Citation: 2010 TCC 477
Date: 20100922
Docket: 2008-1109(IT)I
BETWEEN:
JAMES RAGLAN,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
In this appeal, James Raglan
challenges a directors’ liability assessment issued under section 227.1 of the Income
Tax Act. The assessment was issued by notice dated June 3, 2005.
[2]
The assessment was triggered by
the failure of Goose Loonies Eatery & Taps Ltd. (“Goose Loonies”) to remit
proper payroll source deductions in its 1999 and 2000 taxation years. Goose
Loonies has ceased business and assessments issued to the corporation have gone
unsatisfied.
[3]
Goose Loonies was assessed for
remittance failures in the amount of $3,365.14, plus penalties and interest. In
addition, related assessments were issued under other statutes. The
appellant was issued directors’ liability assessments for these as well, which are
being held at the objections stage pending the outcome of this appeal. The
aggregate amount for all of the assessments is $18,853.18.
[4]
The appellant testified on his own
behalf and called four other witnesses to whom he had issued subpoenas: two
brothers who had invested in Goose Loonies and two officials of the Canada
Revenue Agency (CRA).
[5]
The respondent did not call any
witnesses.
Background facts
[6]
Sometime in 1998, the appellant agreed
to go into the restaurant business in Lindsay, Ontario with an individual by the name of Colin
Linneberg. The appellant agreed to invest $25,000 and to manage the kitchen.
[7]
Early in 1999, Goose Loonies was
incorporated to operate the business and premises were leased under its name.
According to a shareholders’ agreement entered into evidence, the two partners
were equal shareholders and each had the right to nominate one director.
[8]
Notwithstanding that Mr. Linneberg
could have appointed himself as a director, it appears that he never formally
did. The appellant was the sole director on incorporation and that never
changed.
[9]
Although there were other
investors in the business, the evidence as a whole suggests that the appellant
and Mr. Linneberg were the principals.
[10]
The restaurant opened sometime in
1999. The appellant testified that it opened around November.
[11]
The appellant also testified that
in January 2000 he notified Mr. Linneberg that he was leaving the business and
that he wanted nothing more to do with Goose Loonies. He said that there were many
issues with how Mr. Linneberg was running the business. Mr. Linneberg was also
told that the appellant would stay a couple of months until a replacement could
be found. The appellant also testified that he had informed the lawyer for
Goose Loonies of his decision. I accept this testimony.
[12]
The appellant testified that his
planned departure led to the incorporation of a new company. Based on the
evidence as a whole, it is likely that the assets of Goose Loonies were
transferred to a new corporation at some point in 2000.
[13]
The appellant left the business in
late April 2000 and shortly thereafter he became employed as a paralegal with X
Coppers.
[14]
It appears that there were
significant defaults in lease payments by both Goose Loonies and the new
corporation, which led to a closure of the restaurant and a seizure of its
assets by the landlord in December 2000. There were other defaults as well,
such as to Brewers Retail and on wages owed to staff.
[15]
In August 2000, the CRA undertook
a payroll audit for 1999 after receiving a complaint from an employee who had
not received a T4 slip. The auditor, Oliver Baro, testified that he attended at
the restaurant premises and was provided with payroll records, cheques and bank
statements by Mr. Linneberg. The audit was completed in one day and an
assessment of Goose Loonies for remittance failures followed.
[16]
In September 2000, Mr. Baro
attempted to undertake a payroll audit for part of 2000. He testified that he
met with the appellant at the restaurant and was told that no records were
available.
[17]
The appellant vehemently denies
that he met Mr. Baro at the restaurant in September 2000. Given the length of
time that has passed since this event, it is possible that Mr. Baro was
mistaken as to whom he met.
[18]
The payroll audit for 2000 was
subsequently completed by another auditor and an assessment for remittance
failures for 2000 was then issued to Goose Loonies.
[19]
The two assessments issued to Goose
Loonies were unsatisfied, and accordingly an assessment was issued to the
appellant, as the sole director, pursuant to s. 227.1 of the Income Tax Act.
[20]
At the present time, the appellant
is still listed with the Ontario Ministry of Government Services as the sole
director of Goose Loonies.
Issues
[21]
There are three issues:
-
Are the underlying assessments
correct?
-
Did the appellant exercise
appropriate care as a director?
-
Did the appellant resign?
Legislative provisions
[22]
The relevant legislative provisions,
subsections 227.1(1), (2), (3) and (4) of the Income Tax Act, as in
effect in 2005, are reproduced below.
Liability
of directors for failure to deduct
227.1(1) Where a
corporation has failed to deduct or withhold an amount as required by subsection
135(3) 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 liable,
together with the corporation, to pay that amount and any interest or penalties
relating thereto.
Limitations
on liability
227.1(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.
Idem
227.1(3) A director 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.
