Date: 20001115
Docket: 2000-346(IT)I
BETWEEN:
ALEC MCDOUGALL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AND BETWEEN:
2000-347(GST)I
ALEC MCDOUGALL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Beaubier, J.T.C.C.
[1] These appeals pursuant to the
Informal Procedure were heard together on common evidence by
consent of the parties at Calgary, Alberta, on
November 3, 2000. The Appellant testified. The
Respondent called Louise Marischuk, who was a collections officer
of Revenue Canada at the pertinent times. The Appellant has been
assessed respecting withholdings under Section 227.1 of the
Income Tax Act ("ITA") and respecting
Goods and Services Tax ("GST") under Section 323 of the
Excise Tax Act ("ETA"). He has denied
liability on the basis that he was not a legal or de facto
director of Columbia Birch Wood Products Ltd.
("Columbia") and that, if he was, he exercised due
diligence.
[2] The assumptions in paragraph 18 of
the Reply under the Excise Tax Act read:
18. In so assessing the
Appellant, the Minister made the following assumptions of
fact:
(a) the facts
admitted or stated in this Reply, some of which are repeated here
for ease of reference;
(b) the Corporation
was incorporated on or about April 13, 1994;
(c) at all material
times the Corporation was a valid and subsisting corporation;
(d) at all material
times the Corporation operated a sawmill;
(e) at all material
times the Corporation was engaged in commercial activities and
made supplies which were taxable at 7 percent;
(f) the
Corporation registered for the purposes of the ETA effective July
1, 1994 and was assigned GST registration number 139142012;
(g) at all material
times the Corporation was a registrant for the purposes of the
ETA;
(h) at all material
times the Corporation collected tax pursuant to Part IX of the
ETA on the supplies it made;
(i) the
Corporation was required to file returns on a quarterly
basis;
(j) the
Corporation filed returns reporting tax collected/collectible,
input tax credits and net tax as follows:
|
Period
End Date
|
Date Filed
|
Date Due
|
Tax
Collected
|
Input Tax
Credits
|
Net Tax
|
Remitted
with
Return
|
|
95/03/31
|
95/05/08
|
95/05/01
|
4,004.27
|
3,821.37
|
182.90
|
no
|
|
95/06/30
|
95/11/27
|
95/07/31
|
1,678.92
|
2,714.01
|
-1,035.09
|
*
|
|
95/09/30
|
97/02/10
|
95/10/31
|
3,313.98
|
1,777.06
|
1,536.92
|
no
|
|
95/12/31
|
97/02/10
|
96/01/31
|
3,313.98
|
1,777.06
|
1,536.92
|
no
|
|
96/03/31
|
97/02/10
|
96/04/30
|
3,313.98
|
1,777.06
|
1,536.92
|
no
|
|
96/06/30
|
97/02/10
|
96/07/31
|
3,313.98
|
1,777.06
|
1,536.92
|
no
|
|
96/09/30
|
98/10/15
|
96/10/31
|
1,388.12
|
1,668.54
|
-280.42
|
|
|
96/12/31
|
98/10/15
|
97/01/31
|
2,650.64
|
1,319.48
|
1,331.16
|
no
|
|
Total
|
|
|
22,977.87
|
16,631.64
|
6,346.23
|
|
* the Corporation originally reported net tax of $4,643.21,
claimed input tax credits of $2,714.01 and net tax remittable of
$1,929.20 by a return filed on August 7, 1995 and the
payment did not accompany the return.
