Citation: 2010 TCC 539
Date: 20101026
Docket: 2008-2825(IT)I
BETWEEN:
JOHN GOICOECHEA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Favreau J.
[1]
This is an appeal by
way of the informal procedure from a reassessment made under section 227.1
of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as
amended (the "Act"). The Appellant was reassessed, by a notice
dated August 30, 2007, on the basis that he was a director of
2030885 Ontario Ltd. (the "Corporation") when it failed to remit
to the Receiver General source deductions in respect of its employees during
the 2003 and 2004 taxation years. The amount of the reassessment was $22,304.09,
which included unremitted federal and provincial source deductions and premiums
under the Canada Pension Plan and the Employment Insurance Act,
together with interest and penalties thereon in the amounts of $5,285.02 and
1,615.49 respectively.
[2]
The Appellant takes the
position that he resigned as director of the Corporation on May 3, 2004,
which was more than two years prior to his being assessed under
section 227.1 of the Act, that he never received notification that
a section 223 certificate in respect of the Corporation's tax liability had
been registered by the Canada Revenue Agency ("CRA"), and that he is
not liable for the Corporation's failure to remit source deductions because he
exercised the degree of care, diligence and skill to prevent the failure that a
reasonably prudent person would have exercised in comparable circumstances.
[3]
The Respondent takes
the position that the Appellant never resigned as director of the Corporation,
that on or about January 26, 2006, a certificate for the amount of the
Corporation's liability was registered pursuant to section 223 of the Act
in the Federal Court Trial Division, that execution was returned unsatisfied by
way of a nulla bona report, and that the Appellant took no positive
steps to ensure that remittances were made to the Receiver General.
Facts
[4]
The Appellant is an
employee of the Ontario Liquor Board. The Corporation was incorporated on
August 11, 2003 under the Ontario Business Corporations Act, R.S.O.
1990, c. B.16 (the "OBCA"). The Appellant was the sole
shareholder and the sole director of the Corporation from its incorporation.
The Corporation carried on the business of buying and selling used appliances
until it ceased its operations in March 2004 after carrying on those operations
for only five months. The Corporation obtained a franchise from Cash Converters
and operated a store in Ottawa, on Carling Avenue, with five employees (three full‑time and two
part‑time). The Corporation obtained small business loans from the Bank
of Nova Scotia after the presentation of a business plan dated
September 2, 2003, and the Corporation had a bank account with the Bank of
Nova Scotia. The Corporation entered into a lease agreement with Ogilvy Realty
Ltd. in respect of the leased premises situated at 2183 Carling Avenue and
obtained, on September 22, 2003, an acknowledgement from the landlord
confirming that any leasehold improvements performed by the tenant to the
leased premises were and would remain the property of the tenant and that
neither did the landlord have, nor would it have, any ownership interest in or
charge on any such improvements.
[5]
The Appellant submitted
as evidence an e‑mail dated February 24, 2010 from Denise Weishar, Vice‑president
Franchise Relations for Cash Converters Canada, in which she states that, to
the best of her recollection, the Ottawa Carling Avenue
store was closed in 2004 by the Appellant as a result of financial difficulties
due to the theft of inventory by staff (Exhibit A‑3).
[6]
The Appellant also
submitted as part of Exhibit A‑1 two documents to support his claim
that he resigned as director of the Corporation, namely:
1.
a photocopy of a
document entitled "Resignation" signed by the Appellant and addressed
to the Corporation and to the shareholders thereof and dated May 3, 2004,
whereby the Appellant resigned as director, president and secretary of the
Corporation effective as of that date;
2.
a photocopy of a page
entitled "Register of Directors" of the Corporation, which indicated
that the "resident address" of the Appellant was 2168 Bloomfield Drive, Oakville, Ontario,
that the Appellant was appointed or elected as director on August 11, 2003,
and that he ceased to be the director, president and secretary of the
Corporation on May 3, 2004. The date of cessation of functions was entered
manually.
[7]
The Appellant testified
at the hearing and revealed that he hired the employees working at the store, that
they came from another store and that they were recommended by the franchisor.
The Appellant also explained how the employees' salaries were paid. The manager
of the store sent reports of the hours worked by the employees to the
bookkeeper, a company named 1451100 Ontario Inc. located at 112 Grace Drive, Oakville, Ontario,
and owned by the president of the franchisor. The amounts owed to each employee
were calculated by the bookkeeper and the bookkeeper prepared the cheques for
the biweekly salary payments. The Appellant stated that he was not involved in
the process and that his role consisted only in signing the pay cheques. The
Appellant claims that the bookkeeper was supposed to make the payments to the
Receiver General.
