Date: 19990129
Docket: 97-2306-GST-I; 97-2307-GST-I; 97-2309-GST-I
BETWEEN:
LAWRENCE RAYMOND BOYD, BARBARA BOUDREAU, JOSEPH BOUDREAU,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Hamlyn, J.T.C.C.
[1] The three Appellants filed a common Notice of Appeal. The
appeals were heard by way of common evidence.
[2] The appeals are in respect of failure to remit Goods and
Services Tax ("GST") by a corporation and subsequent
notices of assessment sent to the three appellants in their
capacity as directors of the corporation pursuant to
subsection 323(1) of the Excise Tax Act (the
"Act").
FACTS
[3] A Partial Agreed Statement of Facts was filed. It
reads:
1. Joseph Boudreau, Barbara Boudreau and Lawrence Raymond Boyd
(the "Appellants") were directors of B & B Trailer
Supplies Ltd. ("B & B") at all material times; and
the Appellants did not resign as directors of B & B at any
time.
2. B & B was registered for GST effective January 1, 1991
and was required to report and remit GST on a monthly basis.
Until default in September 1992, its GST payments were made in a
timely manner.
3. On January 6, 1993, B & B filed a Notice of Intention to
Make a Proposal under the Bankruptcy and Insolvency Act.
On February 3, 1993 a Proposal was filed by B & B pursuant to
the Bankruptcy and Insolvency Act.
4. On April 15, 1993 the Proposal, dated February 3, 1993, was
annulled and B & B was deemed to have made an assignment in
bankruptcy as at April 15, 1993.
5. By Notice of Assessment No. SWOL040 dated May 27, 1993 the
Minister of National Revenue (the "Minister") assessed
B & B for unremitted GST in the amount of $215,761.88
consisting of net GST in the amount of $209,998.15, penalty of
$2,705.08, and interest of $3,058.65 for the period of September
1, 1992 to April 14, 1993.
6. A Proof of Claim, dated May 27, 1993, for the amount of
B & B's liability to the Minister proved within six months
after the date of B & B's assignment in bankruptcy under
the Bankruptcy and Insolvency Act.
7. By Notices of Assessment Nos. 08BP-100430057-01,
08BP-100430057-02, and 08BP-100430057-03, dated January 26, 1996,
the Minister assessed Joseph Boudreau's, Lawrence Boyd's
and Barbara Boudreau's, respectively, tax liability in the
amount of $147,570.10 consisting of net GST in the amount of
$141,806.37, penalty of $2,705.08, and interest of $3,058.65 for
the period of September 1, 1992 to February 29, 1993 in respect
of B & B's failure to remit GST, interest and
penalties.
8. By Notices of Decision dated December 6, 1996 the Minister
confirmed the Notices of Assessment, referred to in paragraph 7
above, with respect to the Appellants' liability pursuant to
subsection 323(1) of the Excise Tax Act
("Act").
THE VIVA VOCE EVIDENCE
[4] B & B Trailer Supplies Ltd. ("B & B") was in
the business of selling trailer supplies to retailers. The
company originally had its head office in Montreal. For the
period in question the company was based in London, Ontario. The
Appellant Joseph Boudreau was the President and the Appellant
Lawrence Boyd was the Vice President. Both of these
Appellants were directors of B & B and managed and ran the
day-to-day activities of B & B. Mr. Boyd was the General
Manager and in charge of operations and Mr. Boudreau was in
charge of sales. The Appellant Barbara Boudreau is the wife of
Joseph Boudreau and also was a director of B & B. In 1992 and
1993 she was not involved with the operations and management of
the company. In l988 she left her active role as a bookkeeper
with B & B; she and her husband stated her only role after that
date was a means to allow her to receive income that normally
would be destined for Mr. Boudreau.
[5] Mr. Boudreau held 75% of the shares of B & B and
Mr. Boyd held the remaining 25% of the shares.
[6] The company in the eighties was expanding in terms of
market share and facilities. Its physical premises grew and it
acquired an existing western Canadian corporation. The National
Bank of Canada ("Bank") advanced funds for these
projects and sustained a line of credit to B & B.
[7] Each year the financing arrangements continued with
variations and modifications as to terms.
[8] In the nineties, the trailer parts business, being part of
a recreational based industry, declined with the recession bound
economy.
