Date: 19991207
Docket: 98-145-GST-G
BETWEEN:
JOHN MacDONALD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
_______________________________________________________________
Counsel for the Appellant: Donald F. Gurney
Counsel for the Respondent: Heather J. Konrad
_______________________________________________________________
Reasons for Judgment
(Delivered orally from the Bench at Vancouver, British Columbia, on November 1, 1999)
Bowie, J.T.C.C.
[1] The Appellant was, at the material times, a director of Nasty Jack’s Restaurants Inc. That company made an assignment in bankruptcy on August 31, 1994, while owing some $30,000 in unpaid GST, interest and penalties. The Appellant has been assessed under section 323 of the Excise Tax Act, which imposes liability for the unpaid taxes owing by a corporation on the directors of that corporation. Subsection 323(1) reads as follows:
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.
[2] The Appellant relies upon the due diligence defence available under subsection 323(3), which reads:
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 Appellant’s post-secondary education consisted of two semesters at Simon Fraser University, and later some refresher courses at the University of British Columbia. He has no formal qualification beyond his high school diploma, and no formal training in matters of business administration or finance. He has worked over the years at a variety of jobs, which included managing a Chamber of Commerce, and one or two positions in the field of marketing and public relations.
[4] He achieved the rank of Captain in the Armed Forces, and from 1988 to 1995, he worked for Greyhound Bus Lines as a driver. He has in the past been a member of two other boards of directors of companies listed on the Vancouver Stock Exchange, for about one year on each occasion. He appears to have been invited onto those boards because he had some retirement funds invested in the companies. He testified that in neither case did he play an active role as a director, although he did attend some board meetings. He professes an inability to read and understand financial statements.
[5] In 1981, the Appellant met a Mr. Michael Riley, and they became friends. In the summer of 1993, Mr. Riley and the Appellant decided to go into the restaurant business together. The Appellant had no experience that would qualify him to operate a restaurant. However, he knew that his friend Mr. Riley had in the past owned two different restaurants, which he believed had been successful. He had also operated a carpet business. So far as the Appellant knew, Mr. Riley was an experienced businessman and had enjoyed some success as a restaurateur.
[6] In September 1993, the two purchased a restaurant previously known as P.J. All Stars. They changed the name, and proceeded to operate it under the name Nasty Jack’s.
[7] Nasty Jack’s Restaurants Inc. was incorporated on September 1, 1993, and it began operations about two weeks later. The Appellant owned 49 per cent of the shares, Mr. Riley owned 51 per cent, and they were the two directors of the corporation.
[8] In the beginning, Mr. Riley and the Appellant had a discussion which led to their dividing the management duties for the restaurant between them. The Appellant’s duties included the areas of marketing and advertising, promotion, catering, music and decor, maintenance, and the computer, about which I will say more shortly. Mr. Riley’s responsibilities included hiring, training, scheduling and overseeing the staff, supervising the kitchen, and accounting, banking, finance and accounts payable, payroll, purchasing and legal matters. Evidently they did not stick entirely to this division of labour, as the Appellant ended up dealing with the payroll, and the accounting records were kept on the computer.
[9] The restaurant was purchased for $175,000, of which $75,000 was paid in cash, with $100,000 to be paid by instalments. The Royal Bank provided an operating line of credit. The Appellant paid $10,000 to Mr. Riley for what he described as a finder’s fee, and was required by the bank to keep $30,000 on deposit as collateral security for the line of credit. In total, the restaurant had about 70 employees, many of them part-time.
[10] As I said a moment ago, the Appellant’s duties included the computer system. He testified that he had no prior knowledge or experience with computers, but he appears to have accumulated sufficient working knowledge of the operation of it, and of the accounting software known as "AccPac", to do the basic inputting of data, in particular the invoices for supplies, and the data for the computation of the payroll which was supplied to the Royal Bank who issued the payroll cheques. The Appellant quickly found, however, that he required most of his time to do this data input. He worked at the restaurant about ten hours per day, six days per week, but he said he was never able to keep the data input up to date. By the spring of 1994, it was somewhere between eight and 12 weeks in arrears, and he was finding that he devoted most of his working time to attempting to catch up. It was at this point that the Appellant decided that he did not enjoy his new life, and he advised Mr. Riley that he wanted out.
[11] At the beginning of March, the Appellant ceased drawing his $3,000 monthly salary, but he continued to do some data input work to assist Mr. Riley until a replacement could be found to take that work over. It was agreed that the Appellant would remain as a director and shareholder for the balance of 1994, but that he would spend little time at the restaurant, and in the spring he returned to his earlier work as a driver for Greyhound Bus Lines.
[12] In August 1994, Mr. Riley telephoned the Appellant to advise him that he had closed the restaurant and given the keys to the former owner. The operation was insolvent, and among the unpaid debts was the arrears of GST which gave rise to this appeal. On August 12, 1996, the Appellant was assessed for unpaid GST, interest and penalties totalling $30,354.48.
