Citation: 2008 TCC 402
Date: 20080711
Docket: 2007-561(GST)G
BETWEEN:
SERGE TRAJKOVICH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Little J.
A. Facts
[1] A company by the name of 4225317 Manitoba
Limited was incorporated under the laws of the province of Manitoba on June 19, 2000.
[2] The Corporation carried on business as
Image Colour 2000.
[3] The Corporation was involved in the
commercial printing industry, primarily printing promotional materials and the
manufacturing of plates and films for use by printers. The Corporation became
part of the Imaginex Group of Companies.
[4] On or about June 19, 2000 the Appellant,
Marvin Kass and Emilio Mazzona were elected Directors of the Corporation.
[5] On or about July 5, 2001 Marvin Kass ceased
to be a Director of the Corporation.
[6] On or about November 1, 2001 Emilio Mazzona
ceased to be a Director of the Corporation.
[7] On or about May 10,
2002, the Appellant, being the sole shareholder of the Corporation, elected
himself to be the sole director of the Corporation for the ensuing year.
[8] The parties agree
that at all relevant times the Appellant was a director of the Corporation.
[9] The Corporation was
a registrant for Goods and Services Tax (“GST”) under the Excise Tax Act
(the “Act”).
[10] The Minister of
National Revenue (the “Minister”) maintains that the Corporation failed to
remit to the Receiver General GST in the amount of $51,313.41 for the period
December 1, 2001 to August 7, 2002.
[11] On or about August
7, 2002 the Ontario Superior Court of Justice ordered that the Corporation be
placed in receivership.
[12] On or about December
20, 2002 the Receiver filed for bankruptcy on behalf of the Corporation.
[13] On or about
September 7, 2004 the Minister filed with the Receiver an amended proof of
claim as an unsecured creditor in the amount of $51,313.41.
[14] On October 14, 2005
the Minister issued a Notice of Assessment against the Appellant for GST in the
amount of $51,313.41. The GST in issue represents the unremitted GST owing by
the Corporation for the specified periods:
|
Reporting
Period
|
Net GST
|
Interest
|
Penalty
|
Total
|
|
Dec. 1, 2001
to Feb. 28, 2002
|
$19,219.58
|
$316.59
|
$794.88
|
$20,331.05
|
|
Mar. 1, 2002
to May 31, 2002
|
$21,521.19
|
$244.75
|
$616.91
|
$22,382.85
|
|
June 1, 2002
to Aug. 7, 2002
|
$8,441.08
|
$45.00
|
$113.43
|
$8,599.51
|
|
Total
|
$49,181.85
|
$606.34
|
$1,525.22
|
$51,313.41
|
B. Issue
[15] The issue is whether
the Appellant is liable under subsection 323(1) of the Act for the
failure of the Corporation to remit GST in the amount of $51,313.41.
C. Analysis
and Decision
[16] Section 323 of the Excise Tax Act reads 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.
(2) Limitations - A
director of a corporation 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 316 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 subsection
(1) 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 subsection (1) has been proved within six months after
the date of the assignment or bankruptcy order.
(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.
(4) Assessment
- The Minister may assess any person for
any amount payable by the person under this section and, where the Minister
sends a notice of assessment, sections 296 to 311 apply, with such
modifications as the circumstances require.
(5) Time Limit - An
assessment under subsection (4) of any amount payable by a person who is a
director of a corporation shall not be made more than two years after the
person last ceased to be a director of the corporation.
(6) Amount recoverable - Where execution referred to in paragraph (2)(a) has
issued, the amount recoverable from a director is the amount remaining
unsatisfied after execution.
(7) Preference - Where a director of a corporation pays an amount in respect
of a corporation’s liability referred to in subsection (1) that is proved in
liquidation, dissolution or bankruptcy proceedings, the director is entitled to
any preference that Her Majesty in right of Canada would have been entitled to
had the amount not been so paid and, where a certificate that relates to the
amount has been registered, the director is entitled to an assignment of the
certificate to the extent of the director’s payment, which assignment the
Minister is empowered to make.
