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Citation: 2004TCC618
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Date: 20040929
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Dockets: 2003-4156(IT)I
2003-4157(GST)I
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BETWEEN:
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BRIAN MacISAAC,
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Appellant,
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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
Campbell J.
Introduction:
[1] The Appellant was assessed
pursuant to section 227.1 of the Income Tax Act for the
failure of Sylvan Valley Construction Limited
("Sylvan") to remit federal income tax withheld from
employees' salaries for the 1998 taxation year, together with
interest and penalties, as required by section 153 of that
Act. The Appellant was also assessed pursuant to
subsection 323(1) of the Excise Tax Act for failure
of Sylvan to remit net tax owing in respect to the GST/HST
reporting periods ending April 30, 1996, April 30, 1997 and
April 30, 1998, together with interest and penalties, as
required by subsection 228(2) of that Act. The
assessments are against the Appellant as the sole director and
officer of Sylvan.
[2] The appeals were heard together on
common evidence.
[3] The Appellant counsel called five
witnesses: Bill Meehan, the solicitor who incorporated Sylvan;
Ron MacGillivray, the bookkeeper for Sylvan; Alan MacIsaac,
the Appellant's father, Greig Campbell, CCRA collections'
officer and the Appellant himself. There were no witnesses called
by the Respondent.
The Evidence of Bill Meehan:
[4] Mr. Meehan, a solicitor for 36
years in Antigonish, Nova Scotia, incorporated Sylvan in December
1994 on instructions received from Alan MacIsaac. His
testimony was clear that the Appellant did not retain him to do
this incorporation. He sought direction from Alan MacIsaac on the
corporate set-up respecting officers, directors, shareholders and
banking.
[5] Meehan set up Sylvan with himself
as a provisional director. After the incorporation in December
1994, it took several months before Alan MacIsaac provided him
with the final instructions on the corporate set-up and the
ultimate transfer of directorship to the Appellant. He was not
sure he ever spoke to the Appellant about Sylvan or anything
else. He recalled that he became aware that the Appellant would
be returning to Antigonish from university in Newfoundland for
the Christmas holidays in 1994 and he hoped to finalize the
incorporation at that time. As nothing happened, he pursued the
matter with Alan MacIsaac into the spring of 1995 at which time
he was told to list the Appellant as director and officer of
Sylvan. He forwarded a final reporting letter to Sylvan, to the
attention of Brian MacIsaac in April 1995, but the address was
not the Appellant's address. He stated he did nothing further
for the company except for a quasi-criminal matter under the
Occupational Safety Standards Act. Alan MacIsaac was
charged along with the company. He stated that he filed a defence
for both at the request of Alan MacIsaac and that "the
company sort of rode on that". In June 2002, when the
Appellant requested a copy of the minute book for Sylvan, Mr.
Meehan testified that he wrote to Alan MacIsaac requesting his
permission to release the book to the Appellant.
The Evidence of Ron MacGillivray:
[6] Mr. MacGillivray, a self-employed
bookkeeper, testified that he had been completing Alan
MacIsaac's returns and doing business with him since 1971. In
late 1994 Alan MacIsaac informed him that he was incorporating a
company to bid on some jobs. This company was to replace his
former company, Silverwood Construction, which was not doing
well. He was aware of who the Appellant was as he recalled seeing
him at the rink and at Alan MacIsaac's residence. He
knew the Appellant was in his early twenties and attending
university at the time Sylvan was incorporated.
[7] He testified that Alan MacIsaac
hired him to complete weekly payroll, prepare monthly remittances
respecting employee deductions and file HST reports and corporate
returns on behalf of Sylvan. It was Alan MacIsaac that provided
all of the information required to complete the above returns and
remittances. Mr. MacGillivray was aware when insufficient amounts
were remitted and also in some instances when no remittances were
made at all because there were no available funds. During his
testimony he reviewed several subcontractors' applications
for payment, which he prepared monthly based on actual
work-amount totals billed and provided to him by Alan
MacIsaac. These forms were signed by the Appellant after Mr.
