Date: 20010118
Docket: 1999-497-GST-G; 1999-1307-GST-G; 1999-1308-GST-G
BETWEEN:
RONALD MERCIER, HOSAM EL-DIN IBRAHIM, and FAWZY H. MORCOS
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Counsel for the Appellants: Horst G. Wolff
Counsel for the Respondent: David I.
Bessler
____________________________________________________________________
Reasons for Judgment
(Delivered orally from the Bench at Edmonton, Alberta, on
October 20, 2000)
McArthur J.
[1]
These appeals were heard on common evidence and involve
assessments of goods and services tax as against the Appellants
under subsection 323(1) of the Excise Tax Act, which
subsection provides:
323(1) Where a corporation fails to
remit an amount of net tax as required under subsection 228(2) or
(2.3), the directors of the corporation at the time the
corporation was required to remit the amount are jointly and
severally liable, together with the corporation, to pay that
amount and any interest thereon or penalties relating
thereto.
Subsection 323(3) of the Act states:
323(3) A director of a corporation is
not liable for a failure under subsection (1) where the director
exercised the degree of care, diligence and skill to prevent the
failure that a reasonably prudent person would have exercised in
comparable circumstances.
The parties agree that the sole issue in these appeals is
whether the Appellants met what is commonly described as the due
diligence test.
[2]
On March 26, 1998, the Minister of National Revenue assessed the
Appellants the amount of $66,399. The liability for that amount
is joint and several and includes interest of $6,945 and penalty
of $9,076. Subsection 323(3) of the Excise Tax Act is
identical to subsection 227.1(3) of the Income Tax Act and
a great deal of litigation has arisen from these sections. The
decision that is referred to most frequently by this Court in
recent years is Soper v. The Queen,[1] which sets out the tests to be
applied. It also describes the standard of care under
subsection 227.1(3) of the Income Tax Act as
“objective/subjective” and differentiates between
inside and outside directors. Despite the mountain of
jurisprudence, it is a question of fact whether a director meets
the due diligence test.
[3]
In my analysis, I am guided by the reasoning of Bowman J. in
Holmes v. The Queen,[2] where he stated:
Essentially, however, whether a director meets the test under
subsection 227.1(3) is a question of fact.
It is obvious from the many cases that have been decided under
section 227.1 of the Income Tax Act and the
corresponding section of the Excise Tax Act,
section 323, that each case must be decided on its own
facts, and no single factor predominates, nor can one test apply
that fits all circumstances. For example, we know from
Soper that although inside directors may find it more
difficult to meet the due diligence test than outside directors,
not every inside director will be found liable. Similarly, a
director may not escape liability under section 227.1 by
remaining wilfully blind to a deteriorating financial condition
in a corporation, or by claiming ignorance of his or her
obligations as a director. However, directors have been held not
liable for a corporation’s failure to remit source
deductions where economically it was impossible to ensure that
the required remittances be made (Fancy v. M.N.R. 88 DTC
1641) or where the directors were completely excluded from the
affairs of the corporation by an autocratic and domineering owner
of all the shares of the corporation (Fitzgerald et al. v. The
Queen, 92 DTC 1019).
[4]
The Appellants in the present appeal are of different
backgrounds. All three directors testified. Fawzy H. Morcos is a
medical doctor who, in addition to his practice as a gynecologist
and obstetrician, lectures at the University of Alberta. Hosam
El-Din Ibrahim has been a pharmacist for over 35 years and
operates his own pharmacy in Edmonton. Ronald Mercier has a B.Sc.
degree from the University of Alberta and has been a realtor in
the Edmonton area for about 26 years. They were the sole
directors of Lojim Management Ltd. which from about 1989, owned
and operated a shopping plaza in Stettler, Alberta. The plaza was
unsuccessful from the outset and the shareholders were called on
each year to pay a deficit. In acquiring the shopping plaza, all
three shareholders personally guaranteed the repayment of a
$500,000 first mortgage. In 1993, they were desperate to rid
themselves of the plaza as well as their personal guarantees.
[5]
In paragraph 2 of the Notices of Appeal, the Appellants set out
the transaction as they understand it upon which the assessments
are based and it reads:
Pursuant to an agreement dated December 17, 1994, Lojim
entered into a complex real estate transaction with 552293
Alberta Ltd. ... pursuant to which it agreed to exchange its
equity in a commercial complex in Stettler, Alberta for the
equity owned by 552293 in ten condominium units in Edmonton which
552293 was in the process of purchasing from 529198 Alberta Ltd.
... and as part of the overall transaction, the condominium
units would be disposed of to owner/occupants and a corporation
controlled by the Appellant and a corporation controlled by the
spouse of another director of Lojim.
