Date: 19980513
Docket: A-331-97
CORAM: STONE J.A.
LINDEN J.A.
ROBERTSON J.A.
BETWEEN:
ANN DROVER
Applicant
- and -
HER MAJESTY THE QUEEN
Respondent
Heard at Toronto, Ontario, Friday, April 24, 1998.
Judgment delivered at Ottawa, Ontario, Wednesday, May 13, 1998.
REASONS FOR JUDGMENT BY: ROBERTSON J.A.
CONCURRED IN BY: STONE J.A.
LINDEN J.A.
Date: 19980513
Docket: A-331-97
CORAM: STONE J.A.
LINDEN J.A.
ROBERTSON J.A.
BETWEEN:
ANN DROVER
Applicant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
ROBERTSON J.A.
[1] The applicant taxpayer was a director of Conestoga Inn Limited, which carried on a hotel and restaurant business in Kitchener, Ontario. Conestoga was registered under the provisions of the Excise Tax Act and required to remit the goods and services tax (GST) on a quarterly basis. The taxpayer lost "control" of Conestoga on December 12, 1992 when a receiver manager was appointed by a secured creditor. Conestoga was declared bankrupt on December 18, 1992. Prior to these dates, Conestoga was in arrears with respect to its remittance obligation in the amount of $7,887.42. Subsequent to the appointment of a receiver and the bankruptcy, the Minister of National Revenue audited Conestoga for the period January 1, 1991 to December 10, 1992. As a result of the audit, it was found that additional GST was owing.
[2] In an assessment dated February 21, 1995, the Minister held the taxpayer personally liable as a director of Conestoga, for $57,833.70, including penalties and interest, pursuant to ss. 323(1) of the Act. That assessment was appealed to the Tax Court of Canada under the informal procedure. While several issues were raised before the Tax Court, only one is relevant to this application. This state of affairs arises because of certain concessions made by both parties prior to the hearing of this application, of which more will be said shortly. The issue before this Court is whether the taxpayer is entitled to rely on the due diligence defence set out in ss. 323(3). The relevant subsections of s.323 read as follows:
| 323(1) Where a corporation fails to remit an amount of net tax as required under subsection 228(2), 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. |
| ... |
| (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. |
[3] The Tax Court Judge concluded that the taxpayer had not satisfied the due diligence defence. He reasoned:
| The word "prevent" means to stop an event from happening before it happens. Once a failure to remit takes place, its prevention is no longer possible. (See Ho v. M.N.R., 91 DTC 76) |
| The action the Appellant took to pay the outstanding tax was too late to prevent the failures from occurring. |
[4] A day prior to the hearing of this judicial review application, the parties informed the Court that they had reached a partial settlement. The taxpayer conceded that she was liable for the arrears equalling $7,887.42. At the same time, the Minister conceded that the taxpayer is not
liable for $29,213, plus applicable penalty and interest. That amount represents GST owing for the final reporting period, October 1, 1992 to December 10, 1992 and which amount did not have to be remitted until January 30, 1993 pursuant to ss. 238(1)(b). Presumably, this concession was made on the authority of Robitaille v. The Queen, 90 DTC 6059 (F.C.T.D.) in which it was 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, i.e. after a receiver is appointed. Given that the taxpayer lost control of Conestoga on December 12, 1992, she can hardly be held liable for failing to remit GST which was not due until January of 1993. The amount remaining in dispute is $18,296, plus penalty and interest. That amount covers GST assessed as owing for the period January 1991 to December 1992. This amount is in addition to the amounts previously reported by Conestoga when filing its periodic returns. As a result of the audit, it was discovered that Conestoga had under-reported the amount of GST owing which presumably should have been remitted prior to December 12, 1992.
[5] It is common ground that the learned Tax Court Judge did not apply the proper test when determining whether the taxpayer should be absolved of liability under the due diligence defence. It is also common ground that the Tax Court Judge did not have the benefit of this Court's decision in Soper v. The Queen, [1998] 1 F.C. 124 (F.C.A.). Therein the relevant principles concerning director"s liability and the due diligence defence are set out. Although that case dealt
with the due diligence defence in the context of ss. 227.1(3) of the Income Tax Act, the wording of that provision mirrors ss. 323(3) of the Excise Tax Act. However, the issue in Soper was slightly different than the one before us.