MacGillivray completed them. He stated that he requested the
Appellant to sign the forms so that Sylvan could get paid. He
thought the Appellant was signing these documents because he was
President of Sylvan. He did not know the Appellant was a
director. On occasion the Appellant did ask him how things were
going and he advised the Appellant that Sylvan was busy and that
everything was fine. These conversations lasted 30 to 45 seconds.
However he never explained to the Appellant that there were
outstanding accounts payable for source deductions and HST
arrears. He testified that his instructions were received from
Alan MacIsaac, and that it was Alan 's company. Although the
Appellant signed the corporate documents relating to HST
remittances and payroll deductions, he never asked about the
status of these accounts. Mr. McGillivray, on cross-examination,
stated that he never informed the Appellant that Sylvan was
falling behind in tax remittances but that he did discuss it with
Alan MacIsaac.
The Evidence of Alan MacIsaac:
[8] Alan is the father of the
Appellant. Alan has been in the construction industry since 1960,
most of the time being self-employed. The Appellant is one of
eight children. Alan stated that he had two corporations -
Silverwood Construction and Sylvan. He testified that when
Silverwood got into financial problems and its equipment had to
be sold, he decided to incorporate Sylvan in late 1994. Alan, his
wife and daughter, Allana, were the directors of Silverwood. He
stated that he gave Bill Meehan instructions to incorporate
Sylvan and that he paid him to do it. He testified that he gave
Meehan instructions to list his son, Brian, as the director of
Sylvan but did not recall just how it came about. He wanted Brian
to help with Sylvan until Silverwood's affairs were concluded
at which time things could be switched. His conversations with
Brian concerning this matter were brief. He did recall that he,
his wife and daughter were assessed for director's liability
in respect to his other company, Silverwood. He never disclosed
or discussed these assessments with his son.
[9] He stated that his son worked for
Silverwood for three summers while in high school doing
"just every dirty, old job that came along". He never
discussed the financial aspects of Silverwood with his son or any
other family member.
[10] All of the equipment leases for Sylvan
were executed by Alan MacIsaac. He also indicated that he
executed contracts on behalf of Sylvan. For example he testified
that he signed a contract for $467,000.00 with Walter and SCI
Corporation. He stated that Brian knew he was going to do this
job but that he did not discuss Sylvan's work with Brian nor
did he specifically discuss this contract for $467,000.00 or any
other with his son.
[11] He reviewed how he and Ron MacGillivray
arrived at the employee deductions and employee salaries. He
stated that it was his responsibility to make the decision of how
much money to remit to Revenue Canada when there were
insufficient funds. However, he never advised Brian that Sylvan
was behind in payroll deductions and HST remittances. Although he
testified he could have signed the documents that Brian signed at
MacGillivray's office, he simply did not. He testified that
other documentation prepared by MacGillivray on Sylvan letterhead
respecting workmanship guarantees were signed by himself and not
his son because he ran Sylvan.
[12] On cross-examination he stated that he
did not advise his son that Silverwood was experiencing financial
difficulties, and that if his son knew about it, it was not
because he had made his son aware of the problems. In fact he
stated he never discussed Silverwood's financial problems
with anyone. He simply told Brian that he did not wish to be
associated with Sylvan until he had Silverwood's affairs
finalized, at which time he would switch Sylvan from Brian's
name to his own. Sylvan never paid any money to Brian in respect
to wages, director's fees or profit, although Alan MacIsaac
took a salary.
The Evidence of Greig Campbell:
[13] The primary reason for calling this
witness was to introduce a number of documents into evidence.
These documents included the payroll collection diary, the GST
collection diary, GST registration forms, third party
authorization form, and several memos of Margaret Buckley
relating to sections 227.1 and 323.
