[OFFICIAL ENGLISH TRANSLATION]
Date: 20011019
Docket: 98-9176(GST)I
BETWEEN:
DENIS MARCEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
___________________________________________________________________
REASONS FOR JUDGMENT
(delivered orally from the bench
on August 25, 2000, at Montréal, Quebec,
and edited for greater clarity and
completeness)
Archambault, J.T.C.C.
[1] Mr. Marceau disputes an
assessment made by the Minister of National Revenue
(Minister) on December 11, 1992, under
section 323 of the Excise Tax Act (Act). By
that assessment, the Minister holds Mr. Marceau liable, as a
director of Dualco Inc. (Dualco), for a net amount of tax
that Dualco owed to the Minister under the Act for the period
from August 1, 1991, to May 31, 1992 (relevant
period).
[2] As reasons for his objection,
Mr. Marceau raises the following points in his notice of
appeal:
[TRANSLATION]
(a) the assessment did not take into account the input tax
credits (ITC) at the time of the purchase of the
goods;
(b) the assessment does not take into account the actual
amounts of goods and services tax (GST) collected by Dualco, but
is based on a projection using data relating to another
period;
(c) the assessment does not take into account debts of
$116,000 and $60,000, which Dualco could not collect from two
businesses, Hydrogain and André Boucher
Climatisation;
(d) Mr. Marceau states that he personally derived no
benefit from the amounts owed to the Minister by Dualco and he
objects to any interest and penalty on the amounts unfairly
assessed in the assessment;
(e) he exercised due diligence in performing his duties as a
director of Dualco.
Facts
[3] At the start of the hearing,
Mr. Marceau admitted all the following facts stated in
paragraph 5 of the Reply to the Notice of Appeal, with the
exception of those in subparagraphs (g) and (i):
[TRANSLATION]
(b) the appellant
was a director of Dualco Inc. during the period relevant to the
instant case;
(c) Dualco Inc. was
a registrant during the periods in issue;
(d) Dualco Inc. was
incorporated under the federal legislation on March 8,
1990;
(e) Dualco Inc.
operated a business selling and distributing heating and air
conditioning equipment until the fall of 1992;
(f) the
Minister notes that, throughout its period of commercial
operations, Dualco Inc. filed no GST returns with the
ministère du Revenu du Québec (hereinafter the
ministère) and remitted no net amount in respect of the
goods and services tax;
(g) as a result of a
goods and services tax audit of Dualco Inc., the ministère
du Revenu du Québec made an assessment in December 1992 to
claim duties of $30,921.49 from the registrant;
(h) on or around
March 17, 1994, a certificate was registered in the Federal
Court under section 316 of the Excise Tax Act, R.S.C.
1985, c. E-15, in respect of Dualco Inc.;
(i) on or
around May 17, 1994, the serving bailiff confirmed that the
execution of the writ in respect of Dualco Inc. had been
returned unsatisfied;
(j) on or
around December 9, 1994, the ministère made an
assessment under section 323 of the Excise Tax Act to
claim $43,599.24 from the appellant in respect of Dualco
Inc.'s tax liability.
[4] Testifying at the hearing were
Mr. Marceau, his co-director Mr. Derome, the
Minister's auditor and a tax advisor from the Minister's
office in Longueuil. Their testimony revealed the following
additional facts.
[5] During the relevant periods,
Messrs. Marceau and Derome held equal numbers of
Dualco's common shares through a holding company of which
they were the only two directors. There had previously been a
third shareholder and director, a certain
André Boucher, but Dualco redeemed his shares and he
resigned as director. The redemption price of $50,000 for
Mr. Boucher's shares apparently represented a heavy
burden for Dualco's financial resources.
Mr. Boucher's accounts payable were apparently used to
pay for his shares.
[6] When its operations began, Dualco
purchased heating equipment in order to take advantage of a
Hydro-Québec subsidy program designed to promote the
use of dual energy. Since that program's implementation was
delayed by approximately one year, Dualco had to bear some
$40,000 in inventory costs over a period of a year and a half.