[8]
The Appellant further
explained that the small business loans that the Corporation obtained from the
Bank of Nova Scotia (approximately $150,000) were guaranteed by government and
by him personally up to $40,800. According to him, this explains why the bank
did not initiate collection procedures against the Corporation; the bank simply
called upon the guarantors for reimbursement.
[9]
The Appellant said that
as soon as he discovered the inventory problem, in January or February of 2004,
he closed the store. He said that the landlord and the CRA were informed of the
closing. In particular, he referred to a meeting with the CRA held in April
2004 that lasted two hours and at which the CRA examined all of the Corporation's
cheques and bank statements and was provided with information concerning the
location of the assets of the Corporation.
[10]
Finally, the Appellant
confirmed that no other director was elected by the shareholder of the
Corporation and that the Corporation was not dissolved or wound up.
[11]
Ms. Jacqueline
White, a collection agent with the CRA, gave evidence on behalf of the
Respondent. She stated that her mandate was to collect from the director of the
Corporation the amounts owing to the Receiver General. In her testimony, she
referred to the pre‑assessment letter that was sent to the Appellant in
October 2005 and to the collection action taken by the CRA, namely the
examination of the books and records of the Corporation in March 2004 and the
garnishment of the bank account of the Corporation. She referred as well to the
receipt of notice from the Bank of Nova Scotia that the loans were being called,
to the fact that there were no funds available in the bank account and that the
value of the assets was not sufficient to repay the loans, and to the contact made
with the landlord, who stated that the assets were junk.
[12]
Ms. White further
stated that the CRA never received any indication or documentary evidence that
the Appellant had resigned as director of the Corporation. The Appellant's notice
of objection does not contain any reference to the fact that he was not a
director of the Corporation. Ms. White also mentioned that when reviewing
the file she did not find any notes written by previous assessors in the period
since November 26, 2003, indicating that the Appellant had resigned as
director of the Corporation.
[13]
In the course of her
testimony, the following documents were tendered as Exhibit R‑1:
1.
a copy of the certificate
under section 223 of the Act, in the amount of $19,273.52 and dated
January 26, 2006 (Tab 1), presented to the Federal Court against
2030885 Ontario Ltd.;
2.
a copy of the writ of
seizure and sale in the Federal Court against 2030885 Ontario Ltd., dated January 26,
2006 (Tab 2);
3.
a copy of the sheriff's
levy report of J. Manser dated October 19, 2006 (Tab 3).
Legislation
[14]
Subsections 227.1(1) to
(4) of the Act read as follows:
227.1(1) Where a corporation has failed to deduct or withhold an
amount as required by subsection 135(3) or 135.1(7) or section 153 or 215, has
failed to remit such an amount or has failed to pay an amount of tax for a
taxation year as required under Part VII or VIII, the directors of the
corporation at the time the corporation was required to deduct, withhold, remit
or pay the amount are jointly and severally, or solidarily, liable, together
with the corporation, to pay that amount and any interest or penalties relating
to it.
(2) A director 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 223 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 that subsection 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 bankruptcy
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 that
subsection has been proved within six months after the date of the assignment
or bankruptcy order.
(3) A director is not liable for a failure under subsection 227.1(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.
(4) No action or proceedings to recover any amount payable by a
director of a corporation under subsection 227.1(1) shall be commenced more
than two years after the director last ceased to be a director of that
corporation.
Analysis
[15]
The Corporation was
incorporated under the OBCA and section 121 thereof determines when a
director ceases to hold office, as follows:
121.(1) A director of a corporation ceases to hold office when he or
she,
(a) dies or, subject to subsection 119(2), resigns;
(b) is removed in accordance with section 122; or
(c) becomes disqualified under subsection 118(1).
(2) A resignation of a director becomes effective at the time a
written resignation is received by the corporation or at the time specified in
the resignation, whichever is later.
[16]
The Respondent has asserted
that the Appellant, as sole director of the Corporation, could not resign, and in
that regards relied, inter alia, on subsections 119(1) and (2) of
the OBCA, which read as follows:
119. (1) Each director named in the articles shall hold office from
the date of endorsement of the certificate of incorporation until the first
meeting of shareholders.
(2) Until the first meeting of shareholders, the
resignation of a director named in the articles shall not be effective unless
at the time the resignation is to become effective a successor has been elected
or appointed.
[17]
The Appellant was named
as the first director in the Articles of Incorporation (the
"Articles"), tendered as part of Exhibit A‑1, and was
elected director of the Corporation by a resolution of the sole shareholder of
the Corporation dated August 11, 2003, and was to hold office until the
first annual meeting of shareholders or until his successor was elected or
appointed. Pursuant to Article 3.03 of By‑law No. 1, which was
confirmed by a resolution of the sole shareholder of the Corporation dated
August 11, 2003, if an election of directors is not held at the proper
time, i.e. at the first meeting of shareholders and at each annual meeting of
shareholders or by written resolution signed by the shareholders in lieu of
such meeting, the incumbent directors are to continue in office until their
successors are elected.
