Date: 20010629
Docket: 98-2653-IT-G,
98-2816-IT-G
BETWEEN:
HENRI SIMON,
GILDA SIMON,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Archambault, J.T.C.C.
[1]
Gilda Simon and her husband, Henri Simon, are
challenging assessments made by the Minister of National Revenue
(Minister) on September 4, 1997, under section 227.1 of
the Income Tax Act (Act). The Minister, applying
that section, is holding the Simons liable to pay the source
deductions that Aviron Limitée (Aviron)
allegedly failed to withhold for the tax payable by its employees
on the wages it paid to them. The assessments also concern
premiums owed by Aviron and its employees under the Employment
Insurance Act (EIA). Aviron's failure in relation
to all those amounts (SDs) that it ought to have withheld
and remitted to the Minister allegedly occurred for the period
from May 1, 1993 to June 30, 1994 (relevant
period). The following is a breakdown of the SDs that Aviron
allegedly failed to withhold and remit to the Minister as well as
the penalty and interest amounts claimed from Aviron in the
assessments made against it:
|
Date
|
Assessment breakdown
|
Federal
tax
|
Unemploy-ment insurance
|
Penalty
|
Interest
|
Total
|
|
|
|
|
|
|
|
|
|
27/04/94
|
SDs from May to December 1993
|
$39,253.34
|
$2,266.20
|
$3,751.95
|
$1,837
|
$47,108.49
|
|
|
|
|
|
|
|
|
|
27/04/94
|
SDs from January to March 1994
|
$11,082.50
|
$484.59
|
$1,006.70
|
$66
|
$12,639.79
|
|
|
|
|
|
|
|
|
|
25/01/95
|
SDs from April to June 1994
|
$15,396.00
|
|
$1,539.60
|
$759
|
$17,694.60
|
|
|
|
|
|
|
|
|
|
21/02/96
|
Difference 1994 T4s
|
$5,381.34
|
|
$488.13
|
$654
|
$6,523.47
|
|
Minus:
15/05/94
|
Payment applied
|
|
|
|
|
($4,000.00)
|
|
|
|
|
|
|
|
|
|
19/09/94
|
Payment applied
|
|
|
|
|
($3,832.74)
|
|
Plus:
04/09/97
|
Accrued interest
|
|
|
|
|
$24,829.39
|
|
|
|
|
|
|
|
|
|
|
Legal fees
|
|
|
|
|
$100.69
|
|
|
|
|
|
|
|
|
|
Balance due:
|
|
|
|
|
|
$101,063.69
|
[2]
The only grounds that the Simons put forward at the hearing to
challenge the assessments are as follows: (i) they were not
directors of Aviron during the relevant period; (ii) in the
alternative, if they were directors, they had ceased to be
directors by September 4, 1995, and, since the assessments were
made on September 4, 1997, they are statute-barred; (iii)
the amount of the SDs that Aviron allegedly failed to withhold
and remit for 1994 has not been established satisfactorily. The
appellants do not dispute the amount for 1993. The Minister, for
his part, admits that the legal fees of $100.69 must be
subtracted from the amount of the assessment made under section
227.1 of the Act.
The facts
[3]
Aviron was incorporated on December 9, 1940, under Part I of the
Québec Companies Act.[1] It operated a trade school
(school) from that time on. Mr. and Mrs. Simon, along
with a Kamal Chehab, purchased all of Aviron's shares in May
or June 1990 either directly or through a corporation.
Mr. Chehab is a childhood acquaintance of Mr. Simon's
and one of his former clients. Their mothers were friends in
Egypt. It was Mr. Chehab who encouraged the Simons to join him in
purchasing all of Aviron's shares. At the time of the
purchase, Aviron was having financial difficulties. It had about
$800,000 in debts, which would explain why the purchase price for
its shares was a very low $1.
[4]
The allotment of the shares among the new shareholders was not
clearly established at the hearing. Unfortunately, the evidence
is contradictory. Mrs. Simon testified that she was a
shareholder in Aviron from the start. Mr. Chehab said that
he and Mr. Simon owned 45 shares each and that
Mrs. Simon owned 10 shares.[2] According to Mr. Simon, only he and
Mr. Chehab were shareholders in Aviron, and they had 45
shares each. However, he did not explain why there were 100
common shares on May 6, 1994: according to the annual
report, Mr. Chehab held 45 shares and a numbered company,
2744-6020 Québec Inc. (GSI), held
55 shares. It is possible that the shares owned by Mrs.
Simon and Mr. Chehab were purchased by GSI in the fall of 1990,
but this was not established convincingly.
[5]
Mr. Chehab became the school's executive director and,
according to Mr. Simon, he was Aviron's only director.
However, Mrs. Simon testified that she had been a director of
Aviron from the outset. Mr. Chehab had to devote all his energies
to making the operation of the school by that corporation
profitable.
[6]
In the fall of 1990, Mrs. Simon starting taking part in the
day-to-day management of Aviron. She said that she
initially did secretarial work. A few months after her arrival at
the school, she noted that there were personality clashes between
Mr. Chehab and the teaching staff. She also found that
Mr. Chehab had used one of Aviron's credit cards to make
personal purchases for one of his close relatives. According to
the Simons, all of this led to Mr. Chehab's departure
around October 1990.[3] He was apparently replaced as a director by a Sandy
Lapenna. Mr. Lapenna left Aviron after a few months to start his
own business and, according to Mr. Simon, he was replaced in 1991
by Mrs. Simon, who then became the school's executive
director as well as a director of Aviron.
[7]
Mr. Simon said that he was not very involved in the
day-to-day management of the school and that he was
never a director of Aviron until August 1992. He stated that he
limited his role to that of legal advisor. As such, he negotiated
the corporation's refinancing with the bank and also
negotiated with its other creditors. However, he signed the share
certificate as Aviron's president. Mr. Simon has been a
lawyer since 1975: he practises business law, especially in the
area of business financing. He said that at first he met with Mr.
Chehab only on Fridays after work. As well, he himself taught a
security course from 1992 to 1994. It was a basic course given in
four-hour blocks. He said that he taught it 10 or so times,
particularly on Mondays.
[8]
Ms. Malo gave a different version of the facts. She said that
initially she saw Mr. Simon at the school almost every day.
Subsequently, in 1993 and 1994, he was in his office at the
school every Monday for the entire day. He was also there
occasionally the other days of the week. The accountant, Mr.
Lafond, also said that Mr. Simon was at the school every Monday
between 1991 and 1994.
[9]
In August 1992, Aviron obtained $750,000 in new financing from
the National Bank, for which Mr. Simon had to personally give
security. The financing was made up of a $500,000 term loan and a
$250,000 line of credit. In addition to providing security, Mr.
Simon apparently had to agree to participate more in Aviron's
management and, at the National Bank's request, to become one
of that corporation's directors. On August 13, 1992, Mr. and
Mrs. Simon gave the National Bank written confirmation that
they were both directors of Aviron[4] and that Mr. Simon was its
president and Mrs. Simon its vice-president.
[10] According
to Mrs. Simon, the school had about 35 employees at that time.
Mr. Simon said that the start of the new school year in the fall
of 1992 was disastrous. The school had only about 120 to 150
students. The economic situation at the time strongly contributed
to the drop of about 200 in student enrolment. According to Mr.
