Citation:2006TCC609
Date: 20061114
Docket: 2004-3873(GST)I
BETWEEN:
RANDY D. KNECHT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Beaubier, J.
[1] This appeal pursuant to the Informal Procedure was heard at Kelowna, British Columbia on November 2, 2006. The Appellant testified. The Respondent called Hannah Chesher, the collections officer on the file and John McWhirter, the appeals officer on the file.
[2] Paragraphs 6 to 14, inclusive, of the Reply to the Notice of Appeal set out the matters in dispute. They read:
6. By Notice of Assessment - Third Party numbered A101366, dated June 10, 2003, the Minister assessed the Appellant under subsection 323(1) of the Excise Tax Act, R.S.C. 1985, c. E-15, as amended, (the "Act"), for the amount of $70,505,63, representing net Goods and Services Tax ("GST"), interest and penalties as detailed in the attached Schedule "A", in respect of the Company's failure to remit net tax under subsection 228(2) of the Act.
7. On September 04, 2003, the Appellant filed a Notice of Objection.
8. By Notice of Decision dated June 25, 2004, the Minister confirmed the assessment.
9. In assessing and confirming the assessment, the Minister relied on the same assumptions of fact, as follows:
a) the Company was in the business of selling new and used vehicles;
b) the Company registered under Part IX of the Act, effective January 01, 1991, and was assigned GST registration number 102813474RT;
c) the Company was required to file its GST returns on a monthly basis;
d) at all material times, the Company made taxable supplies;
e) at all material times, the Company collected or was required to collect GST at the standard rate of 7% on the taxable suppliers;
f) the Company did not file its GST returns on time for the periods ending November 30, 1998, December 31, 1998 and February 28, 1999 to June 30, 1999;
g) the Company's car financing loan with GMAC was called in full in January 1999;
h) the Company filed its GST returns for the periods from November 01, 1998 to June 30, 1999, as detailed in the attached Schedule "B";
i) the Company continued to operated (sic) at a reduced level until the end of 1999;
j) the Company did not remit the net tax for the periods from November 1, 1998 to February 28, 1999 and from April 1, 1999 to June 30, 1999;
k) on April 28, 1999, a certificate for the Company's liability for GST, penalty and interest in the amount of $36,911.89 was registered in the Federal Court of Canada;
l) on September 30, 1999, a Writ of Seizure and Sale was issued in respect of April 28, 1999 certificate, and execution for the amount was returned unsatisfied on August 31, 2000;
m) on October 1, 1999, a certificate for the Company's liability for additional GST, penalty and interest in the amount of $22,436.65 was registered in the Federal Court of Canada;
n) on October 1, 1999, a Writ of Seizure and Sale was issued in respect of the October 1, 1999 certificate, and execution for the amount was returned unsatisfied on August 31, 2000;
o) at all material times, the Appellant was a shareholder and a director of the Company;
p) the Appellant has experience and background in the automobile dealership business;
q) the Appellant was actively involved in the business operations;
r) at all material times, the Appellant as a director of the Company was aware that the Company was to charge, collect and remit GST on taxable supplies;
s) the Appellant knew the Company was in financial difficulty in the beginning of 1999;
t) at all material times, the Appellant knew, or ought to have known, of the responsibilities of a director, the obligation to collect and remit GST, and his statutory liability as a director for the Company's failure to remit GST; and
u) the Appellant did not exercise the degree of care, diligence and skill to prevent the Company's failure to remit, that a reasonably prudent person would have exercised in comparable circumstances.
B. ISSUES TO BE DECIDED
10. The issue is whether the Appellant is liable for the Company's failure to remit to the Receiver General net tax as required, plus related penalties and interest.
C. STATUTORY PROVISIONS RELIED ON
11. He relies on sections 123, 165, 221, 222, 225, 228, 280, 296 and 323 of the Act.
D. GROUNDS RELIED ON AND RELIEF SOUGHT
12. He respectfully submits that the Minister properly assessed the Appellant under section 323 of the Act for the Company's failure to remit to the Receiver General an amount of net tax as required by subsection 228(2) of the Act, plus related penalties and interest.
13. He further submits that the Appellant did not exercise the degree of care, diligence and skill to prevent the Company's failure to remit, that a reasonably prudent person would have exercised in comparable circumstances.
14. He requests that the appeal be dismissed.
None of the assumptions in paragraph 9 were refuted.
[3] The Appellant became the chief operating officer of Ken Taylor Motors Ltd. (the "Company") a GM dealer in Revelstoke, British Columbia after his father's death in mid-1996. On November 26, 1999, he signed a resignation as a director of the Company (Exhibit A-3) but he did not deliver it to anyone; it was simply left in the file in his office. On August 10, 2001, the Company was dissolved under the Business Corporations Act of British Columbia. As a result, under the law, the Appellant remained a director of the Company until August 10, 2001. On June 10, 2003, the Appellant was assessed for third party liability as a director of the Company for GST, interest and penalties owed by the Company in the amount of $70,505.63.