Limitation period
227.1(4) No action or proceedings to
recover any amount payable by a director of a corporation under subsection (1)
shall be commenced more than two years after the director last ceased to be a
director of that corporation.
Are the underlying
assessments correct?
[23]
Pursuant to subsection 227.1(1) of
the Act, if a corporation fails to remit payroll source deductions, the
directors of the corporation are jointly and severally liable with the
corporation to pay the remittances together with interest and penalties. The
appellant seeks to dispute the amount of his liability by challenging the correctness
of the underlying assessments issued to Goose Loonies.
[24]
The respondent submits that: (1)
the assessments issued to Goose Loonies are dispositive of the amount for which
the appellant is liable under s. 227.1(1); and (2) in any event the appellant
has not satisfied the onus of proving that the assessments are incorrect.
[25]
It is not necessary for me to
consider the respondent’s first argument because I am not satisfied that the
assessments issued to Goose Loonies are incorrect. As far as the evidence
reveals, the CRA properly assessed Goose Loonies based on the books and records
that were provided to them by the corporation. The Minister’s assumptions as to
the amounts owing have not been disproven.
Did the appellant exercise
appropriate care?
[26]
The appellant also denies
liability on the basis that he did not have control of the financial affairs of
Goose Loonies.
[27]
This raises the question of
whether the appellant exercised the “care, diligence and skill” to prevent the
remittance failures that a reasonably prudent person would have exercised in
comparable circumstances: subsection 227.1(3).
[28]
The general principles to be
applied are summarized by Sharlow J.A. in the following excerpt from Smith
v. The Queen, 2001 FCA 84; 2001 DTC 5226:
[9] The Soper decision, supra,
established that the standard of care described in the statutory due diligence
defence 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
subsection 227.1(1) of the Income Tax Act and subsection 323(1) of the Excise
Tax Act depends upon the facts of the case, and has both an objective and a
subjective aspect.
[10] 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 defence 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) 260 N.R. 79, [2000] 4 C.T.C. 215, 2000 DTC 6564 (F.C.A.)).
[11] 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.
[12] The inherent flexibility of
the due diligence defence 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).
[13] That is particularly so if it
is established that the outside director reasonably relied on assurances from
the inside directors that the corporation’s tax remittance obligations were
being met. See, for example, Cadrin v. Canada (1998), 240 N.R. 354, [1999]
3 C.T.C. 366, 99 DTC 5079 (F.C.A.).
[14] In certain circumstances, the
fact that a corporation is in financial difficulty, and thus may be subject to
a greater risk of default in 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 operations 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.
[29]
The evidence does not establish
that the appellant exercised appropriate care, diligence and skill to prevent
the payroll remittance failures. I accept that Mr. Linneberg managed the
financial aspects of the business, but I do not accept that a reasonably
prudent director would permit Mr. Linneberg to be in charge of source
deductions without some supervision.
[30]
It appears that Goose Loonies had
serious financial problems from the start and I am not satisfied that the
appellant did anything to prevent the failures.
[31]
The appellant submits that there
is nothing he could have done. I am not persuaded of this. The evidence as a
whole suggests that Mr. Linneberg did not handle finances responsibly and this
should have been evident to the appellant from the outset. A reasonably prudent
director would not have left the remittance obligation in the control of Mr.
Linneberg alone.
Did the appellant resign?
[32]
The appellant submits that he
resigned by advising Mr. Linneberg and Mr. Linneberg’s father that he was going
to have nothing more to do with Goose Loonies.
[33]
If the appellant did resign in
2000, the CRA would be precluded from recovering any amount from the appellant
by virtue of subsection 227.1(4) because the resignation occurred more than two
years before this assessment was issued.
[34]
I am not convinced, however, that
the appellant ever resigned as a director of Goose Loonies.
[35]
The appellant announced his departure
from Goose Loonies in January 2000 and he indicated that he would stay a couple
of months until a replacement could be found. Based on the limited evidence
presented, it appears that a lawyer was retained to implement the transfer of
the restaurant assets from Goose Loonies to a new corporation. There is
insufficient evidence that the plan involved the appellant’s resignation as a
director of Goose Loonies.
Conclusion
[36]
As a result of these findings, the
appeal will be dismissed.
[37]
The respondent seeks costs
pursuant to subsection 10(2) of the Tax Court of Canada Rules (Informal
Procedure). It provides that costs may be awarded to the respondent
if the actions of the appellant unduly delayed the prompt and effective
resolution of the appeal.
[38]
I will not grant costs on this
basis. Although I have some concerns about how the appellant conducted the
appeal, particularly in regard to voluminous case authorities, I also have
limited information as to what transpired prior to the hearing, and note that
prior adjournments were granted based on circumstances that were beyond the
control of the appellant.
Signed at Ottawa, Canada this 22nd
day of September 2010.
“J. M. Woods”
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