Delia v. Agence du revenu du Québec, 2018 QCCQ 9487

The appellant (“Delia”) had been the sole shareholder and director of a corporation (“Motostar”) engaged in a recreational vehicle sales business. Motostar was dissolved pursuant to voluntary dissolution proceedings under s. 312 of the Business Corporations Act (Quebec) in November 2012. In September 2013, the ARQ commenced an audit of Motostar, assessed Motostar on June 5, 2014 the basis that there was no support for an entry in its accounts that reduced in recorded QST remittance obligation by $12,600, and then, on November 3, 2014, assessed Delia for this amount pursuant to s. 24.0.1 of the Tax Administration Act (the “TAA”) (similar to ETA s. 323(1) and ITA s. 227.1(1).)

In connection with finding (at para. 50, TaxInterpretations translation) that “the assessment of Motostar was completely void, having been made respecting a non-existent person without legal standing”), Cameron JCQ noted the contrast in wording between s. 306 of the Business Corporations Act (Quebec) (“QBCA”) (which did not apply to the type of dissolution engaged in by Motostar) and s. 313 (which did). Those provided:

306. Despite its dissolution, a corporation remains a party to any judicial or administrative proceeding to which it was a party before its dissolution, and a proceeding may be brought against it within three years after its dissolution.

313. As of the dissolution of the corporation, its rights and obligations become those of the shareholder, and the shareholder becomes a party to any judicial or administrative proceeding to which the corporation was a party.

Cameron JCQ stated (at para. 54) that under s. 313 (as contrasted to s. 306) “a fresh procedure is not permitted regarding a defunct corporation… .” Wesdome was distinguished on the basis that there, audit proceeding had already commenced by the time of the corporate dissolution. He further stated (at para. 61):

The situation is different in the case of a dissolution subject to Articles 306 and following of the BCA. In that situation, the Act provides for the possibility of initiating recourse against a corporation following its dissolution.

The appellant (“Delia”) had been the sole shareholder and director of a corporation (“Motostar”) engaged in a recreational vehicle sales business. All the accounting and tax returns were handled by an experienced accounting employee in consultation with an accountant at Motostar’s accounting firm. Following the dissolution of Motostar, the ARQ commenced a GST/QST audit. With the exception of one very small item, the ARQ auditor was satisfied with all the items reviewed other than an adjusting entry to the account for QST on sales, which debited that account for $12,631. The former Motostar accounting personnel were unable to substantiate this entry or provide documentary support.

After finding that Delia would be liable under an assessment made of him for the above amount plus interest under the Quebec equivalent of ETA s. 323(1) (s. 24.0.1 of the Tax Administration Act (the “TAA”)) but for the due diligence defence (under s. 24.0.2), Cameron JCQ then found that such defence was made out, stating (at paras. 122-123, 125-126):

…Mr. Delia did everything that was reasonable in establishing and maintaining a reliable accounting system. The audit also confirmed this, as all that which was reviewed on the audit was to the full satisfaction of the auditor, save for that one entry … [concerning] a small amount… .

As for the adjusting entry, the Court does not see it as an extraordinary transaction, in terms either of nature or amount. … The entry accounted for around 2.4% of the total gross QST (before input tax refunds) generated annually on sales. The error, if error it was, or the loss of documentation were that the case, concerned an amount with a certain effect, but which is minimal compared with the sales volume.

…[T]he inability of those at Motostar to substantiate with precision the entry does not in any way establish a lack of diligence, care or skill on the part of the director who had entrusted the accounting and the handling of the tax returns to them.

There was nothing extraordinary about the entry in itself so as to attract the particular attention of Mr. Delia when signing the documents for the dissolution of the enterprise which, to the best of his knowledge, had paid all tax debts.

The appellant (“Delia”) had been the sole shareholder and director of a corporation (“Motostar”) engaged in a recreational vehicle sales business. All the accounting and tax returns were handled by an experienced accounting employee in consultation with an accountant at Motostar’s accounting firm. Following the dissolution of Motostar, the ARQ commenced a GST/QST audit. With the exception of one very small item, the ARQ auditor was satisfied with all the items reviewed other than an adjusting entry to the account for QST on sales, which debited that account for $12,631. The former Motostar accounting personnel were unable to substantiate this entry or provide documentary support.

