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Citation: 2007TCC590
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Date: 20071012
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Dockets: 2005-404(IT)G
2005-405(IT)G
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BETWEEN:
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PARAMJIT THANDI,
MANDEEP THANDI,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Little J.
A. FACTS
[1] The Appellant,
Paramjit Thandi (“Paramjit”), is the son of Jarnail Thandi.
[2] The Appellant, Mandeep
Thandi (“Mandeep”), is married to Paramjit and is therefore the daughter-in-law
of Jarnail Thandi
[3] Jarnail Thandi was
employed in various capacities by National Aluminium Production (“NAP”) from
1976 until NAP closed its factory in 1994.
[4] After NAP
discontinued its business operation in 1994, Jarnail Thandi and six friends
decided to form a business and work together in operating that business.
[5] In June 1995
Jarnail Thandi and his six friends incorporated AC Vinyl Windows Manufacturing
Ltd. (the “Company”) under the British Columbia Company Act.
[6] Jarnail Thandi and
his six friends were directors, shareholders and employees of the Company.
[7] The Company was in
the business of manufacturing vinyl windows.
[8] The Company ceased
its business operation in February 1998.
[9] The Minister of
National Revenue (the “Minister”) maintains that in paying wages to its
employees in the 1997 taxation year the Company failed to remit the amount of
$39,571.42 (this sum includes tax, interest and penalties).
[10] A certificate
representing the Company’s liability for federal income tax, interest and
penalties was registered in the Federal Court of Canada on June 30, 1999.
[11] A writ of execution
corresponding to the certificate was issued against the Company and was
returned wholly unsatisfied on August 16, 1999.
[12] By Notice of
Assessment dated October 14, 1999, the Minister assessed Jarnail Thandi with
respect to federal income tax (plus interest and penalties) deducted at source
by the Company but not remitted. This Assessment was issued under subsection
227.1(3) of the Income Tax Act (the Act”). The total amount
involved at that time was $30,934.48.
[13] Jarnail Thandi did
not file a Notice of Objection to the Assessment dated October 14, 1999.
[14] On or about May 15,
1998, Jarnail Thandi transferred a one-half interest in property located at
13302 88A Avenue, Surrey, British Columbia to the Appellant, Paramjit Thandi. The above property is
hereinafter referred to as the “Property”).
[15] On or about May 15,
1998, Jarnail Thandi transferred a one-half interest in the Property to the
Appellant, Mandeep Thandi.
[16] At the time of the
transfer of a one-half interest in the Property to each of Paramjit and Mandeep
the equity in the Property was estimated to be in excess of $250,000.00.
[17] By Notice of
Assessment No. 26352 dated June 14, 2002, the Minister assessed the Appellant,
Paramjit, in the amount of $39,571.42 in respect of the transfer of an interest
in the Property to Paramjit by Jarnail Thandi. The Assessment was issued under
section 160 of the Act.
[18] By Notice of
Assessment Number 26351 dated June 14, 2002, the Minister assessed the
Appellant, Mandeep, in the amount of $39,571.42 in respect of the transfer of
an interest in the Property to Mandeep by Jarnail Thandi. The Assessment was
issued under section 160 of the Act.
B. ISSUES
[19] The issues are:
(a) Whether the Appellant, Paramjit, is liable to pay
the amount of $39,571.42 pursuant to section 160 of the Act in respect of
the transfer of an interest in the Property to him by Jarnail Thandi.
(b) Whether the Appellant, Mandeep, is liable to pay
the amount of $39,571.42 pursuant to section 160 of the Act in respect
of the transfer of an interest in the Property to her by Jarnail Thandi.
C. ANALYSIS AND
DECISION
[20] Counsel for the
Appellants argued that the assessments issued against the Appellants should be
vacated because the underlining assessments are flawed. Counsel for the
Appellants said that there is legal authority for the proposition that an
individual can challenge a “cascading type” of assessment even though no Notice
of Objection was filed to the initial underlining assessment.
[21] Counsel for the
Appellants maintains that the central issue to be decided is whether Jarnail
Thandi exercised the level of care, skill and diligence that a reasonable
person would exercise in the circumstances.
[22] In support of his
argument Counsel for the Appellants referred to the decision of Mr. Justice
Robertson in Soper v. The Queen, 97 DTC 5407.
[23] Counsel for the
Appellants said that the Soper case stands for the following principles:
1. A
director is not to be equated with a trustee.
2. A director need not exhibit in the performance of
his duties, a greater degree of skill and care than may be expected from a
person of his knowledge or experience.
3. A director is not obliged to give continuous
attention to the affairs of the Company.
4. In the absence of grounds for suspicion it is not
improper for a director to rely on Company officials to perform the duties that
they have been delegated to perform.
[24] Counsel for the
Appellants argued that Jarnail Thandi satisfied his obligation under section
227.1 of the Act and therefore he should not have been assessed as a
director of AC Vinyl. Appellants’ Counsel concludes that since the assessment
issued against Jarnail Thandi under section 227.1 of the Act is improper
the “cascading” assessments issued against the Appellants should be vacated,
[25] Counsel for the Respondent
noted that in this situation we are dealing with “triple layer” assessment
with the first assessment issued against AC Vinyl, the second assessment issued
against Jarnail Thandi and the third assessment issued against each of the
Appellants pursuant to section 160 of the Act.
[26] Counsel for the Respondent
said that it would have been open to the Appellants to challenge the
assessments issued against AC Vinyl. However, the pleadings never raised that
issue.
