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Citation: 2004TCC311
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Date: 20040917
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Docket: 2001-1954(GST)G
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BETWEEN:
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ROBERT ALAN MORIYAMA,
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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
Bonner, J.
[1] This is an appeal from an
assessment under s. 323 of the Excise Tax Act (the
"Act"). The assessment arises from the failure
of Jetcom Communications Inc. ("Jetcom") to remit net
tax as required by ss. 228(2) of the Act for periods
listed in Schedule A to the Notice of Assessment as follows:
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Period Ending
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Net
Tax
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Interest
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Penalty
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Balance
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31-Oct-97
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$44,553.11
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$2,105.43
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$3,066.69
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$49,725.23
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30-Nov-97
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42,008.68
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1,697.75
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2,443.84
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46,150.27
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31-Dec-97
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12,616.58
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464.03
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659.44
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13,740.05
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31-Jan-98
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25,040.34
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844.30
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1,184.36
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27,069.00
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28-Feb-98
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33,160.17
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1,013.77
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1,398.98
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35,572.92
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31-Jul-98
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18,498.02
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232.42
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292.91
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19,023.35
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31-Aug-98
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24,200.92
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207.13
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261.04
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24,669.09
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31-Oct-98
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31,517.40
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16.45
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20.73
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31,554.58
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30-Nov-98
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28,773.45
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0.00
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0.00
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28,773.45
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Total
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$260,368.67
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$6,581.28
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$9,327.99
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$276,277.94
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[2] The Appellant was at all relevant
times sole director of Jetcom. Subsection 323(1) of the
Act imposes vicarious liability on directors in respect of
corporate failure to remit. It provides:
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.
Subsection 323(3) limits the circumstances in which ss. (1)
can apply as follows:
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.
[3] There are several issues to be
decided. First, there is a preliminary application on behalf of
the Appellant to vacate the assessment on the ground that the
individual who issued it was not authorized to do so. Second, the
Appellant raises a due diligence defence under under
ss. 323(3). Finally, there is a question whether a claim for
the amount of Jetcom's liability was proved within the
six-month period laid down in paragraph 323(2)(c) of
the Act.
[4] I turn first to the preliminary
issue. The notice of assessment under appeal was not signed but
it bore the title of the Deputy Minister of National Revenue. It
was in fact prepared and issued by Christopher Ball, a
collections officer with the Collections Division of the Toronto
North Taxes Services Office of the Canada Customs & Revenue
Agency ("CCRA"). Once Mr. Ball decided to assess the
Appellant he informed the Appellant of his decision. He prepared
a memorandum to Michelle Douglas, his team leader, and obtained
her concurrence with his decision.
[5] The question whether the Appellant
should be assessed was never considered by any official holding a
position with the CCRA higher than Mr. Ball and Ms.
Douglas
[6] In deciding to assess and in
preparing his memorandum to his team leader, Ms. Douglas, Mr.
Ball focused on the question whether the Appellant was a director
of Jetcom and whether, if assessed, the Appellant had the ability
or assets to pay. Mr. Ball had limited experience and very little
instruction in dealing with and deciding the question whether a
director should be assessed pursuant to ss. 323(4) and
296(1) of the Act.
[7] Counsel for the Appellant argued
that the "discretionary"[1] power to assess granted to the
Minister of National Revenue by ss. 323(4) was not exercised by
the Minister, by the Commissioner of Customs and Revenue, or by a
designated officer or agent or class of officers or agents
authorized by the Minister. Therefore, it was said, the
assessment and notice of assessment were of no force or effect.
The Appellant relied upon s. 275 and 323 of the Act.
[8] Section 275 of the Act
reads in part as follows:
275.(1) The Minister shall administer and enforce this Part
and the Commissioner may exercise all the powers and perform the
duties of the Minister under this Part.
(2) Such officers, agents and employees as are necessary to
administer and enforce this Part shall be appointed or employed
in the manner authorized by law.
(3) The Minister may authorize a designated officer or agent
or a class of officers or agents to exercise powers or perform
duties of the Minister under this Part.
Counsel for the Appellant noted that on September 27, 1999,
the then Minister of National Revenue signed a document entitled
Delegation of the Minister of National Revenue's Powers
and Duties - Excise Tax Act (the "Delegation
Instrument"). The delegation instrument authorizes
persons holding the position of Associate Deputy Minister and
Assistant Deputy Minister of National Revenue to exercise all the
powers of the Minister under the Act. It further
authorizes other officers to perform powers specifically assigned
to them. Nothing in the instrument specifically addresses or
assigns to "complex case officers", Mr. Ball's
classification at the relevant time, the authority to assess
which is conferred on the Minister by ss. 323(4).
