REASONS FOR JUDGMENT
Favreau J.
[1]
This is an appeal from a reassessment,
notice of which is dated March 27, 2013, and bears number F-043465, for the
period from June 3, 2008, to February 28, 2010 (the period at issue),
made under Part IX of the Excise Tax Act, R.S.C.
1985, c. E-15 (the ETA) by the Minister of Revenue of Quebec, for and on behalf
of the Minister of National Revenue (the Minister).
[2]
In the
reassessment, the Minister claimed from the appellant the payment of $5,738.85
in duties, without interest or penalties, as a director of the corporation Les
Entreprises G.G. Tech Inc. for goods and services tax (GST) amounts that the
corporation owed to Revenu Québec.
[3]
Les Entreprises
G.G. Tech Inc. was the result of the amalgamation on October 21, 2011, of
Les Entreprises G.G. Tech Inc., a company incorporated on September 16, 2002,
under Part 1A of the Quebec Companies Act, and Magtek 2008 Inc., a
company incorporated under Part 1A of the Quebec Companies Act though a
certificate of incorporation dated March 1, 2007. Les Entreprises G.G.
Tech Inc. operated a business in metal recycling and mechanical work and Magtek
2008 Inc.’s business was in leasing containers and in collecting metal.
[4]
On March 26,
2012, Les Entreprises G.G. Tech Inc. made an assignment of its property under
the Bankruptcy and Insolvency Act.
[5]
Based on the
amending declaration of the legal person Les Entreprises G.G. Tech Inc., filed
on March 20, 2008, under the Act respecting the legal publicity of sole
proprietorships, partnerships and legal persons, the appellant was a
shareholder and a director of that company at that time.
[6]
Based on the Entreprise Register information
statement filed on July 16, 2009, by Magtek 2008 Inc., the appellant was a
shareholder and a director of that company at that time.
[7]
According to the
appellant’s testimony, in 2008, he purchased 29 class A shares of the share
capital of Les Entreprises G.G. Tech Inc., while his two sons, Mathieu and
Alexis Gagné, each purchased 10 class A shares of the same company. The share
subscription or purchase agreement was not filed in evidence.
[8]
The evidence on
the record contains no information regarding the date when the appellant became
a shareholder of Magtek 2008 Inc., and no subscription or purchase agreement
for the shares of this company was filed in evidence. However, according to the
testimony of Sylvie Demers, a collection officer with the Canada Revenue Agency
(CRA), and Nathalie Labelle, bankruptcy officer with the CRA, Les Entreprises
G.G. Tech Inc. and Magtek 2008 Inc. had their offices at the same address and
the same people were both shareholders and directors of both companies.
[9]
Confirmation that
the appellant was also a shareholder of Magtek 2008 Inc. is found in the share
sale agreement concluded on July 7, 2010, but in effect as of June 23,
2010, between the appellant (the Seller), Clermont Bélanger (the Purchaser) and
Magtek 2008 Inc. (the Intervener). The third “whereas” of this agreement reads as follows:
[Translation]
WHEREAS the Seller is the owner of thirty-nine (39) class A shares
issued and in circulation of the share capital of the Intervener.
[10]
In his testimony,
the appellant explained that, under the sale agreement, he sold the 29 class A
shares that he owned and the 10 class A shares that one of his sons owned. The sale price agreed upon for the sale of
the 39 class A shares was $1. The appellant pointed out that, under
paragraph 5 of the sale agreement, the purchaser undertook to release the
seller from all endorsements, suretyships and personal guarantees given to the
intervener’s creditors, including but not limited to lines of credit in the
approximate amount of $80,000 from Visa Business, GST and Quebec sales tax of
approximately $19,000, the suretyships for two (2) F-350 trucks as well as the
personal liability portion of two (2) small-business loans from
Desjardins Group the balances of which were approximately $6,000 and $7,000
respectively.
[11]
Following the
sale of the shares that the appellant held in the share capital of Magtek 2008
Inc., the appellant stopped being a director of Magtek 2008 Inc. and Les
Entreprises G.G. Tech Inc.