[14] Mr. Campbell testified that he
travelled to Antigonish in April 1998 with several files,
including the files of Sylvan and Silverwood, plus files
respecting a numbered company, Alan MacIsaac Construction. All
three companies listed the same mailing address. His only contact
with the Appellant was a brief telephone conversation during this
trip. He called the Appellant at his place of work, the
Department of Social Services, and advised him that as director
of Sylvan he would be responsible for monies owing. He stated
that the Appellant advised him his father ran Sylvan and he would
have his father contact Mr. Campbell. There were no other
contacts between the Appellant and this witness.
The Evidence of Brian MacIsaac, the Appellant:
[15] The Appellant reviewed his academic and
employment background. For a number of years he was a case worker
with Social Services and is now a school teacher. His only
involvement with his father's construction business was doing
odd jobs as a summer student. He started his university years in
business but did not do well and switched courses. His degrees
are in history, sociology and physical education. His community
activities had very little if any direct involvement with
finances, fundraising or bookkeeping.
[16] The Appellant testified that as one of
eight children, he was raised by a father who controlled the
household. His mother had no control over monetary matters. His
father never discussed his business operations or his financial
difficulties with his family members. When Silverwood began
experiencing financial problems, Alan MacIsaac never discussed
this with the Appellant except to say there was no more work and
therefore no need to keep the equipment.
[17] When the Appellant's father asked
him to help start up another company (Sylvan), he told the
Appellant it would assist his father in bidding on new jobs while
Silverwood was winding down. The Appellant testified that he
trusted his father and felt he was helping him out.
[18] The Appellant knew Ron MacGillivray,
because he had him complete his personal tax returns. He also
knew Mr. MacGillivray's children. When he agreed to assist
with Sylvan, he testified that he was told that MacGillivray and
his father would operate the business. His father requested the
Appellant to open an account at the local Credit Union. After
this, his father controlled the corporate chequebook and retained
it in his possession. The Appellant would receive a visit at his
workplace from his father to have cheques signed or he would
receive a telephone call at work to attend at MacGillivray's
office to execute documentation. He stated that the signatures on
the GST registration form (Exhibit A-4) and the third party
authorization form (Exhibit A-5) were not his but that he did
execute other documentation at MacGillivray's office which
included the subcontractors' application for payment. He
never read the documents but stated that MacGillivray explained
that the documents had to be signed so that Sylvan would get paid
for work completed.
[19] The subcontractors' certificate,
which he agreed he executed on behalf of Sylvan, at
MacGillivray's office, contained a paragraph stating that any
taxes owed by Sylvan were current. The Appellant, on
cross-examination, stated that he never specifically inquired
whether taxes were actually paid as both his father and
MacGillivray assured him that things were going well and
everything was up to date.
[20] Prior to his telephone call from Greig
Campbell in April 1998, he testified that neither his father nor
Ron MacGillivray ever indicated to him that Sylvan was
experiencing remittance problems with Revenue Canada. After the
call from Mr. Campbell, he went to his father and asked him to
deal with this matter. His father told him he would deal with the
problem when a job he was working on was completed.
Issue:
[21] Whether the Appellant is liable under
section 227.1 of the Income Tax Act for Sylvan's
failure to remit federal income tax in respect to employee
salaries and whether the Appellant is also liable pursuant to the
corresponding subsection 323(1) of the Excise Tax Act
for Sylvan's failure to remit federal net tax for three
reporting periods. The amounts were also assessed for interest
and penalties.
Analysis:
[22] A director of a corporation is not
liable for the corporation's failure under subsection 323(3)
of the Excise Tax Act where that director
... exercised the degree of care, diligence and skill to
prevent the failure that a reasonably prudent person would have
exercised in comparable circumstances.
This creates the possibility of a due diligence defence for a
director.
[23] For all practical purposes the wording
in subsection 323(3) is the same as the corresponding subsection
227.1(3) of the Income Tax Act.
[24] Both sections enable a director to hold
himself harmless from liability in certain circumstances.
