had developed - that he was a
director of JPT although he had known he held the office of
Secretary. Counsel submitted the evidence had shown the
assumption of the Minister - at paragraph 6(i) of the
Amended Reply - to have been incorrect because the
appellant was never aware of any financial difficulty of the
corporation except as it related to the one incident concerning
the Coca-Cola supplier. Having regard to the particular facts of
the within appeals, counsel requested the assessments issued
pursuant to the Excise Tax Act and the Income Tax
Act be vacated.
[8]
Counsel for the respondent referred to the jurisprudence in this
area as being extremely fact-specific and conceded the cases
often involve individuals who have been caught in a difficult
position as a consequence of an unfortunate lack of care. Counsel
referred to the evidence of the appellant and categorized it as
insufficient in order to permit the conclusion to be drawn that
he had made the proper inquiries to ensure the mechanism for
remittances of GST and income tax were in place and were being
adhered to by those persons hired for that purpose. Overall,
counsel submitted the appellant had ample reason to be suspicious
and, as an individual who was an inside director, should have
taken certain precautions to protect his own self-interest in a
manner consistent with what a reasonably prudent person would
have done under those circumstances. Counsel submitted the facts
in the within appeals did not support the view the appellant had
a reasonable basis for confidence in the ability of Jerry Woo -
his brother and fellow director - to manage financial
affairs of JPT and that it was not sufficient to assume someone
else in charge of preparing payroll cheques was otherwise
properly meeting the requirements concerning source deductions
and GST especially when the appellant became aware he was being
kept away from the particular information sought by him on a
regular basis.
[9]
Although these two appeals are heard on the basis of common
evidence, I will deal primarily with the appeal concerning the
GST assessment at this point.
[10] The
relevant provisions of the Excise Tax Act are as
follows:
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(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.
[11] The
decision of the Federal Court of Appeal in Soper v. The
Queen, 97 DTC 5407, dealt extensively with the matter of
directors' personal liability for a corporation's
unremitted source deductions for income tax. The wording of that
provision of the ITA under consideration -
subsection 227.1(3) - is identical to that of subsection
323(3) of the Act relevant to the within appeals. In the
course of his judgment, Roberston J.A. reviewed the legislative
history and framework of the provisions concerning personal
liability of directors together with the standard of care as
illustrated by the jurisprudence in this field. At page 5416 and
following, Robertson J.A. stated:
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).
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".
V. ANALYSIS
There are far too many cases dealing with section 227.1 of the
Act. One way to appreciate the breadth of the extant law is to
categorize the relevant cases. That task has, in fact, already
been accomplished in large part by some of the commentators: see
e.g. Moskowitz, supra at 556-66; see also R.L.
Campbell, "Directors' Liability for Unremitted
Employee Deductions" (1933) 14 Advocates' Q.
453.
For example, in some instances the relevant issue will be
whether an individual was in fact or in law a director at the
relevant time for purposes of imposing personal liability or
whether that individual ceased to hold office by operation of a
valid resignation. In other cases, such as those involving
bankruptcy and receivership, the central issue will be de
jure control. Yet another cluster of cases, including
situations in which a dominant director is able to limit
others' influence over corporate affairs, will deal with
de facto control. I intend to focus on the category of
cases respecting the distinction between inside and outside
directors since that line of authority is the most pertinent to
this appeal.
At the outset, I wish to emphasize that in adopting this
analytical approach I am not suggesting that liability is
dependent simply upon whether a person is classified as an inside
as opposed to an outside director. Rather, that characterization
is simply the starting point of my analysis. At the same time,
however, 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.
In some instances, it is easy to see why inside directors have
been held liable. Such is true in respect of Barnett,
supra, the first case which dealt with the due diligence
defence. In that case the taxpayer, as director and sole
shareholder of the company, hired a comptroller. When the latter
informed the taxpayer that the company was short of cash, the
taxpayer instructed that the business' key suppliers should
be paid first. In these circumstances, the Tax Court dismissed
the taxpayer's appeal from the Minister's assessment
which held the taxpayer personally liable for the source
deductions withheld but not remitted. Equally understandable is
the imposition of liability in the following cases involving
inside directors: Quantz v. M.N.R., 88 DTC 1201 (T.C.C.);
and Beutler v. M.N.R., 88 DTC 1286 (T.C.C.).