[4] The Appellant was the "inside" director of the Company and its chief operating officer. All of the managers and the bookkeeper and controller, Annita May, reported to him and he managed the Company on a day to day basis. Annita May had cheque signing authority, as did the Appellant. But in January, 1999 the Appellant removed Annita May's cheque signing authority after a group of Company cheques, including two to General Motors Acceptance ("GMAC"), could not clear the bank. As a result, GMAC sent two representatives to the Company premises in Revelstoke on January 15, 1999. They stayed there until the Company had sold enough vehicles to pay out GMAC on about February 4, 1999. All of the sales' payments, including the GST amount on each sale (a total of $14,191.03) were taken by GMAC to satisfy its loan after which GMAC would release the sold vehicles. Many of the vehicles were sold at a loss and many were sold to other dealers in the interior of British Columbia. In January, 1999 the Appellant asked GM to find a buyer for the dealership.
[5] As this was occurring, the Company's chartered accountants were advising the Appellant to pay off the Company employees and to pay all taxes and withholdings, including the GST, otherwise he would be personally liable. But the Company was unable to continue to try to operate until its assets could be sold and at the same time to pay the employee withholdings and the GST.
[6] It is clear to the Court from the totality of the evidence that the Company was in a poor cash flow position at the time of the elder Mr. Knecht's death in 1996. Mr. Knecht kept the Company operating despite this.
[7] Mr. Knecht testified that in November, 1998 the Company's financial position had deteriorated to such a condition that he obtained, with some difficulty, a "short term" overdraft from the Royal Bank. Thus, the Appellant and the Company had a clear warning in November, 1998 that things were not well. Nonetheless, Mr. Knecht failed to take hold of operations or to check the GST account or the employee withholdings account. In particular, he allowed the accountant and controller to continue to write Company cheques and to pay accounts in her sole discretion. In the Court's view, he was negligent in November, 1998 and continuing thereafter when he did not check on and see that the GST was paid or, for that matter, take active control of the Company's business operations in November, 1998.
[8] Mr. Knecht allowed Annita May to pay the various accounts as she saw fit (including a $32,000 debt to her), until January, 1999. Mr. Knecht excused this failure on his part on the basis that he was busy sorting out estate matters and he was not paying attention to the Company but his duty as president, director and chief operating officer, was to manage the Company and pay its accounts. In particular, the GST account was a trust account to the government of Canadaand not merely another simple debt. On the evidence before the Court, Mr. Knecht did not actively supervise the Company's payments out, starting in 1996 when his father died.
[9] From January, 1998 until the GM dealership was lost, the Appellant was the dealer principal for GM and from the time of his father's death in mid-1996 the Appellant was the Company's operating officer. After the cheque failures of January, 1999 the Appellant kept paying the operating bills such as insurance, hydro, telephone and payroll, in order to keep the doors open so as to sell an operating Company. Thus, it was a conscious decision on his part as to who to pay. But he admitted that once the vehicles were gone in February, 1999 all the Company had was its assets. Most of the staff was laid off then as well, with consequent severance pay outs.
[10] The Company listed its property for sale in 1999 at the appraised value of $150,000. In September, 1999 it accepted an offer to buy the Company property. The Appellant's testimony was not clear on the distribution of the proceeds of sale. $92,000 was paid to secured creditors on the property but the actual sale price and subsequent net proceeds were not detailed. The Appellant feels that Canadian Revenue Agency ("CRA") should have seized its GST money from these proceeds but it did not. The Appellant failed to explain why the Company did not pay CRA these proceeds to the GST account.
[11] On November 17, 1999 the sheriff seized the Company assets including book receivables of about $70,000. On November 26, 1999 GM accepted the Company's resignation as a dealer after weeks of negotiations; this enabled the Company to return its GM parts for payment. In February, 2000 the remaining Company assets were sold at auction.
[12] The Appellant was upset that an attachment by CRA to the Royal Bank which would have recovered $32,770.04 failed because of improper service on about July 29, 1999. He also felt that CRA should have pursued other Company debtors more aggressively. However, in the Court's view there are two answers to this, the second of which is overriding. They are -
1. The Company should have collected its debts aggressively itself while it could have.
2. Any alleged failure by CRA does not excuse the Company and the Appellant as its operating officer from not collecting and paying the GST as it should have and as its chartered accountants warned the Appellant to do.
[13] In the Court's view, the Appellant, as the operating director, had a duty to prevent the Company's failure to remit from the time he became the operating director on his father's death in June, 1996. He failed to supervise Annita May, the controller and that became evident to everyone, including the Appellant in January of 1999. The Company's financial short flow was obvious to him in November, 1998 when he had to arrange a "short term" over draft. From then on he had a clear warning of the problems and in January, 1999 the Company's chartered accountants warned him of his personal liability for GST.
[14] The Appellant's duty was to prevent a failure to remit. He controlled the Company and before January, 1999 he negligently failed to prevent the failure to remit GST. From November, 1998 on, the Appellant was clearly negligent in failing to prevent the Company's failure to remit GST when a reasonably prudent person would have seen to the payment of the GST. From January, 1999 on, he deliberately chose to pay other accounts in priority to the GST. For these reasons, the appeal is dismissed.
Signed at OTTAWA, Canada, this 14th day of November, 2006.
"D.W. Beaubier"
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