Simon, there were no longer enough students for the school to be
run profitably. He therefore recommended to his spouse that it be
closed, but she thought that she could improve the situation. She
worked very long hours, from 9:00 a.m. until 10:00 or 11:00 p.m.
Unfortunately, the number of enrolments for the 1993 winter
session was just as disastrous as for the 1992 fall session. The
situation encouraged Mr. Simon to find a new purchaser or,
failing that, to close the school.
[11] According
to Mr. Simon, Mr. Chehab came knocking at his door again in
May 1993. He knew that there had been a considerable drop in
enrolment and that Aviron's business was not doing well. Mr.
Simon said that Mr. Chehab [translation] "was dead
set on taking over the school". Mr. Simon therefore
offered to sell him all of Aviron's shares for the nominal
sum of $1. Mr. Simon said that, since he had given the bank
security for $750,000, it was in his interest to sell his shares
that way because the new owner would see to it that the payments
of the amounts owed to the National Bank were made.
[12] In
support of his allegation that he and his wife sold their entire
interest in Aviron to Mr. Chehab on May 3, 1993, and that they
were replaced as directors of that corporation at that time, Mr.
Simon, during his testimony, filed a copy of the share
certificate on the back of which it is stated that he transferred
the certificate to Mr. Chehab on May 3, 1993.[5] Mr. Simon said that the
certificate was endorsed on May 3, 1993. Mrs. Simon may have
transferred her shares in GSI to Mr. Chehab a few days later.
[13] Mr. Simon
also filed a copy of a resolution passed by Aviron's
shareholders (resolution of May 3, 1993) in lieu of an
annual meeting. The resolution was passed at a meeting allegedly
held on May 3, 1993, at 10:30 a.m. at
3975 Rue de Courtrai in Montréal, which was
the school's address. Mr. Simon said that he drafted the
document on Mr. Chehab's instructions and witnessed the
signature of the document. It is a resolution through which Mr.
Chehab and GSI, as shareholders, elected three directors:
Kamal Chehab, Robledo David and Vasilios Alefantis
(three designates). In addition to that resolution,
Mr. Simon filed the annual report in which it is stated that
the three designates were Aviron's directors. That report,
which Mr. Simon prepared, is signed by Mr. Chehab.
[14] In his
testimony, Mr. Chehab said that he did not sign the resolution of
May 3, 1993, until around June 20, 1994, and that that document
was therefore backdated. He stated that he was merely acting as a
nominee for the Simons when he acquired Aviron's shares in
June 1994.[6] He
added that he never received the share certificate that Mr. Simon
allegedly endorsed over to him. Mr. Simon was, moreover, the
one who filed it as Exhibit A-1 and who described it as a
[translation] "photocopy of the share certificate".
Mr. Chehab also said that he never received Aviron's
minute book or registers of shareholders and directors. He said
that he did not know Mr. David and Mr. Alefantis. According
to him, Mr. Simon took those names out of the telephone
book. Mr. Simon also admitted that he did not know those two
persons.
[15] Mr. Simon
said that the person responsible for Aviron's account
(loan officer) at the National Bank insisted that
Mrs. Simon remain the signing officer for Aviron's
cheques after the shares were sold to Mr. Chehab and that there
be no change in the corporation's directors. That loan
officer did not testify to corroborate what Mr. Simon said.
Until July 1994, Mrs. Simon was the only signing officer for
Aviron's current account at the bank.[7]
[16] Although
they had, they claim, sold their entire interest in Aviron to
Mr. Chehab in May 1993, the Simons agreed to take out a
$100,000 mortgage on their home on July 30, 1993, in order to
guarantee Aviron's line of credit. Moreover, Mrs. Simon
remained in charge of managing the school at least until the end
of 1993. She explained that Mr. Chehab's presence would have
caused a revolt at the school. A visit by Mr. Chehab in May 1993
allegedly worried the staff very much. She described the period
between May 1993 and June 1994 as [translation] "a
weaning period" intended to enable Mr. Chehab to make a
gradual return. She described the situation as follows:
[TRANSLATION]
. . . So obviously I was interested, I wanted to leave. I had
three children at the time, and it was no longer any kind of life
for me anyway. So when he came back, quietly, no one knew
about it, of course. We didn't say anything. It would have
been . . . I think the employees would have gone on strike, there
would have been an incredible revolt, and when there are
problems with the employees, the students . . . and when their
course isn't good or isn't taught properly or there are
also students complaining . . . and students, you know. So one
problem on top of another, so there had to be a kind of,
there had to be a kind of weaning by me to bring
Mr. Chehab in. Does that answer the question?
HENRI SIMON:
92
Q.
And that weaning you refer to, can you explain it?
A.
Well, I continued to be a sort of figurehead for him while
quietly waiting. I came all the time, all the time, all
the time, and at one point I quietly withdrew and then I
was coming three days a week. And I even continued to
sign cheques for a little while first . . . for the bank and
first for Mr. Chehab. Mr. Chehab couldn't sign. It was as if
he didn't exist at that point. Does that answer the
question?
[Emphasis added.]
[17] Mrs.
Simon said that she was pregnant with her fourth child. Starting
in October 1993, she cut back her presence at the school to two
or three days a week, and they were not full days. She said that
she left the school in January 1994 to give birth and did not
come back after that except on rare occasions. She described the
situation as follows:
[TRANSLATION]
94
Q.
. . . you cut back and then what happened, until when did you cut
back?
A.
I cut back . . . I was pregnant; I gave birth in January 94. That
means I left completely I'd say two or three months
earlier, in October maybe, around then, October 93,
because I gave birth in January 94.
HIS HONOUR:
. . .
96
Q.
Excuse me, what happened in October 93?
A.
I went home in October 93. I was going to give birth before
long.
97
Q.
And were you a hundred percent gone then?
A.
Well, but I still came in from time to time.
98
Q.
OK.
A.
Never a hundred percent. I'd been going in from time to time
for a little while.
99
Q.
So from October 93 to January 94, when you stopped
completely, how many days a week did you go in?
A.
Maybe two days.
100
Q.
OK.
A.
It could vary from week to week, two days, sometimes three
days, and not even full time the entire day like
before.
[Emphasis added.]
[18] On
cross-examination, she provided the following additional
explanations:
[TRANSLATION]
312
Q.
And Mr. Chehab, was he there every week, every
day?
A.
I don't know how often. Mr. Chehab was being
very discreet for a while. It was in his interest to be very
discreet.
313
Q.
So who made the decisions?
A.
I don't know, he tried to . . . But things
always went on as usual at the school, the school went on and all
the employees were on the job and were doing their work, their
jobs. Classes were still being given, the teachers were there.
That was the main thing.
HIS HONOUR:
314
Q.
Who ran the school when you left?
A.
But even though there were . . . running things.
315
Q.
Yes.
A.
Mr. Chehab.
VALÉRIE TARDIF:
316
Q.
But you're saying that he wasn't there?
A.
He wasn't there all the time, probably because
he was doing . . . he was doing things discreetly,
but after that . . .
317
Q.
But what do you mean by he was doing things discreetly? Where was
he? Was he at home? Was he at his store?
A.
I don't know where he was. Before he was
present completely and constantly—and I don't know when
that was, so don't ask me—he did not appear
constantly right away, because obviously, if the
employees knew he was going to be their boss, that would have
created a problem.
[Emphasis added.]