[12] In a
recent judgment - Cassels v. Her Majesty the Queen,
1999-2627(GST)G), I dealt with the appeal of an experienced
businessman who controlled various retail businesses and, as a
consequence of having been a director of the relevant
corporations, was assessed on the basis of personal liability. In
that case, I found there were two different fact patterns within
the relevant period, one concerning a period during which there
had been a reasonable attempt to comply with new and complex GST
legislation and another when the taxpayer had made a deliberate
choice to divert GST monies towards payments of debts owed to
suppliers. For the first portion of the assessment, I found he
had discharged his duty as a director in a manner consistent with
a reasonably prudent person in comparable circumstances since the
Act did not demand perfection nor was a director required
to serve as a guarantor to ensure that all deficiencies occurring
within the conduct of a business would be rectified on the basis
of personal responsibility.
[13] In
Cassels, supra, I also commented as follows:
It is important to bear in mind the difference between
directors' liability arising from a failure to remit source
deductions for income tax, employment insurance premiums and
Canada Pension Plan contributions and a breach of duty in
remitting the required amount of GST together with the
appropriate return for the reporting period. Even though the
withholding of source deductions is a notional concept - as
discussed by Robertson J.A. in Soper, supra - and
employers do not actually set aside those funds every time a pay
cheque is issued, the regulations made pursuant to the Income
Tax Act require - as a minimum - that the funds
withheld must be remitted by the 15th of the month following the
end of the month in which the deductions were taken. As a result,
it soon becomes apparent that the employer is in a serious
financial position when those funds - belonging to the
employees and subject to a trust in favour of Her Majesty in
right of Canada - cannot be remitted to the Receiver
General. Unless the failure is due to a temporary glitch in the
financial machine of a business, capable of rectification within
a reasonable period, then the ongoing ill health of the entity is
going to be compounded and the arrears will accumulate. In that
situation, the directors of a corporation will know - or
certainly ought to know - relatively quickly that there is
trouble - not looming on the horizon - but squarely in front of
their faces. They know or ought to know that something will have
to be done to prevent any further failure to remit the amount due
by way of source deductions which - after all - is
not the corporation's money and those funds must not be
used to gamble in the course of efforts designed solely to
maintain the life of the ailing business without concern for the
debt owing for said deductions...
[14] The
Federal Court of Appeal in Alexander Bruce Cameron v. Her
Majesty The Queen, 2001 DTC 5405, dealt with an appeal
concerning a lawyer who had been a director of a corporation.
Linden, J.A. - writing for the Court - at paragraphs 6 and
7 of the judgment, described that appellant's role, as
follows:
6.
True, the appellant was a lawyer, but his role as a director of
the corporation was primarily to help raise money for it through
a public offering. He was not a hands-on person involved in the
day-to-day operation of the company, but he was concerned mainly
with general policy. He was not a signing officer and had only
limited influence on management. He was, therefore, more an
outside director than an inside one. While these facts certainly
do not exempt him from his legal obligation, something he himself
recognized, they are relevant matters in assessing whether he
behaved in a reasonably prudent manner.
7.
Let us look more closely at his conduct. Early in his tenure of
office, and on many occasions thereafter, the appellant, because
he was aware of some problems, frequently asked management about
the status of the tax remittances and he was always assured that
they were in order. He unwisely relied on these false assurances;
in fact, the remittances were not in order as management
professed.
[15] At
paragraph 8 and following, Linden J.A. dealt with the specific
circumstances surrounding the default in remittances and the
steps taken to rectify the problem. He stated:
8.
In September of 1994, documentary evidence emerged to demonstrate
that management had not been truthful and that past remittance
amounts were still owing and that current obligations were still
not being met. Included in this documentation were an
auditor's report, draft financial statements, and a letter
from Revenue Canada dated September 19, 1994 to the effect that
arrears of $205,000 were owing.
9.
As a result of this, the appellant, Cameron, and his fellow
directors decided to appoint Mr. McArthur, an accountant who had
done a report about the corporation's financial status, as a
director of the company and Chief Financial Officer to correct
and oversee these matters. In addition, a certified management
accountant, Mr. Solomon was appointed to be specifically
responsible for remittance compliance. As a result of these
efforts, it appeared as though matters were brought under control
and that remittances were being made as required by law.