Sales did not begin until the end of summer 1991. It was
Mr. Marceau who was responsible for the promotion of
Dualco's sales on a full-time basis, while Mr. Derome
handled equipment purchasing and delivery as well as the
management of the corporation. Dualco relied on a bookkeeper, a
certain Mr. Asselin, to prepare invoices for its customers.
Mr. Asselin also had to calculate the amounts of GST and QST
that those customers had to pay. Mr. Asselin was also the
one who did what was needed to register Dualco for GST
purposes.
[7] During the relevant period, Dualco
purchased $234,456 worth of taxable supplies, to which must be
added GST of $16,411. Mr. Marceau produced a worksheet in
support of this information, but no invoice containing the
information required by the Act was filed at the hearing. In the
course of his audit, the Minister's auditor tried to obtain
those invoices from Mr. Asselin, but Mr. Asselin was unable
to provide them, even within the 21-day time period allowed
him.
[8] For the same period,
Mr. Marceau estimated Dualco's sales at $217,199, to
which must be added GST of $15,203. A very large portion of those
sales, that is, $166,633, was made to Hydrogain. Of that amount,
$100,906 was not paid. A demand letter was sent by Dualco in
April 1992 and legal proceedings were instituted before the
Superior Court of Quebec in June 1992. An interim order of that
Court dated April 30, 1993, required Hydrogain to pay Dualco
the sum of $34,644, and that an expert opinion of an accountant
be obtained with respect to the balance of the debt.
[9] That sum of $34,644 was apparently
never paid, nor was the rest of the debt. Mr. Marceau stated
that Dualco had discontinued its action in view of the fact that
it was impossible to execute the order and every hope of being
paid had disappeared. For the other sales for which it was paid,
Dualco collected amounts of GST, which, in Mr. Marceau's
calculations, amounted to $8,140.
[10] The Minister's auditor met
Dualco's representative, Mr. Asselin, who provided him
with a summary of purchases and sales as well invoices for
Dualco's sales to its customers. Analysis of those invoices
revealed to the auditor that the total sales for the relevant
period had amounted to $415,857, whereas the taxpayer's
summary indicated a figure of $439,210. Since there were no
invoices for the month of August and Mr. Asselin's
summary showed sales of $24,706, the auditor accepted the figure
from the summary provided by Mr. Asselin.
[11] Messrs. Marceau and Derome knew
they had an obligation to pay the Minister GST. However, because
Dualco had exhausted its line of credit and had to pay its
suppliers, they decided by mutual agreement to give priority to
the most urgent accounts payable, which of course ruled out the
Minister.
[12] The Minister's tax advisor
testified in order to file the report of the bailiff, who
confirmed that he had tried to execute the certificate registered
with the Federal Court and to carry out the seizure of
Dualco's property but to no avail.
Analysis
[13] For the purposes of this appeal, the
most relevant statutory provisions are cited below. First there
is section 323 of the Act, which provides, in particular,
as follows:
323(1) Where a corporation fails to remit an amount of net
tax as required under subsection 228(2), 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.
(2) A director of a corporation 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 316 and
execution for that amount has been returned unsatisfied in whole
or in part; ...
(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.
...
(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.
Subsection 228(2) describes the duty to pay the net tax
to the Minister:
228(2) Where the net tax for a reporting period of a
registrant is a positive amount, the registrant shall remit that
amount to the Receiver General on or before the day on or before
which the return for that period is required to be filed.