(k) the Corporation
failed to remit all or part of the amount reported as positive
net tax on all of the returns for the reporting periods ending
between January 1, 1995 and December 31, 1996, on or before the
day on which the remittance was required to be made;
(l) the
Appellant did not file a return for the reporting period of
January 1, 1997 to January 31, 1997;
(m) on or about January
31, 1997, the Corporation ceased carrying on its business
activities;
(n) On or about May
13, 1996, June 26, 1996, August 15, 1996 and October 2,
1996 the Corporation received requests to file its outstanding
returns for the reporting periods ending between July 1, 1995 and
June 30, 1996;
(o) on or about
October 25, 1996, the Corporation was assessed net tax of
$3,999.96, penalty of $152.70 and interest of $142.33 with
respect to the reporting periods ending between July 1, 1995 and
June 30, 1996;
(p) the Corporation
was subsequently reassessed for the reporting periods referred to
in the previous subparagraph;
(q) the Corporation
received Notices of Assessment for the positive amounts of net
tax it reported but had failed to remit with the returns for the
reporting periods ending between July 1, 1995 and June 30,
1996;
(r) on or about
March 18, 1997, the Corporation was assessed net tax of
$27,797.44, penalty of $614.30 and interest of $422.86 with
respect to the reporting period of July 1, 1996 and December 31,
1996;
(s) the Corporation
was subsequently reassessed for the reporting periods referred to
in the previous subparagraph;
(t) on or
about May 27, 1997, the Corporation was assessed net tax of
$523.28, penalty of $7.57 and interest of $3.59 with respect to
the reporting period of January 1, 1997 to January 31, 1997;
(u) the Corporation
did not file a Notice of Objection to any of the Notices of
Assessment referred to in subparagraphs 18(o), 18(q), 18(r) and
18(t) supra;
(v) the Corporation
failed to remit net tax of at least $7,721.70 for the reporting
periods ending between July 1, 1995 and January 31, 1997, to
the Receiver General of Canada as required by the provisions of
the ETA;
(w) the Corporation failed
to pay penalties and interest relating to the net tax referred to
in the previous subparagraph as required by the provisions of the
ETA;
(x) the net tax that
was not remitted as and when required by the provisions of the
ETA was used by the Corporation to carry on its operations and to
satisfy other creditors;
(y) the Corporation
never, during the relevant periods, maintained a separate account
or separate deposits in respect of the tax it collected from its
customers, which were trust funds;
(z) the Corporation
did not make an assignment under the Bankruptcy and Insolvency
Act;
(aa) a receiving order was not
made against the Corporation under the Bankruptcy and
Insolvency Act;
(bb) a Certificate was issued
and registered at the Federal Court of Canada on June 25, 1997,
certifying that the Corporation's liability was $36,838.01,
plus penalty and interest relating thereto;
(cc) a Writ of Fieri Facias was
issued on June 25, 1997;
(dd) execution of the Writ of
Fieri Facias was returned unsatisfied in whole;
(ee) at all material times the
Appellant was a director of the Corporation; and
(ff) the Appellant
did not exercise the degree of care, diligence and skill that a
reasonably prudent person would have exercised in comparable
circumstances to prevent the failure of the Corporation to remit
the net tax in that, among other things:
(i) he knew or
ought to have known of the Corporation's failure to file
returns when required by the ETA and he knew or ought to have
known that the positive amounts of net tax reported on the
returns prior to the periods at issue was not remitted when
required by the ETA and he took no steps to prevent the
Corporation's failure to remit the tax collected to the
Receiver General;
(ii) he did not
implement or ensure that the Corporation had an effective
internal control system in place to ensure the timely and
periodic remittance of the net tax to the Receiver General;
and,
(iii) he did not take any
steps to ascertain the Corporation's position with respect to
the tax.
Assumptions (a) to (dd) inclusive were not refuted. The
remaining assumptions are in dispute.