10.
In addition, as part of this clean up operation, on
September 28, 1994 an assignment agreement was entered into
between the corporation and Revenue Canada, whereby the expected
proceeds of a fire insurance claim with the Zurich Insurance
Company were assigned to Revenue Canada up to an amount $215,000
in return for the assignee's agreement not to take steps to
enforce the debt owing, that is a "standstill
agreement".
11. A
further step was later taken by the Board of Directors on March
23, 1995 to set aside monies as a second potential source for
paying the overdue remittances. Out of the monies received from
the public offering $213,000 was earmarked to repay the Alberta
Opportunities Corporation and the arrears of source deductions.
None of these funds were to be disbursed without the written
authorization of one of the outside directors, which included
Mr. Cameron.
12.
At the meeting, however, it also became known that there were
arrears of $25,000 in current source deductions. The Board
directed that these arrears be paid immediately. The Board
decided to meet again on April 12, 1995.
13.
It was at the April 12, 1995 meeting that the appellant and the
other board members learned that the $25,000 had not been paid as
ordered. A cheque had been issued, but it was returned N.S.F.
Another cheque covering the amount was later issued for
$38,703.09 on May 4, 1995. Surprisingly, the April 12, 1995 board
meeting was mistakenly told that the source deductions were
current.
14.
At this same April 12 meeting, the appellant learned that
management had not complied with the board's direction to
protect $213,000 from the proceeds of the public offering and
that $113,000 of it had been spent without the consent of any
outside director. This caused Mr. McArthur to resign from the
Board. The appellant understandably became angry, decided to
resign that evening and eventually did resign as of June 6,
1995.
15.
These uncontested facts indicate that the appellant was not
passive. He did as much as he could reasonably be expected to do
in order to protect the interests of Revenue Canada. He may not
have been as attentive, as skeptical and as assertive as he might
have been, especially in allowing himself to be misled by
management. But it is not easy to see what more he was required
to do in the circumstances to comply with his director's duty
to be reasonably prudent in the circumstances.
[16] In
allowing the appeal and vacating the assessment on the basis the
appellant had met the standard of due diligence required of him -
under the circumstances - pursuant to subsection 227.1(3)
of the ITA, it is apparent the Court found the appellant
to have acted reasonably. As Linden, J.A. stated in paragraph 4
of his judgment, "although positive steps are required of
directors, they need only be reasonable, positive steps, not
foolproof ones".
[17] In the
case of Whitehouse v. The Queen, 2000 DTC 1541, Judge Rip
- Tax Court of Canada - heard the appeal of a
woman who had assisted in incorporating a company, and in the
process had become a director, in order to ensure the employment
of her son. Prior to that, she had never been a director of any
corporation and had no idea what the responsibilities of a
director were under the Income Tax Act or the Excise
Tax Act. However, she was aware a corporation had to withhold
and remit source deductions and pay GST. Judge Rip - at
paragraph 17 and following of his judgment - stated:
17.
It is quite obvious that Ms. Whitehouse was an "outside
director". The affairs of the Corporation were being run by
Mr. Brodmann and I doubt he would have tolerated any
interference by Ms. Whitehouse who had no experience in the
business, notwithstanding that she was a Human Resource Manager
responsible for employee benefits, among other things, for her
employer's 350 employees.
18.
Ms. Whitehouse knew very little of Mr. Brodmann's business
and did not believe it was necessary to make any inquiries. She
considered themselves friends and, rightly or wrongly, relied on
his purported expertise and contacts to give him full rein to
operate the Corporation. She placed her full confidence in
Mr. Brodmann and she knew that source deductions and GST had
to be paid regularly. She never inquired if these payments where
[sic] being made as required. Ms. Whitehouse was satisfied
with the reply that all was well when she would make a general
inquiry.
19.
Whether a standard of care by a director has been met for
purposes of subsections 227.1(3) and 323(3) is predominantly a
question of fact to be resolved in the light of the personal
knowledge and experience of the director at issue. An entirely
passive approach on the part of a director may not help that
director's defence of an assessment but, unless there is
reason for suspicion, the director is permitted to rely on the
day-to-day corporate managers to be responsible for payment of
statutory debt obligations. An outside director who knows or
suspects or ought to know something is amiss must take positive
steps to try to remedy the situation. A director of a company who
never put his or her mind to exercise his or her duty to prevent
the company from falling to remit source deductions and pay GST
as required by section 227.1 of the ITA and section 323 of the
ETA respectively and has remained completely uninterested and
passive with respect to his or her duty is going to be
vicariously liable for the payments required to be made by the
company.
20.
Both counsel also discussed the reasons in Hevenor v.
Canada, [1999] T.C.J. No. 65 (Q.L.). In Hevenor an
elderly taxpayer became the sole director of his son's
corporation as a favour for his son. He did not fully understand
his responsibilities and liabilities as a corporate director and
was not involved in the decisions or operations of the company.
Had he been shown financial statements, he would not understand
them. His degree of care as a director was limited by his lack of
skill and his appeal from an assessment pursuant to section 323
of the ETA was allowed.
21.
In many ways Ms. Whitehouse finds herself in the same situation
as Mr. Hevenor did: both were directors as a favour for their
children, both assisted in financing the particular business,
neither was involved in the day-to-day operations of the
business, neither company appears to have had any meetings of
shareholders or directors, neither parent knew of an impending
financial crisis, neither parent was aware of the liabilities and
responsibilities of a director. On the other hand Ms. Whitehouse
knew that source deductions had to be paid on a regular basis and
that GST was payable.
22. I
cannot accept the respondent's submission that
Ms. Whitehouse was "more comfortable in the business
world" than Mr. Hevenor could be said to be and
"possessed a capacity for greater understanding of business
matters" than Mr. Hevenor. Ms. Whitehouse's
so-called business experience was as an employee of a company.
She was an administrator, not a business woman who made
decisions. She simply executed the work assigned to her. My
impression of her is that she was probably a valued employee for
what she did but no more. Ms. Whitehouse was not a person
who made decisions or developed her employer's policies.
23.
Ms. Whitehouse's ignorance was not deliberate and did not
result from wilful negligence. She was a mother who, like
Mr. Hevenor, wanted the best for her son and relied on a
person she respected to operate a business that would hopefully
pay the debts assumed and benefit her son. She acted as most
mothers would act in similar circumstances. There is no evidence
that Ms. Whitehouse's lack of experience as a director
and her ignorance of what the office of director entailed could
have been remedied by her experience as an employee of her
employer. I cannot find that her situation is so different from
Mr. Hevenor.
24.
The appeals are allowed and the assessments are vacated...
[18] Counsel
for the appellant referred to a case - Steven Andreeff
v. M.N.R. (89-2985(IT)) in which he had been
counsel and I had been the presiding judge. The judgment was
issued on October 19, 1990 and the appeal had concerned the issue
of liability pursuant to subsection 227.1(3) of the ITA
and concerned a young man who had been a director in a company
controlled by his father. At page 5 - and following
- I commented:
It is trite that a director is expected to live up to obligations
imposed by the relevant statutes and the common law. However, the
liability is not absolute unless so specified for the purposes of
a particular statute and in subsection 227.1(3) the language
permits escape under certain circumstances. I find it difficult
that a director be required to do an undefined act, that is,
something, when, in truth, such an act would have, in hindsight,
been nothing more than an empty, albeit wise gesture that could
be trotted out in the course of an appeal to justify exculpation.
In order that the need arise to prevent a failure there must be
some observable fact or circumstance from which an inference
would be drawn by a reasonably prudent person that there was a
difficulty in the operation of the corporation which could lead
to its inability to remit employee source deductions. It might be
the corporation was newly established, with limited financing and
having embarked on a risky venture with limited cash flow in the
early stages of operation. It could be the worsening of a
specific or general economy that should cause a director to be
concerned about the general ability of the corporation to meet
liabilities including those to Revenue Canada. The particular
director in question may, as a result of proximity to the
business operation, be confronted with inescapable evidence that
something is amiss and wilful blindness will not assist in
escaping liability. Or, the director may be possessed of such
skill and knowledge in business affairs that it is unthinkable
for him or her not to have assimilated the facts and been put on
guard. Often, the cases turn on findings of credibility and the
protestations of the taxpayers as to their degree of passivity
and ignorance of the affairs of the corporation are rejected. In
my opinion, care must be taken to distinguish between that which
was not proven in a particular case and that which is, in other
circumstances, capable of being proven.
In the present appeal, at the time of the default of the Company,
the appellant was a 22-year old common labourer, living apart
from his father who had been in the logging business for over 20
years and was the operating mind of the corporation. The
appellant was working in isolated areas, regularly receiving an
ordinary pay cheque every two weeks and the timber being logged
was being shipped and the operation in the middle of the forest
was undisturbed by the frowns and grey visages of the bankers in
Port Alberni. Nick Andreeff did not share his concerns with
his son and the $4000,000.00 line of credit in place since 1982
would appear to the appellant as permitting the logging
operations to continue and the Company to persevere as it had
since its formation in 1964. The bookkeeper, Donald Keith, had
been with the Company since 1974, and had obviously been capable
of looking after the books and records and payables since that
time. There was not, in my view, any reason for the alarm bells
to ring, bearing in mind the historical physical separation of
the appellant and the nature of his duties as a labourer (far
removed from the office of the Company) the length of time the
business had been in operation and 7 years of his association
with it as an employee. When his pay cheque bounced and he later
had to make a claim with the trustee in bankruptcy the alarm
bells were loud and clear. The appellant is now 29 years old,
married, with five children and is still engaged in logging
through a limited company formed by him on the advice of his
accountant. He is not the same person he was in 1983. In light of
all the circumstances, what is it the appellant should have done
in 1983 to prevent something which he did not know existed nor
reasonably should have suspected and in any event, had he known,
could have done nothing more to prevent other than to resign as
director? The answer is nothing. On any reasonable assessment of
the facts within the capacity of the appellant to perceive there
was no palpable risk. As a result there was no need to
respond.
These director's liability cases are like snowflakes, and
although it would be most welcome, it is difficult to forecast
the arrival of any dazzling pronouncement that will prevent
specific fact-based findings from being the norm.
[19] The
decision of the Federal Court of Appeal in Soper, supra,
was one which provided additional insight into this difficult
problem and set forth guidelines and relevant indicia to be
observed when dealing with director's liability cases. In
my view, the most significant aspect of the decision was the
development of the concept of "outside" and
"inside" director - as established in the judgment of
Robertson J.A. - together with recognition of the practical
business practice concerning the withholding of source deductions
which - in the overwhelming majority of cases - is not done
by means of a separate bank account but by a notional concept
which is met when the deadline for remittance arises.
[20] In the
case of Tremblay and McLeod - [1996] G.S.T.C. 28 -
Tremblay and McLeod had each been assessed for the failure of
certain corporations to remit income tax and GST on the basis
they had been directors. Mr. Tremblay had become involved because
he needed employment and possessed certain expertise in
franchising which was to be put to use when approaching potential
investors. He thought he had been a director only for the limited
purpose of a corporate share reorganization. He never saw any
share certificate evidencing his 25% ownership and had no control
over the accounts of any of the three corporations. He was aware
the corporations had been operating hair salons for some time and
had been introduced to an individual who was fulfilling the role
of controller and manager of the financial operations of the
allied corporations. Tremblay's co-appellant - McLeod
- had installed a computer system in the various stores and
it had the capacity to record sales and calculate the appropriate
tax. Unfortunately, the controller deliberately chose not to make
remittances to Revenue Canada as they became due and elected to
retain the money for his own purposes. In that case, I found in
favour of Tremblay on the basis he had no reason to perceive that
the GST was not being remitted and had the right to rely on the
controller performing his duty in the context of a
well-established business fully equipped with the proper
accounting system for that specific purpose. However, he had no
ability to assess - independently - the efficacy of
the system. While there were other aspects of liability attaching
to McLeod in regard to another corporation, he was also relieved
of responsibility for the most part because he had installed a
computer system that recorded sales on a point-of-sale basis in
the various hair salons and he - like Tremblay - had
no signing authority and had relied on misleading information
provided by the controller. I noted in that case that it is very
difficult for someone to prevent deliberate defalcation by
someone in a corporation who has access to the bank account,
particularly when that person is charged with the duty of making
proper remittances, as required by relevant legislation.
[21] The
recent jurisprudence has established the requirement to examine
the particular circumstances as they relate to the specific
director, bearing in the mind the standard of care is partly
objective - by reference to the reasonable person - while
retaining a subjective component based on an analysis of all the
evidence as it concerns the intelligence, education, knowledge,
business experience and worldliness of the individual in
question. In the within appeals, the appellant is a
highly-trained and competent individual with impressive
credentials permitting him to operate as a Master - on a
particular class of vessel - or as second-in-command on a
Superferry capable of transporting more than 2,500 passengers and
nearly 450 vehicles on each passage. He has been employed by
BC Ferries for 32 years and rose through the ranks beginning as a
galley helper with only a Grade 10 education. There are many
reported cases which support the view that naiveté need
not be a bar to exculpation in matters of director's
liability. However, it seems to me if an individual is - overall
- so guileless, unsuspicious, child-like and ingenuous and
so lax in pursuing ordinary financial information concerning the
corporation of which he is an integral part, then it is extremely
difficult to find this person has discharged the appropriate duty
of care. Peter Woo undertook the business venture in order to
assist his family. It provided continuing employment for his
brother and his mother and enabled him to participate in a
well-established business with the knowledge his family members
had been a part of that continuing success for 15 and 22 years,
respectively. At the office of the solicitor during the meeting
concerning the incorporation of JPT, the appellant admitted he
did not understand the nature of the documents he was signing,
except that he understood he was being named as Secretary. He
testified he was unaware of having been a director of JPT until
he received a call from an official at the Employment Standards
Branch concerning unpaid wages to the employees of the
restaurant. Earlier, he had attempted to obtain financial
information on the financial state of affairs and tried to use
the computer for that purpose but was unable to do so due to his
lack of knowledge. When he demanded certain information from
Theresa Woo - one of the individuals performing the role of
bookkeeper - he was constantly rebuffed and when he inquired of
Brent Wilson - the other bookkeeper - about the
financial health of the business - in a generic sense
- he received assurances that all was well. The appellant
did gain access to certain print-outs on a regular basis but
conceded he was not able to make much sense of them. He was aware
- generally - of the amount of daily deposits and found
them to be fairly consistent throughout so was not concerned with
any sudden downturn in the total revenue generated. He became
aware that his brother had needed to borrow money on a personal
line of credit in order to inject additional funds into the
business. At another point, he was confronted with the refusal of
a delivery person to drop off a supply of Coca-Cola unless a
previous account was paid in full. As a result, the appellant
took cash from the till and satisfied the debt. Later, when
questioned by the appellant about the matter, Jerry Woo assured
him it had been a simple matter of reduced cash flow for a brief
period and the situation would not be repeated. Throughout, the
appellant was frustrated in his attempts to secure the sort of
financial information he felt he needed to have since he was
always aware he held a 49% interest in - and was an officer
of - JPT, a corporation operating a business in which he
had invested heavily by placing a large mortgage on his principal
residence. The problem in gaining access to the relevant
information was rooted in his inability to communicate with
his brother and sister-in-law and his failure to
confront them on a "push-come-to-shove" basis
left him merely wishing everything was in order as it related to
the financial operation of the business and hoping all debts were
being paid as they became due. He admitted he had - to use
his words - "no clue" about GST and the manner by
which it was collected and remitted. He never saw any financial
statements of JPT or any of the corporate tax returns prepared by
an outside accountant, probably because he never demanded those
documents and it is clear on the evidence his brother and
sister-in-law were not about to volunteer that sort of
information. He did not attempt to consult with the corporate
accountant - whom he knew of only as a person named
Brian - even though he knew where the office was located. A few
moments spent by the appellant talking with either the bookkeeper
- Brent Wilson - or the accountant in charge of
preparing financial statements and corporate tax returns would
have enabled him to determine the extent of liabilities,
including those to the Receiver General for GST and/or
withholding of source deductions. The amount of GST owing - from
the failure of JPT to file GST returns or remit GST - is in
the sum of $80,907.00 for the period from July 1, 1995 to October
31, 1996. It is obvious that this large accumulated debt must
relate to total sales in excess of $1.1 million since the
tax rate is 7%, bearing in mind, however, that without the proper
return being filed there would be no capacity to claim
appropriate Input Tax Credits. The Minister assessed on the basis
of net GST due and payable on October 31, 1995, January 31,
1996, April 30, 1996. July 31, 1996, October 31, 1996 and
December 31, 1996. JPT neglected to comply with reporting
- and remitting - requirements for all of those
periods.
[22] The
appellant was on site between 10-15 hours a week as an employee.
He had signing authority on the bank account together with his
brother, although Theresa Woo was added later. It required two
signatures on any JPT cheque. He was one of the incorporators of
the company and held 49% of the shares, a holding which he
readily understood was subject to the majority interest of his
brother who held the balance. Yet, when it came to running the
business, he remained totally passive - to the point of
irresponsibility - concerning his own substantial investment and
the attached risk which he later discovered had another layer to
it, namely vicarious responsibility for certain corporate debts,
including unpaid wages to employees. In Cameron, supra,
Linden J.A. found the appellant to have been more of an outside
director than an inside one. In the within appeals, the evidence
supports the view that Peter Woo was more an inside director than
an outside director. Since there is no middle ground, I find him
to have been an inside director and do so with the clear
understanding that liability is not dependent only on this
classification. The appellant's brother - and fellow
director - Jerry Woo acted in concert with Theresa Woo -
the appellant's sister-in-law - so as to treat the
appellant in accordance with the time-honoured tradition of
mushroom growers, namely keeping him in the dark and - as
required - feeding him that which is politely referred to as
fertilizer of equine origin. Unlike the situation in
Cameron, Peter Woo did have signing authority on the bank
account and regularly signed what he referred to as "payroll
cheques". Whether or not that included remittances to the
Receiver General was not referred to specifically but for part of
the relevant period, only he and Jerry Woo had signing authority
on the bank account and later on when Theresa Woo was added as a
signatory, it still required two of three persons to sign a
cheque. It is reasonable to conclude that the appellant was
signing cheques to the Receiver General in respect of income tax
remittances since the total arrears in that category was less
than $5,000 - excluding penalties and interest. It must be
noted that JPT had operated the business - with a staff of
approximately 15 persons - from November, 1993 until
close of business on October 31, 1996 and any prolonged default
would have amounted to a much larger sum. The appellant was also
being paid - at an hourly rate - for his services as
a cook and had reported these earnings on his income tax returns
for the relevant years. I refer to this aspect of the matter in
the context that while the appellant was aware of certain
requirements pertaining to payment of wages to employees -
including himself - he remained satisfied that an
accounting software package - as utilized by Theresa and/or
the other bookkeepers - was capable of handling all payroll
requirements which would include source deductions. However, the
appellant also knew he was being shut out of access to financial
information concerning the operation of the restaurant, including
payments to creditors. He would attempt to search the office when
Theresa Woo was not on the premises. Regrettably, he did not
really know what he was looking for and was not properly equipped
to interpret the documents he had been provided with earlier,
only after having made repeated demands for regular print-outs
concerning revenue collected and funds paid out. In my view, he
not only had ample grounds for suspicion but had harboured those
suspicions to the point where there had been an attempt to
mediate the problem by meeting at the office of the solicitor in
Sooke. Had Peter Woo not been wearing the hat of brother and
mother's son - attempting to assist family members
who had worked at that restaurant for a total of 40 years - it is
reasonable to conclude he would not have put up with such
treatment and would have obtained legal and accounting advice in
order to achieve his goal of determining the actual state of
affairs pertaining to the operation of the business. However, he
chose to keep peace within the family and went on hoping for the
best. He accepted off-hand assurances in response to wistful
inquiries, couched in the broadest terms. He truly wanted to
believe everything was on the up-and-up. That, in my opinion, is
not discharging the statutory duty imposed on a director pursuant
to the identical wording of the legislation relevant to each of
these appeals. It is one thing to demonstrate devotion to the