Therefore I must determine whether the Appellant acted with the
degree of care, diligence and skill required pursuant to both
subsections to prevent the non-payment of net tax for three
GST/HST reporting periods and to prevent the non-payment of tax
withheld from employee's salaries for the 1998 taxation
year. Each case must be decided on its facts.
[25] I believe the approach taken by
Associate Chief Justice Bowman in Cloutier et al. v.
M.N.R., 93 DTC 544 is the favoured approach. At pages 545 and
546 of his judgment, he states:
The question therefore becomes one of fact and the court must
to the extent possible attempt to determine what a reasonably
prudent person ought to have done and could have done at the time
in comparable circumstances. Attempts by courts to
conjure up the hypothetical reasonable person have not always
been an unqualified success. Tests have been
developed, refined and repeated in order to give the process the
appearance of rationality and objectivity but ultimately the
judge deciding the matter must apply his own concepts of common
sense and fairness. [See Note 1 below] It is easy to
be wise in retrospect and the court must endeavour to avoid
asking the question "What would I have done, knowing what I
know now?" It is not that sort of ex post facto
judgement that is required here. Many judgement calls
that turn out in retrospect to have been wrong would not have
been made if the person making them had the benefit of hindsight
at the time.
[26] I have no difficulty in finding as a
fact that there was nothing that the Appellant could have done to
prevent Sylvan's non-payment of money owing to the Government
of Canada. The facts would indicate that Alan was the patriarchal
head of the family unit. Alan did not discuss his finances with
anyone, including his wife. He maintained a tight rein over the
family's finances. Both Alan and Brian confirmed that Brian
was the child that was closest to his father. Brian was 25 years
old when his father asked him to help get another company
(Sylvan) started. Brian was a couple of years out of university
working as a caseworker for Social Services. His educational
background was in the arts and physical education. He had no
business expertise. In fact he realized his strengths were not in
the business area after attempting and then failing a business
course at university.
[27] The actual term "director"
was never mentioned when Alan asked his son to assist him in
setting up Sylvan. In fact I believe the evidence supports my
conclusion that neither Brian nor his father had really any idea
that Brian was being asked to be a director, although I do
believe that Alan knew the financial ramifications of having
Brian assist him with Sylvan. Brian agreed to assist his father
because his siblings were either in high school or college and
most importantly as Brian stated he trusted his father and had no
reason not to. However the evidence is that Brian was unaware
that his father's other company Silverwood was bankrupt, that
large sums of money were owed to Revenue Canada, and that Alan,
his wife and Brian's older sister, Allana, had all been
assessed for director's liability. In fact it is very telling
that during the hearing it came to light that Alan MacIsaac also
had a numbered company, Alan MacIsaac Construction, that no one,
including Brian's counsel, seemed to be aware of. This third
company also owed huge amounts of money to Revenue Canada. None
of this information, including the existence of a third company,
was disclosed to Brian by his father or any other family member.
He was aware that his father was selling off Silverwood's
equipment but he believed that it was to pay the corporate loans
because of a slow market. He was never told that in actual fact
Silverwood was wading through a sea of debt with remittances
unpaid.
[28] Sylvan was incorporated by Bill Meehan
pursuant to instructions received from Alan. This is supported by
the evidence of both Alan and Mr. Meehan. Meehan received no
instructions of any kind from Brian and in fact Brian never met
with Meehan or attended at his office to execute any corporate
documentation. Meehan testified that his usual practise was to
incorporate a company naming himself as a provisional director
and then after incorporation transfer the company to the
appropriate individuals. It was Alan who directed Meehan to
appoint Brian as a director. There were no conversations, by
telephone or otherwise, between Brian and Meehan, no
correspondence to Brian and just simply no direct contact between
Meehan and Brian.