[9] Counsel's argument
proceeded
a) the Act and delegation instrument set out an
explicit scheme of delegation of the Minister's powers under
the Act. The delegation instrument clearly demonstrates
that the Minister specifically considered each of the powers
granted to him by the Act. With respect to each power that
he did choose to delegate, he specifically named the class of
officers who would have the appropriate capacity and experience
to exercise them;
b) Because neither ss. 323(4) nor
296(1) appear in the Schedule to the Delegation Instrument, it is
evident that the Minister chose not to delegate the discretionary
powers contained in these ss.;
c) The only persons who are
entitled to exercise the Minister's discretionary power to
assess under the Act are: (collectively referred to
hereinafter as the "Delegates"):
The Minister of National Revenue
- Act ss. 275(1)
The Commissioner of the Canada Customs & Revenue Agency
-
Act ss. 275(1)
The Deputy Minister of National Revenue
- Interpretation Act paragraph 24(2)(c)
The Assistant Deputy Minister of National Revenue
- Delegation Instrument, paragraph 2
The Associate Deputy Minister of National Revenue
- Delegation Instrument, paragraph 2
[10] The nature of the act of assessing is
described by Thorson, P. in Pure Spring Ltd. v. M.N.R.[2] as
follows:
... The assessment, as I see it, is the summation of all the
factors representing tax liability, ascertained in a variety of
ways, and the fixation of the total after all the necessary
computations have been made.
[11] In my view, nothing in the language of
the statute or in the nature of the power which is exercised when
a s. 323 assessment is to be issued suggests that the legislature
intended that the Minister must exercise the power personally or
that the power be exercised only by the delegates referred to
above. The issuance of such an assessment is a simple
administrative function forming part of the ordinary day-to-day
administration and enforcement of the Act. The fact that
the Minister has exercised his ss. 275(3) power by signing the
delegation instrument does not support an inference that
"officers, agents and employees" employed under ss.
275(2), as Mr. Ball obviously was, require an express grant of
specific ministerial authority to perform routine administrative
acts. Even if the power exercised when a s. 323 assessment is
issued could be regarded as discretionary in nature, the
legislation must be interpreted in light of the common sense
principle referred to in R. v. Harrison:[3]
...Although there is a general rule of construction in law
that a person endowed with a discretionary power should exercise
it personally (delegatus non potest delegare) that rule can be
displaced by the language, scope or object of a particular
administrative scheme.
...A power to delegate is often implicit in a scheme
empowering a Minister to act. As Professor Willis remarked in
"Delegatus Non Potest Delegare", (1943), 21 Can. Bar
Rev. 257 at p. 264:
...in their application of the maxim delegatus non potest
delegare to modern governmental agencies the Courts have in most
cases preferred to depart from the literal construction of the
words of the statute which would require them to read in the word
"personally" and to adopt such a construction as will
best accord with the facts of modern government which, being
carried on in theory by elected representatives but in practice
by civil servants or local government officers, undoubtedly
requires them to read in the words "or any person authorized
by it".
See also S.A. DeSmith, Judicial Review of Administrative
Action, 3d ed., at p. 271. Thus, where the exercise of a
discretionary power is entrusted to a Minister of the Crown it
may be presumed that the acts will be performed, not by the
Minister in person, but by responsible officials in his
department: Carltona, Ltd. v. Commissioners of Works [[1943] 2
All E.R. 560 (C.A.)]. The tasks of a Minister of the Crown in
modern times are so many and varied that it is unreasonable to
expect them to be performed personally. It is to be supposed that
the Minister will select deputies and departmental officials of
experience and competence, and that such appointees, for whose
conduct the Minister is accountable to the Legislature, will act
on behalf of the Minister, within the bounds of their respective
grants and authority, in the discharge of ministerial
responsibilities. Any other approach would but lead to
administrative chaos and inefficiency. ...
[12] There is no foundation in the evidence
for a conclusion that the issuance of the assessment fell outside
the scope of the very sort of function which Mr. Ball was hired
to perform. The case is not analogous to that of the issuance of
an assessment by a person hired, for example, as a window
cleaner. The matter is governed by ss. 275(2) and (3) of the
Act. In my view, Mr. Ball had authority to issue the
assessment.