[12]
During the period
when the appellant was a director of Magtek 2008 Inc., the company failed to
remit to the Minister the GST amounts collected between September 1, 2008,
and May 31, 2010. Following
the amalgamation of Les Entreprises G.G. Tech Inc. and Magtek 2008 Inc. on
October 21, 2011, the obligation to remit the GST amounts collected became
the responsibility of the corporation resulting from the amalgamation. The
appellant was never a shareholder or director of the corporation resulting from
the amalgamation.
The appellant’s position
[13]
In his testimony,
the appellant referred to the fact that he was in no way involved in the
administration of Les Entreprises G.G. Tech Inc. and Magtek 2008 Inc. and that
he had neither the knowledge nor the skills needed to manage the corporations. He has not completed his Secondary II, and he has worked in
construction his entire life.
[14]
According to him,
the administration of Les Entreprises G.G. Tech Inc. and Magtek 2008 Inc. was
done entirely by Clermont Bélanger, who held the majority of class A shares in
both corporations.
[15]
Clermont Bélanger
is a professional accountant, who has his own accounting firm. He kept the
corporations’ books, prepared financial statements and filed the corporations’ income
tax and tax returns. He managed the corporations’ bank accounts in addition to
managing the accounts payable and collecting the accounts receivable. Mr. Bélanger
was responsible for finding the funding needed for the corporations to operate.
He was responsible for insurance and claims to the Commission de la Santé et
Sécurité au Travail (and labour relations with employees (hiring, wages,
etc.)).
[16]
The appellant
explained that he had not taken part in any board of directors’ meetings for
either Les Entreprises G.G. Tech Inc. or Magtek 2008 Inc., that he had never
signed any board of directors’ resolutions of either corporation and that he
had never signed any financial statements or tax returns for either
corporation.
[17]
According to the
appellant, Clermont Bélanger seemed to have everything under control and
everything seemed to be in order. The appellant trusted Mr. Bélanger
because, in addition to being his friend, he had a great deal of experience in
managing companies. He had no reason to doubt him.
[18]
The appellant
explained that Clermont Bélanger had not informed him of the corporations’ financial
difficulties until 2009. At that time, the lines of credit for Les Entreprises
G.G. Tech Inc. and Magtek 2008 Inc. were increased. The corporations’ clients
were called to speed up the payment of accounts receivable and a business
recovery consultant, Sébastien Girard, was hired. Following those measures,
there was a cash receipt and the situation improved somewhat but, after that,
the financial situation of Magtek 2008 Inc. deteriorated again. He therefore
decided to dispose of his shares in Magtek 2008 Inc. releasing himself from his
endorsements and suretyships and from his tax liabilities owed to the tax
authorities.
The respondent’s position
[19]
The respondent
considers that the share sale agreement dated July 7, 2010, is unenforceable
against third parties because it was done under private writing, and that, as a
result, it cannot release the appellant from his solidary liability for the
failure to remit the GST amounts collected.
[20]
The appellant was
aware of the tax obligations of Magtek 2008 Inc. and had been aware since 2009
that the corporation was failing to comply with its obligations in this regard.
In addition, it is for that reason that the appellant requested the inclusion
in the share sale agreement dated July 7, 2010, of a provision regarding his
release from all his endorsements, suretyships and personal guarantees
including approximately $19,000 in GST and Quebec sales tax.
[21]
The appellant had not
put in place an adequate system to prevent numerous failures to remit GST by
Magtek 2008 Inc. of which he was a director.
Analysis
[22]
The assessment at
issue is a reassessment vacating and replacing the notice of assessment dated
May 25, 2012, and bearing the number F-037631. The amount assessed under
subsection 323(1) of the ETA was $9,188.31, that is, $7,999.42 in duties
and $1,188.90 in interest. The reassessment followed the appellant’s
submissions and became necessary in order to subtract the GST amounts for the
periods when the appellant was not a director of the defaulting corporation. The
amount of the reassessment was $5,738.85 in duties; the penalties and interest had
been removed.
[23]
The original assessment
was made within the two-year period after the appellant last ceased to be a director
of Magtek 2008 Inc.