[3] The assumptions in paragraph 18 of
the Reply under the Income Tax Act read:
18. In so assessing the
Appellant, the Minister made the following assumptions of
fact:
(a) the facts
admitted or stated in this Reply, some of which are repeated here
for ease of reference;
(b) at all material
times the Corporation was a valid and subsisting corporation;
(c) at all material
times the Corporation operated a sawmill;
(d) at all material
times the Corporation withheld tax from its employees pursuant to
the ITA;
(e) on or about
January 31, 1997, the Corporation ceased carrying on its business
activities;
(f) the
Corporation failed to remit part of its payroll source deductions
for the 1995 taxation year on or before the day on which the
remittance was required to be made;
(g) on or about
April 30, 1996, the Corporation received an assessment with
respect to the payroll source deductions for the 1995 taxation
year that it had failed to remit on or before the day on which
the remittance was required to be made, plus interest;
(h) the Corporation
failed to remit all of the amounts it withheld from its employees
during 1996 on or before the day on which the remittances were
required to be made;
(i) on or
about May 1, 1996, the Corporation received a Notice of
Assessment for payroll source deductions in the amount of
$1,978.62 that it had filed to remit when required, plus
penalties and interest (the "May assessment");
(j) on or
about September 26, 1996, all but $7.44 of the May assessment was
paid by way of a garnishee;
(k) between January
1, 1996 and September 25, 1996, the Appellant did not remit any
amounts that had been withheld as payroll source deductions in
1996;
(l) on or
about November 19, 1996, the Appellant made a remittance of
$2,659.54, which included payroll source deductions withheld in
October 1996;
(m) the Corporation had
insufficient funds in its chequing account to cover the
remittance referred to in the previous subparagraph;
(n) on or about
December 6, 1996 the Corporation received a Notice of Assessment
for payroll source deductions in the amount of $2,659.54 that it
had failed to remit when required, plus penalties and
interest;
(o) on or about
January 29, 1996, February 26, 1996, May 1, 1996,
September 25, 1996, October 28, 1996, November 20, 1996, December
5, 1996, December 23, 1996 and December 30, 1996, the
Corporation received assessments with respect to arrears of
penalty and interest arising from late remittances of payroll
source deductions;
(p) during 1997 the
Corporation received the following assessments with respect to
its unremitted payroll source deductions
|
Date Issued
|
Amount
Assessed
|
relates to
|
|
Jan 30
|
1,172.68
|
November & December 1996 remittances
|
|
Mar 19
|
2,577.09
|
January 1997 remittance
|
(q) the Corporation
did not file a Notice of Objection to any of the Notices of
Assessment;
(r) the Corporation
failed to remit payroll source deductions of at least $2,687.69
for the period of October 1, 1996 to January 31, 1997 to the
Receiver General of Canada as required by the provisions of the
Acts;
(s) the
Corporation's liability for the amounts referred to in the
previous subparagraph remains outstanding;
(t) the
Corporation failed to pay penalties and interest relating the
remittances of payroll source deductions for the months of
October, November and December 1996 and January 1997 as required
by the provisions of the Acts;
(u) the payroll
source deductions that were not remitted as and when required by
the provisions of the ITA were used by the Corporation to carry
on its operations and to satisfy other creditors;
(v) the Corporation
never, during the relevant periods, maintained a separate account
or separate deposits in respect of the tax it collected from its
employees, which were trust funds;
(w) the Corporation did
not make an assignment under the Bankruptcy and Insolvency
Act;
(x) a receiving
order was not made against the Corporation under the
Bankruptcy and Insolvency Act;
(y) a Certificate
was issued and registered at the Federal Court of Canada on June
18, 1997, certifying that the Corporation's liability was
$3,862.05, plus interest relating thereto;
(z) a Writ of Fieri
Facias was issued on June 18, 1997;
(aa) execution of the Writ of
Fieri Facias was returned unsatisfied in whole;
(bb) the Appellant had
considerable experience in business and business acumen to
prevent the Corporation's failure to remit the payroll source
deductions;
(cc) at all material times the
Appellant was involved in the financial affairs of the
Corporation and could have influenced the course of events;
(dd) at all material times the
Appellant held himself out to be a director of the
Corporation;
(ee) at all material times the
Appellant was a director of the Corporation; and
(ff) the Appellant
did not exercise the degree of care, diligence and skill that a
reasonably prudent person would have exercised in comparable
circumstances to prevent the failure of the Corporation to remit
the payroll source deductions in that, among other things:
(i) he had
knowledge of the Corporation's failure to remit part of the
payroll source deductions owing for the 1995 taxation year and of
the Corporation's failure to remit the payroll source
deductions in 1996 when required by the statutes and he took no
steps to prevent the Corporation's failure to remit the
payroll source deductions to the Receiver General;
(ii) he did not
implement or ensure that the Corporation had an effective
internal control system in place to ensure the timely and
periodic remittance of the payroll source deductions to the
Receiver General; and
(iii) he did not take any
steps to ascertain the Corporation's position with respect to
the payroll source deductions.
Assumptions (a) to (bb), inclusive, were not refuted. The
remaining assumptions are in dispute.