(8) Contribution - A director who satisfies a claim under this section is
entitled to contribution from the other directors who were liable for the
claim.
[17] Counsel for the
Appellant agreed that the Appellant was a director of the Corporation at the
relevant time. However, Counsel for the Appellant maintains that the Appellant
was effectively removed from the normal operations of a director.
[18] In support of his
position Counsel for the Appellant maintains that as a result of a refinancing
of the Imaginex Group of Companies, the Appellant was stripped of any ability
to control the financial affairs of the Corporation.
[19] The argument of
Counsel for the Appellant may be summarized as follows:
(1)
After
the refinancing carried out by the Laurentian Bank of Canada, RoyNat and the Business
Development Bank of Canada (“BDC”) the Appellant had no authority to force or compel the Corporation
to pay GST.
(2)
The
Appellant was a Director of the Corporation in name only. RoyNat and BDC had appointed
Richard Parkinson, Chartered Accountant, as the Chief Financial Officer. All
decisions as to which accounts payable by the Corporation should be paid were
made by RoyNat, BDC and Mr. Parkinson.
(Note: An examination of the
Agreement prepared by the Laurentian Bank of Canada (see Exhibit A-1, Tab 3) and the
agreement prepared by RoyNat Capital (see Exhibit A-1, Tab 5, pages 3 and 4)
contain severe restrictions on what the Corporation and its management could do
in the future.)
(3)
By
letter dated January 7, 2002, Laurentian Bank of Canada indicated that it was providing a
new term loan of $40,000 to cover the Bank’s solicitor’s expenses and monitor
expenses (Mr. Bob Cumming) (see Exhibit A-1, Tab 6). (Note – Richard Parkinson
signed this letter as the CFO of Imaginex Incorporated.)
(4)
On
February 14, 2002, Richard Parkinson specifically instructed the Appellant not
to involve himself in the financial affairs of the Imaginex Group of Companies.
Mr Parkinson prepared a Notice which reads as follows:
“I PROMISE TO BUGGER OUT OF FINANCE”
Signed “S. Trajkovich”
Date February 14, 2002
(see Exhibit A-1, Tab 7)
The evidence was that this Notice
was signed by the Appellant and placed by Mr. Parkinson on his wall behind
his chair.
(5)
The
Appellant did not have the authority to issue a cheque on behalf of the
Corporation on the basis of his signature alone.
(6)
All
cheques issued to pay the liabilities of the Corporation were issued by Richard
Parkinson, the CFO, and/or Gary Hill, a Chartered Accountant employed by the
Corporation.
(7)
The
new equity parties, RoyNat, BDC and Richard Parkinson controlled approximately
65% of the voting shares of the Corporation.
(8)
The
Appellant was demoted to a sales function. The Appellant’s job description was
“Direct Sales, Mississauga and Indirect Sales, Toronto and Winnipeg”.
(9)
The
control of payables was outside the authority or control of the Appellant. In
support of his position that the Appellant was not involved or responsible for
the payables, Counsel for the Appellant referred to an e-mail from Gary Hill,
Chartered Accountant in Toronto, to Marilyn McClay in Winnipeg dated May 17, 2002. The e-mail from
Mr. Hill reads as follows:
Subject: Re: GST
GST – That will do.
That is, A) Currently – we to cover
Vision’s chq for 6,500 released but hold back on any further payments by Image
Color.
B) Plan – unless cash position improves, pls.
hold off on making further payments for GST until at least mid-August.
- please file GST returns by their due
dates, but note on your returns that we will catch up on delayed …
(underlining added)
(10)
Note - This instruction from
Gary Hill not to pay GST for the Corporation was not conveyed to the Appellant
until July 5, 2002 when he received an e-mail from Marilyn (see Exhibit A-1,
Tab 25).