[24]
The relevant provisions of the ETA for the
purposes of this appeal are subsection 299(4) and section 323, which
read as follows:
299(4) Assessment deemed
valid — An assessment shall, subject to being
reassessed or vacated as a result of an objection or appeal under this Part, be
deemed to be valid and binding, notwithstanding any error, defect or omission
therein or in any proceeding under this Part relating thereto.
323.(1)
Liability of directors — If a corporation fails to
remit an amount of net tax as required under subsection 228(2) or (2.3) or to
pay an amount as required under section 230.1 that was paid to, or was applied
to the liability of, the corporation as a net tax refund, the directors of the
corporation at the time the corporation was required to remit or pay, as the
case may be, the amount are jointly and severally, or solidarily, liable,
together with the corporation, to pay the amount and any interest on, or
penalties relating to, the amount.
(2)
Limitations — A director of a corporation is not
liable under subsection (1) unless
(a)
a certificate for the amount of the corporation’s liability referred to in that
subsection has been registered in the Federal Court under section 316 and
execution for that amount has been returned unsatisfied in whole or in part;
(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 subsection (1) 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 bankruptcy 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 subsection (1) has been proved
within six months after the date of the assignment or bankruptcy order.
(3)
Diligence — 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.
(4)
Assessment — The Minister may assess any person for
any amount payable by the person under this section and, where the Minister
sends a notice of assessment, sections 296 to 311 apply, with such
modifications as the circumstances require.
(5)
Time limit — An assessment under subsection (4) of
any amount payable by a person who is a director of a corporation shall not be
made more than two years after the person last ceased to be a director of the
corporation.
(6)
Amount recoverable — Where execution referred to in
paragraph (2)(a) has issued, the amount recoverable from a director is
the amount remaining unsatisfied after execution.
(7)
Preference — Where a director of a corporation pays
an amount in respect of a corporation’s liability referred to in subsection (1)
that is proved in liquidation, dissolution or bankruptcy proceedings, the director
is entitled to any preference that Her Majesty in right of Canada would have
been entitled to had the amount not been so paid and,. where a certificate that
relates to the amount has been registered, the director is entitled to an
assignment of the certificate to the extent of the director’s payment, which
assignment the Minister is empowered to make.
(8) Contribution — A director who satisfies a claim under this section is entitled
to contribution from the other directors who were liable for the claim.
[25]
Since the share sale agreement dated July 7,
2010, is governed by the laws of Quebec, article 1440 of the Civil Code of
Québec should be referred to. It reads as follows:
1440. A
contract has effect only between the contracting parties; it does not affect
third persons, except where provided by law.
[26]
The documentary evidence filed clearly showed
that the appellant was a director of Les Entreprises
G.G. Tech Inc. and Magtek 2008 Inc.
[27]
Even though the appellant did not deal with the
day-to-day management of Les Entreprises G.G.
Tech Inc. and Magtek 2008
Inc, or prepare and file their financial reports, he would still have been involved
in the financial transactions performed by these corporations in order to have given
endorsements, suretyships and personal guarantees for significant amounts to
the various creditors of Magtek 2008 Inc.
[28]
The appellant would also have been familiar
with the formalities of remitting GST in order to have signed a tax remittance
cheque in the amount of $1,938.81 dated September 30, 2008, drawn on a
bank account of Les Entreprises G.G. Tech Inc.
[29]
There is no evidence on
the record that the appellant took any measures to ensure that GST was paid to
Revenu Québec. There is no evidence of the recovery mandate given to Sébastien
Girard, and Clermont Bélanger did not testify to corroborate the recovery
mandate and other measures taken by the directors of Magtek 2008 Inc. to remedy
the failure to remit the GST.
[30]
The appellant has not shown that he has met the
conditions to successfully use the due diligence defence under subsection
323(3) of the ETA. In order to use the due diligence defence, directors of the
defaulting corporation must establish that they exercised the degree of care, diligence and skill to prevent the
failure that a reasonably prudent person would have exercised in comparable
circumstances.
[31]
For these reasons, the appeal is dismissed.
Signed at Québec, Quebec, this 26th day of June 2014.
“Réal Favreau”
Translation certified true
on this 8th day of August 2012
Margarita Gorbounova, Translator
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