[19] Since
Mrs. Simon was still the only signing officer for Aviron's
cheques while she was on maternity leave, Mr. Lafond had the
cheques prepared and sent them by messenger, often the
school's janitor, to Mrs. Simon's home for her to sign.
He kept in touch with Mrs. Simon by telephone. Mr. Chehab
never called Mrs. Simon [translation] "for the
cheques"; rather, it was she who called him. When she
was not available, the accountant dealt with Mr. Simon.
[20] Ms. Malo
and Mr. Lafond[8]
both testified that they had not noticed Mr. Chehab's
presence at the school at all between 1991 and June 1994.
Ms. Malo said that Mr. Chehab reappeared [translation]
"only at the time the school was sold" by Aviron to
2853-2968 Québec Inc. (RTI).
According to the contract of sale, the transaction took place on
June 28, 1994, the price being $480,000, which was the secured
amount owed to the National Bank. The contract states that Mr.
Chehab was Aviron's director and vice-president[9] and that one
Reza Tehrani was RTI's president. Mr. Simon declared
that he did not know who owned RTI. On June 28, 1994, Mr. Chehab
and RTI also entered into a 10-year employment contract.
Mr. Chehab became RTI's chief executive officer at an annual
salary of $50,000.
[21] According
to the version given by Mr. Tehrani, it was Mr. Chehab who
introduced Mr. Simon to him. Mr. Tehrani said that he met Mr.
Chehab for the first time at his computer store in Lasalle in
February 1994, which was when he learned that Mr. Chehab owned a
school, just as he did.
[22] According
to Mr. Chehab's version, it was Mr. Simon who introduced
Mr. Tehrani to him in June 1994. Mr. Simon told him that he
had found a new buyer for Aviron and that there was a possibility
that Mr. Chehab could have employment for 10 years running the
school since, according to Mr. Simon, Mr. Tehrani had no
experience in school management.[10] However, Mr. Chehab said that to
obtain the new job he had to become a shareholder and director of
Aviron. Mr. Chehab also said that he did not become a shareholder
and director until one week before the sale to RTI, that is,
around June 21, 1994.
[23] In his
testimony, Mr. Simon explained that a transfer of a business was
subject to fairly strict conditions under the new Civil Code
of Québec and that the negotiations between Aviron and
RTI lasted from March to June 1994. Mr. Tehrani's lawyer
apparently noticed that Aviron had not submitted an annual report
to the Inspector General of Financial Institutions. Mr. Simon
therefore prepared the annual report for 1992 and 1993. The
address of the [translation] "transfer office for the
company's shares", like the address indicated for
correspondence, is the same as that given by Mr. Simon as his
address[11] on
his Notice of Appeal dated October 5, 1998.
[24] According
to Mr. Tehrani, Mr. Chehab left his employment at RTI in
April 1995 following an investigation into the theft of
$4,000 at the school. The three main suspects underwent a
polygraph test, which only Mr. Chehab failed. Furthermore, on
cross-examination by Mr. Simon, Mr. Chehab admitted that he
had been sentenced to pay $10,000 for unlawfully copying
software. Mr. Simon testified that Mr. Chehab had also
misappropriated funds belonging to a business he had run with his
cousins before joining Mr. Simon in purchasing Aviron.
Mr. Simon said that he learned of this from Mr. Chehab's
cousins after Mr. Chehab left Aviron in 1990.
[25] On
cross-examination, Mr. Chehab admitted that he had discussed the
possibility of not testifying for the Minister if he was paid
money for not doing so. According to Mr. Chehab, while he was in
the Court's waiting room, Mr. Tehrani invited him to go down
and get a cup of coffee. During that meeting, Mr. Tehrani said
that he had an attractive offer to make him and that he would
call him the next day. The next day, Mr. Tehrani offered to pay
him $35,000. Mr. Chehab said that he never seriously
considered accepting the offer, as shown by the fact that he
instead demanded $1,000,000 even though the amount at issue in
the case is well under $1,000,000.
[26] Mr.
Tehrani testified subsequently and told the Court that he had
recorded his telephone conversation with Mr. Chehab. The
suggestion that he do this had been made to him by Mr. Simon, who
had learned from Mr. Tehrani the day before that Mr. Chehab
was prepared to accept $35,000.[12] According to Mr. Tehrani—who used
Mr. Simon's professional services several times after
purchasing the school—Mr. Chehab was the one who asked
him to go to the restaurant and who offered not to appear as a
witness if he was given $50,000. Mr. Tehrani then asked him
whether he could be more reasonable, and Mr. Chehab answered that
the least he could accept was $35,000. During the telephone
conversation as recorded by Mr. Tehrani, Mr. Tehrani told
Mr. Chehab that the price had to be reduced to $30,000. Mr.
Chehab then insisted on the $35,000 they had talked about. The
recording shows that at no time during the conversation was there
any reference to $1,000,000, contrary to what Mr. Chehab had
claimed.
[27] After
hearing the recording, Mr. Chehab first denied that it was
actually his voice. After pausing for a few minutes, he then
apologized to the Court for lying. He said that he felt ashamed.
Although he admitted that he had been prepared to accept $35,000,
he continued to maintain that it was Mr. Tehrani who had
offered him money for not testifying, and he stood by his
testimony that he had not become a director until June 1994.
[28] The
respondent called two collection officers, Martin Girard and
Richard Dvaranauskas, and an SD auditor, Céline
Couture, to testify about the making of the assessments against
Mr. and Mrs. Simon. Mr. Girard said that he did some of the
preliminary work with regard to the assessments under section
227.1 of the Act. It was Mr. Dvaranauskas who actually made the
assessments on September 4, 1997. In their preliminary
work, Mr. Girard and Mr. Dvaranauskas merely looked up in
the Department's computerized data the amounts that had been
determined in the assessments made by three SD auditors,
Jacques Daï, Christopher Prokop and Ms.
Couture, and that were being claimed from Aviron.
[29] Mr.
Daï apparently made his assessments against Aviron on
April 27, 1994. Those assessments concerned unremitted
SDs for the period of May to December 1993 as well as for January
to March 1994. As for Mr. Prokop, he apparently made an
arbitrary assessment[13] in January 1995 for unremitted SDs for May and June
1994. It seems that Aviron remitted the required SD amounts for
April 1994. Neither Mr. Daï nor Mr. Prokop
testified in order to explain their audit work by, inter
alia, describing the books of account they were able to
consult and indicating which individuals they were able to
meet.
[30]
Ms. Couture described the circumstances that led her to
reassess Aviron on February 21, 1996. She had been asked to audit
the insurable earnings of one Fouad Sarrouf for the purposes
of the EIA. She went to the facility occupied by Aviron until
June 1994. Since RTI had moved the school to new premises,
Ms. Couture went to the school's new address. It was
then that she learned of its new owner. In making checks
concerning Mr. Sarrouf, she found that 29 T4 information slips
for 1994 had mistakenly been treated as being part of RTI's
file rather than being included in Aviron's file. She
therefore made corrections to the Minister's files. The SD
adjustment amounted to $29,866.46. Since some remittances had
been made to the Minister and the amounts claimed by way of
assessment totalled $24,485.12, the SDs not paid by Aviron,
according to Ms. Couture's assessment, amounted to
$5,381.34.