best interests of one's family and I commend the
appellant's commitment in that regard. It is another to be
preternaturally artless in accepting assurances under
circumstances where the root cause for the inquiry has never been
properly addressed. Further, his continuous neglect of
significant financial matters and failure to take any reasonable
and meaningful steps to inform himself as to the ability of JPT
to discharge its commitments in respect of the ordinary
requirements of source deductions and GST - in order to prevent a
failure by the corporation to remit amounts due - discloses a
naiveté that is colossal - indeed - Brobdingnagian
in proportion. The situation in the within appeals is unlike
others in which the intervention of a third party - such as
a receiver or a bank manager - has prevented a director
from complying with the requirement to remit monies due to the
Receiver General. In the within appeals, the evidence discloses
the appellant to have been on the scene for a substantial period
of time as an employee and as a shareholder of the corporation
owned by himself and his brother. Unlike the facts in other cases
referred to herein, the appellant had not been mislead as to
whether payments had been made nor had other persons acted
contrary to an agreed-upon course of conduct with respect to
dealing with the issue of remittances in accordance with an
established mechanism designed for that purpose. In addition to
everything else that had gone on before, the appellant had been
around the restaurant business long enough that when the
Coca-Cola delivery person demanded cash in order to drop off the
product, the alarm bells should have started ringing and proper
inquiries by the appellant at that point may have been able to
prevent the default in remitting source deductions during what I
infer from the evidence as having occurred only during the last
two or three months prior to the business ceasing operations on
October 31, 1996.
[23] This is
not a happy result for the appellant. He is a good, decent man
caught up in a terrible situation. Because he is a local resident
holding a secure, well-paid position and (for the moment) has
deeper pockets, he is the person to whom the Minister looks for
payment on the basis of joint and several liability imposed by
the relevant legislation.
[24] Having
regard to all the evidence and applying the relevant
jurisprudence, I am not satisfied the appellant exercised the
degree of care, diligence and skill to prevent the failure that a
reasonably prudent person would have exercised in comparable
circumstances.
[25] As a
consequence of the above finding, both appeals are hereby
dismissed with one set of costs to the Respondent.
Signed at Sidney, British Columbia, this 18th day of January
2002.
"D.W. Rowe"
D.J.T.C.C.
COURT FILE
NO.:
2000-3119(IT)G
STYLE OF
CAUSE:
Peter Woo and H.M.Q.
PLACE OF
HEARING:
Victoria, British Columbia
DATE OF
HEARING:
October 16, 2001
REASONS FOR JUDGMENT
BY:
the Honourable Deputy Judge D.W. Rowe
DATE OF
JUDGMENT:
January 18, 2002
APPEARANCES:
Counsel for the
Appellant:
George Jones
Counsel for the
Respondent:
Karen Truscott
COUNSEL OF RECORD:
For the
Appellant:
Name:
George Jones
Firm:
Jones Emery Hargreaves Swan
Victoria, British Columbia
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
COURT FILE
NO.:
2000-3561(GST)G
STYLE OF
CAUSE:
Peter Woo and H.M.Q.
PLACE OF
HEARING:
Victoria, British Columbia
DATE OF
HEARING:
October 16, 2001
REASONS FOR JUDGMENT
BY:
the Honourable Deputy Judge D.W. Rowe
DATE OF
JUDGMENT:
January 18, 2002
APPEARANCES:
Counsel for the
Appellant:
George Jones
Counsel for the
Respondent:
Karen Truscott
COUNSEL OF RECORD:
For the
Appellant:
Name:
George Jones
Firm:
Jones Emery Hargreaves Swan
Victoria, British Columbia
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-3119(IT)G
BETWEEN:
PETER WOO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal
of Peter Woo (2000-3561(GST)G) on October 16, 2001,
at Victoria, British Columbia, by
the Honourable Deputy Judge D.W. Rowe
Appearances
Counsel for the
Appellant:
George Jones
Counsel for the
Respondent:
Karen Truscott
JUDGMENT
The
appeal from the assessment made under the Income Tax Act,
notice of which is dated June 23, 1999 and bears number 04404 is
dismissed in accordance with the attached Reasons for
Judgment.
One set
of costs is awarded to the Respondent.
Signed at Sidney, British Columbia, this 18th day of January
2002.
D.J.T.C.C.
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