Counsel for the Respondent describes the transaction in this
manner:
Simply put, 529198 Alberta Ltd. transfers the condominiums to
552293 Alberta Ltd., which transfers the condominiums to Lojim
Management Ltd., which then in turn transfers to what's been
referred to as the end purchasers.
The only transactions for the purposes of this decision
wherein the corporation may have been required to ultimately
collect and remit tax was upon the sale of the condominiums by it
to the group of purchasers.
[6]
In a nutshell, Lojim purchased 10 condominium units from 552293
in exchange for the shopping plaza and sold them to various
purchasers. The fact that there was but one registered conveyance
from 529198 to the end purchasers does not change the reality of
what actually took place. The director Morcos' corporation,
F.H.M. Properties Ltd., took two units; the director
Ibrahim’s corporation, Alberpharm Ltd., took two units; and
Mercier took six units and he in turn, sold them to six
individuals at a substantial loss. F.H.M. Properties and
Alberpharm continue to retain their units as rentals. I believe
F.H.M. Properties has paid GST on the acquisition of its two
condominiums.
[7]
James Cox, a lawyer who acted on behalf of Lojim, the individual
Appellants, F.H.M. Properties and Alberpharm testified on behalf
of the Appellants. The Appellant Mercier was the most active and
knowledgeable of the three directors and he was the one who put
together the transaction at issue. Basically, the directors felt
they were better off with condominiums in Edmonton than a losing
shopping plaza in Stettler. Prior to the present situation, in an
entirely different transaction, Mercier had to pay GST as a
vendor. Because of that poor experience, he included in the
Agreement of Purchase and Sale between 552293 and Lojim a clause
(paragraph 8) which reads in part: "GST to be paid by the
vendor". In a letter dated February 2, 1995, Mr. Abbi,
solicitor for the vendor 552293, refers to the purchaser as
paying the GST. Mr. Mercier reminded the solicitor, Mr. Cox, of
paragraph 8 in the Agreement of Purchase and Sale and in turn,
Mr. Cox directed the vendor’s solicitor, Mr. Abbi, to
that clause by letter dated February 3, 1995 which letter reads
in part:
With respect to the GST, the offer in clause 8 provides that the
Vendor is to pay the GST and you might want to call me about
that.
On the same date Mr. Abbi replied, in part:
... you are at liberty to disregard all references to GST
in our trust letter aforesaid ...
After the closing, Mr. Abbi advised Mr. Cox that GST had been
paid. Apparently, Mr. Abbi no longer practices law in Alberta and
cannot be located. 552293 has no assets and is apparently
judgment-proof and Lojim has been dissolved voluntarily.
[8]
The position of the Appellants is that they were aware of the
existence of GST and they provided for the payment of it in the
Agreement of Purchase and Sale. Mr. Cox was acting on behalf
of Lojim. It was his responsibility to see that the provisions of
the agreement were carried out. Mr. Mercier had reminded him of
paragraph 8 on February 2 or 3, 1995 and upon being advised by
solicitor Abbi, Mr. Cox was satisfied that the GST had been
paid.
[9]
Counsel for the Appellants submitted that it was really one
transaction. It was a disposition of the Stettler property and
flipping on behalf of 552293 of 10 condominiums for cash. No
cash went to Lojim at any time. Both Mr. Cox and his three
director clients felt GST had been dealt with. Counsel for the
Appellants added further that subsections 323(3) of the Excise
Tax Act and 227.1(3) of the Income Tax Act were aimed
at
...directors who see a company going down, they collect
this trust money, use it to fund operations to make or are
willfully blind to the fact that remittances may not be being
made on a routine basis and then throw up their hands when the
Receiver walks in and says, why didn’t you take pains to
ensure it was being remitted.
Counsel further referred to the decision in Soper,
supra, and stated:
Justice Robertson tries to outline some of the criteria. But
it's my submission that even those criteria are not on point
here, because it was sort of one transaction, and most of the
other due diligence cases, it's usually an ongoing mess,
where companies are going deeper and deeper in the red and
remittances simply aren't being made.
[10] The
position of the Respondent includes the following: Both 552293
and Lojim were registrants under the Excise Tax Act and
for practical purposes, Revenue Canada treated the 552293-Lojim
transaction as a wash for GST purposes. Counsel for the
Respondent stated:
The amount Lojim failed to report, though, or to remit, was
the GST that formed part of the purchase price from those end
users.
The case of Franklin Estates Inc. v. The Queen,[3]essentially sets out the
proposition that it is not an optional one that the parties to
the transaction can opt out of. At page 5, bottom of
paragraph 11, the Court stated:
... A payment to a person not cloaked with the authority
to collect the tax as agent of the Crown cannot be regarded as
payment of the tax.
