Tax Court of Canada Judgments

Date: 19990409

Dockets: 98-117-GST-I; 98-118-GST-I; 98-119-GST-I; 98-120-GST-I

BETWEEN:

GRAHAM FERGUSON, GRACE FERGUSON, MURRAY SMITH, BRUCE ROSS,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for judgment

Hamlyn, J.T.C.C.

[1] These are four separate appeals from assessments of Goods and Services Tax ("GST") which were heard together on common evidence. The Appellants appeal from assessments of tax for the periods May 1, 1992 to July 31, 1992, August 1, 1992 to October 31, 1992 and November 1, 1992 to January 31, 1993.

[2] The Minister of National Revenue (the "Minister") assessed the Appellants as directors of a corporation known as 592416 Ontario Inc., carrying on business as O'Tooles Roadhouse Restaurant, ("592416" or "O'Tooles") by Notices of Assessment mailed on June 10, 1996.[1] The assessments were with respect to the failure by the corporation to remit GST in the amount of $40,149.03 and for penalties and interest. The following chart provides a breakdown of the Minister's assessment:

Period End	Net Tax	Interest	Penalty	Total
July 31, 1992	$13,144.52	$3,858.03	$3,858.58	$20,861.13
October 31, 1992	$14,051.12	$3,698.46	$3,687.11	$21,436.69
January 31, 1993	$12,953.39	$3,100.73	$3,104.71	$19,158.83
TOTAL	$40,149.03	$10,657.22	$10,650.40	$61,456.65

[3] In assessing the Appellants, the Minister made the following assumptions of fact:

(a) the Appellant[s] [were], at all material times, director[s] of the Corporation;

(b) the Corporation failed to remit to the Receiver General GST in respect of the periods May 1, 1992 to July 31, 1992, August 1, 1992 to October 31, 1992 and November 1, 1992 to January 31, 1993 in the amount of $40,149.03;

(c) the Corporation failed to pay penalties and interest relating to the unremitted GST;

(d) the Corporation was assessed on May 26, 1994;

(e) the Corporation was dissolved on June 11, 1994;

(f) a certificate in the amount of $48,984.68 was registered in the Federal Court of Canada with respect to the liability of the Corporation for unremitted GST, interest and penalties. The resulting writ issued on September 2, 1994 by the Federal Court of Canada was registered with the Sheriff of the County of Peterborough, Ontario. The writ was returned unsatisfied, nulla bona; and

(g) the Appellant[s] did not exercise the degree of care, diligence and skill to prevent the failure of the Corporation to remit GST in the amount of $40,149.03 that reasonably prudent person[s] would have exercised in comparable circumstances.

EVIDENCE

[4] A Partial Agreed Statement of Facts was filed. The relevant parts read as follows:

The Appellants and Respondent agree as follows:

1. 592416 Ontario Inc. ("592416") was incorporated on July 18, 1984.

2. Alan Wine, a lawyer, was the incorporator and first director of 592416.

3. 592416 carried on business as O'Tooles Roadhouse franchise restaurant in Peterborough, Ontario.

4. 592416 failed to remit to the Receiver General GST in respect of the periods May 1, 1992 to July 31, 1992, August 1, 1992 to October 31, 1992 and November 1, 1992 to January 31, 1993 in the amount of $40,149.03.

5. 592416 failed to pay penalties and interest relating to the unremitted GST.

6. 592416 was assessed on May 26, 1994.

7. 592416 was dissolved on June 11, 1994.

8. A certificate in the amount of $48,984.68 was registered in the Federal Court of Canada with respect to the liability of 592416 for unremitted GST, interest and penalties. The resulting writ issued on September 2, 1994 by the Federal Court of Canada was registered with the Sheriff of the County of Peterborough, Ontario. The writ was returned unsatisfied, nulla bona.

VIVA VOCEEVIDENCE AT TRIAL

[5] The Appellants called five witnesses: each of themselves and Kevin Ross, the former general manager of O'Tooles.

[6] Kevin Ross ran the day-to-day operations of O'Tooles. His occupational history and training was extensive in the hospitality industry. This includes both specialized post-secondary education and hotel and restaurant work experience.

[7] Kevin Ross invited family and friends to invest in shares of 592416. The four Appellants became minority shareholders-investors in 592416, with relatively small investments. More substantial funds came from other shareholder-investors.

[8] Kevin Ross maintained he and the four Appellants were not directors of 592416, although they did, from time to time, have meetings to discuss the progress of the restaurant. All the witnesses stated the Appellants had no day-to-day role in the restaurant.

[9] As part of the O'Tooles structure, 592416 hired a full-time trained bookkeeper and also had a chartered accountant retained as an advisor.

[10] The payroll of the business, including some deductions under the Income Tax Act, were handled by a service provided by O'Tooles' bank.

[11] GST remittances were prepared by the bookkeeper and Kevin Ross would directly remit them. It was also Kevin Ross' evidence that none of the Appellants were aware of the remittance practices and procedures.

[12] Eventually, O'Tooles ran into financial difficulty. The landlord locked-out O'Tooles and, at the direction of the Vice President of Finance for the franchisor, Kevin Ross did not remit GST.

[13] Until O'Tooles was locked-out, the Appellants were not aware of any problems.

[14] The Minister, in assessing the Appellants, relied on exhibit R-1, tab 7 as evidence that the Appellants were directors of 592416.

[15] Exhibit R-1, tab 7 reads as follows:

RESOLUTION OF THE BOARD OF DIRECTORS

OF

592416 ONTARIO INC.

___________________________________________

WHEREAS the Directors acknowledge that the Nineteen Thousand Two Hundred (19,200) Common Shares in the capital stock of the Corporation subscribed for by Brian Schachter were subscribed for in trust for a corporation to be incorporated, and that the said corporation was incorporated on August 24, 1984, as COUNSELTRON INTERNATIONAL LTD.

TRANSFER OF SHARES

BE IT RESOLVED THAT the following transfer of shares in the capital of the corporation be and the same is hereby approved:

TRANSFEROR TRANSFEREE    NO. & CLASS

   OF SHARES

BRIAN SCHACHTER COUNSELTRON 19,200 Common

INTERNATIONAL LTD.

The foregoing resolution is hereby passed by all of the directors of the Corporation pursuant to the Business Corporations Act, 1982, as evidenced by their respective signatures hereto.

DATED the 13th day of September, 1984.

[signed]         [signed]

BRIAN SCHACHTER JEFFERY MILLER

[signed]         [signed]

RALPH CARSTENS MURRY SMITH

[signed]         [signed]

KEVIN ROSS BRUCE ROSS

[signed]         [signed]

GRAHAM FERGUSON GRACE FERGUSON

[16] All the Appellants and Kevin Ross confirmed that it was their signatures on the document, however none of them recalled the document or signing it. Their evidence was that most likely the lawyer for the corporation had told them to sign the document and they did so.

[17] Kevin Ross also advised the Court that he had made enquiries before the trial as to the whereabouts of the minute book of the corporation and that the landlord of the restaurant's premises had advised him that it was probably thrown out at the time of the lockout.

[18] The four Appellants' evidence was similar in respect of whether they were directors of the company and the extent of their business experience. They all testified that they had no business or legal education or experience, they had no knowledge or involvement with GST matters, they were not directors of 592416 and that they did not knowingly sign anything as directors. They did admit their signatures on exhibit R-1, tab 7, but they testified that although their respective signatures appeared on the document as directors, they did not know or believe they were directors and, other than signing the document filed as exhibit R-1, tab 7, they never consented to be or act as directors. It was also their evidence that the Appellants found out the restaurant was in trouble only when one of the Appellants, Grace Ferguson, noted an absence of vehicles in the parking lot and saw a notice on the door of the restaurant indicating the restaurant was closed due to liquor license problems.

[19] All the Appellants stated that throughout the O'Tooles existence, they did not receive independent legal advice.

[20] One Appellant, Brian Ross, did have a broader knowledge of what went on at O'Tooles as he was related to Kevin Ross and received more information. He did attend some of the shareholders-investors meetings.

[21] Brian Ross stated that he placed total reliance on Kevin Ross and on the hired bookkeeper to look after the affairs and management of the restaurant.

[22] He told the Court that he could not recall any meetings where discussions or financial statements or documents indicated or showed taxes were not being paid.

[23] The Respondent called two witnesses: the lawyer who had acted as 592416's incorporating solicitor whose evidence was limited because of solicitor-client privilege and the Revenue Canada official who was involved in and mailed the Notices of Assessment.

ISSUES

[24] The main issue to be determined is whether the Appellants are liable for unpaid GST remittances owed by 592146 pursuant to subsection 323(1) of the Act. In determining this issue, it is necessary to determine three sub-issues:

(a) were the Appellants directors of 592146?

(b) if the Appellants were directors of 592146, did the Minister assess the Appellants' more than two years after the Appellants ceased to be directors contrary to subsection 323(5) of the Act; and

(c) if the Appellants were directors of 592146, did they exercise the degree of care, diligence and skill required of them under subsection 323(3) of the Act?

THE APPELLANTS' POSITION

[25] The Appellants submitted that they were passive investors in the corporation and at no time were directors of the corporation.

[26] They also submitted that the Respondent failed to serve the Appellants with Notices of Assessment within the time limitation provided in subsection 323(5) of the Act and the Respondent is therefore statute-barred from assessing the Appellants under subsection 323(1).

[27] In the alternative, if the Appellants are found to be directors and if the Notices of Assessment are found to have been sent within the aforesaid limitation period, the Appellants submitted that they exercised the degree of care, diligence and skill to prevent the failure, as required of them pursuant to subsection 323(3) of the Act.

THE RESPONDENT'S POSITION

[28] The Minister submits that he properly assessed the Appellants pursuant to section 323 of the Act for the failure of the corporation to remit to the Receiver General an amount of $40,149.03 as required by section 228 of the Act and the interest thereon and penalties relating thereto. The Minister submitted that the Appellants did not exercise the degree of care, diligence and skill to prevent the failure to remit the amount by the corporation that reasonably prudent persons would have exercised in comparable circumstances.

LEGISLATION

[29] The provisions of the Act relevant to these appeals are as follows:

228(1) 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.

(2) Where the next tax for a reporting period of a person is a positive amount, the person shall remit that amount to the Receiver General ...

...

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.

(2) 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;

...

(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.

(4) 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) 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.

...

ANALYSIS

WERE THE APPELLANTS DIRECTORS?

[30] As stated, the Appellants' position is that they were not directors, they did not exercise power or control over the actions of the corporation and therefore they should not be held liable for the failure of the corporation to remit GST.

[31] There is apparently no documentation registered with the province to show that the board of directors was enlarged from the time of incorporation from the incorporating director to the number of persons alleged to be directors in exhibit R-1, tab 7. The Appellants have argued in the absence of any registered document showing the purported increased size of the board of directors, that the Court must conclude the board of directors' size must be as incorporated.

[32] However, the Minister, in assessing the Appellants, assumed that they were directors. This assumption was based on, inter alia, exhibit R-1, tab 7, in which the Appellants had signed: "The foregoing resolution is hereby passed by all the directors of the Corporation".

[33] It is well established that the assumptions of the Minister are taken to be true unless shown otherwise. The onus is on the Appellants to rebut the assumptions of the Minister.

[34] The Appellants did not present the other alleged directors (exhibit R-1, tab 7) beyond Kevin Ross to give evidence about the organization and structure of 592416. In the absence of documentary or other significant viva voce evidence, aside from explanation about the minute book, it was incumbent upon the Appellants to bring forward substantive evidence that they were not directors. They could have subpoenaed, for example, the other alleged directors who, according to evidence, were also officers of 592416 (President and Secretary Treasurer) to testify as to the events and as to the corporate organization of 592416.

[35] I conclude that, overall, the evidence was insufficient to rebut the assumption that the Appellants were directors.

DID THE MINISTER ASSESS WITHIN THE STATUTORY TIME LIMIT?

[36] Subsection 5 of section 323 provides an assessment 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. The Appellants have raised the issue that the assessments were not issued and served within the time limitations prescribed by the Excise Tax Act (the "Act"). However, the evidence of the Appellants does not support this assertion. The assessments were received by the Appellants and the evidence confirms the Notices of Assessment were issued and mailed within two years of the dissolution of the corporation.

DID THE APPELLANTS EXERCISE DUE DILIGENCE?

[37] With regard to the test of whether a director has been duly diligent so as to avoid liability under the Income Tax Act,[2] the following statement in Canadian Business Corporations by Iacobucci, Pilkington and Prichard, Canada Law Book Limited, 1977, at page 287 has been cited with approval in a number of cases:

The common law standard of care and skill which a director must meet is generally expressed as an objective standard: he must exercise the reasonable care and skill which an ordinary person might be expected to exercise in the circumstances on his own behalf. However as Mr. Justice Romer indicated, in the leading case of Re City Equitable Fire Insurance Company,²⁶² the common law standard is also partly subjective: a director need not exhibit a greater degree of skill than may reasonably be expected from a person of his knowledge and experience.

At common law the degree of care and skill demanded of a director varies with the type and size of the company he serves.

____________

²⁶²[1925] Ch. 407, at p. 428, affd [1925] Ch. 50 (C.A.).

[38] This objective/subjective standard was confirmed in the decision of the Federal Court of Appeal in Soper v. The Queen, 97 DTC 5407, where Robertson J.A. said at page 5416:

The standard of care laid down in subsection 227.1(3) of the Act is inherently flexible. Rather than treating directors as a homogeneous 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".

[39] The principle that the standard of care laid down for directors' liability is inherently flexible has been further commented on in The Queen v. Gary J. Corsano et al., March 29, 1999, file number A-752-97 (F.C.A.), where Desjardins J.A. states at paragraph 23:

It is true that in Soper, this court wrote that "the standard of care laid down in subsection 227.1(3) of the Act is inherently flexible"¹¹. It is obvious, however, on the reading of the decision, that it is the application of the standard that is flexible because of the varying and different skills, factors and circumstances that are to be weighed in measuring whether a director in a given situation lived up to the standard of care established by the Act. For subsection 227.1(3) statutorily imposes only one standard to all directors, that is to say whether 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.

