Citation: 2008TCC416
Date: 20080718
Dockets: 2006-2297(IT)G
BETWEEN:
JEAN-PIERRE CADORETTE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1]
Jean-Pierre Cadorette is
appealing from an assessment made on March 16, 2004, by the Minister
of National Revenue ("the Minister") under
subsection 227.1(1) of the Income Tax Act, R.S.C. 1985,
c. 1 (5th Supp.), as amended ("the ITA") and section 83 of
the Employment Insurance Act, S.C. 1996, c. 23, as amended
("the EIA"). The Minister held Mr. Cadorette liable, as a director of
9056‑3826 Québec Inc. ("the Company"), for amounts that the
Company failed to remit to the Receiver General for Canada for the 1998
and 1999 taxation years ("the relevant period"). The amount of
the assessment is $42,399.65 and consists of source deductions, interest and
penalties that the Company failed to pay under the notice of assessment issued
to the Company on March 6, 2002.
[2]
In making the
assessment in issue, the Minister relied on the following facts, which are set
out in paragraph 21 of the Reply to the Amended Notice of Appeal:
[TRANSLATION]
(a) 9056-3826
Québec Inc. ("the Company") failed to remit, to the Receiver General
for Canada, the source deductions that it was required to remit during the 1998
and 1999 taxation years. Those deductions amounted to the following:
|
|
1998
|
1999
|
|
Federal income tax
|
$11,742.04
|
$1,135.16
|
|
Employment insurance premiums
|
$12,167.62
|
$688.56
|
(b)
As at March
16, 2004, the penalties and interest payable by the Company following the
failures referred to in the preceding subparagraph totalled $15,712.56 for
1998, and $953.71 for 1999.
(c)
The amounts referred to
in the two preceding subparagraphs, i.e. the unpaid source deductions,
penalties and interest, totalled $42,399.65 as at
March 16, 2004.
(d)
The Appellant was a
director of the Company when the Company was required to remit the amounts
referred to above in subparagraph (a).
(e)
The Federal Court
issued a certificate against the Appellant in the amount of $43,193.51 on
June 22, 2004, under section 223 of the ITA.
[3]
By confirming the
assessment in issue, the Minister also relied on the following facts, which are
set out in paragraph 22 of the Reply to the Amended Notice of Appeal:
[TRANSLATION]
(a)
The facts referred to
in paragraph 21 of the Reply to the Amended Notice of Appeal.
(b)
The Company's
registration had been struck off by the enterprise registrar on
May 5, 2000, but that striking-off was revoked on
November 5, 2002.
[4]
According to the Quebec
enterprise registrar's CIDREQ system, the Company was incorporated on
October 29, 1997, under Part 1A of the Companies Act, for the
purpose of operating a restaurant and bar. The Company was registered on
November 3, 1997, and, according to the initial declaration filed on
November 21, 1997, Mr. Cadorette was the sole director and
majority shareholder of the Company.
[5]
The Company operated Resto
BBM in Québec from 1983 to 1990, at which point it was operated by others until
1999, when it was permanently closed. Mr. Cadorette owned the building in
which the restaurant was operated.
[6]
In addition to this
investment in the Company, Mr. Cadorette held franchise interests in 17
A&W restaurants in the Québec and Trois-Rivières areas from 1988 to 2006.
According to Mr. Cadorette, the franchise agreements required exclusivity, but
he managed to secure some time in which to dispose of his other restaurant
business interests.
[7]
Although Resto BBM was
operated by third parties, the Company, being the owner of the restaurant, kept
tabs on the operating results. For the fiscal year ended
November 22, 1998, the unaudited financial statements of the Company,
tendered as Exhibit A‑1, showed a $194,927 operating deficit.
The short-term liabilities included amounts payable for rent, property
tax, insurance, GST, sales tax, and federal and provincial source deductions.
[8]
In early 1999, the
Company permanently closed the restaurant, and, in a "giving in payment"
instrument, the hypothecary creditor took over ownership of the building that
housed the restaurant.
[9]
According to the CIDREQ
system, the Company was struck off the register ex officio on
May 5, 2000; notices of failure to file declarations had been issued to
the Company on May 21, 1999. On November 5, 2002, the Inspecteur général
des institutions financières filed an order under section 56 of the Act
respecting the legal publicity of sole proprietorships, partnerships and legal
persons, R.S.Q., c. P-45, revoking the Company's striking-off in the
register of sole proprietorships, partnerships and legal persons.
[10]
Mr. Cadorette adduced
no evidence confirming that he had resigned from his position as director of
the Company.
Analysis
[11]
The question that the
Court must decide is as follows: Can a person who was a director of a company
at the time that it was struck off the register be held liable for the
company's tax debts following the revocation of its striking-off?
[12]
The power of the
enterprise registrar to strike off the registration of a registrant and to
revoke that striking-off is granted by sections 50 to 57 of the Act
respecting the legal publicity of sole proprietorships, partnerships and legal
persons, R.S.Q., c. P‑45, as amended by S.Q. 2002,
c. 45, which came into force on February 1, 2004, and by
S.Q. 2005, c. 14, which came into force on June 17, 2005.
The sections relevant to the instant case are as follows:
50. The enterprise registrar may,
ex officio, strike off the registration of a registrant having failed to file
two consecutive annual declarations or to comply with a request made under
section 38, by filing an order to that effect in the register. He shall
transmit a copy of the order to the registrant.
The striking off of the registration of a legal person constituted
in Québec entails its dissolution.