Counsel added:
Similarly here, Lojim could not escape its liability for the
tax by simply contractually obligating 552293, the vendor.
The issue ... is simply where there's been due
diligence by the directors. It's the crown's position
that none of the directors took steps to ascertain Lojim's
obligations with respect to the GST, nor did they take any steps
to ensure that the GST was paid. In that sense they didn't
exercise the degree of care, diligence and skill to prevent the
failure that a reasonably prudent person would have exercised in
comparable circumstances.
He also quoted the Soper, supra case and specifically,
Justice Marceau as saying:
I simply cannot imagine that such a duty may ever have been
seen as having been fulfilled by a director who, as here, has
never put his or her mind to the requirement and has remained
completely uninterested and passive with respect to it.
Finally he concluded:
Essentially, in a nut shell, this case is about, was that
sufficient. That if you have a real estate transaction, a lawyer
handling the deal, is that sufficient for your obligations.
It's the crown's submission that knowing that there was
problems in this area, having had that experience, they should
have at least asked.
Analysis
[11] The
approach I will try to take is that one set out by Bowman J. in
Cloutier et al v. M.N.R.[4] where he states:
The question therefore becomes one of fact and the court must to
the extent possible attempt to determine what a reasonably
prudent person ought to have done and could have done at the time
in comparable circumstances. Attempts by courts to conjure up the
hypothetical reasonable person have not always been an
unqualified success. Tests have been developed, refined and
repeated in order to give the process the appearance of
rationality and objectivity, but ultimately the judge deciding
the matter must apply his own concepts of common sense and
fairness. It is easy to be wise in retrospect and the court must
endeavour to avoid asking the question “What would I have
done, knowing what I know now?” It is not that sort of
ex post facto judgment that is required here. Many
judgment calls that turn out in retrospect to have been wrong
would not have been made if the person making them had the
benefit of hindsight at the time.
Section 227.1 is an example. That section imposes a standard of
care on directors that requires reasonable prudence and skill in
ensuring that the money raised through the SRTC program be in
fact used for scientific research or else that the Part VIII tax
be paid either out of the money so raised or otherwise. In
determining whether that standard has been met one must ask
whether, in light of the facts that existed at the time that were
known or ought to have been known by the director, and in light
of the alternatives that were open to that director, did he or
she choose an alternative that a reasonably prudent person would,
in the circumstances, have chosen and which it was reasonable to
expect would have resulted in the satisfaction of the tax
liability. That the alternative chosen was the wrong one is not
determinative. In cases of this sort the failure to satisfy the
Part VIII liability usually results either from the making
of a wrong choice in good faith, or from deliberate default or
willful blindness on the part of the director.
[12] In these
appeals, I must determine if the three Appellants chose an
alternative that reasonably prudent persons would have chosen
under the circumstances. This is a single transaction. It is in
contrast to the majority of due diligence cases where there is a
continuing deterioration of a business and the taxpayer is using
Revenue Canada’s money to help keep his or her business
afloat. The Appellants were dealing with a complex real estate
transaction and a highly complex Act, particularly in the
early years of its inception. They were aware of GST and they
signed an agreement that provided for the payment of any GST.
They were not aware of the decision in the case of Franklin
Estates, supra. They retained a lawyer to carry out the
provisions of the agreement on their behalf and their lawyer was
satisfied that this was done. To insist that they should have
spoken to an officer in the GST office or not have completed the
transaction without an official receipt is, in my mind, beyond
what a reasonably prudent person is required to do. Surely,
having retained a lawyer to assure that the GST was paid in
accordance with the terms of the agreement is sufficient. While I
do not accept the Appellants’ position that there was no
sale to Lojim, that in itself does not make the Appellants
liable.
[13] The
Respondent stated in paragraph 15 of the Reply to the Notice of
Appeal that the money collected, presumably by Lojim, was trust
money. In fact, there was no money collected by Lojim and there
was no money to be remitted. The Appellants were not trying to
escape paying GST. They innocently believed GST had been taken
care of. They were not lawyers or accountants. They were faced
with a complicated transaction and a more complicated Act.
They acted prudently and reasonably by relying on their solicitor
who, in turn, relied on a less than straightforward
vendor’s lawyer. This was a single transaction under
unusual circumstances. It was not the case of continuing fault.
Therefore, the appeals are allowed, with one set of costs, and
the assessments are vacated.
Signed at Ottawa, Canada, this 18th day of January, 2001.
"C.H. McArthur"
J.T.C.C.
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