[9] In l990, the Bank became concerned about the status and
viability of B & B's borrowing and thereafter, over time,
changed its relationship with the company. The Bank advised the
company to seek other equity capital and reduced the Bank's
risk in relation to the line of credit. The Bank imposed
consultants on the company to be paid for by the company and
placed daily controls on operating credit margins including the
issuing of cheques.
[10] These arrangements continued until August 1992.
Throughout this period the GST remittances were made and treated
by the Bank and the company as 'prior claims'. However,
at the end of August l992, the Bank's representative,
according to Mr. Lawrence Boyd, told him not to pay GST.
Mr. Boyd immediately passed this information on to
Mr. Boudreau and informed the bookkeeper of the Bank's
directive. Each day a list of proposed cheques, along with the
daily report, were sent to the Bank, and B & B, after
consultation with the Bank, would act on the cheques as the Bank
instructed.
[11] During the months of September, October, November and
December l992, the Bank imposed tightening credit controls and
developed an exit strategy that removed the Bank's funds from
B & B at an accelerated rate.
[12] In December l992 the directors Joseph Boudreau and
Lawrence Boyd sought other means to solve B & B's problems.
In January l993 they developed a proposal under the insolvency
laws that would have seen the GST claim paid in six months. From
February to mid-April this proposal in bankruptcy proceeded until
it became apparent it was doomed to fail. What followed was
bankruptcy.
[13] After consultations with professionals on April 14,
l993, B & B prepared a cheque to the Receiver General for a
large amount of the outstanding GST funds. The directors were
advised the cheque would not be honoured.
[14] Even with bankruptcy the directors Joseph Boudreau and
Lawrence Boyd were confident that GST claims would be paid as
there were sufficient accounts receivables and inventory in their
belief to cover the indebtedness. In the fullness of time
however, this did not happen.
[15] Throughout the process, while their ability to use
corporate funds was subject to Bank approval, the directors
attempted to save the company and save the jobs of the
employees.
[16] The documentary evidence filed supported much of the
viva voce evidence.
[17] From 1987 onward, letters from the Bank to B & B set
out the terms and conditions for credit.
[18] Later, the documents set forth the Bank's demand for
the imposition of a consultant and the imposition of bank centred
administrative services. Other filed documents speak about the
Bank's priority in relation to the continuing debt and the
Bank's concern about the on-going viability of B & B.
[19] Correspondence from B & B to the Bank shows the
company's total dependency on the Bank and the desire to be
amenable in the face of the looming alternatives.
[20] Examples of the daily filings to the Bank and the list of
cheques sought to be issued support the evidence the Bank was in
control of the cash flow.
[21] One point of evidence that was not supported by documents
was the Bank's directive after August l992 that GST was not
to be paid.
[22] The evidence from Mr. Boyd was clear, he
unequivocally received this non-remittance directive. The
evidence from the Bank official involved was that he did not
recall saying that but it was possible that it could have been
said.
[23] The focus of that same Bank official was to get the
Bank's money back and indeed the last statement return of the
Bank to him was complimentary and at the bottom was endorsed
"the centre is to be commended for the successful wind-down
of this loan".
[24] The evidence from another Bank employee involved prior to
August l992 was to the effect that from time to time he told the
company to put certain cheques 'in a drawer'; that is,
the direction was clear — do not issue those cheques.
Again, this evidence clearly supports the conclusion the Bank was
in control over who should be paid.
[25] The veracity and credibility of the evidence of
Mr. Boyd was unassailed. I accept that the Bank told him not
to pay GST after August l992. Therefore, under the circumstances
and given B & B's economic dependency on the Bank, the
directors had no power to do otherwise.
[26] The other point of evidence in contention was the degree
of knowledge and involvement of Barbara Boudreau. She advised
when she left the company in l988 she was 'tired out',
that she had taught her stepdaughter the necessary skills of
bookkeeping and then left active involvement in the company. For
the critical period of late l992 and the early period of l993 she
was in Florida and was not present in London, Ontario.
Mr. Joseph Boudreau stated he kept all the critical and
damaging information about B & B from his wife. She was not
told what was going on and that she only found out when
Mr. Boudreau went to Florida in January l993 to tell her the
Florida condominium had to be sold as things were not going
well.
ANALYSIS
[27] The legislation sets forth director's liability of a
corporation, where the corporation collects the GST and does not
remit the tax to the Receiver General in accordance with the
statutory regimen.
[28] Where a corporation fails to remit an amount of net tax
pursuant to the Act, 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 the amount, any interest thereon and penalties relating
thereto.