[31] Given
that Ms. Couture had to respond to an urgent request concerning
Mr. Sarrouf's insurability, she does not seem to have
spent much time auditing Aviron's SDs for the first six
months of 1994. According to her report, her audit at RTI lasted
just half an hour and she took only three and a half hours to
finish her work concerning Mr. Sarrouf and make the corrections
to Aviron's SDs. When she testified, Ms. Couture was unable
to provide much information on her audit work with respect to
Aviron's SDs. In particular, she was unable to clearly
explain how she had been able to conclude that the 29 T4s had
mistakenly been treated as being part of RTI's file. It is
highly likely that she made her assessment solely on the basis of
the T4s. This is clearly illustrated by the following excerpt
from the cross-examination conducted by Mr. Simon:
[TRANSLATION]
1288
Q.
So when you made your assessment, if I understand correctly,
you had nothing other than the employer's T4s.
Is that your testimony?
A.
It is.
1289
Q.
That's what you said earlier?
A.
With respect to the figures I relied on, I had nothing other than
the T4s . . .
1290
Q.
Exactly, we're talking about figures?
A.
Yes.
1291
Q.
OK. So, for the figures, you had nothing but the employers'
T4s?
A.
Nothing but the amount from the T4s, that's right.
1292
Q.
Did you look at whether, specifically for those
employees during that period, there was a payroll
journal that corresponded to the T4s?
A.
I can't tell you, maybe yes, maybe no . . .
[Emphasis added.]
[32] Moreover,
when she began her testimony, she was not even certain whether
she had looked at the T4s. She did not conclude that she had
until noting that she had written in her audit report that copies
of the T4s were in RTI's file. Ms. Couture was unable to
give the employer's name appearing on the T4s. Unfortunately,
she had not brought RTI's SD file with her, so she was not
able to file the 29 T4s.
[33] Based on
his reading of Ms. Couture's audit report, Mr. Simon noted
not only that Ms. Couture had found a mistake in the way the
29 T4s had been dealt with but also that RTI had paid SDs, also
by mistake. Ms. Couture admitted that, in theory, RTI would have
been reimbursed or would have been given a credit for those
amounts.
Analysis
[34] For the
purposes of these appeals, the relevant subsections of section
227.1 of the Act are as follows:
227.1 Liability of directors
for failure to deduct.
(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.
(2) Limitations on liability. 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.
(4) Limitation period. No action or proceedings to
recover any amount payable by a director of a corporation under
subsection (1) shall be commenced more than two years after
the director last ceased to be a director of that
corporation.
[Emphasis added.]
Were the Simons replaced as directors on May 3,
1993?
[35] When the
Minister assessed the Simons on September 4, 1997, he assumed
that they were directors of Aviron at all relevant times. The
burden is on the Simons to demolish that assumption. Their first
argument is that they were replaced by three new directors on
Monday, May 3, 1993, and that they cannot be held liable for the
failure to fulfil the obligation to remit SDs for the relevant
period, which, it will be recalled, is from May 1, 1993, to June
30, 1994. Have they been able to prove on a balance of
probabilities that they were replaced?
[36] In
support of their position, the Simons stated that they sold their
shares in Aviron to Mr. Chehab on May 3, 1993, and perhaps the
shares in GSI a few days later. They also filed a copy of an
Aviron share certificate endorsed over to Mr. Chehab and the
resolution of May 3, 1993, whereby Mr. Chehab and GSI elected Mr.
Chehab, Mr. David and Mr. Alefantis as directors. The respondent
called Mr. Chehab as a witness, and he stated that the resolution
was not signed until June 1994, or near the end of the relevant
period. We therefore have contradictory testimony: the
Simons' version on the one hand and Mr. Chehab's on the
other. Which one should be accepted?
[37] It is
important to deal first with Mr. Chehab's credibility. As we
have seen, he perjured himself while being cross-examined
by Mr. Simon: he is therefore a tainted witness. It is thus
imperative that one be cautious as to the probative force to be
given to his testimony. However, it must be acknowledged that,
although Mr. Chehab lied about the attempt to bribe him, this
does not mean that he necessarily lied when he said that Mr.
Tehrani initiated the bribe attempt. Nor did he necessarily lie
when he said that the resolution of May 3, 1993, was
not signed until June 1994 and that Mr. Simon got the names of
Mr. David and Mr. Alefantis out of a telephone book. Moreover,
the fact that Mr. Chehab is a tainted witness does not
necessarily mean that the Simons[14] and Mr. Tehrani[15] necessarily told the
truth in their testimony.
[38] One
aspect of the Simons' testimony that gives rise to serious
doubt is their assertion that Mr. Chehab became Aviron's sole
shareholder (directly, or indirectly through GSI) on May 3, 1993,
and that he gradually got involved in running the school. First
of all, it strikes me as very surprising that the Simons would
have agreed to sell Mr. Chehab their entire interest in Aviron
when they knew for a fact that he was unscrupulous and they
believed that he had acted dishonestly on at least two occasions.
According to their own version of the facts, they had dismissed
him in October 1990 for fraudulently using the school's
credit card. He had apparently also misappropriated funds
belonging to a business owned by his own cousins. How could the
Simons trust Mr. Chehab to make repayment to the National Bank of
Aviron's loans totalling about $750,000, for which Mr. Simon
had personally stood surety?[16] Did not Mr. Chehab have a reputation for
appropriating property belonging to the companies for which he
worked, to the detriment of those companies and their
shareholders? Even more surprising, how could they have agreed,
following the alleged sale to Mr. Chehab in May 1993, to
give the bank a mortgage on their own home to guarantee existing
loans of Aviron's?
[39] Moreover,
how could they hope that the school would function properly and
make enough money to pay back its loans if the owner was going to
cause [translation] "a revolt and a strike" at the
school? I also consider it totally implausible that Mr. Chehab
purchased all of Aviron's shares in May 1993 while continuing
to hide so as not to cause a revolt at the school he had just
bought even though he [translation] "was dead set on
taking over the school". Why would Mr. Chehab have
[translation] "gradually" worked towards managing the
school between May 1993 and June 1994 without being paid for his
services? Mr. Lafond, who was responsible for issuing
Aviron's cheques (including those to pay the lease fee on the
car used by Mr. Chehab 12 months after he left the school in
1990), would certainly have known of any salary paid to Mr.
Chehab. If Mr. Lafond had paid him a salary, he would have
mentioned it.
[40] During
the period from May 1993 to June 1994, Aviron had serious cash
flow problems and failed to remit substantial amounts of SDs to
the Minister. Why did the accountant obtain his instructions only
from the Simons and not from Mr. Chehab, the alleged new
owner and one of the alleged new directors as of
May 3, 1993? Mrs. Simon claimed that she called Mr.
Chehab to decide which cheques would be postdated. Now, why did
someone like Mr. Lafond—who Mr. Simon admitted was
very discreet and with whom Mr. Chehab had had no personality
conflicts (Mr. Lafond having been hired after Mr. Chehab's
departure in 1990)—not "discreetly" consult Mr.
Chehab directly? Yet the Simons said that Mr. Chehab gradually
became involved in managing the school. On
cross-examination, Mrs. Simon gave counsel for the
respondent the following answer indicating that Mr. Chehab
got involved in managing the school in 1993:
[TRANSLATION]
375
Q.
Did Mr. Chehab have some degree of presence at the company in
1993 and 1994?
HIS HONOUR: Pardon me, for what period?
VALÉRIE TARDIF: 1993 and 1994.