However, that legal person is deemed to continue in existence in
order to terminate any judicial or administrative proceeding.
54. The enterprise registrar may,
on application and on the conditions he determines, revoke a striking off under
section 50.
The application for revocation must be presented with the fees
prescribed by regulation.
55. The enterprise registrar shall
revoke the striking off of the registration of every legal person constituted
in Québec that has resumed its existence under the particular Act applicable to
it.
56. The enterprise registrar shall
revoke the striking off of the registration of a registrant by depositing an
order to that effect in the register. He shall transmit a copy of the order to
the registrant.
The revocation of the striking off of the registration of a legal
person constituted in Québec results in its resuming existence on the date of
deposit of the order.
57. Subject to the rights acquired
by any person or group, the registration of a registrant is deemed to have
never been struck off and the legal person constituted in Québec is deemed to
have never been dissolved.
[13]
By virtue of
section 57, supra, once the striking-off has been revoked, the registration
of the company is deemed never to have been struck off, and the legal person
constituted in Quebec is deemed never to have been dissolved. The effect of the
revocation of the striking-off is retroactive, "subject to the rights
acquired by any person or group." Paul Martel, in La Compagnie au
Québec, volume 1 : Les aspects juridiques (Wilson & Lafleur) made
the following remarks, at paragraph 34.53, concerning the reservation of rights
acquired by a person or group:
[TRANSLATION]
Thus, the revival has some, but not full, retroactive effect. The
company's existence is resumed, but is subject to rights that anyone may have
acquired, including, for example, third parties who, during the period
between the dissolution and the reconstitution, have acquired prescription
against a company or obtained a security, hypothec or prior claim on its
property, and third parties who began to use a name identical or similar to the
company's name during that period.
However, this reservation of acquired rights is not a
basis on which the Appellant can assert that his term as director of the
Company ended.
[14]
Section 123.76 of
the Companies Act, R.S.Q., c. C-38, contains the following statement concerning
the termination of a director's term:
123.76 Notwithstanding the expiry of his term, a director
remains in office until he is re-elected, replaced, or removed.
A director may
resign from office by giving notice to that effect.
[15]
The noteworthy conditions
under which a directorship can terminate include the death, personal bankruptcy
or protective supervision of the director, and the voluntary or judicial
liquidation of a company incorporated under the laws of Quebec.
[16]
Since the evidence does
not disclose that the Appellant resigned from his position as director, went
bankrupt or availed himself of protective supervision, or that the Company
was liquidated, the Appellant must be considered never to have lost his status
as director between the time that its registration was struck off and the time
that the enterprise registrar revoked the striking-off of its registration.
Consequently, the Appellant can be held liable for the tax debts of the
Company if the applicable requirements of the ITA and EIA are met.
[17]
The Minister's remedy
under section 227.1 of the ITA and section 83 of the EIA was not
time-barred at the time that the assessment in issue was made because the
Appellant was still a director of the Company. The two-year limitation period
imposed by subsection 227.1(4) of the ITA is not applicable to the case at
bar because it only begins to run at the time that the Appellant ceases to be a
director. Unfortunately for him, Mr. Cadorette never resigned, and the
evidence has not established the date until which the Company continued to
exist. If a person has not ceased to be a director, the two-year limitation
period does not run.
[18]
Subsection 227.1(1) of
the ITA holds the director of a corporation liable for its failures to remit
income tax and other source deductions in respect of employee remuneration, and
subsection 227.1(3) of the ITA relieves a director of such liability if the
director can show that he or she exercised
the degree of care, diligence and skill to prevent the failure that a reasonably
prudent person would have exercised in comparable circumstances.
[19]
Counsel for the
Respondent submits that the Appellant presented no facts showing that he
exercised the degree of care, diligence and skill that a reasonably prudent
person would have exercised in comparable circumstances to prevent the
Company's failure to remit source deductions totalling $23,909.66 in 1998 and
$1,823.72 in 1999.
[20]
At the hearing, the
Appellant acknowledged that he knew that the Company was having financial
problems in 1998 and 1999, but could not cure those problems. In addition, the
Appellant stated that he was not in bad faith, but acknowledged that he was
negligent.
[21]
The Appellant was an
experienced restaurateur. He had personally operated Resto BBM, and had operated
A&W franchises covering 17 restaurants for several years. He knew that
the restaurant in question was running a deficit and that it was not making
source deductions, because he had access to the monthly results.
The Appellant lost a lot of money in the venture, including unpaid rent,
but the restaurant had to stay in operation to preserve the acquired rights as
well as the value of the building that housed it.
[22]
The Appellant cannot
plead ignorance of the ITA and of his responsibilities, nor can he claim not to
have known the Company's true financial state in 1998 and 1999. In my opinion,
the Appellant did nothing to prevent the failure because the restaurant's
financial condition was too disastrous, and only by taking over the restaurant's
operations again and injecting substantial capital could he have restored it to
health.
[23]
Given the
circumstances, I do not believe that the Appellant exercised reasonable care.
Rather, he was passive, and allowed things to worsen until they collapsed.
[24]
In my opinion, it has
not been shown that Mr. Cadorette could avail himself of the defence of due
diligence.
[25]
For these reasons, Mr.
Cadorette's appeal must be dismissed, with costs.
Signed at Montréal, Quebec, this 18th day of July 2008.
"Réal Favreau"
Translation
certified true
on this 28th day
of November 2008.
Brian McCordick,
Translator
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