[6] In Soper, the issue was whether the director had exercised the required degree of care to prevent the failure by his corporation to remit income tax and other source deductions from employees' salaries. The following passages from Soper are particularly relevant (at pages 155, 156, 157 and 160):
| The standard of care laid down in subsection 227.1(3) of the Act is inherently flexible. Rather than treating directors as a homogenous group of professionals whose conduct is governed by a single, unchanging standard, that provision embraces a subjective element which takes into account the personal knowledge and background of the director, as well as his or her corporate circumstances in the form of, inter alia, the company"s organization, resources, customs and conduct. Thus, for example, more is expected of individuals with superior qualifications (e.g. experienced business-persons). |
| The standard of care set out in subsection 227.1(3) of the Act is, therefore, not purely objective. Nor is it purely subjective. It is not enough for a director to say he or she did his or her best, for that is an invocation of the purely subjective standard. Equally clear is that honesty is not enough. However, the standard is not a professional one. Nor is it the negligence law standard that governs these cases. Rather, the Act contains both objective elements - embodied in the reasonable person language - and subjective elements - inherent in individual considerations like "skill" and the idea of "comparable circumstances". Accordingly, the standard can be properly described as "objective subjective". |
| ....I am not suggesting that liability is dependent simply upon whether a person is classified as an inside as opposed to an outside director. Rather, that characterization is simply the starting point of my analysis. At the same time, however, it is difficult to deny that inside directors, meaning those involved in the day-to-day management of the company and who influence the conduct of its business affairs, will have the most difficulty in establishing the due diligence defence. For such individuals, it will be a challenge to argue convincingly that, despite their daily role in corporate management, they lacked business acumen to the extent that this factor should overtake the assumption that they did know, or ought to have known, of both remittance requirements and any problem in this regard. In short, inside directors will face a significant hurdle when arguing that the subjective element of the standard of care should predominate over its objective aspect. |
| ... |
| Of course, not all inside directors have been held liable. The Tax Court has refused to impose liability on an inside director in cases where he or she is an innocent party who has been misled or deceived by co-directors: see Bianco v. Minister of National Revenue (1991), 2 B.L.R. (2d) 255 (T.C.C.); Edmondson (S.G). v. M.N.R., [1988] 2 C.T.C. 2185 (T.C.C.); Shindle (B.) v. Canada, [1995] 2 C.T.C. 227 (F.C.T.D.); and Snow v. Minister of National Revenue (1991), 38 C.C.E.L. 70 (T.C.C.). There are also other examples of an inside director being exonerated: see Fitzgerald (G.) v. M.N.R., [1991] 2 C.T.C. 2595 (T.C.C.). |
| ... |
| In my view, the positive duty to act arises where a director obtains information, or becomes aware of facts, which might lead one to conclude that there is, or could reasonably be, a potential problem with remittance of GST. |
[emphasis mine]
[7] It could not be expected that Soper would provide a ready answer to all questions dealing with directors' liability. At the same time, it did attempt to provide some general principles in order to fill the analytical void that existed. The "objective subjective" standard of care outlined above focuses on whether the surrounding circumstances are such that a person of the director's ability and business experience was under a positive duty to act as to ensure that the corporation's obligation to remit withholding taxes was fulfilled. Certainly, such a duty exists if a director is aware or should have been aware of a remittance problem, and is breached if no steps are taken to ensure compliance with the legislation. As the taxpayer in Soper was held to be under a positive duty to act and had done nothing to fulfill that obligation, the due diligence defence was not available. In these circumstances, it was unnecessary for this Court to consider what steps the director in that case should have taken once the positive duty to act arose.
[8] The present case adds a further dimension to the principles set out in Soper. The obligation imposed on directors is not limited to that of exercising the requisite standard of care in ensuring that GST as calculated was remitted. There is also an obligation to exercise the same standard with respect to ensuring that GST is properly calculated. To interpret s. 321(1) of the Excise Tax Act, (or for that matter s. 227.1(1) of the Income Tax Act) in a contrary manner would undermine the purpose of that section. Carelessness in calculation is as unacceptable as carelessness in remittance. The obligation to properly calculate GST flows from ss. 228(1) of the Excise Tax Act which reads as follows:
| Every person who is required to file a return under this Division shall in the return calculate the net tax of the person for the reporting period for which the return is required to be filed. |
[9] Utilizing the language adopted in Soper, the issue in the present case may be recast as follows: Did the taxpayer exercise the required standard of care as to ensure that Conestoga did not fail in its obligation to properly calculate and remit GST to the Receiver General? Having regard to the surrounding circumstances and the taxpayer's business experience and acumen should she have been aware that there was a problem with respect to the proper calculation of GST? Correlatively, if the taxpayer knew or ought to have known that there was a problem with respect to its proper calculation, did she exercise the requisite standard of care in ensuring that the problem was resolved. Though the taxpayer was an "inside director" (involved in the day to day operation of the business) it is evident that other persons, including an accountant, were responsible for calculating and remitting all taxes. I should add that no evidence was drawn to this Court's attention in support of the understanding that the taxpayer was actually aware of a problem with respect to the proper calculation of GST.
[10] The taxpayer seeks to persuade us that having regard to the requisite standard of care and the facts of this case, the tenets of the due diligence defence have been met. The Minister asserts that as this particular issue was not raised by her before the Tax Court, it is too late to raise it on the application for judicial review. In other words, since the taxpayer failed to raise the due diligence defence in the context of the $18,296 in dispute, thereafter she is precluded from raising it in this Court: on this point see generally Athey v. Leonati (1997), 203 N.R. 36 (S.C.C.) at 58, paras. 50 & 51.
[11] I have two difficulties with the Minister's position. First, I doubt that the taxpayer would have been as quick to reach an agreement with respect to the other two amounts if she had known that the right to raise the due diligence defence would be inadvertently eliminated. Second, the argument ignores the fact that the Tax Court Judge committed a reviewable error of law. At the same time, I have difficulty in accepting that it is the proper role of this Court on a judicial review application to arrive at a finding of mixed fact and law when the Tax Court Judge was not asked to address what the parties would later identify as the pivotal issue. This difficulty is heightened by the realization that the taxpayer's plea of due diligence rests on transcript evidence. In my opinion, this application is more appropriately disposed of by referring the matter back to the Tax Court for a determination with respect to the $18,296 remaining in dispute.
[12] For the above reasons, the application for judicial review should be allowed and the judgment of the Tax Court dated April 3, 1997 set aside. The matter should be remitted to the Tax Court Judge for a determination in a manner consistent with these reasons and those found in Soper. The Tax Court Judge shall retain the discretion to determine whether the parties are entitled to adduce further evidence on the sole issue in dispute.
"J.T. Robertson"
J.A.
"I agree
A.J. Stone J.A."
"I agree
A.M. Linden J.A."
[13]
FEDERAL COURT OF APPEAL
Date: 19980513
Docket: A-331-97
BETWEEN:
ANN DROVER
Applicant
- and -
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT