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Citation: 2003TCC255
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Date: 20030414
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Docket: 2001-3459(GST)I
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BETWEEN:
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FRED YAKIMISHYN,
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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
McArthur J.
[1] The Minister of National Revenue
assessed the Appellant pursuant to subsection 323(1) of the
Excise Tax Act for the failure by Lualco Ltd. (the
"Corporation") to remit goods and services tax of
$69,533.67 together with penalties and interest of $3,375.53 and
$3,592.53, respectively. The Appellant chose to proceed under the
informal procedure of this Court clearly understanding the
monetary limitation by doing so.
[2] The hearing of this appeal
commenced on May 30, 2002. Being concerned that the Appellant was
misunderstanding the issue, I adjourned the hearing to permit him
to obtain legal assistance and to have his appeal heard
immediately after the appeal of Luigi Domenico Marzetti, court
file no. 2001-3502(GST)G. Mr. Marzetti's appeal was under the
general procedure, but Mr. Yakimishyn chose to proceed under the
informal procedure. A Consent to Judgment was filed in the
Marzetti appeal and on January 27, 2003.
[3] The Appellant requested a further
adjournment to obtain legal counsel. Because he had from June
2002 to do so, his adjournment request was denied. He was
prepared to proceed on his own on January 29, 2003. He had
explained earlier that he had bad experiences with lawyers in the
past. The hearing proceeded.
[4] The Appellant has a grade 11
education and worked as a foreman in the construction industry
for many years prior to 1981. In 1981, he became a shareholder
and director of the Corporation and by 1985, he owned 50% of the
issued shares and Mr. Marzetti owned the remaining 50%. The
Corporation was in the business of supplying steel and setting up
or modifying equipment in plants. It commenced construction of
its own plant in Brampton, Ontario in 1988 and suffered serious
cost overruns.
[5] In late 1989, the Corporation
began to be late in remittances to Revenue Canada. The situation
worsened with the economic slowdown in the early 1990s. It
appears that the Corporation had GST remittance problems from the
conception of the legislation in 1990. The Corporation's cash
flow problems increased in 1991 and 1992. Mr. White, a chartered
accountant, was retained by the Corporation on a fulltime basis
as a comptroller.
[6] Through 1992, GST collection
officers pressed the Corporation to pay up outstanding arrears.
The Appellant and Mr. Marzetti persevered with the Corporation
with the conviction that it eventually would recover financially.
In the meantime, it was using non-remitted GST funds to help
support its operation. During the period in question (June 30,
1992 to June 30, 1993), the Appellant and Mr. Marzetti each
continued to withdraw $1,600 weekly for their personal use.
[7] Mr. White testified on behalf of
the Respondent. As a result of the collection efforts by Revenue
Canada representatives, he wrote a Corporation cheque to Revenue
Canada in the amount of $60,000 in late December 1992 which he
gave to the Appellant and Mr. Marzetti for their signatures. He
stated the cheque was never returned to him by the Appellant. The
Appellant could not recall the incident but indicated that such a
cheque would have been returned "NSF". Mr. White
indicated that he was monitoring the bank account daily and there
was a time or there were times when the cheque could have been
honoured. It was the Appellant's decision in late 1992 and
early in 1993 to use available corporate funds for other
purposes. Mr. Marzetti's responsibilities were outside the
office. The Appellant was more responsible for administration and
financial affairs of the Corporation.
[8] In his evidence, the Appellant
dwelt primarily on the efforts he took in 1993 after he lost
control of the Corporation. It was this focus that concerned me
during the May 30th commencement of the hearing of this
appeal. The Appellant asked me to have Exhibit A-3 (a bundle of
documents) filed in evidence in that it set out the relevant
facts and his due diligence efforts. The events and facts set out
therein took place in 1993 yet 90% of the amount claimed was for
amounts not remitted in 1992.
[9] I found the Appellant to be an
honest witness. He admitted that he was aware of the
non-remittance of GST. He stated that they were juggling
payments, struggling to keep afloat. The employee payroll was
their priority. In 1990, the bank stopped their line of credit.