[13] I turn next to the question of the due
diligence defence. The Respondent took the position that the
Appellant:
...did not exercise the degree of care, diligence and skill
that a reasonably prudent person would have exercised in
comparable circumstances to prevent the failure of Jetcom to
remit to the Receiver General of Canada the net tax, interest and
penalties, stated above ..., that a reasonably prudent person
would have exercised in comparable circumstances.
and he pleaded that supposed "fact" as an assumption
made on assessment. The Respondent also pleaded as assumptions
made on assessment a number of specific facts which, if correct,
would support the assessment.
[14] Normally the onus is on the Appellant
to establish, if he can, error in the Minister's findings or
assumptions of fact.[4] In this case Mr. Ball's testimony made it clear
that he did not consider facts relevant to a conclusion whether
an assessment might not be warranted having regard to ss. 323(3).
Rather, before proceeding to assess, he considered only the
question whether the Appellant filed a submission on the point.
In the circumstances the burden of disproving the pleaded
assumptions bearing on ss. 323(3) has not shifted to the
Appellant.
[15] Mr. Moriyama testified at the hearing
of the appeal. In my view, he was a credible witness. He had
three years of post-secondary education but no formal training in
business or law. He is now 49 years old. Jetcom was incorporated
in 1985. For a number of years during the period leading up to
1997 and 1998 Jetcom operated a substantial and successful
business selling large dishes and ancillary equipment used for
receiving satellite television signals. Jetcom developed a
network of dealers who resold its equipment to resale
customers.
[16] In 1995 the legal framework governing
the distribution of satellite broadcasting services changed. It
became apparent that the future prospects of Jetcom's
business were uncertain. In response Jetcom sought align itself
with holders of direct broadcast satellite (DBS) licenses who,
under the new framework, were entitled to distribute signals to
the public. The plan involved the use of Jetcom's
distribution network for the sale to the public of satellite
signal receiving hardware.
[17] In 1995 and 1996 when the signing of
agreements with DBS licensees was underway it was recognized that
Jetcom required further financial resources. Accordingly, Jetcom
arranged to raise money by a public issue of securities.
[18] At the beginning of 1997 there was a
falling out between Jetcom and the financial advisors responsible
for implementing the financing. At this time Jetcom had sales of
the old style equipment of $100,000 per month but the sales were
drying up and revenues did not cover expenses. In the meantime
the DBS licensees with whom Jetcom hoped to do business
experienced delays in launching their services. One licensee went
into bankruptcy.
[19] Clearly from the beginning of 1997
onward Jetcom was in financial peril. Throughout the year Jetcom
operated on a line of credit from a bank. In the second half of
the year the bank began to monitor payments and to pull funds
from Jetcom's account.
[20] Senior management at Jetcom consisted
of Justin Mason, the Chief Financial Officer, Susan Coles, the
Controller, and the Appellant. From January to December of 1997
almost all of Jetcom's GST returns were late filed and no
payments were remitted. In August 1997 the Appellant learned for
the first time of GST remittance problems. The Appellant
testified that he made it clear to Coles and Mason that payment
of GST was a priority. In October 1997 a series of cheques were
issued to pay arrears. There is no suggestion however that the
Appellant intervened personally to ensure that the remittances
were made on time thereafter.
[21] Jetcom's financial situation
continued to deteriorate. In December of 1997 the bank appointed
a consultant to prepare a report on the performance and
operations of Jetcom. The terms of the appointment, to which the
Appellant reluctantly agreed, stripped him of all management
responsibility and control over business operations. The bank
took steps to collect Jetcom's receivables and to apply them
to reduce the business debt. There is no suggestion that the
Appellant asked the new manager, who had the authority to direct
Mason and Coles, to comply with the requirement to file returns
and remit tax.
[22] On December 23, 1997, the bank called
its loan. Negotiations for settlement of the debt ensued. Both
the Appellant and the company borrowed money and paid it to the
bank in settlement of its claims. At that point, in February
1998, the Appellant planned to cause Jetcom to diversify and put
together a new business plan.
[23] It will be noted that Jetcom failed to
remit from October 1997 to February 1998.
[24] In the spring of 1998 the Appellant had
discussions with a Revenue official. He explained Jetcom's
difficulties and made a commitment that Jetcom would remain
current and retire its arrears. Post-dated cheques were issued.
The June and July 1998 remittances were made on time and some
payments were made on account of arrears. The Appellant testified
that he was "overseeing" the filing and payment of GST
returns during this period.
[25] The return for the period ending July
31, 1998 was filed two and a half months late although payments
on account were being made.
[26] In the fall of 1998 Jetcom's
business was still struggling. Further discussions were held with
Revenue and an agreement was made for a reduction in the rate of
payment on account of arrears. Jetcom provided Revenue with a
list of its receivables in order to facilitate garnishee
proceedings.