[4] The evidence respecting this
appeal will be described chronologically. However before doing
so, it is necessary to deal with two evidential items, one of
which was filed and the other of which was not. The alleged
Minute Book of Columbia was filed. The Court believes Mrs.
Marischuk who testified that she asked Alec McDougall for it,
apparently on both January 21, 1997 and March, 1997, and
that on one of these occasions Mr. McDougall said that it had
disappeared or was stolen. The alleged Minute Book was not placed
in evidence by the Corporate Secretary or any officer of the
Corporation. It was submitted by Mr. McDougall who identified the
signatures in it. It is not known when the alleged minutes were
made, if they are in fact the minutes, if they are the only
minutes or if in fact it is the Minute Book. Therefore the
documents in it may be referred to from time to time for
chronology, but they may not be minutes or correct. At best, they
are pieces of paper with these peoples' signatures. The
second set of documents which is not in evidence is a complete,
certified, record of the British Columbia Registrar of Companies
respecting Columbia. Mrs. Marischuk testified that she did a
phone search on a given date with that office. That is hearsay
and it may indicate something to her on that date, but that
information could also be mistaken and does not indicate other
such information on other dates.
[5] Alec McDougall graduated as a
civil engineer from the University of Calgary in 1971. He worked
for the City of Calgary and then for various small corporations,
some of which he and a few others formed, and for various
businesses which appear to have been related to waste disposal.
He is presently involved in three corporations. By 1994 he had
extensive corporate and business experience and testified that
then, or now, he signs as many as 200 documents each business
day. At the material periods he was, and he still is, an officer
of the various corporations.
[6] On April 13, 1994, 470674 B.C.
Ltd. was incorporated in British Columbia.
[7] On April 13, 1994 the
incorporating person, Cheryl Woronchak transferred her share to
Charles Rea, and the following shares were issued:
51 "A" shares, Charles Rea
49 "A" shares, Altess Investments Ltd.
("Altess")
Alec McDougall signed Altess' share subscription as
President of Altess (Exhibit A-l, Tab 9). Altess is owned by
Alec McDougall and his wife, Theresa. Charles Rea had raised and
been a father figure to Alec for a period after Alec's father
died when Alec was nine years old. Alec's father was a half
brother to Charles's father.
[8] On April 13, 1994 (Exhibit A-1,
Tab 2) Columbia registered the following officers and
directors:
Charles Rea - President and Director
Theresa McDougall - Secretary-Treasurer and Director
This was signed by Charles Rea on August 1, 1995
(Exhibit A-1, Tab 6).
[9] On June 10, 1994 Columbia borrows
from Shuswap Ventures Development Association. Alec guarantees
$75,000 of the loan, as does Theresa (Exhibit A-1, Tab 10). In
addition:
1. Their family
corporation lent Charles Rea about $50,000 capital to set
Columbia up initially.
2. Alec personally
guaranteed 50% of a $100,000 loan by Federal Business Development
Bank to Columbia.
3. Alec personally
guaranteed the credit that "Bell Pole" gave Columbia in
1994 or 1995.
[10] On June 13, 1994, 470674 B.C. Ltd.
changes its name to Columbia Birch Wood Products Ltd. (Exhibit
A-1, Tab 1).
[11] On August 25, 1994 Columbia registers
with GST, signed "Casey Rea" (Charles' son) and
shows Charles Rea as president and both Theresa and Alec as
directors. This was filed September 7, 1994 (Exhibit R-2).
[12] On August 2, 1995 Columbia opens a bank
account with the Bank of Nova Scotia in Calgary. (It already had
an account with the Royal Bank of Canada at Chase, B.C. near its
base operations. Alec signs the statement of particulars as
"director" (Exhibit R-3, page 1) and the Agreement re
Operation of Account as "director" of Columbia (Exhibit
R-3, page 5). Page 5 is also signed by Alec McDougall as
"director", and by Charles Rea and Theresa McDougall as
both officers and directors. The initial deposit of $16,158.24 is
described on page 1 as relating to Paul Bunyan Timber Ltd.,
("Paul Bunyan") an Alberta contractor with Columbia.
Alec was supervising this contract, apparently for both parties.