Subsection 225(1) of the Act defines the amount of the
net tax as follows:
225(1) Net tax - Subject to this Subdivision, the net tax
for a particular reporting period of a registrant is the positive
or negative amount determined by the formula
A - B
where
A is the total
of
(a)
all amounts that became collectible and all other amounts
collected by the registrant in the particular reporting period as
or on account of tax under Division II, and
(b) [Immaterial]
B is the total of
(a) all amounts each of which is an input tax
credit for the particular reporting period or a preceding
reporting period of the registrant claimed by the registrant in
the return under this Division filed by the registrant for the
particular reporting period, and
(b) [Rest is immaterial]
[My emphasis]
Subsection 225(4) specifies the time limit that must be
met in order to claim ITCs:
An input tax credit of a registrant for a particular reporting
period of the registrant shall not be claimed by the registrant
unless it is claimed in a return under this Division
filed by the registrant on or before the day that is
four years after the day on or before which the return under
this Division for the particular reporting period of the
registrant is required to be filed.
[My emphasis]
Paragraph 169(4)(a) of the Act concerns the
documents that must be obtained in order to deduct ITCs:
A registrant may not claim an input tax credit in respect of a
supply of property or a service for a reporting period unless,
before filing the return in which the credit is claimed,
(a) the registrant has obtained sufficient evidence in
such
form
containing such information as will enable the amount of the
input tax credit to be determined, including any such information
as may be prescribed; and
Subsection 231(1) states when the net tax may be reduced
by the amount of the tax relating to bad debts:
231(1) Where a
particular person has made a taxable supply (other than a
zero-rated supply) in the course of a commercial activity for
consideration to a person with whom the particular person was
dealing at arm's length and has filed a return accounting for,
and remitted tax under Division II in respect of, the supply as
required under this Division, to the extent that it is
established that the consideration and tax have become in whole
or in part a bad debt, the particular person may, in determining
the net tax for the reporting period of the particular person
in which the bad debt is written off in the particular
person's books of account or for a reporting period that ends
within four years after the end of that period, deduct an amount
equal to the tax fraction of the bad debt written off.
[My emphasis]
Lastly, subsection 280(1) of the Act provides for
penalties and interest:
280(1) Subject to this section and section 281, where a person
fails to remit or pay an amount to the Receiver General when
required under this Part, the person shall pay on the amount not
remitted or paid
(a) a penalty of 6% per year, and
(b) interest at the prescribed rate, computed for the period
beginning on the first day following the day on or before which
the amount was required to be remitted or paid and ending on the
day the amount is remitted or paid.
[14] The burden was on Mr. Marceau to
prove the facts of which he had knowledge, in particular, those
relating to his office of director and those relating to his due
diligence defence. However, he had no burden of proof with
respect to the facts concerning Dualco, such as those relating to
the existence of Dualco's tax liability, to the
Minister's registration of the certificate with the Federal
Court and the failure to execute that certificate. The onus was
on the Minister to prove those facts.
[15] First of all, Mr. Marceau admitted
that he was a director during the relevant period. Furthermore,
the evidence showed that the Minister's assessment was made
within the two-year time period provided for in
subsection 323(5) of the Act, since it is dated December
1992, and Mr. Marceau admitted that he was still a director
during the relevant period and that this period ended in May
1992. Mr. Marceau also admitted that the Minister had
registered the certificate with the Federal Court and that the
respondent had proven the failure to execute the certificate.
[16] There remains the question of the tax
liability. What evidence did the Minister adduce on this point?
In my view, he adduced prima facie evidence showing on a
balance of probabilities that there was an amount of net tax
unpaid by Dualco. The Minister first filed the notice of
assessment concerning the corporation. I believe, however, that
the mere filing of that notice would not have been sufficient if
that had been the only evidence. The testimony of the
Minister's auditor, however, revealed additional facts. It
showed that the auditor had met Mr. Asselin at 1475 Rue
Bégin in Saint-Laurent, the address of Dualco's place
of business appearing in the Minister's records.
[17] In his cross-examination of the
auditor, Mr. Marceau insinuated that, in the fall of 1992,
Dualco was no longer operating a business at that address and
that it might have been the address of Hydrogain's office.
