Date: 20000203
Docket: 1999-1964-GST-G
BETWEEN:
CLAUDETTE MAHEUX,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Tardif, J.T.C.C.
[1] The appellant testified in support of her appeal; she explained that, on January 26, 1996, she made a $25,000 capital investment in Au coin de la Chaudière Inc., thus becoming co-owner of that company along with her de facto spouse. The company ran a tavern under the firm name "Brasserie La Chaudière Inc." ("the tavern").
[2] The appellant, who had some experience in the restaurant business and in personnel management, ran the tavern from January to May 1996. She ordered goods, paid for deliveries, waited tables occasionally, substituted in the kitchen and, in terms of management, cosigned with her spouse all the cheques needed in operating the business.
[3] Since she had little knowledge of accounting and computers, she put all the documents and relevant information together and sent them to an accountant, who saw to the preparation of the various reports associated with the remittances owed to the authorities, such as the goods and services tax ("GST"), the Quebec sales tax ("QST") and various premiums and source deductions, etc.
[4] The tavern operated without a line of credit and its finances were generally fairly tight, so much so that the company had to plan and make choices when it came to paying certain invoices and various accounts, including those of the respondent.
[5] Since he did not like the way the appellant conducted herself in her business dealings with suppliers and male customers, her de facto spouse quickly became very verbally abusive, and he ended up barring her from the tavern as of June 1996.
[6] The appellant, who had to work to earn a living, very quickly sorted herself out and found a job at the B.G.P. sewing factory in La Guadeloupe (another area of economic activity in which the appellant had experience and knowledge).
[7] Although this did nothing to improve her relationship with her de facto spouse, which remained very stormy, she continued to live with him since she was unable to support herself.
[8] Over the next few months, specifically in June, July and August, the appellant kept an eye on operations from a distance given the fact that she was still cosigning the cheques needed to keep the company running.
[9] She was aware of the state of the company's finances and knew that business was not very good. She even said that she and her de facto spouse deliberately chose to spread out certain remittances to the Department of Revenue, even though this meant that they had to pay interest and penalties in addition to the amounts owed, because they were not able to do otherwise.
[10] Since she was aware of the serious problems that then existed and that were on the horizon, the appellant agreed to accept the loss of the capital she had invested. She agreed to do so for no consideration other than an undertaking by her de facto spouse, who acquired her shares, that he would assume all the company's past and future debts, thus discharging her in respect of any debts that were due or would become due. This was a substantial loss for the appellant, especially since she had had to borrow the $25,000.
[11] Since she was still worried about the possibility of eventually having to pay certain amounts and as she knew the importance of the remittance timetables, the appellant continued to ask her de facto spouse and the accountant responsible for preparing the reports whether the amounts owed to the Department for the period from May to September 1996 had been paid, as she had not signed the cheques at the time the remittances were due.
[12] She became particularly worried when the accountant confirmed to her that the company was still in default and that he refused to do the work until his own fees had been paid.
[13] The appellant said that she knew that the remittance was supposed to be made on August 15; what is more, she added that she knew she was liable as a director, which explains why she was so insistent with both the accountant and her de facto spouse that the necessary payment be made.
[14] She admitted on cross-examination that, at the request of the credit union, she had approved her spouse's stop payment order on the cheques payable to the Department of Revenue, thus unequivocally confirming the reality of her concerns.
[15] At the time of the transaction dated September 13, 1996, the appellant required, as a fundamental condition of her consent, that she be discharged from all the company's debts. The undertaking was worded as follows:
[TRANSLATION]
. . .
b — He is aware of the company's situation and in no way holds the vendor liable for any invoice, expense or claim whatsoever for the period during which they operated the business together, acknowledging that he is solely liable for any future claim, and he undertakes to indemnify and save the vendor harmless in respect of any premium, obligation or liability for the period extending until the above-mentioned closing date;
c — the purchaser formally undertakes, as an essential condition of this act, to ensure that the vendor is completely discharged from her endorsements, security and personal guarantees in respect of the company's business on the above-mentioned closing date.
[16] That agreement could not be set up against either third parties or the respondent except for the future and in so far as its content was disclosed or brought to the attention of interested parties.
[17] The content of the agreement was brought to the respondent's attention after a letter of intent was sent to the appellant on November 24, 1997, informing her that an amount of $22,812.31 was owed.
[18] Why was the agreement not signed earlier? The appellant claimed that the credit union manager and the notary had delayed matters because of their annual vacation. When asked why she had not refused to sign the cheques, the appellant answered that she thought she had to and was very afraid of her de facto spouse's reactions.
