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Citation: 2004TCC494
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Date: 20040709
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Docket: 2003-4352(GST)I
2003-4575(IT)I
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BETWEEN:
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CLAUDE JAMES GARLAND,
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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
Bowie J.
[1] These two appeals are brought from
assessments made under section 227.1 of the Income Tax Act
(the ITA) and section 323 of the Excise Tax Act (the ETA).
Those sections impose personal liability on the directors of a
corporation for unpaid income tax withholdings and goods and
services tax (GST) owed by the corporation. The appeals
were heard together on common evidence under the Court's
informal procedure. The assessments hold the Appellant liable as
a director of Short Stop Foods (1984) Limited (Short Stop) for
source deductions under the ITA of $1,911.23, and for GST of
$78,460.00 under the ETA, together with interest and penalties
under both statutes.
[2] Mr. Garland started a grocery and
convenience store, with a partner, in the early 1980s. In about
1984, he bought out his partner and from that point forward the
newly formed corporation owned and operated the business.
Mr. Garland was the only director of Short Stop during the
relevant time period, and he managed the business. Over the next
eight years or so the business was expanded until there were
about five stores, some owned and operated by Short Stop,
and some operated under franchises agreements.
[3] Mr. Garland had no training in
business, or in bookkeeping, nor did he have any experience
before he opened the Short Stop business. Initially an employee
by the name of Judy Payne kept the books. She left in 1992, and
the Appellant's wife then took over the bookkeeping function.
Her only qualification for that task was that she had taken a
secretarial course at a vocational school, which included a
bookkeeping session as part of the course. Ms. Payne gave her
some instruction in the bookkeeping functions of the business
during the two weeks prior to her departure. With this background
she assumed responsibility for all the bookkeeping, and the
filing of returns for GST and income tax. An accountant, whose
qualifications were not made clear in the evidence, prepared the
year-end statements. It is not clear from the evidence what other
functions he performed, if any.
[4] The business was required to file
GST returns quarterly. Mrs. Garland prepared the returns and
prepared a cheque for the amount of tax that was to be remitted.
She presented these to the Appellant for his signature. The
Appellant had less training and knowledge of the GST system than
his wife. After 1992, he depended entirely on her to prepare the
returns and compute the company's liability correctly, just
as he had relied on Ms. Payne before that.
[5] Throughout the 1990s, a number of
events took place that had serious adverse consequences for Short
Stop's business. One of those was the moratorium imposed on
the offshore cod fishery, which resulted in a serious decline in
the volume of Short Stop's business. Another was the failure
of one of Short Stop's major suppliers. Additional losses
resulted from pilferage by some of the employees, and errors made
by the staff in ringing up merchandise sales, according to the
Appellant.
[6] Eventually, the Canada Customs and
Revenue Agency conducted an audit of the company's GST
accounts. There soon followed an audit by the provincial sales
tax authority. Both these audits resulted in substantial
assessments against the company. The Federal Business Development
Bank held a mortgage on the company's premises. As the
business faltered following these audits, the Bank foreclosed its
mortgage and took steps to liquidate the inventory. The Appellant
blames all these misfortunes on the fact that the GST auditor
produced an assessment that he says was far greater than the
facts of the case warranted. Following an objection to the
original assessment, the CCRA Appeals Branch reduced it
substantially. However the effect of the original assessment, the
Appellant says, had been to bring about all the other financial
difficulties that eventually caused the company to cease
operations. At that time, its substantial liabilities for
unremitted GST and unremitted payroll deductions were
outstanding, and they gave rise to the derivative assessments
against Mr. Garland that are now under appeal.
[7] The Appellant took the position in
giving his evidence that the assessment against Short Stop for
unremitted GST, even after it had been reduced by reassessment
following the company's objection to it, was not warranted,
and that its GST returns had in fact been flawless. However, he
conceded that the company had unsuccessfully appealed the
reassessment to this Court. In argument his counsel accepted,
albeit reluctantly, that it was not open to him in those
circumstances to contest the extent of the liability of Short
Stop.