A.
I suppose so, yes. He came and went, that's for
sure.[17]
[Emphasis added.]
[41] To this
must be added the fact that Mrs. Simon allegedly cut back her
time at the school in October 1993 and left at the end of 1993 to
go on maternity leave. If there was a time when one would have
expected Mr. Chehab to be more present at the school, it
would certainly have been between October 1993 and
June 1994, as Mr. Simon admitted in argument. However, such
was not the case. Ms. Malo[18] and Mr. Lafond did not see Mr. Chehab
before June or July 1994.
[42] Moreover,
neither Ms. Malo nor Mr. Lafond confirmed that
Mr. Chehab had come to the school in May 1993 and that this
had greatly worried the school's staff. As well, no one other
than the Simons stated that there were serious problems with the
interpersonal relations between Mr. Chehab and the school's
employees.
[43] Mr. Simon
did try to impugn Mr. Lafond's credibility by saying that he
had a financial stake in the Simons' being recognized as
directors because he had brought proceedings against Aviron
before the Commission des normes du travail. Mr. Lafond's
answer was that he had not brought proceedings against Mr. Simon
and that he had not taken account of Mr. Simon's credit
standing. I consider Mr. Lafond's answer honest. Moreover,
Ms. Malo corroborated his testimony concerning Mr.
Chehab's absence prior to the sale of the school in June
1994. Mr. Simon attempted to impugn Ms. Malo's credibility by
saying that she had been Mr. Chehab's [translation]
"private secretary" and that she had expressed her
displeasure at testifying in court. However, I found
Ms. Malo's testimony credible. She did her best to
answer candidly the questions she was asked. As well, it should
be added that Mr. Simon admitted that there is no evidence that
Ms. Malo brought proceedings against Aviron or the Simons before
the Commission des normes du travail.
[44] Given the
circumstances already described and the testimony of
Ms. Malo and Mr. Lafond, the Simons' version of the
facts strikes me as highly implausible and even improbable. To
this it must be added that Mrs. Simon's testimony was often
evasive and contradictory. For example, she said that Mr. Chehab
gradually took part in managing the school right on the school
premises, but she did not know how often he was there.
[translation] "He wasn't there all the time . . .
because . . . he was doing things discreetly." She
[translation] "suppose[d]" that he had "some
degree of presence" at the company and at the same time she
was sure that he came and went. Mr. Chehab was running the
school, but she did not know who made the decisions
(question 313)!
[45]
Furthermore, in my view, the Simons' contention that the loan
officer strongly suggested that they keep Mrs. Simon as signing
officer for the cheques after May 1993 and that they not
officially inform the bank of the change in directors has not
been established convincingly. The Simons' testimony on this
point is hearsay to which I give no probative value here. The
loan officer should have been called to testify and I draw an
unfavourable conclusion from his absence at the hearing. I will
point out here what Sopinka and Lederman say in The Law of
Evidence in Civil Cases, as cited by Judge Sarchuk of this
Court in Enns v. M.N.R., 87 DTC 208, at page 210:
In The Law of Evidence in Civil Cases, by Sopinka and
Lederman, the authors comment on the effect of failure to call a
witness and I quote:
In Blatch v. Archer , (1774), 1 Cowp. 63, at p. 65,
Lord Mansfield stated:
"It is certainly a maxim that all evidence is to be
weighed according to the proof which it was in the power of one
side to have produced, and in the power of the other to have
contradicted."
The application of this maxim has led to a well-recognized
rule that the failure of a party or a witness to give evidence,
which it was in the power of the party or witness to give and by
which the facts might have been elucidated, justifies the court
in drawing the inference that the evidence of the party or
witness would have been unfavourable to the party to whom the
failure was attributed.
[46] There are
also other indications that, when added to the facts already
mentioned, cast doubt on the Simons' version.[19] Mrs. Simon said that
she saw Mr. Chehab's signature on the contract dated
June 28, 1994, through which Aviron sold the school to
RTI.[20] If she
had sold all her shares in May 1993, why would she have been
shown that contract (on which her signature does not even appear)
when she said she was not involved in the negotiations[21] and merely signed
some documents?[22] Moreover, if Mr. Chehab owned Aviron when the school
was sold to RTI in June 1994, why was he only Aviron's
vice-president, as stated in the conveyance? And who was its
president?
[47] There is
Ms. Malo's testimony, which contradicts that given by Mr.
Simon, regarding his much more important role in running the
school. It should be remembered that Mr. Simon was Aviron's
president from the very beginning in 1990. Moreover, how can Mr.
Simon claim that Mr. Chehab was the sole director of a
corporation governed by Part I of the Companies Act
(QCA) (R.S.Q., c. C-38) given that section 83
of that statute requires that there be not less than three
directors? It must be borne in mind that Mr. Simon has been a
lawyer specializing in business law, particularly financing law,
since 1975. How could he have been unaware of that legal rule?
Besides, Mr. Simon seems to have been aware of it, since he
drafted the resolution of May 3, 1993, stating that
Aviron's shareholders had elected "three"
directors.
[48] For all
these reasons,[23] I find unconvincing the testimony of Mr. and Mrs.
Simon that they sold their interest in Aviron to Mr. Chehab in
May 1993 and that Mr. Chehab became a director and shareholder of
Aviron at that time. Accordingly, I am prepared to accept that
Mr. Chehab was telling the truth when he said that he did not
become a shareholder in Aviron again until June 1994, and that he
was likewise being truthful in stating that the names of Mr.
David and Mr. Alefantis were taken out of the telephone book and
that he did not know them. The Simons' two alternative
arguments must therefore be considered.
Were the Simons directors of Aviron on September 4,
1995?
[49] Before
looking at the facts relevant to answering this question, it is
helpful to refer to certain rules laid down by the QCA concerning
companies governed by Part I of that statute. According to
subsection 4(1), Part I of the QCA applies to every "company
incorporated under Part I of The Québec Companies
Act". As stated above, section 83 QCA provides that the
affairs of the company are to be managed by a board of not less
than three directors. Section 87 QCA states that the number of
directors may be increased or decreased. However, there must
always be at least three directors. According to subsection 86(1)
QCA, no person is to be elected or appointed a director of a
company unless the person, or any other company of which the
person is an officer or director, is a shareholder therein.
[50] According
to subsection 71(1) QCA, no transfer of shares is valid for any
purpose until entry thereof is duly made in the register of
transfers, except for the purpose of exhibiting the rights of the
parties thereto towards each other and of rendering the
transferee liable in the meantime, solidarily with the
transferor, to the company and its creditors. In Leduc v.
Leduc, [1959] B.R. 779, at page 784, Taschereau J.
of the Court of Queen's Bench (in appeal) stated that
delivery of an endorsed share certificate does not transfer
ownership of the shares of a company governed by the QCA.
[51] Finally,
section 85 QCA provides that failure to elect new directors means
that the former directors continue in office:
85. If, at any time, an election of directors is not
made or does not take effect at the proper time, the company
shall not be held to be thereby dissolved, but such election may
take place at any subsequent general meeting of the company
called for that purpose, and the retiring directors shall
continue in office until their successors are
elected.
[Emphasis added.]