[19] Since she had minimal knowledge of administration, she relied on the accountant. After investing $25,000 in the company, which was a very substantial amount given her situation, she had to stop going to the business's premises and thus withdraw from day-to-day management of the business, which was detrimental to her being able to watch over her own interests.
[20] The appellant asserted that she had lived in a climate of terror, feeling constantly and continually threatened; she also said that she had had to endure that mental cruelty because she was financially dependent and responsible for her son, who was also financially dependent on her spouse.
[21] These facts are corroborated by several pieces of information, including the fact that she stopped going to the business's premises and quickly found a job. She also assigned her entire interest in the company after just a few months even though she had invested therein a very substantial amount that she had had to borrow. She ultimately left this home environment, which had become intolerable.
[22] The appellant testified spontaneously and candidly, not trying to be evasive or claim that she was unaware of the extent of her responsibilities; she admitted and acknowledged that she knew the consequences of failing to pay. She explained and described the many steps she had taken to sort things out.
[23] Given the circumstances, I do not think that a reasonable person could have done anything other than what the appellant did without risking even more unpleasant consequences in terms of her relationship with her de facto spouse. In other words, the appellant could hardly have done anything other than what she did.
[24] Was the appellant, in actual fact, an inside director on account of her duties and responsibilities? She certainly could not influence the conduct of the company's business affairs. She was terrorized and very intimidated by her de facto spouse, whose ascendancy over her was so great that he paralysed her to such an extent that she did not feel capable of defying him. Accordingly, in light of the special circumstances, the appellant was not an inside director.
[25] Over the years, the courts have drawn certain distinctions with regard to the responsibilities of inside and outside directors.
[26] It is thus recognized that inside directors have a weightier responsibility and that it is much more difficult for them to escape liability under subsection 323(1) of the Excise Tax Act ("the Act"), which reads as follows:
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.
[27] Although the standard of care is partly objective in that it must be assessed using the "reasonable person" concept, it is also partly subjective, since a person's reasonableness depends essentially on his or her knowledge and also on the situation the person is in at the time of the assessment.
[28] Subsection 323(3) of the Act provides as follows:
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.
[29] Given this wording, it is not always easy to determine whether directors against whom a claim is made under this provision are liable.
[30] In this regard, the Federal Court of Appeal's decision in Soper v. Canada, [1998] 1 F.C. 124, which was delivered on June 27, 1997, by the Honourable Mr. Justice Robertson, is a highly relevant reference. I consider it helpful to reproduce the following passages from that judgment:
At page 155:
This is a convenient place to summarize my findings in respect of subsection 227.1(3) of the Income Tax Act. 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".
(Emphasis added.)
At page 156:
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. 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 that 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.
And finally, at pages 160-161:
. . . This is not to suggest that a director can adopt an entirely passive approach but only that, unless there is reason for suspicion, it is permissible to rely on the day-to-day corporate managers to be responsible for the payment of debt obligations such as those owing to Her Majesty. This falls within the fourth proposition in the City Equitable case: see discussion supra, at page 146-147. The question remains, however, as to when a positive duty to act arises.
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. For example, in Byrt (H.) v. M.N.R., [1991] 2 C.T.C. 2174 (T.C.C.), an outside director signed financial statements revealing a corporate deficit and thus he knew, or ought to have known, that the company was in financial trouble. The same director also knew that the business integrity of one of his co-directors, who was the president of the corporation too, was questionable. In these circumstances, having made no efforts to ensure that remittances to the Crown were made, the outside director was held personally liable for amounts owing by the corporation to Revenue Canada. According to the Tax Court Judge the outside director had, in contravention of the statutory standard of care, failed to "heed what is transpiring within the corporation and his experience with the people who are responsible for the day-to-day affairs of the corporation" (supra, at page 2184, per Rip T.C.J.).
[31] In the case at bar, the weight of the evidence shows that the appellant could certainly not influence the conduct of the company's business affairs.
[32] Quite the opposite: she was dominated and subjugated by her de facto spouse, who was the only one who controlled things. In the circumstances, the appellant did everything that a reasonable person with her knowledge and skills could have done. I do not think that the Act's requirements are so rigid as to impose absolute liability in such a context.
[33] The appellant was excluded from the conduct of the company's business affairs and lost the authority conferred on her by her position as a director. Moreover, she quickly reacted by assigning her entire interest in the company's affairs.
[34] For all these reasons, I believe that the appellant has discharged her burden of proof and shown to the Court's satisfaction that she exercised care, diligence and skill to prevent the failures that gave rise to the assessment at issue in this appeal.
[35] The appeal is accordingly allowed, with costs.
Signed Ottawa, Canada, this 3rd day of February 2000.
"Alain Tardif"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 15th day of December 2000.
Erich Klein, Revisor