[27] On December 4, 1998 Jetcom became
bankrupt.
[28] It will be noted that all of the
failures to remit which gave rise to the assessment under appeal
took place many months after Jetcom's financial distress had
become evident and, as well, two months after the Appellant
discovered that the officials on whom he relied had failed to
comply with ss. 228(2).
[29] In Soper v. Canada, [1998] 1
F.C. 124, the Federal Court of Appeal analyzed the ambit of ss.
227.1(3) of the Act, a provision analogous to
ss. 323(3). At page 155, Robertson J.A., speaking for the
majority stated:
40. This is a convenient
place to summarize my findings in respect of subsection 227.1(3)
of the Income Tax Act. The standard of care laid down in
subsection 227.1(3) of the Act is inherently flexible. Rather
than treating directors as a homogeneous group of professionals
whose conduct is governed by a single, unchanging standard, that
provision embraces a subjective element which takes into account
the personal knowledge and background of the director, as well as
his or her corporate circumstances in the form of, inter alia,
the company's organization, resources, customs and conduct.
Thus, for example, more is expected of individuals with superior
qualifications (e.g. experienced business-persons).
41. The standard of care
set out in subsection 227.1(3) of the Act is, therefore, not
purely objective. Nor is it purely subjective. It is not enough
for a director to say he or she did his or her best, for that is
an invocation of the purely subjective standard. Equally clear is
that honesty is not enough. However, the standard is not a
professional one. Nor is it the negligence law standard that
governs these cases. Rather, the Act contains both objective
elements - embodied in the reasonable person language - and
subjective elements - inherent in individual considerations like
"skill" and the idea of "comparable
circumstances". Accordingly, the standard can be properly
described as "objective subjective".
[30] At page 156, Robertson J.A. considered
the position of the inside directors. He said:
44. At the outset, I wish
to emphasize that in adopting this analytical approach I am not
suggesting that liability is dependent simply upon whether a
person is classified as an inside as opposed to an outside
director. Rather, that characterization is simply the starting
point of my analysis. At the same time, however, it is difficult
to deny that inside directors, meaning those involved in the
day-to-day management of the company and who influence the
conduct of its business affairs, will have the most difficulty in
establishing the due diligence defence. For such individuals, it
will be a challenge to argue convincingly that, despite their
daily role in corporate management, they lacked business acumen
to the extent that that factor should overtake the assumption
that they did know, or ought to have known, of both remittance
requirements and any problem in this regard. In short, inside
directors will face a significant hurdle when arguing that the
subjective element of the standard of care should predominate
over its objective aspect.
[31] Finally, at page 157, he characterized
as "inattentive" an inside director who, after learning
that his company was in arrears with Revenue Canada, did nothing
more than rely on assurances from the inside directors
responsible for the financial side of the business. He said:
46. Similarly, the
taxpayer in Fraser (Trustee of) v. M.N.R. (1987), 37
B.L.R. 309 (T.C.C.), provides a good example of an inattentive
inside director upon whom liability was justifiably visited. The
taxpayer in that case was a director, minority shareholder and
vice-president of manufacturing operations of a corporation. As
of a certain time, he was apprised of the fact that the company
was in arrears with Revenue Canada. Nevertheless, the taxpayer
did nothing more in respect of that problem than rely on
assurances, from the inside directors responsible for the
financial side of the business, to the effect that there was no
need to worry. Having made no efforts to prevent further
defaults, the taxpayer was held personally responsible for the
amounts that should have been remitted to the Crown by the
corporation.
[32] In my view, the Appellant was not in
any way deficient in the skill, experience and knowledge required
to ensure fulfilment of Jetcom's obligation to remit GST in a
timely fashion. It is true, as counsel pointed out, that his
post-secondary education was in an unrelated field but the
Appellant's experience in overseeing the operation of Jetcom
for many years more than compensates for any lack of formal
education.
[33] Moreover, the Appellant clearly fell
into the category described in the case law as 'inside
director'. He was sole director of Jetcom and there were no
circumstances which impeded discovery and elimination of the
recurring failures to remit.
[34] Prior to the period ending October 31,
1997 it was evident that Jetcom was in financial distress. Its
business was in decline and revenue from sales did not cover
expenses. The company was operating on a line of credit and its
creditor, the bank, had appointed a special loans officer, a
clear indication of its concern. The Appellant discovered in
August of 1997 that Mason and Coles, the senior officials on whom
he relied to file returns and remit tax, had failed to remit. The
return for October 1997 which was due on November 30, 1997 was
not filed until April 1998. The Appellant admitted that he had
made no enquiries of Mason and Coles because at the time he
"knew we were in trouble". In my opinion, in such
circumstances, the failure to verify on a monthly basis that
payments were remitted on time falls below the statutory standard
of care.