[27] Respondent’s Counsel
referred to the decision in Gaucher v. The Queen, 2000 DTC 6678, and noted
that the courts have said that taxpayers should be able to address the
“underlining or initial assessments” to ensure that the federal tax, provincial
tax, penalties and interest were issued correctly so that the subsequent person
can be sure that the foundation of the assessment is correct. However, she
questioned whether the Court could review the assessment issued against Jarnail Thandi
in determining the validity of the section 160 assessment issued against the
Appellants.
[28] I have reviewed the
legal authorities referred to by counsel. In Gaucher (supra), Justice
Rothstein speaking for the Court said at paragraph 1:
1. The issue in this appeal is whether a taxpayer
assessed under a derivative assessment pursuant to subsection 160(1) of the Income
Tax Act may object to that assessment by challenging the primary assessment
on which the derivative assessment is based.
At paragraph 7, Justice
Rothstein said:
7. When the Minister issues a derivative assessment
under subsection 160(1), a special statutory provision is invoked entitling the
Minister to seek payment from a second person for the tax assessed against the
primary taxpayer. That second person must have a full right of defence to challenge
the assessment made against her, including an attack on the primary assessment
on which the second person's assessment is based.
At paragraph 8, Justice
Rothstein said:
8. This
view has been expressed by Judges of the Tax Court. See, for
example, Acton v. The Queen (1994), 95 DTC 107, at 108 per
Bowman T.C.C.J.; Ramey v. The Queen (1993), 93 DTC 791, at 792 per
Bowman T.C.C.J.; Thorsteinson v. M.N.R. (1980), 80 DTC 1369, at 1372 per
Taylor T.C.C.J. …
[29] I have concluded
that these Court decisions give the Appellants the authority to review or
challenge the underlining or primary assessment issued against Jarnail Thandi
in the course of determining the validity of the assessments issued against the
Appellants.
[30] I have carefully
considered the assessment issued against Jarnail Thandi on October 14, 1999 under
section 227.1 of the Act.
[31] Section 227.1 of the
Act provides that in certain situations directors of a corporation are
jointly and severally liable with the corporation if the corporation fails to
deduct or withhold or remit or pay tax as required by certain provisions of the
Act.
[32] Subsection 227.1(3)
of the Act provides that a director is not liable if he exercised the
degree of care, diligence and skill to prevent the failure of the corporation
to deduct or withhold and remit the tax that a reasonably prudent person would
have exercised in comparable circumstances.
[33] After considering
the evidence that was presented, I have concluded that Jarnail Thandi does not
satisfy the due diligence defence that is contained in subsection 227.1(3)
of the Act.
[34] I have reached this
conclusion for the following reasons:
1. Jarnail Thandi was very vague in his answers to
the questions put to him. His recollection was uncertain and, at times,
inconsistent with his previous answers.
2. Jarnail Thandi was asked whether he had asked
questions of the “inside directors” (i.e. Messrs. Bagri and Dardi) about the
operation of the Company. Mr. Thandi was not able to provide any examples of
questions that he had asked the inside directors.
3. There were very few documents presented to
explain what was happening to the Company and the position that was taken by
the directors with respect to the operation of the Company.
4. There was no corroborating evidence presented to
establish the relevant facts. For example, Mr. Bagri, the managing director,
did not testify and Mr. Alan Seabrook, the Company’s lawyer, did not testify.
5. Exhibit A-1 was filed in evidence. This is a
letter to the directors from Mr. Seabrook, the Company’s lawyer. The letter
refers to the sale of the business. However, Jarnail Thandi stated that he was
not sure if he had read the letter.
6. The corporate records show that Jarnail Thandi
remained a director of the Company until March 1998 (See Exhibit R-3).
7. Exhibit A-2 is a letter of resignation signed by
Jarnail Thandi on November 20, 1997. However, there is no receipt stamp on the
letter. Furthermore, the letter appears to be an original.
8. Jarnail Thandi said that he did not attempt to
obtain any assurance from the income tax department that the Company’s tax
liability was paid.
9. Jarnail Thandi said that he had no knowledge of
the bookkeeping system that was used by the Company.
10. Jarnail Thandi said that he took no steps to
determine his duties as a director of the Company. Counsel for the Respondent
asked the following questions of Jarnail Thandi:
Q. What did
you understand your duties to be as a director?
A. I knew
nothing. I just had faith in him (i.e. Mr. Bagri), whatever he was doing was
right.
(Transcript - page 43, lines 23 – 25 and page
44, line 1)
Q. What
steps did you take to find out what you needed to be doing?
A. I
didn’t take any steps.
(Transcript – page 44, lines 2-4)
[35] In summary, the
evidence clearly indicates that Jarnail Thandi did nothing to satisfy his
duties as a director of the Company.
[36] Based on the comments
referred to above and the additional evidence that was presented, I have
concluded that the assessment issued against Jarnail Thandi under section 227.1
was a valid assessment.
[37] As I have noted above
the only argument raised by counsel for the Appellants related to the
assessment issued against Jarnail Thandi under section 227.1 of the Act,
Appellants’ counsel did not object to the assessments issued under section
160 of the Act but confined his argument to the assessment issued
against Jarnail Thandi under section 227.1.
[38] The appeals are
dismissed, without costs.
[39] Before closing, I
wish to note that each of the Appellants was assessed on a joint and several
basis, i.e. the total tax assessed is $39,571.42 times two. However, the tax liability
is limited to the total amount of $39,571.42. The Minister must keep
this point in mind when he reassesses each of the Appellants.
Signed at Vancouver, British Columbia, this 12th day of October 2007.
“L.M. Little”
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