Page 1, signed by Alec, states that he has been a director of
Columbia for one year, as have Theresa and Charles Rea.
[13] On October 7, 1995 Theresa McDougall
allegedly resigns as a director of Columbia (Exhibit A-1, Tab
2).
[14] From January 1, 1996 to January 29,
1997 Alec signed various cheques on the Bank of Nova Scotia
account for Columbia as the sole signatory (Exhibit R-6).
Some were to him personally for expense claims on behalf of
Columbia for several hundred dollars each. On January 29, 1997
the cheque was to Revenue Canada for $4,389.08 (#0072).
Simultaneously Alec was authorizing wire transfers for Columbia
from the Calgary account to Columbia's Royal Bank account at
Chase, B.C. (Exhibit R-7).
[15] On January 21, 1997 Louise Marischuk, a
collections officer for Revenue Canada at Penticton, B.C.,
telephones Alec McDougall in Calgary to inquire about GST and
payroll instalments of Columbia. Alec was listed with GST as a
director of Columbia. She testified that she told him about
directors' liability and asked him to fax to her within 7
days (1) a list of Columbia's accounts receivable, and (2)
the unfiled GST returns, and in addition to pay Columbia payroll
remittances for November and December. Alec never told Louise
that he was not a director of Columbia. He also denied that he
was a director of Columbia in his testimony, or that he would
have told Louise at that time that he was a director of
Columbia.
[16] On January 24, 1997, Alec signs
Columbia's 31/07/1996 fiscal year end Income Tax Return (T2)
as a director (Exhibit R-4). It is filed February 6.
[17] On January 31, 1997 Columbia ceases
business.
[18] On February 4, 1997 Alec signs:
1. T2013, the income tax
agreement among associated corporations and hand inserted his
title as "Director" for all of Columbia, 630303 Alberta
Ltd. and Altess (Exhibit R-4).
2. Columbia's GST
quarterly returns for quarters ending 95/09/30; 95/12/31;
96/03/31; and 96/06/30 as director (Exhibit R-5).
They are filed February 10, 1997.
[19] In March, 1997 Louise Marischuk
telephones Alec McDougall who denies that he is a director of
Columbia. Alec does not recall this telephone call.
[20] On September 28, 1998 Alec signs
Columbia's 96/09/30 and 96/12/31 quarterly GST returns as
"owner". The are filed October 15, 1998 (Exhibit
R-5).
[21] Columbia held out that Alec was a
director on August 2, 1995, to the Bank of Nova Scotia when
Charles Rea, Theresa McDougall and Alec McDougall signed Exhibit
R-3, pages 3, 4 and 5, the Agreement re Operation of Account. By
comparison, the last and only corporate filing listing directors
in evidence is signed August 1, 1995 (Exhibit A-1, Tab 6,
described in paragraph [8] herein.)
[22] Alec held out that he was a director of
Columbia
1. August 2, 1995 to the
Bank of Nova Scotia (Exhibit R-3, p. 1, and pp. 3, 4 and 5)
2. January 24, 1997 to
Revenue Canada (Income Tax) when he signed Columbia's
31/07/1996 T2 Income Tax Return (Exhibit R-4).
3. February 4, 1997 to
Revenue Canada (GST) when he signed the quarterly GST
returns.
4. Similarly, when he
signed Columbia's cheques contained in Exhibit R-6, he did
not describe his position with Columbia on the cheques, but
anyone inquiring with the Bank of Nova Scotia respecting his
position with Columbia would have learned that their records
showed him as a director of Columbia. One such cheque, dated
January 29, 1997 was to Revenue Canada.
[23] In 2000-346(IT)I, the Income Tax
appeal, assumptions 18(dd) and (ee) are that Alec held himself
out as a director at all material times and that he was a
director of Columbia. In 2000-347 (GST)I, the GST appeal,
assumption 18(ee) is that at all material times Alec was a
director of Columbia.
[24] The facts are that:
1. August 1, 1995, Charles
Rea as President of Columbia signs corporate registry forms that
do not show Alec as a director of Columbia (Exhibit A-1, Tab
6).
2. August 2, 1995 Charles
Rea, Theresa McDougall and Alec McDougall all sign Bank of Nova
Scotia forms that do show Alec as a director of Columbia.
3. There is no record in
evidence of subsequent corporate filings by Columbia.
4. Neither Charles Rea nor
Theresa McDougall testified. Alec said that Charles has
disappeared. No reason was given for Theresa's failure to
testify.
[25] The evidence is that both Columbia and
Alec held out that Alec was a director of Columbia. Alec did so
after August 1, 1995 and until at least February 4, 1997. Alec
held this out by his own signature to Revenue Canada. Employees
and officers of the corporation also signed documents to that
effect, including Casey Rea's filing of Columbia's GST
registration on September 7, 1994 (Exhibit R-2). Both the Bank of
Nova Scotia and Revenue Canada relied on those
representations.
[26] In The Queen v. Corsano (F.C.A.)
99 DTC 5658, Noel, J.A., reviewed the concept of de facto
director under the ITA. He concluded at paragraph [18] to
[21]:
[18] In my view, the Act cannot be construed as giving those
acting as directors without the requisite qualifications the
status of director, nor can it be said that the common law has
provided such individuals this status. What the courts have done
over the years, however, is devise remedies to assist third
parties who deal with persons who act as directors or who are
held out by the company as directors although they lack the
required qualification or authority.
[19] As I understand it, one principle underlying these common
law remedies is that a person who has not obtained the requisite
qualifications, is prevented from pleading this failure in order
to escape liability attaching to a director. As held by Richards,
J.A. in MacDonald v. Drake,
I cannot assent to the contention that a director, who, with
his consent, has been elected and has acted as a director,
should, merely because he was not qualified to hold the office,
escape liability that he would have incurred if he had been
qualified. The true principle seems to be that a man cannot take
advantage of his own wrong.
It being recognized in this instance that the respondents
acted as directors, in conformity with the will of the
shareholders, I see no reason why they should be allowed to
assert their lack of qualification to escape the liability cast
upon directors by virtue of section 227.1 of the ITA.
[20] Thus, while I would agree with the conclusion of the Tax
Court judge that those acting as directors without having the
requisite qualifications are not directors under the Act, I do
not believe that the respondents can raise this lack of
qualification as a defence to their liability under subsection
227.1(1) of the ITA.
[21] On the issues of the applicable standard of care and its
application to the facts of this case, I agree with the reasons
of my colleague, Létourneau, J.A. and would dispose of
these appeals as he suggests.
Similarly Letourneau, J. A. said at paragraphs [4], [5], [6]
and [9] to [12] inclusive:
[4] As a matter of fact, the governing provision which is in
dispute here is subsection 227.1(1) of the Act. It is the scope
of this provision which falls to be determined, not the scope of
the Nova Scotia Companies Act. Much of the focus has been put,
unnecessarily in my view, on the ambiguous and free use of the
word "director" in the Nova Scotia Companies Act and on
the proper scope and interpretation of that Companies Act. This
is, as we shall see, the result of the respondents misconstruing
an earlier decision of this Court and the purpose of subsection
227.1(1) of the Act.
[5] Subsection 227.1(1) of the Act imposes liability on all
the directors of a corporation who have failed to remit to
Revenue Canada the sums due. The word "directors" in
the said subsection is unrestricted and unqualified. It is a
basic rule of legislative drafting, based on the
corresponding rule of interpretation which conditions drafting,
that the use of a generic word without restrictions or
qualifications conveys the legislator's intention that the
word be given a broad meaning. Here, by using the word
"directors" without qualifications in subsection
227.1(1), Parliament intended the word to cover all types of
directors known to the law in company law, including, amongst
others, de jure and de facto directors.
[6] It bears repeating that there is no disagreement between
the parties, and the Tax Court judge so found, that the Nova
Scotia common law has developed the concept of de facto
director. I hasten to add that, in this regard, the legal
situation is practically the same in all common law jurisdictions
across Canada.
...
[9] In addition, our Court never decided that, in interpreting
the word "director" in subsection 227.1(1) of the Act,
one can only look at the company's incorporating legislation
and not at the common law. Here is what our colleague McDonald,
J.A. wrote:
The Income Tax Act neither defines the term director,
nor establishes any criteria for when a person ceases to hold
such a position. Given the silence of the Income Tax
Act, it only makes sense to look to the company's
incorporating legislation for guidance.