[35] The evidence indicates that between the
end of August 1997 and November 18, 1998 the total GST
outstanding increased only slightly from $211,240 to $215,949. It
appears that as a result of arrangements made between the
Appellant and Revenue officials at least some payments were made
which were applied to arrears. In the meantime the requirement to
make current remittances was not fulfilled. While this is
evidence of a sincere effort to pay the arrears, it is not, as I
see it, evidence of an attempt to prevent the failures to remit
which did occur during the period. In my view, the
Appellant's conduct, though sincere, did not measure up to
the standard laid down in Ruffo v. Canada, [2000] 4 C.T.C.
39 per Létourneau J.A. at page 42:
The appellant's duty as a director was to anticipate and
prevent the failure to pay the sums owing and not to commit such
failure or perpetuate it as he did from March 1992 on in the hope
that at the end of the day the firm would again become profitable
or there would be enough money, even if it were wound up, to pay
all the creditors.
The due diligence defence therefore fails.
[36] Finally, the Appellant argued that the
Minister failed to satisfy paragraph 323(2)(c) which
provides:
(2) A director of a corporation is not liable under subsection
(1) unless
(c) the corporation has made an assignment or a
receiving 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
receiving order.
[37] On December 4, 1998, Jetcom filed an
assignment in bankcuptcy. On December 23, 1998, Revenue Canada
filed a proof of claim on account of GST in the amount of
$233,288.70 with the Trustee. The Proof of Claim related to
reporting periods between August 1997 and August 1998. The proof
of claim did not include Jetcom's liability for tax, interest
and penalties for the periods ended October 31, 1998 and November
30, 1998 because at December 23, 1998, Jetcom had not filed its
GST returns for those periods; on January 11, 2000, the Minister
submitted an amended proof of claim to the Trustee in Bankruptcy
in the amount of $276,277.94 to include Jetcom's liability
for the October 31 to November 30, 1998 periods.
[38] The Respondent's position was that
the amended proof of claim satisfied the paragraph
323(2)(c) requirement which was directory in nature only.
Counsel argued that the assessment under appeal is saved by ss.
299(5) of the Act which reads:
(5) An appeal from an assessment shall not be allowed by
reasons only of an irregularity, informality, omission or error
on the part of any person in the observation of any directory
provision of this Part.
[39] In Kyte v. The Queen 97 DTC
5022, the Federal Court of Appeal dealt with a directors
liability case under s. 227.1 of the Income Tax Act in
which a taxpayer sought to shelter under paragraph
227.1(2)(a). Subsection 227.1(2) reads:
(2) A director 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 223 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 that
subsection 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
receiving 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 that subsection has
been proved within six months after the date of the assignment or
receiving order.
In Kyte, the Minister had registered a certificate
against the corporation for $500,000 but assessed the taxpayer
under ss. 227.1(1) for a smaller amount by reason of a refund
which reduced the liability of the corporation. The taxpayer
argued that the failure to register a certificate in the correct
amount was fatal. That argument was rejected on the basis that
paragraph 227.1(2)(a) was directory in nature and that the
assessment of the taxpayer was saved by s. 166, a provision which
is virtually identical to ss. 299(5). In Kyte,
supra, Robertson J.A. stated at page 5024:
Thus, we have to consider whether the error here was in
respect of a directory provision of the Act, namely the reference
to stating the amount of the corporation's liability in the
certificate. To the extent that a determination as to whether a
provision in the Act is mandatory or directory involves a
balancing test, as set out in Ginsberg v. The Queen 96 DTC
6372 (F.C.A.), we are of the view that that test has been met.
Having regard to the fact that the amount owing in many cases
will be fluid (this is particularly true in cases involving a
determination of a refund) and in cases such as the one under
appeal the error in the certificate will cause no prejudice to a
taxpayer, it seems to us that the Trial Judge's finding, that
the requirement to state the amount of the tax liability of the
corporation in the certificate is directory rather than
mandatory, is correct in law. (emphasis added)
Paragraph 323(2)(c) of the Act falls in the same
category. The late filing of the amended proof of claim is
therefore not fatal.
[40] The appeal will therefore be dismissed
with costs.
Signed at Toronto, Ontario, this 17th day of September
2004.
Bonner, J.
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