[29] It was Alan who gave instructions to
MacGillivray, the bookkeeper. Again there was a certain degree of
trust on Brian's part as MacGillivray had completed
Brian's personal returns in the past and Brian was aware that
MacGillivray had also done work for his father. MacGillivray
testified that Alan hired him to prepare weekly payroll and
monthly remittances. In addition MacGillivray listed himself as
the contact person for Revenue Canada on the GST registration
form and the third part authorization. When asked however about
GST remittances, MacGillivray stated he did nothing. Sylvan
required a GST number so it could bid on jobs where such a number
was required. MacGillivray then did nothing in respect to GST
remittances except to bring it up with Alan. He had first hand
knowledge and by his own admission was fully aware that Sylvan
was not remitting the tax and that it was behind with the
employee source deductions. Although both he and Alan knew fully
that Sylvan had remittance issues, a number of corporate
documents, including the request for payment forms respecting
jobs completed, were placed before Brian for execution with
certifications that Sylvan was in compliance and current with its
tax remittances. However Brian was never told that these
certifications were incorrect. He was intentionally kept in the
dark. In fact when asked by Brian on a couple of occasions how
things were going, MacGillivray's amazing response was -
"I told him things were fine". Yet MacGillivray knew
full well that some remittances were either insufficient or had
not been paid at all. He clearly felt he had no obligation to
disclose these facts to Brian because as he stated in his
evidence "it was Alan's company". The only two
individuals privy to this information were Mr. MacGillivray and
Alan. When MacGillivray was contacted by Revenue Canada, it was
not Brian he called but Alan. It was MacGillivray who prepared
the documents that Brian signed at the direction of Alan. The
evidence here fully supports that these two individuals, while
aware of Sylvan's operations and its financial problems,
intentionally kept Brian "in the dark". It is clear
that these two individuals played Brian like a puppet to do their
bidding so that Sylvan could continue to operate. I believe both
knew that if Brian was to be told the extent to which remittances
had not been made, in all likelihood he would refuse to sign
documentation until they were made current. I believe Brian in
good faith trusted both his father and MacGillivray and accepted
what he was told - that all was well, everything was fine. In the
end, he was purposively misled by two individuals in whom he had
placed his trust. It is astonishing that ethically MacGillivray
felt no professional obligation to provide this information to
Brian as the corporate director, when he was asked, but I find it
even more astonishing and abhorrent that a father would choose to
have his son front these activities, knowing full well the
potential financial consequences of non-remittance to Revenue
Canada. This knowledge came first hand when as a director of his
other two companies, Silverwood and the numbered company, he was
found liable for the same tax issues. Instead of taking
responsibility for his own actions and choices not to remit, he
hid behind his son.
[30] The evidence clearly supports my
finding that Brian was powerless to do anything. In fact I
believe he felt he could not refuse to help his father when he
was asked to do so because he respected his father for rearing
and educating eight children. In these circumstances the
Appellant ends up being the unwitting pawn in an operation
controlled by his father and his father's bookkeeper. He did
nothing and took no action because there was nothing he could do.
His father retained total control over the corporate contract
bids, its employees, wages, equipment leases and job bids, right
down to the chequebook. He directed the lawyer and the
bookkeeper. There was no consultation with Brian on any aspect of
Sylvan's operations and I conclude that this was intentional.
Brian had no way of accessing any information in respect of
Sylvan except to make the occasional inquiry, which he did, of
both his father and MacGillivray as to how things were going. He
had no reason to suspect that his father and MacGillivray were
not remitting tax. Alan knew Brian respected and trusted him and
that trust was grossly betrayed. I believe he intentionally did
not disclose pertinent information on his two prior companies and
their remittance problems which had affected both his wife and
his daughter, and that MacGillivray became part of the scheme
when he too failed to truthfully answer Brian's
inquiries.
