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Citation: 2004TCC148
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Date: 20040219
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Docket: 2003-3198(GST)I
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BETWEEN:
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MICHEL TAILLEFER,
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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
Paris, J.
[1] Mr. Taillefer is appealing an
assessment against him under section 323(1) of the Excise Tax
Act in respect of his liability as a director of The Trailer
Centre Inc. (the "company") for the failure of that
company to remit the GST for the periods ending September 30,
1998 through December 31, 1999 and for penalties and interest
relating thereto. The total amount assessed against
Mr. Taillefer is $20,126.10.
[2] The only issue before the Court is
whether Mr. Taillefer, as a director of the company,
exercised the degree of care, diligence and skill to prevent the
company's failure to remit the GST that a reasonably prudent
person would have exercised in comparable circumstances, in which
case he would not be liable for the amounts owed by the
company.
[3] Mr. Taillefer was the sole
shareholder and director of the company, which he incorporated in
about 1993. The company started off selling utility
trailers, aluminum boat docks and lifts, and parts from its first
location south of Sudbury. It expanded to a second location
in Estaire after a few years and began to sell recreational
vehicles such as tent trailers, truck campers, travel trailers
and fifth-wheel trailers. The company purchased premises in
Estaire for its operation for approximately $139,000, which it
financed through the Business Development Bank.
[4] The company acquired its inventory
from suppliers on credit that was extended by certain financing
agencies. Mr. Taillefer said that the type of financing used
by the company was called "floor planning", which meant
that the party supplying the financing had a lien against the
merchandise and that when a customer of the Trailer Centre
purchased a trailer or other item, the financing against it had
to be paid off by the company in order to have the lien released.
For this reason, a large part of the purchase price received by
the company from a customer for the purchase of merchandise had
to be used immediately to pay the financing company.
Mr. Taillefer estimated that the normal profit margin the
company earned over its cost was 40-60% on parts, 30% on trailers
and lifts and 25% on trailers and fifth-wheels. I understood this
to mean that this was the profit made on the sale of the item,
over its cost but before payment of the company's operating
expenses, which included interest on the floor plan
financing.
[5] Mr. Taillefer was active in
the day-to-day operations of the company and made all the major
financial decisions in the business. The company bookkeeper
prepared monthly financial statements that were reviewed by
Mr. Taillefer, and these statements included information
concerning the payment of source deductions and the GST and PST.
He said that he could tell from these statements whether any
accounts were not being paid on time and, according to him, the
company was never in arrears of the GST prior to the fall of
1998.
[6] In late 1998, because of the state
of the local economy, Mr. Taillefer decided to close the
company's business. There were a number of competitors that
had opened in the area and he felt that the company's
prospects were not good. He planned to have the company
sell of its remaining inventory in an orderly fashion, which
would enable it to pay off all of its creditors. He felt
that there would be sufficient profit from the sale of the
inventory to permit everyone to be paid off in full.
According to Mr. Taillefer, the company was not in financial
difficulty at that time, but that he foresaw difficult times
ahead. He also said that the company's equity in the
Estaire property would be available to pay off any shortfall.
[7] However, the liquidation of the
company's merchandise did not go as smoothly as
Mr. Taillefer had hoped. The company was required to reduce
its prices to make sales because customers knew it was going out
of business. The profit margins on the inventory dropped and the
company did not have enough money to pay all of its creditors.
Mr. Taillefer said that there was some money left from the
sales after the payment of the floor plan financing, and that he
decided how those funds were used. He chose what accounts the
company paid and when those payments were made. He admitted that
the GST was collected on all sales and that these funds were put
in the company's bank account. The funds in the account were
then used to pay the company's day-to-day operating expenses.
This enabled the company to keep its doors open and to continue
selling off its stock.
[8] By keeping the company operating,
he felt that the company would be able to realize the greatest
return on remaining inventory. He said that the inventory would
have been sold at a loss if he had simply shut down the company
and that he would have been left owing the difference to the
creditors. He was aware that the GST remittances were not being
made on time but felt that any shortfall could be made up at a
later date out of the money the company obtained from the sale of
the Estaire property. It was his view that the company had built
up some equity in the property but, as it turned out, the
property was repossessed by the Business Development Bank and
sold for $65,000 and nothing was left over to pay other
creditors.
[9] Mr. Taillefer also said that
in mid-1999 one of its creditors seized some inventory over which
it had liens, and sold those goods at auction. The price obtained
was very low and this created further financial difficulties for
the company although how this affected its operations was not
made clear. From the evidence it appears that the creditor
repossessed about four or five recreational vehicles.
[10] The company first fell into arrears in
with its GST remittances in September 1998, and although it
made many payments on its account, it was in arrears until it
ceased business in December 1999. All of its returns were late
filed during this period, and the amounts owing according to
those returns were not remitted with the returns. Material filed
by the Respondent showed that for the reporting periods ending
September 1998 through December 31, 1999 the company was required
to remit the GST of approximately $70,000 and for those same
periods remitted approximately $50,000.
[11] The Appellant's representative
argued that Mr. Taillefer exercised due diligence to prevent
the failure by the company to remit the GST and that he should
not personally be held liable for the unremitted amounts. He
argued that it was reasonable for the Appellant to do whatever he
could to keep the company operating in order to minimize its
losses from the liquidation of its inventory. He said that the
Appellant's plan was to sell off the inventory in an orderly
fashion and pay all creditors with the proceeds. It was only
because less was realized on the sales that the company was not
able to make the GST remittances. In these circumstances, he
submitted, it would not have been reasonable to simply shut down
his business.