______________

¹¹[1998] 1 F.C. 124, at p. 155.

[40] In Soper (supra), Robertson J.A. went on to distinguish between what he referred to as 'inside' and 'outside' directors: an inside director being one who is involved in the day-to-day management of the company and who influences its business affairs and an outside director being one who is not. With regards to the analysis of the potential liability for directors he said the following at page 5417:

At the outset, I wish to emphasize that in adopting this analytical approach 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.

[41] And at page 5418:

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 remittances. Put differently, it is indeed incumbent upon an outside director to take positive steps if he or she knew, or ought to have known, that the corporation could be experiencing a remittance problem. The typical situation in which a director is, or ought to have been, apprised of the possibility of such a problem is where the company is having financial difficulties.

[42] Several cases before this Court have concluded a director of a corporation is not liable for the corporation's failure to remit tax where the director was unable to control the actions of the person who was controlling the corporation.

[43] In Cloutier et al. v. M.N.R., 93 DTC 544 (T.C.C.), a decision under the Income Tax Act, Bowman J. said at page 551:

Where, however, individual directors who control neither the company nor the board of directors are powerless to influence the course taken by the corporation the law does not require that they should be held responsible for the corporation's obligations to the fisc.

[44] In Champeval et al. v. M.N.R., 90 DTC 1291 (T.C.C.),[3] the effective control of the corporate taxpayer had been assumed by a bank and therefore no longer rested with the board of directors. Couture, C.J. said the following with regards to the director's liability at page 1294:

A director's responsibility for a company under s. 227.1(1) is not absolute. It is contingent, that is, a director is relieved of it when he has acted with the degree of care, diligence and skill that a reasonable person would have exercised in comparable circumstances. If one is to be able to determine whether a director exercised the degree of care, diligence or skill required under s. 227.1(3), that director must have had a free choice before him. If he did not have a free choice in his decisions because of factors completely beyond his control, he cannot be bound by the provisions of s. 227.1(1) because the provisions of subs. (3) relieve him of all personal liability, since in the circumstances a reasonable person would not have acted otherwise.

[45] From the evidence, I accept that the Appellants' involvement in the corporation was indeed minuscule and nothing was expected of them. Their financial involvement as shareholders-investors was limited. They had little, if any, business management sophistication. The management of the business was placed in the hands of experienced persons and there were trained professionals looking after the affairs of the business.

[46] Although they could have attended meetings of shareholders-investors if they so chose, they generally did not do so and they were not aware of the financial difficulty that faced O'Tooles. Moreover, it was indicated that at the meetings financial concerns were not discussed.

[47] In essence, the Appellants believed they were brought into the investment as small minority shareholders-investors.

[48] I also accept the evidence of the Appellants that, other than signing the exhibit R-1, tab 7, they did nothing that would indicate to anyone that they were directors.

[49] Therefore, I find that while the Appellants have not dislodged the Minister's assumption that they were legal directors of the corporation, they were, at best, outside, passive, non-consenting directors of the corporation without, on their part, any personal sense of duty or obligation. A director must exercise a degree of care, diligence and skill to prevent the failure to remit that a reasonably prudent person would have exercised in comparable circumstances. However, to do this it follows directors must also believe or understand they were directors.

[50] In this case, I find that the Appellants, given their personal view that they were not directors, did not exercise nor were expected from the corporation's point of view to exercise power or control over the actions of the corporation. Moreover, there is little or no evidence other than exhibit R-1, tab 7, to lead to a conclusion the Appellants were wilfully blind as to their role, obligations or duties. Thus, I conclude they cannot be held liable for the failure of the corporation to remit GST.

[51] Furthermore, by way of additional comment, directors are only obliged to take some positive action when they realize that there may be a problem with remittances. Even if the Appellants did know that they were directors, which I do not find, then their duty arose when they first became aware that the business was having financial difficulties (see Soper, supra). The management of the corporation, I conclude, concealed the financial difficulties of the business. The Appellants' evidence, which I accept, was that they were completely unaware that the business was in trouble until one of them noticed that the parking lot was empty and a notice was posted to the door. At this point, the business had failed. The Appellants even if they were aware of their responsibilities were powerless at that time to influence the corporation's behaviour.

DECISION

[52] The appeals are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that under these specific circumstances the Appellants have satisfied the test under subsection 323(3) of the Act.

Signed at Ottawa, Canada, this 9th day of April 1999.

"D. Hamlyn"

J.T.C.C.

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