(11)
Counsel
for the Appellant stated in his argument that the Appellant was “ostracized”
from the management of the Corporation.
[20] In support of his
position that the Appellant was excluded from the management of the Corporation
and should not be responsible for the GST liability of the Corporation, Counsel
for the Appellant referred to the following Court decisions:
Mosier v. The Queen, [2001] G.S.T.C. 124;
DiLorenzo v. The Queen, [2001]
G.S.T.C. 67; and
Worrell v. The Queen, 98 DTC
1783.
[21] In Worrell v. The
Queen, my colleague Justice McArthur was considering the liability of the
taxpayer under section 323 of the Excise Tax Act. Justice McArthur
said at paragraph [10]:
[10] The primary submission was that the Appellants, as
directors of Abel, did not have the freedom of choice to govern the corporation
and prevent the failures to remit. Second, the bulk of the GST owing by Abel
for which the Minister of National Revenue (the “Minister”) is holding the
directors liable was never collected by Abel, never came under the dominion of
the directors and never was impressed with a trust. The Appellants submit that
it is inappropriate that they be held vicariously liable for these amounts.
[22] Justice McArthur said at
paragraphs [16], [17] and [22]:
[16] The facts support the finding that from October 18,
1993 until the bankruptcy on April 28, 1994, it was the bank, and not the
directors, that controlled the finances of Abel. This restriction on the
directors' freedom of choice is sufficient to relieve the Appellants of
personal liability for both the payroll assessment and the GST assessment. The
Appellants did not have the freedom of choice to govern the corporation and
prevent the failures to remit, in respect of both the payroll assessments and
GST assessments.
[17] The
Federal Court of Appeal has recently examined the nature of the due diligence
defence in Soper (supra). A necessary pre-condition for
imposition of personal liability is that the directors must have the necessary freedom
of choice such that the corporation is freely acting through its board of
directors. In Champeval (supra), under circumstances similar to
those of the Appellants, Couture, C.J.T.C. found that where the failure of the
corporation results from factors outside the control of the director, the
director is relieved of personal liability. McMartin (supra) is
another case where a bank dictated which cheques would be honoured and which
would not. Bell, J. held in favour of the Appellant. (emphasis added)
[22] The Appellants did not have the freedom of choice to
prevent the failures to remit in respect to both the income tax and GST assessments.
[23] The Minister
appealed the decision of the Tax Court in Worrell to the Federal Court
of Appeal.
[24] The Federal Court of
Appeal upheld the decision of Justice McArthur in a reported decision under the
issue of The Attorney General of Canada v. Lynda McKinnon,
Ronald LaPointe and Brad Worrell, 2000 DTC 6593.
[25] In the decision of
the Federal Court of Appeal Justice Rothstein
said:
…
I wish to emphasize that whether the due diligence defence
will be successful is fact-driven in each case, i.e. always comparing
what the directors did to prevent the failure with what a reasonably prudent
person would have done in comparable circumstances. I agree with Evans J.A.
that the due diligence defence is established on the facts of this case. …
Evans
J.A. had stated at paragraph 77 of his reasons (at page 6604):
Given
the limitations placed upon them by the bank’s de facto control of the
company’s finances, I am satisfied that, on the facts of this case, the
directors exercised the degree of care, diligence and skill to prevent failures
to remit that would have been shown by a reasonably prudent person in
comparable circumstances. …
(underlining
added)
[26] Counsel for the
Appellant also referred to the decision of Associate Chief Justice Bowman (as
he then was) in Mosier v. The Queen. This case also dealt with a
situation where a taxpayer was assessed for the tax liability of a corporation
of which he was a director. Associate Chief Justice Bowman said:
[32] One fact stands out like a sore thumb. The bank had
the company's finances sewn up as tight as a drum. In addition to scooping as
much of the cash as it wanted when it came into the cash room, it had an
absolute power to veto the payment of any cheques that were issued. The
appellant worked out with the CCRA a payment of $2,400 per week to clear up the
arrears of tax. On one occasion he persuaded the bank to allow a somewhat
larger cheque to the CCRA by threatening to walk away from the whole business.
The bank wanted him around because if he succeeded in keeping the business
afloat or, better still, if he bought the business - a prospect that was always
in the wind but never came to fruition until TRS went bankrupt - the bank's
chances of getting paid were enhanced. Apart from this small amount of leverage
the appellant was powerless to ensure that CCRA would get paid. He had to
perform a delicate balancing act with predators snapping at him from all sides
- the bank, the suppliers, the other creditors, the union and the employees. If
he failed the company would go under and everyone would have lost, including
the CCRA and the 600 employees.
[33] One has to
ask: what could he have done that he did not do? The answer is absolutely
nothing. The case is in some ways reminiscent of Holmes v. R., [2000] 3
C.T.C. 2235, where the directors were unable to ensure that the CCRA be paid
because the company's finances were completely controlled by their supplier.
…
I find as a fact that there is nothing that Mr. and Mrs.
Holmes could reasonably have done to prevent the failure. They struck me as
decent, honourable people who did all they could to ensure that the corporate
obligations were fulfilled, but the economic circumstances rendered that
impossible.
[34] This approach is one that I have followed in other
cases and one that is, I believe, consistent with the series of cases in the
Federal Court of Appeal which have invariably modified the more stringent
standards applied in this court. The cases in the Federal Court of Appeal to
which I am referring are The Queen v. Corsano et al. (supra), Worrell
v. R., [2000] G.S.T.C. 91, Smith v. The Queen, 2001 D.T.C. 5226, Cameron
v. The Queen, 2001 D.T.C. 5405, and Soper v. The Queen, 97 D.T.C.
5407.
[35] I need not quote from them. They stand for the proposition
that section 227.1 of the Income Tax Act and subsection 323(3) of the Excise
Tax Act require only that directors act reasonably. They do not demand the
impossible. I have no hesitation in following that approach.
[39] For all the above reasons and notwithstanding Mr.
Bornstein's usual thorough and skilful presentation of the Crown's case the
appeal is allowed with costs and the assessment made under section 323 of the Excise
Tax Act is vacated.
[27] Counsel for the
Respondent suggested that the Worrell decision and the Mosier
decision relied upon by the Appellant could be distinguished on the facts. In
connection with “distinguishing the cases,” I am reminded of the
following comment made by Justice Evans in The Attorney General of Canada v. McKinnon, LaPointe
and Worrell in 2000 DTC 6593. Justice Evans said at paragraphs 23 and 24:
[23]
In the absence of a developed analytical framework, cases are readily
distinguishable on their facts, even when those facts, including the facts in
the instant appeal, conform to a recurring general pattern. Inevitably, but
without express advertence, some decisions exhibit a relatively strict approach
to subsection 227.1(3), while others, including the decision under appeal here,
adopt a view more favourable to the director.
[24]
Nonetheless, amid this wilderness of single instances some general guidance on
section 227.1 is available, most notably from this Court in Soper v. Canada,
[1998] 1 F.C. 124 (C.A.). First, writing for the majority in Soper, supra,
Robertson J.A. (at paragraph 11) put subsection 227.1(3) into context by
explaining its rationale: …
[28] I believe that
Justice Rothstein and Justice
Evans have correctly applied the test for the application of section 323 of the
Act in their Reasons for Judgment
in McKinnon, LaPointe and Worrell.
[29] Based on the
evidence before me, I find as a fact that there is nothing that the Appellant
could reasonably have done to prevent the failure of the Corporation paying the
GST.
[30] I have also
concluded that the Appellant carried out the necessary due diligence that a
reasonable person would do in similar circumstances. He is therefore protected
by the due diligence defence contained in section 323 of the Act.
[31] The appeal is
allowed with costs.
Signed at Vancouver, British
Colombia, this 11th day of July 2008.
“L.M. Little”
Email this Content