[52] It seems
to be recognized in the common law that, for a person to be
lawfully elected a director of a corporation, the person must
have accepted the office of director. In DeWitt v. M.N.R.,
90 DTC 1027, Judge Kempo of this Court adopted that
interpretation, in support of which she referred to
West Leechburg Steel Co. v. Smitton, 280 Mich. 180,
273 NW 439 (Mich. S.C.). At page 440 of that decision, the
Michigan Supreme Court cited the following passage:
To make one an officer of a corporation, his consent, as well
as an appointment or election is necessary. A person who is
elected without his knowledge, and who does not accept the
office, or act as an officer, is not an officer, although he may
have received stock after his election period.
[53] Let us
now consider the relevant facts of this appeal. The first thing
to be decided is whether the Simons have discharged their burden
of proving that they were no longer directors of Aviron by
September 4, 1995, at the latest. That date is relevant because
subsection 227.1(4) of the Act provides that no action to recover
any amount payable under subsection 227.1(1) may be commenced
more than two years after a director last ceased to be a director
of a corporation.
[54] In my
opinion, the Simons have not discharged their burden. To begin
with, regardless of whether or not Aviron was
incorporated—as I believe it was—under Part I of the
Québec Companies Act, it is Part I of the QCA
that applies to that corporation. Moreover, the Simons admitted
that they never prepared a document recording their resignation
as directors of Aviron. They claimed that they ceased to be
directors when they were replaced by three new directors as a
result of the resolution of May 3, 1993. That resolution raises
many problems, however. First of all, one may question whether it
is a valid document. Mr. Chehab testified that he did not
become a shareholder in Aviron until June 1994, that he did
so as a nominee and that the resolution of May 3, 1993, does not
reflect the real situation: this means that no meeting was held
at 3975 Rue de Courtrai on that date. The document is therefore a
forgery and a sham. If the resolution of May 3, 1993,
does not reflect the real situation on that date, might it
reflect the situation in June 1994, when it was actually
drafted?
[55] It must
first be pointed out that section 88 QCA provides that directors
of a company are to be elected by the shareholders in such manner
as the constituting act or, as the case may be, the by-laws
of the company prescribe. However, the corporation's letters
patent, although public documents,[24] were not filed in evidence. The
corporation's by-laws were not filed either. It therefore
cannot be determined whether the directors were elected in
accordance with Aviron's constituting act or
by-laws.
[56] It can
however be determined whether the election was consistent with
the provisions of the QCA. The first question that arises is
whether the three designates were elected as directors by duly
registered shareholders of Aviron. In the first place, there is
only Mr. Simon's testimony that the transfer records for the
shares in Aviron and GSI were completed. No such records from
Aviron showing that Mr. Chehab and GSI validly became
shareholders in Aviron was filed to corroborate that testimony.
Moreover, there is no evidence of who GSI's officers,
directors and shareholders were. Thus, even if one could consider
the resolution of May 3, 1993, to have been passed in
June 1994, it is far from certain that Mr. Chehab and GSI
were registered shareholders of Aviron in June 1994. The
words of Taschereau J. must be recalled: delivery of an
endorsed share certificate does not transfer ownership of the
shares of a company governed by Part I of the QCA. Given the lack
of convincing evidence that all the legal requirements for the
transfer of the shares in Aviron to Mr. Chehab and GSI were
met, it cannot be determined whether Mr. Chehab and GSI were
registered shareholders of Aviron, whether they had the legal
capacity to elect the three designates and whether those three
persons were lawfully elected directors.
[57]
Furthermore, if the three designates were not shareholders in
Aviron, they did not have the essential qualifications needed to
become directors of Aviron as set out in subsection 86(1) QCA,
unless they were officers or directors of GSI and that company
validly became a shareholder in Aviron. However, not only is
there no convincing evidence that GSI lawfully became a
shareholder in Aviron, but there is also no such evidence that
the three designates were officers or directors of GSI.
[58] Even if I
accepted Mr. Simon's testimony as probative and concluded
that GSI and Mr. Chehab lawfully became shareholders in Aviron in
June 1994, Mr. Chehab would merely be the only one of the
three designates elected by the shareholders' resolution of
May 3, 1993. First of all, only Mr. Chehab agreed to become a
director. Not only is there no evidence that the other two
alleged directors, Mr. David and Mr. Alefantis, agreed to become
directors of Aviron, but it has been shown on a balance of
probabilities that they never knew they had been elected
directors. Mr. Chehab said that their names were taken out
of the telephone book. In my opinion, the resolution of May 3,
1993, is a sham not only as regards the date on which the
shareholders' meeting was held but also as regards the
election of the two strangers in question. Moreover, the
interpretation adopted in West Leechburg Steel Co.,
supra, seems to me to be entirely in keeping with the
spirit of the QCA. How can people be elected to manage a
corporation's affairs if they have no knowledge of their
so-called election? How can duties be imposed on such
persons if they have not accepted the office of director?
[59] Since a
corporation governed by Part I of the QCA must have not less than
three directors and only Mr. Chehab accepted the office of
director, the other two director's positions held by Mr. and
Mrs. Simon were not filled. According to section 85 QCA,
"the retiring directors shall continue in office until their
successors are elected". It has been established that the
Simons were directors of Aviron from at least August 1992 on.
Since no evidence was adduced showing that they were lawfully
replaced[25]—Mr. Chehab holding the third
director's position required by the QCA—I have no basis
for concluding that they were not directors of Aviron on
September 4, 1995. Accordingly, the limitation period set out in
subsection 227.1(4) cannot be a valid defence for the Simons in
the circumstances.
[60] A brief
comment must be made about the position taken by counsel for the
respondent concerning the Simons' status as directors in
September 1995. She argued that the Simons' sale of their
shares in Aviron to Mr. Chehab in June 1994 should be
considered as having no effect because it was a sham. In my view,
that position is unfounded. Mr. Chehab admitted that he became a
shareholder as a nominee for the Simons. Legally, nothing
prevented him from doing so. If the transfer was recorded in the
share transfer records, Mr. Chehab became a shareholder in
Aviron from a corporate law standpoint. Under subsection 86(1)
QCA, Mr. Chehab did not have to own shares of the corporation
"absolutely in his own right" unless Aviron's
by-laws so provided. There is no evidence that Aviron's
by-laws contain such a condition. Therefore, the mere fact
that Mr. Chehab did not become the beneficial owner of the shares
is not as such a valid reason for concluding that the Simons were
not replaced by other directors.
Is there sufficient evidence as to the amount of the SDs
that Aviron allegedly failed to remit to the Minister for
1994?
[61] As a
third ground for challenging the Minister's assessments, the
Simons argued that the Minister has not satisfactorily
established the amount of the SDs not remitted to him. As shown
by the facts set out above, the evidence is indeed deficient on
this question. The respondent did not call as witnesses the
auditors who made the assessments holding Aviron liable for the
SDs not remitted to the Minister. The respondent merely called
the collection officers, who said that they had determined those
SDs by relying basically on the Department's computerized
data.
[62] The only
exception is Ms. Couture, who made one of the four SD
assessments against Aviron. However, she did not really conduct
an audit concerning Aviron: she merely found a mistake in the
treatment of 29 T4s and made a correction accordingly. Not only
was she not able to file the 29 T4s in question, but she was also
unable to say which documents she had been able to consult to
reach her conclusion and make her assessment of February 1996.
After hesitating a moment, she admitted that the only documents
she had been able to consult were the T4s.