(emphasis added)
[10] There was no need in that case to look at the common law
because the statutory law determined when a person ceased to be a
director.
[11] In addition, as our Court indicated, the statutory law is
to be looked at "for guidance". It is certainly not
exclusive and determinative, especially in the circumstances of
the present appeal where the issue is not to determine for the
purpose of section 227.1 of the Act whether a person had ceased
to be a director (an issue generally governed by statutory
provisions), but rather whether a person ostensibly acted as a
director and therefore was a de facto or acting director
(an issue generally governed by common law principles). To use
the terms of McDonald, J.A., "it only makes sense for
guidance" to look at the body of law which can provide the
answer to the silence of the Act. In the present instance, such
body is the common law.
[12] I should reiterate here that what is in issue through
subsection 227.1(1) of the Act is the liability of the directors
of a company, as directing minds of that company, for their own
failure to prevent the prohibited act, not whether they engage
the responsibility of the company, as I think they do. As early
as 1906, the Manitoba Court of Appeal in MacDonald v.
Drake rejected the defendants' contention that a
statutory provision making directors jointly and severally liable
for unpaid wages could only be enforced against de jure
directors. The Court found that although the defendants were not
de jure directors because they did not hold the required
shares in their own right, they were ostensibly elected, attended
and took part in the meetings as well as acted as directors. They
were de facto directors and, therefore, personally liable.
Phippen, J.A., at pages 229 and 230 wrote:
The law is clear that the actions of directors "de
facto" within the powers of the Company are binding upon
both the Company and the directors ...
I do not think these defendants can now be permitted to set up
a defect in their own title to the office, of which they have
enjoyed the benefit, to escape a debt, which I do not consider a
penalty, to employees in whose favour the statute grants
relief.
[27] The ETA provisions respecting
directors' liability are similar to those in the ITA
under which Corsano was found liable.
[28] Moreover Columbia registered under the
ETA showing Alec as a director; Alec completed ETA
forms as a director of Columbia; and Alec both signed Columbia
cheques on the Bank of Nova Scotia and failed to withdraw
Columbia's ETA filing of his name as a director after
Louise Marischuk had first notified him on January 21, 1997 that
he was recorded as a director of Columbia.
[29] In these circumstances, the Court finds
that Alec McDougall was, as assumed in both Replies, a director
of Columbia. Certainly he was a de facto director. The
subparagraphs in both Replies assuming his directorship are
confirmed.
[30] On the evidence did Alec McDougall, as
a director of Columbia, fail to exercise due diligence respecting
Columbia's failure to pay under both appeals?
[31] Alec testified that from Columbia's
very beginning Charles Rea began telephoning him for money.
Therefore he knew that Columbia was having financial problems
from its very first days of operation. Its failure to remit under
the ETA began on May 1, 1995. Its failure to remit payroll
source deductions began in its 1995 taxation year concerning
which it was assessed on April 30, 1996. Columbia was
garnisheed for payroll source deductions on September 26,
1996.
[32] Alec's testimony did not
concentrate on due diligence. Rather, it was devoted to the fact
that he was not a director. However, the evidence is:
1. Alec knew from the
beginning of Columbia's financial problems.
2. He participated as
"director" in opening the Calgary bank account on
August 2, 1995. He said that the account's purpose was
to deposit "Paul Bunyan" cheques payable to Columbia.
No acceptable reason was given as to why they could not have been
deposited at the Columbia's Royal Bank account in Chase.
3. He went to Chase, B.C.
a few times respecting Columbia's operations and signed
various guarantees there from time to time including a guarantee
of one of Columbia's ordinary trade creditors.
4. He supervised the Paul
Bunyan contract for Columbia.
5. His family corporation
"Altess" purchased a loader for Columbia's use and
made the payments on it with some reimbursement from Columbia, by
transfers from the Bank of Nova Scotia account (Exhibit R-7).
This occurred beginning on at least March 27, 1996 and indicates
that at that time Alec and Theresa knew that Columbia was in
sufficient difficulty that it could not afford a necessary piece
of equipment and could not obtain credit for it to Alec's
knowledge.