[8] Subsection 227.1(1) of the ITA
reads as follows:
227.1(1) Where a corporation has failed to deduct or
withhold an amount as required by subsection 135(3) or section
153 or 215, has failed to remit such an amount or has failed to
pay an amount of tax for a taxation year as required under Part
VII or VIII, the directors of the corporation at the time the
corporation was required to deduct, withhold, remit or pay the
amount are jointly and severally liable, together with the
corporation, to pay that amount and any interest or penalties
relating thereto.
Subsection 323(1) of the ETA reads:
323(1) 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.
Each of section 227.1 and 323 provides a number of possible
defences for a director against whom they have been invoked, but
in the present case it is not disputed that all the statutory
requirements for liability of the Appellant are satisfied, and
that the only defence open to him lies in subsection (3) of each
of these sections, commonly called the due diligence defence.
(3) 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.[1]
[9] The jurisprudence surrounding
these provisions makes it clear that there are both subjective
and objective elements to be considered in deciding the extent of
a particular director's obligation of diligence, and that
these may vary considerably depending on the extent to which the
director in question is active in the management of the affairs
of the company, his or her education, training, experience and
business acumen, to mention but a few of the relevant factors. In
this case Mr. Garland was the only director, and he had complete
charge of the company's affairs. He is by no means a
sophisticated businessman, but he took it upon himself to run the
company, although he must have known that there were
financial obligations under the various taxing statutes that had
to be complied with. He must have been aware as well when he
decided to place such great reliance upon his wife that her
knowledge and training were minimal.
[10] What is required of directors is that
they "exercise the degree of care, diligence and skill that
a reasonably prudent person would have exercised in comparable
circumstances".[2] The burden of proof is on the Appellant, however, to
establish that he has exercised that degree of care diligence and
skill.
[11] Counsel for the Appellant relied on the
decision in Lau,[3] but he was able only to refer to a brief summary of
the decision. In that case, the wife of one of the directors did
the bookkeeping, computed the GST liability and filed the
returns. She had no formal training or experience in bookkeeping.
Superficially, these facts are similar to the present case.
However, it is apparent from the report of that case that the
system that she followed had been established by a national firm
of chartered accountants, using a computer and appropriate
software for the purpose. That firm also trained her to operate
it and oversaw her work on a regular basis. Those facts cannot
fairly be compared to the present case; Ms. Garland's
only training was by someone whose qualifications are completely
unknown, and there is no evidence that she was supervised at
all.
[12] Counsel for the Appellant also relied
on a brief summary of the judgment of Rowe, D.J. in Cassels v.
The Queen.[4]
However, that case is totally dissimilar to the case before me.
Judge Rowe found there that the Appellant met the due diligence
test for part of the time period in issue, because he had an
experienced, well trained staff handling the accounting for GST
under the supervision of a firm of chartered accountants.
[13] In Armstrong v. The Queen,[5] a director failed
to meet the requirements of due diligence when he simply left the
accounting for GST in the hands of an experienced accountant who
had a professional designation. As in this case, a chartered
accountant was retained to make year-end entries and prepare
statements, but apparently had no responsibility for the GST
accounting function. Mr. Armstrong was a very experienced
businessman, and so a higher standard of care would be required
of him than that required of Mr. Garland. Had Mr. Garland
left matters in the hands of an accountant with a CGA designation
that might well have been sufficient. However, he in fact simply
left the matter in his wife's hands, apparently without
supervision. Due diligence requires that the director, certainly
a director like Mr. Garland who is the sole director and manager,
take positive steps to see that the GST and the income tax
withholdings are properly calculated and remitted. The director
is not an insurer, but he must be able to point to some
safeguards that he has put into place. Mr. Garland was not able
to do that. While I am sympathetic to the position in which he
now finds himself, I have no alternative but to dismiss the
appeals.
Signed at Ottawa, Canada, this 9th day of July, 2004.
Bowie J.
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