[63] The
auditors, who could have enlightened the Court about Aviron's
failure to fulfil its obligation to remit SDs to the Minister,
were not called to testify by the Simons either. The question to
be decided is who had the burden of proving the amount of SDs not
remitted to the Minister. Was it enough for the respondent to
state, in her Reply to the Notice of Appeal, the amounts
determined by the Minister in the assessments against Aviron and
to call as witnesses the collection officers who made the
assessments against the Simons on the basis of the amounts
claimed in the assessments against Aviron?
[64] To answer
these questions, it is first necessary to recall the wording of
subsection 227.1(1) of the Act, which states that the
directors of a corporation are jointly and severally liable,
together with the corporation, "[w]here a corporation has
failed to deduct or withhold an amount as required by
. . . section 153 or . . .
to remit such an amount". Proof of failure to
withhold or remit is a precondition for a director's
financial liability. At first blush, one might expect that the
respondent be the one to establish that juridical fact. In
addition to taking account of the wording of section 227.1,
the nature of an assessment made under that provision must also
be considered. Such an assessment is not a standard assessment
for income tax owed by a taxpayer, for the tax on capital owed by
a taxpayer or for the goods and services tax payable on the
purchase of a product or service. An assessment under section
227.1 is a tool the Minister is given by the Act to enable him to
collect the tax owed by a third party. Here, Aviron had an
obligation under section 153 of the Act to withhold, on account
of tax, part of the wages paid to its employees.[26] Since Aviron did not remit
some of the amounts withheld and the Minister was unable to
recover the unremitted amounts because execution therefor was
returned unsatisfied in whole or in part, the Minister exercised
his remedy against Aviron's directors, whom he held jointly
and severally liable, together with Aviron, to pay the SDs.
[65] That
recovery tool is very similar to the one found in
subsection 160(1) of the Act. In Gaucher v. The
Queen, 2000 DTC 6678, Rothstein J.A. of the Federal Court of
Appeal described an assessment under that subsection as a
"derivative assessment". He stated the following in
paragraph 7 of his reasons:
When the Minister issues a derivative assessment under
subsection 160(1), a special statutory provision is invoked
entitling the Minister to seek payment from a second person for
the tax assessed against the primary tax payer. That second
person must have a full right of defence to challenge the
assessment made against her, including an attack on the primary
assessment on which the second person's assessment is
based.
[66] In the
next paragraph, he commented on the approach taken by the trial
judge: "It seems to me that this approach fails to
appreciate that what is at issue are two separate assessments
between the Minister and two different taxpayers." In
Gaucher, the Federal Court of Appeal concluded that the
transferee of property was entitled to challenge the primary
assessment again even though that assessment had been confirmed
by the Tax Court of Canada. Rothstein J.A. stated the following
in paragraph 9:
. . . since the secondary taxpayer was not a party in the
proceedings between the Minister and the primary taxpayer, she is
not bound by the assessment against the primary taxpayer. The
secondary taxpayer is entitled to raise any defence that the
primary taxpayer could have raised against the primary
assessment.
[67] In
Gestion Yvan Drouin Inc. v. The Queen, 2000
CarswellNat 3296, [2000] T.C.J. No. 872, a decision rendered
shortly after Gaucher, I considered the question of who
had the burden of proving the existence of the primary tax
debtor's tax liability. I stated the following in
paragraph 114:[27]
114. Since it is the Minister who takes measures against a
third party to recover the tax owed to him by the tax debtor, it
seems entirely reasonable to me that it should be incumbent on
the Minister to provide prima facie evidence of the
existence of the tax liability. To do this, the Minister usually
has in his possession the tax debtor's tax return and, if he
has carried out an audit, he may have copies of the source
documents or other relevant documents supporting his assessment.
He is therefore the one who is in the best position to establish
the quantum of the tax liability. I thus conclude that the onus
of providing prima facie evidence of the tax liability
where an assessment has been made under subsection 160(1) of
the Act generally falls on the Minister.
[68] I added
that it was not enough to produce the primary tax debtor's
notice of assessment unless the amount established by the
Minister in that assessment corresponded to that indicated by the
tax debtor in his or her tax return.
[69] A review
of the case law on the application of section 227.1 of the Act
shows that the courts have considered the question of where the
burden of proof under that section lies. It must be noted that
section 227.1 has applied since November 13, 1981; it
is therefore a relatively recent statutory provision. In the
past, taxpayers have tried to challenge the validity of
assessments made under section 227.1 by raising the question
of that section's constitutionality or by attempting to have
the entire burden of proof as regards its application imposed on
the Minister. Those efforts have been unsuccessful. See, inter
alia, Byrt v. M.N.R., 91 DTC 923, [1991] 2 C.T.C.
2174; Tremblay v. M.N.R., [1990] 2 C.T.C. 2666; and
Binavince v. M.N.R., [1991] 2 C.T.C. 2580, 91 DTC 1225.
Those decisions clearly established that section 227.1 is
constitutional and that it is reasonable for taxpayers to bear
the burden of proving that they acted with due diligence in
performing their duties as directors of a corporation, and
specifically that they took all necessary steps to prevent the
failure to fulfil the obligation to remit SDs to the Minister.
This outcome strikes me as entirely appropriate, because the
person who is in the best position to prove this is the director
himself.
[70] However,
it seems to me that an entirely different problem arises in
establishing the amount of SDs not remitted to the Minister by a
corporation. It should be recalled that a corporation and a
director are separate persons. The primary tax debtor in such a
case is the corporation that pays the wages to its employees. The
Minister cannot make an assessment against a director unless he
has been unable to recover the SDs from that corporation. To
determine the amount of SDs not remitted to the Minister by the
corporation, an auditor must normally review the
corporation's accounting records, including its payroll
journal and cash disbursements journal, to determine the amounts
paid by the corporation as wages to its employees and the amounts
that had to be remitted to the Minister. By reviewing the
Department's records, the auditor can then determine how much
the Minister actually received and how much was not remitted. The
accounting records of the corporation and of the Department do
not belong to the director of the corporation. When a director
comes to this Court to challenge assessments made under section
227.1 of the Act, it may be difficult if not impossible for the
director to have access to those records. If the corporation, or
even the Department, as occasionally occurs, has mislaid or
destroyed its records or files, the director should not be
adversely affected thereby unless it is shown that he or she
participated in the destruction of the records or files.
[71] In R.
v. Leung, 1993 CarswellNat 958, [1994] 1 F.C. 482,
Joyal J. of the Federal Court-Trial Division made some
interesting comments on the burden of proof in an appeal raising
the question of the application of section 227.1 of the Act.
After looking at the oft-cited decisions on the burden of proof,
he stated the following principle in paragraphs 91-93:
91 Again, in Hillsdale Shopping Centre Ltd v. Minister of
National Revenue, [1981]
C.T.C. 322, 81 D.T.C. 5261 (F.C.A.) at page 328 (D.T.C.
5266), the Federal Court of Appeal stated:
If a taxpayer, after considering a reassessment made by the
Minister, the Minister's reply to the taxpayer's
objections and the Minister's pleadings in the appeal, has
not been made aware of the basis upon which he is sought to be
taxed, the onus of proving the taxpayer's liability in a
proceeding similar to this one would lie upon the Minister.