In finding that Delia would be liable under an assessment made of him for the above amount plus interest under the Quebec equivalent of ITA s. 227.1 (s. 24.0.1 of the Tax Administration Act) but for the due diligence defence (under s. 24.0.2), Cameron JCQ found that Delia had taken reasonable steps “in establishing and maintaining a reliable accounting system” (para. 122), that the allegedly erroneous entry only “accounted for around 2.4% of the total gross QST … generated annually on sales” (para. 123) and (at para. 125):

…[T]he inability of those at Motostar to substantiate with precision the entry does not in any way establish a lack of diligence, care or skill on the part of the director who had entrusted the accounting and the handling of the tax returns to them.

The ARQ commenced a QST audit of a corporation (Motostar) after its voluntary dissolution by its sole individual shareholder (Delia) and assessed Motostar for some unremitted QST – and five months later assessed Delia for the same amount under the Quebec equivalent of ETA s. 323(1) (and ITA s. 227.1(1).) Cameron JCQ found that the assessment of Motostar was void given that the equivalent provision in the Quebec BCA to CBCA s. 226(2) did not (unlike s. 226(2)) provide that a proceeding may be brought against the dissolved corporation within X years after its dissolution, and instead merely provided that “judicial or administrative proceedings to which the corporation was a party” are continued against its shareholder on the dissolution. (As noted, the “administrative proceedings,” i.e., audit, were commenced after the dissolution.)

Nonetheless, the assessment against Delia was valid but for the due diligence defence (which he found to be available) given that the Quebec equivalent of ETA s. 323(2)(b) (and of ITA s. 227.1(2)(b)) merely required that the corporation have been dissolved (or was in the process of dissolution proceedings) and did not require that a claim for the corporation’s liability have been proved.

Cameron JCQ stated (at paras. 68-70):

[T]he remittance obligation of Motostar before its dissolution constituted a legal reality whose existence did not depend on the administrative act of issuing a notice of assessment.

The application of TAA Article 24.0.1(c) to the director rests on the existence of a remittance obligation of the corporation, one in advance of the day of dissolution, and not on the assessment of the corporation prior to the dissolution.

Otherwise, the dissolution would become a way to avoid obligations arising under tax law each time an assessment had not yet been issued, which would give rise to an impossible situation for the tax authorities.

It was unnecessary to consider whether the assessment of Delia could be founded in the alternative on the basis that under the QBCA he had assumed the tax obligation of Motostar, as this argument had been abandoned by the ARQ.

The ARQ commenced a QST audit of a corporation (Motostar) after its voluntary dissolution by its sole individual shareholder (Delia) and assessed Motostar for some unremitted QST – and then assessed Delia for the same amount under the Quebec equivalent of ETA s. 323(1) (and ITA s. 227.1(1).) Cameron JCQ found that the assessment of Motostar was void given that the equivalent provision in the Quebec BCA to CBCA s. 226(2) did not (unlike s. 226(2)) provide that a proceeding may be brought against the dissolved corporation within X years after its dissolution, and instead merely provided that “judicial or administrative proceedings to which the corporation was a party” are continued against its shareholder on the dissolution. (As noted, the “administrative proceedings,” i.e., audit, were commenced after the dissolution, and Wesdome was distinguished on the basis that there the dissolution had commenced before the dissolution.)

Nonetheless, the assessment against Delia was valid but for the due diligence defence (which he found to be available) given that the Quebec equivalent of ETA s. 323(2)(b) (and of ITA s. 227.1(2)(b)) merely required that the corporation have been dissolved (or was in the process of dissolution proceedings) and did not require that a claim for the corporation’s liability have been proved.

The ARQ commenced a QST audit of a corporation (Motostar) after its voluntary dissolution by its sole individual shareholder (Delia) and assessed Motostar for some unremitted QST – and then assessed Delia for the same amount under the Quebec equivalent of ETA s. 323(1) (and ITA s. 227.1(1).) Cameron JCQ found that the assessment of Motostar was void given that the equivalent provision in the Quebec BCA to CBCA s. 226(2) did not (unlike s. 226(2)) provide that a proceeding may be brought against the dissolved corporation within X years after its dissolution, and instead merely provided that “judicial or administrative proceedings to which the corporation was a party” are continued against its shareholder on the dissolution. (As noted, the “administrative proceedings,” i.e., audit, were commenced after the dissolution)