[18]
The evidence did not
reveal if and when the first annual meeting of shareholders took place, but as
no successor director was elected, the Appellant continued in office in
accordance with Article 3.03 of By‑law No. 1 and the
shareholder resolution whereby the Appellant was elected director of the
Corporation.
[19]
The reports of the
Ministry of Consumer and Business Services, Companies and Personal Property
Security Branch of the Province of Ontario, produced on May 26, 2005
and May 6, 2008 (Exhibit R‑1, Tabs 4 and 5) show no resignation
of the Appellant as director of the Corporation. Furthermore, no evidence was produced
confirming that representatives of the CRA were informed that the Appellant had
resigned as director of the Corporation.
[20]
Even if the Appellant were
considered to have resigned as director on May 3, 2004, the fact would remain,
nevertheless, that he was the person who managed the affairs of the Corporation
after May 3, 2004. At that point in time, the Corporation had no officer
and no director, and the Appellant as sole shareholder was the only person who
could appoint a new director. No one else could manage or administer the
affairs of the Corporation. Subsection 115(4) of the OBCA contemplates the
situation where all of the directors of a corporation have resigned or have
been removed and deems the person who manages or supervises the management of
the business to be the director of the corporation. Subsection 115(4)
reads as follows:
115. (4) Where all of the directors have resigned or have been
removed by the shareholders without replacement, any person who manages or
supervises the management of the business and affairs of the corporation shall
be deemed to be a director for the purposes of this Act.
[21]
No reference was made
to any specific action undertaken by the Appellant on behalf of the Corporation
after May 3, 2004, but it appears reasonable to assume that some actions, albeit
minimal perhaps, must have been taken by the Appellant, actions such as
communicating and meeting with CRA officials to help them with the collection
of the amounts due, making claims against the franchisor for the failure to
remit the source deductions and against the former employees for the theft of
inventory, making reports to the police and to the insurer concerning the
missing inventory, taking steps with a view to the settlement of the bank debt
and the landlord's and other third‑party claims, etc. Such actions could in
many cases have taken several months to complete.
[22]
The Appellant has not shown
that he did not take any actions on behalf of the Corporation after May 3,
2004 or that the Corporation was dormant or completely inactive. In the
circumstances, I consider that the Appellant is deemed to have been a director
of the Corporation after May 3, 2004 by virtue of subsection 115(4),
and consequently, the two‑year limitation period in
subsection 227.1(4) of the Act does not protect the Appellant from
liability under the reassessment.
[23]
The requirements of
paragraph 227.1(2)(a) of the Act were all met in the instant
case. The CRA registered a certificate against the Corporation in the principal
amount of $19,273.52 on January 26, 2006, but was unsuccessful in
collecting any money; the writ of seizure and sale was issued on the same day to
be executed at the Corporation's registered office at 2900 Argentia Road,
Unit 14, Mississauga, Ontario, and was returned nulla bona by the
sheriff on October 19, 2006.
[24]
Even if the Appellant
was not notified that a certificate was registered against the Corporation and even
if the writ was not executed at the right place —
i.e. presumably at the store address — the
certificate was nevertheless valid and executory.
[25]
The CRA was not
required to proceed with collection procedures as there was no urgency in this
case. However, the CRA did attempt to collect the amounts owed by the Corporation.
The landlord and the bank were both contacted and they stated that they were
having problems collecting their own debts. According to the landlord, the
assets were junk.
[26]
The last issue in this
appeal is the due diligence defence as enunciated in subsection 227.1(3)
of the Act. The Appellant was the only director and the only officer of
the Corporation. The Appellant was the only person authorized to sign cheques
on behalf of the Corporation. He outsourced to a bookkeeper the payroll
administration and exercised little supervision over the bookkeeper's
activities. The mandate to the bookkeeper was obviously not clear enough. The
Appellant became aware of the problem only when things went wrong for the
business and when additional funding became necessary.
[27]
The Appellant has not
shown that he met the standard of care that is required by
subsection 227.1(3) of the Act. He took no action to prevent the
bookkeeper's failure to remit source deductions on behalf of the Corporation
when they were due. The due diligence actions should have been taken during the
period of operation of the store instead of after its closing.
[28]
The appeal is
dismissed.
Signed at Ottawa, Canada, this 26th day of October 2010.
"Réal Favreau"
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