6. Alec signed Columbia
cheques to his and his corporation's benefit as follows:
1. August 23, 1996, Alec
McDougall,
$1,755.97
2. November 7, 1996, Alec
McDougall, $ 834.80
3. January 27, 1997, 630303
Alberta Ltd.,
$3,210.00
4. July 28, 1997, Alec
McDougall,
$1,169.20
(Exhibit R-6)
7. The cheque signed by
Alec to Revenue Canada of $4,389.08 on January 29, 1997 is
evidence of some diligence by Alec before Columbia ceased
operations on January 31, 1997 and after Mrs. Marischuk's
telephone call January 21, 1997.
[33] But Alec admitted that:
1. From the beginning of
its operations Columbia was short of funds and Altess and Alec
were sending funds to Columbia. Thus he knew that Columbia had
cash shortages from its first moment of operation and
continuously thereafter.
2. He was writing cheques
copied in Exhibit R-6 on the Bank of Nova Scotia to himself to
cut his own losses from Columbia in preference to other
creditors, including the Respondent.
[34] The Reply in 346(IT)I assumes that
Columbia failed to remit for the 1995 taxation year 18(f), during
1996 18(h), did not remit between January 1 and September 25,
1996 and was garnisheed 18(j). Thereafter no withholdings were
received from Columbia except the cheque signed by Alec McDougall
dated January 29, 1997. The Reply in 347(GST)I, states in
subparagraph 18(j) that Columbia's GST net liability
commenced with failures to pay commencing at the end of the
95/09/30 quarter. Thus both sets of net liabilities occurred
after August 2, 1995 when Columbia opened its Calgary Bank of
Nova Scotia account and both Alec and Columbia described Alec as
a director of Columbia.
[35] In The Attorney General of Canada v.
McKinnon et al, FCA #A-421-98 etc., Evans, J.A. set out six
tests to determine whether a director has exercised the degree of
care, diligence and skill to prevent the failure that a
reasonably prudent person would have shown in comparable
circumstances, beginning at paragraph 26. They are:
1. What were the
characteristics of this director? The Court finds that the
Appellant had well above average skill, experience and knowledge
in corporate matters.
2. Would such a director
act the same way if reasonably prudent? The Court finds that the
Appellant was active in the business and financial operations of
Columbia throughout its business history on at least a month to
month basis and had full knowledge of its financial problems
throughout its existence. Of Charles Rea, Theresa McDougall and
Alec, the evidence is clear that Alec was the most sophisticated
in both corporate and financial matters. For this reason, of all
of them, from the very beginning, he should have been the one to
make sure that the remittances were made to the Respondents. The
evidence is clear that from at least August 2, 1995, he was a
director of Columbia. What is not clear is whether he was a
director both de jure and de facto, and whether he
was a director at least de facto before August 2, 1995. In
these circumstances, the assumption that he was a director was
not refuted. On the evidence, Alec was aware or should have been
aware of every failed remittance by Columbia and only took one
positive step to cure that failure: that was the remittance
cheque of January 29, 1997, which practically speaking was too
late. It occurred at the very end and after he had taken steps to
pay his own debts from a failed Columbia.
3. When he was aware of
Columbia falling behind with its remittances, what positive steps
to prevent the default did he take? Alec was aware of the
defaults from their very beginning and his only positive step to
cure the defaults was the payment of January 29, 1997. That was
far too late.
4. What did the director
do to prevent the default? The cheque of January 29, 1997 was
written long after he knew that the defaults had occurred. He had
known that the defaults had been going on for a long time by
then, and he did nothing to prevent them.
5. Was Columbia's debt
to Revenue Canada discharged so that there is no liability?
No.
6. Did Alec lose legal
control over Columbia so that he was not liable to Revenue
Canada? No, if anything, he was the only person operating
Columbia when it closed for business.
[36] Based on these facts and reasons, the
Court finds that the Appellant has failed to refute assumption
18(ff), in appeal number 347(GST)I and assumption 18(ff) in
number 346(IT)I.
[37] The appeals are dismissed.
Signed at Ottawa, Canada this 15th day of November, 2000.
J.T.C.C.
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