Mr. Marceau did not testify in rebuttal to establish this
fact. In addition, in his own testimony, Mr. Marceau
revealed that Dualco had leased premises from Hydrogain, that
Hydrogain had kept certain records belonging to Dualco and even
that certain documents had been handed to him by a secretary of
Hydrogain who admitted that she had received instructions not to
hand over or disclose them either to Dualco or its directors.
[18] To understand the situation more
clearly, it must be recalled that an action was instituted in the
Superior Court in June 1992 and an order issued in April 1993,
after the meeting between the auditor and Mr. Asselin. It is
therefore highly likely, even if Dualco no longer had its place
of business on Rue Bégin, that the auditor might
nevertheless have met with Mr. Asselin at Hydrogain's
office, where he had access to Dualco's accounting records,
and that Mr. Asselin was able to provide him with the sales
contracts, which he himself had prepared, as Mr. Derome
confirmed. It must also be recalled that Mr. Asselin was the
one in charge of registering Dualco for GST purposes. It is
therefore not surprising that Mr. Asselin was treated as the
person duly mandated to represent that corporation.
[19] The auditor had the opportunity to
consult the sales contracts, which, based on his testimony,
included a contract number. His worksheet moreover provides us
with this information as well as the amount of the contract, the
name of the customer, the contract date and the GST amounts. The
worksheet reveals that there were sales invoices for the period
from September 1991 to April 1992. Mr. Marceau admitted in
his testimony that Dualco's sales commenced in July or August
1991 and continued until April 1992. It is therefore reasonable
to believe that Dualco had sales for the month of August and that
the auditor was justified in including them in the total sales
for the relevant period, on the basis of the taxpayer's
summary. Furthermore, it should be noted that the sales contracts
stopped in April, even though the auditor examined the period
ending on May 31, 1992. These facts as a whole lend credence
to the information gathered by the Minister's auditor.
[20] The total sales audited by the auditor
amount to $439,210, which corresponds to GST of $30,745, not the
amount of $30,921 established by the Minister in his assessment.
There is thus a minor difference of $176, which was not explained
at the hearing. Furthermore, Mr. Marceau did not adduce
evidence that might have contradicted the amounts stated in the
summary, which Mr. Asselin provided to the auditor.
[21] Nor is there any convincing evidence
that the figures provided by Mr. Marceau as representing the
total sales are a more accurate reflection of the situation. It
should be kept in mind that no invoice was filed at the hearing.
In addition, no evidence was adduced as to the amounts of the
ITCs: no return was provided to the Minister or to the Court. Nor
were any invoices filed containing the prescribed information,
which would make it possible to ensure that the GST amounts were
actually paid by Dualco. In addition, the four-year time period
for claiming those ITCs had already elapsed.
[22] As to the allegation that the Minister
did not take into account a bad debt of $100,906, I have no
evidence that the debt was written off during the relevant period
or that this amount was not claimed in a return subsequently
filed by Dualco. In his notice of appeal, Mr. Marceau also
refers to a bad debt of $60,000 relating to the supplies made to
André Boucher Climatisation. In his testimony, he
brought no convincing evidence of this unpaid debt. In fact, it
appears that Dualco was paid since the redemption price of the
shares that Mr. Boucher held in Dualco was set off against
that debt. Having regard to these facts, it is impossible for me
to determine whether credit could be granted in respect of bad
debts. Consequently, in my view, the positive amount of the net
tax is $30,745.
[23] Furthermore, Mr. Marceau was
unable to show that, as a director, he had exercised care and
diligence during the relevant years to prevent Dualco's
failure to discharge its duty to remit the net tax owed to the
Minister. On the contrary, it appears that this corporation
administered by Messrs. Marceau and Derome, in full
knowledge of the facts, used the amounts of GST collected to pay
its suppliers¾its most urgent accounts payable. According
to Mr. Derome, the two directors had decided that Dualco
would use a portion of the GST amounts collected to supply its
working capital. It should also be added that Dualco never filed
a GST return with the Minister and remitted no GST for the
relevant period.