92 In my view, the foregoing are instances where no matter the
peremptory character of a notice of assessment, no matter what
difficult issues it might raise in the eyes of the taxpayer, no
matter the onus which as a general rule is imposed on him,
courts have nonetheless recognized the need to maintain an
even playing field. Courts have done so in recognition of
the adversarial mode within which assessor and taxpayer must
resolve an issue, on the basis of the normal rules of evidence
respecting facts to the knowledge of one party or to the
knowledge of the other, and generally on the basis of
respect for equity and common sense.
93 This leads me to observe that while an assessment is deemed
to be valid or declared to be so, this does not mean that it
cannot be successfully challenged. As I noted when dealing with
the shifting burden of proof, circumstances surrounding the
making of an assessment may well impose on the Crown the burden
of proving that its assessment is correct. This is
especially so when an assessment is pursuant to section 227 of
the statute.[28]
[Emphasis added.]
[72] How
should these principles be applied to the relevant facts of this
appeal? First of all, it must be acknowledged that it is quite
disturbing that the respondent did not see fit to call the
auditors who made the assessments against Aviron to testify.
Where the respondent is defending assessments being appealed by a
taxpayer, she generally calls the auditor as a witness so that he
can tell the Court about the audit work he did. In testifying,
the auditor will state whom he met with for the purposes of the
audit and describe the documents he consulted. This testimony
will show that the facts on which the Minister relied in making
his assessment are not something he imagined but are the facts
found by the auditor following a review of the taxpayer's
affairs that was as rigorous as it was complete. In my opinion,
it is only in such circumstances that the burden of demolishing
the facts gathered by an auditor and relied on by that auditor in
making the assessment can be imposed on a taxpayer.
[73] It would
be totally unacceptable for the Minister to act capriciously and
arbitrarily in making his assessment and for this to prejudice
the taxpayer. It would go against "equity and common
sense" to accept that the Minister can act in such a way and
abuse the right that the courts recognize him as having and by
virtue of which there is imposed on taxpayers an obligation to
demolish the facts on which the Minister relied in making his
assessment.
[74] We are
dealing here with a "derivative" assessment, as
Rothstein J.A. put it in Gaucher, supra, and the
approach adopted by the courts must take into account the fact
that at issue are two separate assessments made by the Minister
against two different taxpayers. Accordingly, where the SD amount
in an assessment against a director is challenged, it is
necessary to call as a witness the auditor who made the
assessment against the corporation that failed to remit the SDs
pursuant to section 153 of the Act, which assessment served as
the basis for the assessment made against the director. It is not
enough for a collection officer who assessed the director to
state that he relied on the assessment made against the
corporation by the SD auditor, just as it would not be enough
merely to file that corporation's assessment. The Court
cannot act on blind faith by assuming that all the audit work
concerning the corporation was done in accordance with good
practice and that the relevant documents were reviewed in making
the assessment against the corporation.
[75] It must
be said that this requirement that the work done by the auditor
of the corporation's SDs be verified is all the more
imperative here because the Simons are alleging that they did not
have access to Aviron's accounting records for the purpose of
challenging their assessment and because the collection
officers' testimony revealed that an arbitrary assessment was
made at least for May and June 1994. Moreover,
Ms. Couture's testimony is obviously insufficient to
reassure the Court about the appropriateness of the corrections
she made when doing her work verifying Mr. Sarrouf's
insurability. Ms. Couture was unable to enlighten the Court about
the documents she was able to consult that led her to conclude
there had been a mistake.
[76] What is
even more disturbing here is the fact that Aviron seemed to have
serious cash flow problems and that some employees were not paid.
Mr. Lafond admitted that he had brought proceedings under
the Act respecting labour standards for $7,000 in unpaid
salary. It is not unthinkable that part of the wages owed by
Aviron to its employees may have been paid by the new owner, RTI.
If wages owed by Aviron to some of its employees were paid by RTI
after those employees became its employees, it was RTI that had
an obligation to withhold at source the tax owed by those
employees.
[77] It is not
implausible that this occurred here, since Ms. Couture admitted
that RTI may have been reimbursed—or at least given a
credit—for the amounts related to the 29 T4s that,
according to her, had been included in the wrong account. Since
it was Ms. Couture who took the initiative of making such a
correction following an audit concerning a completely different
matter, and since the correction does not seem to have been the
result of a request for a correction made by RTI, one wonders
whether the amounts in question were not knowingly paid by RTI.
Obviously, all of this is pure conjecture, because
Ms. Couture was unable to produce the 29 T4s in question and
no other relevant documents, such as Aviron's or RTI's
payroll journal, were filed at the hearing. Moreover, Mr.
Tehrani, RTI's president, was not examined on these
matters.
[78] If Mr.
Daï and Mr. Prokop had testified, it is very likely that
they would have provided prima facie evidence of the SD
amounts not remitted to the Minister by Aviron. If their
testimony had shown that it was impossible to check the relevant
documents for a given period, inter alia because Aviron
had not kept its payroll journal and cash disbursements journal
as the Act requires, the respondent could then have argued that
an arbitrary assessment method like the one described above could
be a valid means of estimating the wages paid by Aviron in
1994.
[79] However,
all of this is mere conjecture, since those two auditors did not
testify. The collection officers' testimony concerning the
work done by Mr. Daï and Mr. Prokop is pure
supposition or hearsay. In the circumstances, I cannot conclude
that the SD amounts Aviron is alleged not to have remitted to the
Minister actually correspond to the amounts not paid by it.
[80] Given the
Minister's failure[29] to show how he went about determining the SD amounts
not paid by Aviron, the Court cannot confirm that the Simons'
assessment for 1994 is correct. Since the Simons do not dispute
the actual amount of the SDs for 1993, the Minister obviously did
not have to adduce evidence concerning that taxation year.
[81] For these
reasons, the appeals of Mr. and Mrs. Simon are allowed, without
costs as regards Mrs. Simon's appeal, and the assessments are
referred back to the Minister for reconsideration and
reassessment on the basis that Mr. and Mrs. Simon are
jointly and severally liable for the unremitted SDs for 1993
only. The legal fees of $100.69 must also be subtracted from the
assessments. Given that the argument focused mainly on the
question of the Simons' status as directors, and given that
success is divided in these appeals, I award the respondent one
third of the costs in Mr. Simon's appeal.
Signed at Ottawa, Canada, this 9th day of August 2001.
"Pierre Archambault"
J.T.C.C.
Translation certified true on this 31st day of January
2002.
[OFFICIAL ENGLISH TRANSLATION]
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
98-2653(IT)G
BETWEEN:
HENRI SIMON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal
of Gilda Simon
(98-2816(IT)G) on August 23, 24 and 25, 2000,
at Montréal, Quebec, by
the Honourable Judge Pierre Archambault
Appearances
For the
Appellant:
The Appellant himself
Counsel for the
Respondent:
Valérie Tardif
JUDGMENT
The
appeal from the assessment bearing the number 2878, dated
September 4, 1997 and made under subsection 227.1(1) of
the Income Tax Act with respect to the period from May 1,
1993 to June 30, 1994 is allowed and the assessment is
referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that Mr. and Mrs.
Simon are jointly and severally liable for the unremitted source
deductions for 1993 only. The legal fees of $100.69 must
also be subtracted from the assessment.
The Respondent is entitled to one-third of the costs.
Signed at Ottawa, Canada, this 9th day of August 2001.
J.T.C.C.
Translation certified true
on this 31st day of January 2002.
Erich Klein, Revisor
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