The Appellant obviously went through very difficult times in 1992
and 1993. Reference again is made to Exhibit A-3 where the
Appellant describes in detail the business difficulties in 1993.
He acknowledges that he did receive telephone calls and letters
from the Revenue Canada collection office. In March or April
1993, he visited the GST office requesting time to pay. I believe
the Appellant feels his strongest argument is that the GST could
have been fully paid had the following people exercised care or
had been more reasonable in 1993 and 1994: Mr. Marzetti, CIBC,
the Corporation's bank, A. Farbert & Associates,
Receiver, and the Corporation's solicitor.
Analysis
[10] The Corporation had an obligation to
remit GST pursuant to subsection 228(2) of the Excise Tax
Act and it failed to remit $69,533 during the period June
1992 to June 1993. The Minister assessed the Appellant pursuant
to subsection 323(1). The Appellant was a director of the
Corporation throughout the relevant period. The Appellant's
defence is that he complied with the provisions of subsection
323(3) which reads:
323(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.
[11] I agree with counsel for the Respondent
that the key word in the subsection is "prevent". To
succeed, the Appellant had to demonstrate that he in fact
complied with the requirements of the subsection. While the
Appellant did not recall the incident, I accept Mr. White's
evidence that he did prepare a $60,000 corporate cheque to
Revenue Canada for Mr. Marzetti's and the Appellants' signature
about December 31, 1992. This would have cleared the bulk of the
Minister's claim. The Appellant chose not to pay the GST
favouring to use available funds to pay more threatening
creditors. It appeared obvious that the Appellant and Mr. White
held a mutual respect for each other. Memory is often selective.
The remembered past may not always coincide with the historical
past. I accept Mr. White's version of the incident over that
of the Appellant.
[12] The decision in this case is primarily
based on the facts. There is no doubt that the Appellant was an
inside director. In this regard, I refer to Soper v. The
Queen, 97 DTC 5407, where Justice Robertson of the Federal
Court of Appeal, stated:
... 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).
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".
...
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.
[13] In Ruffov. M.N.R., 2000
CarswellNat 1570 (F.C.A.), the taxpayer was president, director
and administrator for the corporation. The taxpayer financed the
corporation partially by using statutory deductions withheld from
employee salaries and not remitted to Revenue Canada. Justice
Letourneau of the Federal Court of Appeal stated:
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.
While a director may, under subsection 227.1(3) of the Income
Tax Act, be relieved of personal liability for unpaid
deductions by showing that he acted with diligence, the Appellant
has not, in the circumstances, demonstrated the requisite
diligence.
Subsection 227.1(3) of the Income Tax Act is identical
to subsection 323(3) of the Excise Tax Act.
[14] Similarly, in the present case, the
Appellant allowed the failure to remit to continue and the amount
increase with the hope that the Corporation's finances would
improve. This is not prevention as required in the legislation.
The GST funds collected by the Corporation should not have been
used as operating capital. The Appellant retained the fulltime
services of a competent chartered accountant yet did not take his
advice when asked to sign a $60,000 cheque to CCRA.
[15] I had originally intended rendering
this decision orally on January 31, 2003. Upon reflection, I
requested counsel for the Respondent to make submissions with
respect to subsection 323(5) of the Act. It reads as
follows:
323(5) An assessment under subsection (4) of any amount
payable by a person who is a director of a corporation shall not
be made more than two years after the person last ceased to be a
director of the corporation.
The question to the Respondent was, did the Appellant cease to
be a director of the corporation when he lost control, after it
filed an assignment in bankruptcy on September 7, 1993. The
assessment was made long after two years from the assignment. I
accept the position of the Respondent that merely losing control
of the corporation due to its filing for bankruptcy is
insufficient. (See The Queen v. Kalef, 96 DTC 6132
(F.C.A.) and Drover v. Canada, [1997] T.C.J. No. 263.
[16] The appeal is dismissed.
Signed at Ottawa, Canada, this 14th day of April, 2003.
J.T.C.C.
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