[13] It does not appear that a directors' meeting of Nasty Jack’s was ever held, or at least there was no evidence about it. The Appellant left all financial matters to Mr. Riley, he said. He testified that he never looked at a financial statement of any kind during the period from mid-September of 1993 to early March 1994, or for that matter at all. The output from the computer was simply given by him to Mr. Riley without a glance. The only enquiry that he ever made of Mr. Riley about GST was in a conversation in January 1994, when he asked Mr. Riley about how GST was paid. Mr. Riley told him at that time that there was a requirement to remit GST within 90 days of the end of each quarter, and that it would be done. In cross-examination he said this conversation took about one minute. The Appellant made no more enquiries, and learned nothing more about the non-payment of GST until he met with Mr. Riley, the former owner, and the trustee in bankruptcy in August, at which time he discovered that GST returns had not been filed. At that point he urged Mr. Riley on repeated occasions to do the filing, and ultimately it was done, but of course not until it was much too late.
[14] Counsel for the Appellant argued that Mr. MacDonald’s obligation as a director under section 323 of the Act was discharged adequately by his enquiry in mid-January 1994 as to how the company handled GST. He submitted, too, that Mr. Riley’s response to that enquiry, which was that there was 90 days after each quarter in which to file returns and remit GST, and that he would look after it, misled the Appellant. He relies heavily upon the following passage from the judgment of the Federal Court of Appeal in Soper v. The Queen, 97 DTC 5407 at 5417:
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. M.N.R., 91 DTC 1370 (T.C.C); Edmondson v. M.N.R., 88 DTC 1542 (T.C.C.); Shindle v. M.N.R., 95 DTC 5502 (F.C.T.D.); and Snow v. M.N.R., 91 DTC 832 (T.C.C.)
Each of those cases involved a degree of fraud or deceit practiced on the Appellant by a fellow director. When Riley told the Appellant that they had 90 days in which to file and remit, he was incorrect; there was actually 30 days in which to do so: see Excise Tax Act, sections 228, 238 and 245. However, the corporation’s first quarter had just ended, and the filing was not yet overdue. I do not believe that for Riley to say that he would look after it, at a time when the filing was not overdue, can be characterized as deceit on his part. Certainly it was not deceit on the scale of the cases referred to by the Federal Court of Appeal in Soper.
[15] Nor can the Appellant be totally relieved of his duty under section 323 simply by agreeing with Mr. Riley that he would assume responsibility for matters relating to GST. In my view, the present case is governed by the principle expressed by Judge Bonner of this Court in Black v. The Queen, 93 DTC 1213. At page 1215, Judge Bonner said this:
The appellant cannot take shelter under subsection 227.1(3) by claiming that his actions met the standard of a reasonably prudent person who was ill-informed as to the requirements of the Act. A reasonably prudent person who is aware that he is a director but who is uncertain as to the extent of his responsibilities as director is under a duty to at least attempt to discover what is required of him and to discharge that duty. Cybulski does not assist the appellant. It was a case in which the appellant believed on reasonable grounds that he was not a director and therefore had none of the obligations of a director.
The decision of this Court in Pidskalny appears to suggest that subsection 227.1(3) protects a director who failed to try to prevent a failure to remit because he had no knowledge of the rights, responsibilities and obligations of a directorship and was uninvolved with the management of the company. If that were the ratio of the decision it would very difficult to reconcile with the language of section 227.1. Nothing in that language suggests the existence of a legislative intention to offer relief to a director who fails to act because he is ignorant of and indifferent to his responsibilities and those of his company. It is illogical for example to suggest that a person who drives his vehicle in heavy traffic with his eyes firmly shut can not be negligent because he is unaware of the existence of a duty to those he is about to injure. It is equally illogical to suggest that a director who is ignorant of his responsibilities and who fails to attempt to identify and fulfil them can meet the 227.1(3) standard. However, a careful reading of the reasons in Pidskalny especially at page 1049 indicates that the outcome rests on an application of the decision of the Federal Court Trial Division in Robitaille to a finding that Mr. Pidskalny was unable to do anything to prevent the failure.
The purpose of section 227.1 cannot be ignored. In clear language subsection (1) imposes liability on all directors and not just on those who are aware of the relevant provisions of the Act. Subsection 227.1(3) offers protection to those who exercise the degree of care that a reasonably prudent person would have exercised in comparable circumstances. It is illogical and inconsistent with the evident purpose of the section to suggest that the legislature contemplated that the standard of a reasonably prudent person is met by directors who make no effort to discover what the law requires of them and to comply with it.
[16] That was said in the context of section 227.1 of the Income Tax Act, the language of which is tracked in its material aspect by section 323 of the Excise Tax Act. I do not read the Federal Court of Appeal’s judgment in Soper as detracting from what Judge Bonner said in Black, at least in those cases where the Appellant is an inside director, which, of course, the present Appellant was.
[17] I accept that the Appellant in this case is not experienced in financial matters. However, he certainly was aware of the need to remit GST, and he had at least some experience in his previous employment as a manager of a Chamber of Commerce in overseeing a budget. He also was occupied daily for much of the ten hours he spent in the restaurant in entering accounting data into the computer. He had ready access to its output if he chose to look at it. On his own account of the facts, his conduct was much closer to wilful blindness than it was to care, diligence or skill.
[18] The appeal is dismissed with costs.
Signed at Ottawa, Canada, this 7th day of December, 1999.
"E.A. Bowie"
J.T.C.C.