[31] There was a question whether it was
Brian's signature on several documents with the implication
being that someone else had forged his signature. I accept the
Appellant's evidence on this as he was an honest and
straightforward witness but I do not feel in reaching the
conclusion I have that this is an important or deciding factor in
this case. I believe the Appellant, if his father and
MacGillivray had directed him to sign, would have executed them
under their direction. He has no business background or
experience in GST accounts or payroll remittances. His
educational background, his extracurricular activities, his work
history, both for his father and his other employers, support
this. In 1998 when these problems did surface and Brian was
contacted by Greig Campbell, he immediately took steps to
ensure the Revenue Canada issues were addressed. He telephoned
his father and asked him to take care of it. In reality everyone
felt Sylvan was Alan's company and that it was Alan who
operated it and was responsible for issues such as this. Brian
did the only thing he could do - go to his father and demand that
he deal with it because it was his father who knew about it.
Brian was powerless to do anything else. He never had control of
a chequebook and his father assured him that the Revenue Canada
remittances would be dealt with as soon as a job where he was
experiencing problems was completed. Except for Greig
Campbell's call and several telephone messages from Heather
Harte it appears there were no further attempts by Revenue Canada
to contact Brian. The next contact is a proposal letter sent to
him, after Sylvan had closed its doors, in 2001.
[32] This case bears some resemblance to the
case of Fitzgerald et al. v. M.N.R., 92 DTC 1019 where
Justice Mogan stated at page 1021:
It appears to me that the Appellants were directors in law
(i.e., their names appear in the Company's minute book as
directors) but they were not in fact directors. They never met as
directors. They never acted alone or in concert as directors.
They had no knowledge of the management or administration of the
Company's business. They had no equity in the Company. They
had no way of compelling the fifth director (Eugene Fitzgerald,
the sole shareholder) to disclose any information concerning the
Company's financial affairs. They were directors in law only
because of their family connection to Eugene Fitzgerald. Although
any one of them could have resigned as a director if he or she
had thought of it, such resignation would have been a source of
family friction and, from the viewpoint of the male Appellants
(the three sons), the idea of resigning as a director would not
have occurred to them before the idea of quitting their
employment.
I would not hold as a general rule that a passive or inactive
director is free from liability under subsection 227.1(1) of the
Income Tax Act. For example, a person who consents to being a
director of a corporation in order to accommodate a friend or
client and then fails to participate as a director in the affairs
of the corporation is still very much at risk under subsection
227.1(1). The passive or inactive director is not,
per se, free from liability under subsection
227.1(1). But when the passive or inactive director has become a
director in the context of a family business operated by a
corporation which is dominated by an uncompromising patriarch,
the domestic responsibility for maintaining harmony within the
family becomes interwoven with the legal responsibility to third
parties and, in these circumstances, I think that it is not
reasonable to impose the same standard of care, diligence and
skill on the passive "family director" as on the person
who is truly free to become a director and does so outside a
family context.
[33] Justice Mogan's propositions are
applicable to the present facts. I find the Appellant has
satisfied the tests set out in subsection 323(3) of the
Excise Tax Act and subsection 227.1(3) of the Income
Tax Act. He exercised the degree of care, diligence and skill
that a reasonably prudent person would have exercised in
comparable circumstances. The key words are "in comparable
circumstances" because the Appellant did behave as a
reasonably prudent person would, given he was a 25-year old who
obviously respected and looked up to a father who had been the
breadwinner and dominated the family household. It was reasonable
for the Appellant to assist his father in opening a new company
when his father asked him for help as he had no knowledge that
his father's first company, Silverwood, was bankrupt, owed
money to Revenue Canada and that his father had been assessed for
these amounts as a director, along with his mother and his
sister. During the hearing information concerning a third company
surfaced which the Appellant had no knowledge of. This company
also owed large amounts of money to Revenue Canada. His father
was the strong-willed head of the household who had provided for
eight children and had always worked in the construction industry
operating his own business. With the Appellant's background
within the dynamics of this patriarchal household, he did exactly
as any son his age would do in comparable circumstances. He
assisted a father who then, along with a bookkeeper, failed to
disclose pertinent information which both knew could have serious
financial ramifications for the Appellant.
[34] These appeals are allowed and the
assessments are vacated.
Signed at Ottawa, Canada this 29th day of September 2004.
Campbell J.
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