[29] Where a director can establish that he or she has
exercised under subsection 323(3) of the Act the
degree of care, diligence and skill to prevent the failure that a
reasonably prudent person would have exercised in comparable
circumstances he or she will not be held liable pursuant to
subsection 323(1) for the unremitted amount.
[30] The recent decision of the Federal Court of Appeal in
Soper v. The Queen, 97 DTC 5407[1] is now the leading case on
director's tax liability for both the Income Tax Act
and the Excise Tax Act.[2] The Court in Soper reviews principles
governing the conduct of directors when applying the due
diligence test. These principles include the following:
· the
standard of care is flexible, the analysis must look at the
circumstances;
· the
standard of care for director's tax liability is partly
objective and partly subjective;
· once
a director is aware or should be aware that there are problems
with remittances, he or she has a positive duty to act; and
· an
inside director will be held to a higher standard of care than an
outside director.
[31] Otherjurisprudence indicates that directors should not be
held liable for remittances in cases where they do not have
control over the financial affairs of the corporation.
[32] In Fancy v. M.N.R., 88 DTC 1641
(T.C.C.), per Couture C.J.T.C., the bank of the company in
question had begun monitoring all cheques issued by it and only
authorizing certain payments. The bank refused to approve
remittance payments to Revenue Canada and the Appellant-directors
informed the latter of this fact. It was held that the directors
were victims of circumstance over which they had no effective
control and therefore they were exempt from liability under the
due diligence provisions.
[33] In Robitaille v. The Queen, 90 DTC 6059
(F.C.T.D.), per Addy J., the bank had appointed a controller and
no cheques were issued without his authorization, including those
containing remittances to Revenue Canada. The Court held that a
director is not liable for a failure to remit if he or she did
not have control of the company at the time the remittance
obligation arose. Addy J. wrote, at pages 6062-6063:
Furthermore, where the effective control of the corporation
has been taken over by a bank such as in the case under appeal,
without the bank being requested or invited to do so by the
directors, and where the decisions as to what cheques will or
will not be issued without consultation with the Board of
Directors, are exclusively those of the bank, then from that time
the actions of the corporation regarding the payment or
withholding of monies are essentially those of the bank and I
would be prepared to hold that, even without considering
subsection 227.1(3), there would be no liability on the directors
under subsection 227.1(1) because the latter obviously
contemplates that the corporation is freely acting through its
Board of Directors. The exercise of freedom of choice on the part
of the director is essential in order to establish personal
liability.
[34] Similarly, in Champeval et al. v. M.N.R.,
90 DTC 1285 (T.C.C.), per Couture C.J.T.C. and
Worrell et al. v. The Queen, 98 DTC 1783
(T.C.C.), per McArthur J.T.C.C. the Court held that in cases
where the bank, and not the directors, had the ultimate authority
to decide which cheques to pay, the Appellants had no freedom of
choice in the matter and could not be held liable for the
company's failure to remit.
CONCLUSION
[35] The Appellants Lawrence Boyd and Joseph Boudreau did not
have the freedom of choice to remit the GST to the Receiver
General from B & B as B & B's funds were under the strict
control by the Bank.
[36] The Appellants Lawrence Boyd and Joseph Boudreau tried to
resolve the GST difficulty after the Bank refused to allow
B & B to issue cheques by working through a proposal in
bankruptcy during the period of January to April 1993. They also,
at the end, tried to issue a cheque in April 1993 to satisfy the
liability. Lastly, they believed when bankruptcy did happen that
that proceeding would result in satisfaction of the GST claim. I
therefore conclude directors Lawrence Boyd and Joseph Boudreau,
to the degree they could, beyond the strictures of the Bank's
control, did exercise due diligence.
[37] The Appellant Barbara Boudreau the wife of Joseph
Boudreau was an outside passive director, was not aware of the
problem. Her function as director in terms of Joseph Boudreau was
solely to receive income that would in effect be a means to
reduce his income. She was purposely removed from the problems of
B & B and was mislead by omission as to the financial status of
B & B. When she did find out about the inability to meet the
financial obligations (January 1993) there was no protective
action she could take. At that point B & B was in a proposal
under the insolvency laws.
DECISION
[38] The appeals are allowed and the assessments are
vacated.
Signed at Ottawa, Canada, this 29th day of January 1999.
"D. Hamlyn"
J.T.C.C.
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