[12] In my view it has not been shown that
Mr. Taillefer exercised the care, diligence and skill
required to bring himself within the provisions of subsection
323(3) of the Excise Tax Act. In deciding whether
Mr. Taillefer exercised due diligence within the meaning of
that provision, it is necessary to consider his level of relevant
experience and knowledge. He was heavily involved in the
financial operations of the company and he was relatively
experienced in business, having operated the business for five or
six years prior to the fall of 1998. The standard of care
expected of him is therefore higher than for someone without this
involvement and knowledge.
[13] The evidence shows that the company
collected the GST on its sales and that the Appellant, as
director of the company, made a conscious decision that the
company would not remit the GST to the Receiver General in order
to use those funds to pay other creditors in order to keep the
company operating. There is no evidence that steps were taken to
prevent the failures to remit.
[14] The due diligence defence in subsection
323(3) is directed at steps taken to prevent any failure by a
corporation to remit the GST. This aspect of the due diligence
defence was noted by the Federal Court of Appeal in the case of
Canada v. McKinnon, [2001] 2
F.C. 203. At pages 220-221 and 232-233, Evans, J.A.
said:
[30] ... "due diligence" normally requires that, when a
director becomes aware, or ought to have become aware, that the
company is falling behind with its remittances, he or she should
take some positive steps to prevent the default, such as an
attempt to increase the company's operating line of credit
with its bank or to come to an arrangement with the bank that
would enable it to make remittances. ...
...
[70] In my opinion, it is essential to keep in mind the
relevant question in this appeal: did the directors exercise due
diligence to prevent the company's failure to remit?
This is not necessarily the same as asking whether it was
reasonable from a business point of view for the directors to
continue to operate the business. In order to avail themselves of
the defence provided by subsection 227.1(3) directors must
normally have taken positive steps which, if successful, could
have prevented the company's failure to remit from occurring.
The question then is whether what the directors did to prevent
the failure meets the standard of the care, diligence and skill
that would have been exercised by a reasonably prudent person in
comparable circumstances.
[71] It will normally not be sufficient for the directors
simply to have carried on the business, knowing that a failure to
remit was likely but hoping that the company's fortunes would
revive with an upturn in the economy or in their market position.
In such circumstances directors will generally be held to have
assumed the risk that the company will subsequently be able to
make its remittances. Taxpayers are not required involuntarily to
underwrite this risk, no matter how reasonable it may have been
from a business perspective for the directors to have continued
the business without doing anything to prevent future failures to
remit.
[15] Here Mr. Taillefer said that he
believed initially that, by continuing the business and
liquidating the assets in an orderly fashion, the company would
earn enough money to pay the GST. The evidence shows, however,
that by September 30, 1998 the GST arrears were beginning to
accumulate, and that by the end of that year the arrears had
risen to approximately $15,000. Under cross-examination, he
said that he did not seek out any additional sources of financing
for the company to enable it to pay the GST it owed, nor did he
take any other steps to lessen the likelihood of future failures
to remit. It appears that he was mainly relying on the eventual
sale of the Estaire property to provide funds to pay off the
outstanding GST.
[16] The course of action chosen by the
Appellant for the company was at least in part influenced by the
fact that he would be liable personally for the shortfall between
what the company was able to earn from the sale of the inventory
and the amount of its debts. It was in his interest to keep the
company going, even if it meant that the GST would not be
remitted as required. His plan to pay off the GST liability
at some later point does not meet the test for due diligence set
out in subsection 323(3) of the Excise Tax Act.
[17] The Appellant's representative
referred me to the case of
McKinnon v. The Queen,
2003 TCC 884 in which Bowman, A.C.J., found that the
Appellant had exercised due diligence to prevent the failure to
remit the GST. In that case there were two failures to remit, one
in March 1997 and another within two months in May 1997. It was
held that the failures were due to unforeseen events, which
severely affected the company's cash flow, and primarily
because a contractor to whom the company subcontracted
arbitrarily and unjustly refused to pay significant amounts that
it owed the company. The amount withheld by the contractor
was approximately $58,000 while the unremitted amounts totaled
less than $12,000. The Court there found that the taxpayer did
all that he could to prevent the failure to remit but that the
economic circumstances in which the company found itself made
this impossible.
[18] The McKinnon case is
distinguishable on the basis that the unforeseen loss of revenue
from the contractor made it impossible for the company there to
meet its obligations. It was not a situation where remittances
were in arrears for a significant period of time, during which
the director chose to keep the business operating in the hope of
eventually being able to catch up on its GST obligations.
[19] The duty of a director is to prevent
the default rather than simply to make up the deficiency at a
later point. In this case the evidence did not show that it was
impossible for the company to make the remittances in question.
Rather, Mr. Taillefer made certain choices of how the
company's funds would be spent, and he chose not to remit the
GST that had been collected in the hope that the amounts owing
could be worked out in the end. I am therefore not satisfied that
he has demonstrated that he exercised the care, diligence and
skill that a reasonably prudent businessperson in comparable
circumstances would have exercised to prevent the failures to
remit.
[20] The appeal is therefore dismissed.
Signed at Ottawa, Canada, on this 19th day of February
2004.
Paris, J.
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