[24] Even if Mr. Marceau had been
unaware of his tax liabilities, this would not have constituted a
valid defence. In Cadrin v. The Queen, F.C.A.,
No. A-112-97, December 17, 1998
(99 DTC 5079), the point at issue was the application of
section 227.1 of the Income Tax Act, which is similar
to section 323 of the Act. Décary J.A. of the
Federal Court of Appeal wrote at pages 2 and 3 (DTC, at
pages 5080 and 5081):
First, counsel for the appellant argued that the simple fact
that an outside director is unaware and does not take steps to
learn of the duties which the law imposes on him is sufficient,
according to Soper, to exonerate him from all
liability. This argument is without merit. . . . If
the appellant's only excuse were total passivity based on total
ignorance, he would not escape liability under subsection 3 of
section 227.1.
[25] In Ruffo v. M.N.R.,
F.C.A., No. A-429-97, April 13, 2000
(2000 DTC 6317), the Federal Court of Appeal describes
the essence of the duty of a director of a corporation, at
page 4 (DTC, at page 6319):
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.
[26] In support of his decision,
Létourneau J.A. writes:
As Vinelott J. said, in relation to the duty of a company
manager to make the aforementioned deductions and
remittances:
The directors of a company ought to conduct its affairs in
such a way that it can meet these liabilities when they fall due,
not only because they are not moneys earned by its trading
activities, which the company is entitled to treat as part of its
cash flow... but, more importantly, because the directors ought
not to use moneys which the company is currently liable to pay
over to the Crown to finance its current trading activities.
[27] Thus, the fact that Mr. Marceau
did not personally benefit from the GST amounts kept by Dualco is
completely irrelevant for the purposes of section 323 of the
Act.
[28] There remains the question of the
penalty. My colleague Judge Bowman has acknowledged in
certain decisions that it is possible to raise a due diligence
defence against the application of this penalty. The Federal
Court of Appeal confirmed this interpretation in Attorney
General of Canada v. Consolidated Canadian Contractors
Inc., 98 GTC 6303. I quote a portion of the summary of
the issue given in that case:
In allowing C Inc.'s appeal in part ([1997] 5 GTC 1074),
Bowman, T.C.C.J. of the Tax Court of Canada affirmed a
portion of the GST assessed. He also found that C Inc. had done
everything reasonable to ensure that the GST in issue had been
properly collected and paid, and hence that it had shown due
diligence. Then, as a matter of law, (applying his own reasoning
in Pillar Oilfield Projects Limited v. The Queen ([1997] 2
GTC 1005), Bowman, T.C.C.J. concluded that the section 280
penalty was subject to a defence of due diligence, and hence that
the taxpayer should be relieved of such penalty. The Crown
applied to the Federal Court of Appeal for a judicial review of
Bowman, T.C.C.J.'s findings.
[29] In this instance, Mr. Marceau was
held liable under section 323 to pay the positive amount of
net tax and interest thereon and penalties relating thereto. It
must therefore be determined whether the Minister rightly
assessed the penalty. According to the evidence, the two
directors decided in full knowledge of the facts not to remit the
collected and/or collectable GST and they used those funds to
supply Dualco's working capital and to pay that
corporation's preferred creditors. It is therefore clear that
Dualco did not exercise the necessary degree of diligence in
order to remit the net tax owed to the Minister. Consequently,
the penalty assessed under paragraph 280(1)(a) was
correctly assessed. The interest applies to the amount of the net
tax determined and there is no reason to alter its calculation,
except to reflect my reduction of the amount of the net tax.
[30] For these reasons, the appeal is
allowed and the assessment is referred back to the Minister for
reconsideration and reassessment on the basis that the amount of
Dualco's tax liability for which Mr. Marceau is jointly
and severally liable is $30,745, not $30,921, which results in
corresponding changes to the amount of interest and the penalty
owed by that corporation.
Signed at Ottawa, Canada, this 19th day of October 2000.
J.T.C.C.
Translation certified true
on this 5h day of February 2003.
Sophie Debbané, Revisor
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