[OFFICIAL ENGLISH TRANSLATION]
98-9176(GST)I
BETWEEN:
DENIS MARCEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on August 22 and 23, 2000, and judgment delivered orally
on August 25, 2000, at Montréal, Quebec, by
the Honourable Judge Pierre Archambault
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Marc-André Côté
JUDGMENT
The appeal from the goods and services tax assessment made under the Excise Tax Act notice of which bears number 123-437451-001 and is dated December 9, 1994, is allowed and the assessment is referred back to the Canada Customs and Revenue Agency for reconsideration and reassessment on the basis that the amount of Dualco Inc.'s tax liability for which the appellant is responsible is $30,745.47, not $30,921, which results in changes to the amounts of that corporation's interest and penalties.
Signed at Ottawa, Canada, this 29th day of August 2000.
|
"Pierre Archambault" |
J.T.C.C.
Translation certified true
on this 5h day of February 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20011019
Docket: 98-9176(GST)I
BETWEEN:
DENIS MARCEAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
___________________________________________________________________
REASONS FOR JUDGMENT
(delivered orally from the bench
on August 25, 2000, at Montréal, Quebec,
and edited for greater clarity and completeness)
Archambault, J.T.C.C.
[1] Mr. Marceau disputes an assessment made by the Minister of National Revenue (Minister) on December 11, 1992, under section 323 of the Excise Tax Act (Act). By that assessment, the Minister holds Mr. Marceau liable, as a director of Dualco Inc. (Dualco), for a net amount of tax that Dualco owed to the Minister under the Act for the period from August 1, 1991, to May 31, 1992 (relevant period).
[2] As reasons for his objection, Mr. Marceau raises the following points in his notice of appeal:
[TRANSLATION]
(a) the assessment did not take into account the input tax credits (ITC) at the time of the purchase of the goods;
(b) the assessment does not take into account the actual amounts of goods and services tax (GST) collected by Dualco, but is based on a projection using data relating to another period;
(c) the assessment does not take into account debts of $116,000 and $60,000, which Dualco could not collect from two businesses, Hydrogain and André Boucher Climatisation;
(d) Mr. Marceau states that he personally derived no benefit from the amounts owed to the Minister by Dualco and he objects to any interest and penalty on the amounts unfairly assessed in the assessment;
(e) he exercised due diligence in performing his duties as a director of Dualco.
Facts
[3] At the start of the hearing, Mr. Marceau admitted all the following facts stated in paragraph 5 of the Reply to the Notice of Appeal, with the exception of those in subparagraphs (g) and (i):
[TRANSLATION]
(b) the appellant was a director of Dualco Inc. during the period relevant to the instant case;
(c) Dualco Inc. was a registrant during the periods in issue;
(d) Dualco Inc. was incorporated under the federal legislation on March 8, 1990;
(e) Dualco Inc. operated a business selling and distributing heating and air conditioning equipment until the fall of 1992;
(f) the Minister notes that, throughout its period of commercial operations, Dualco Inc. filed no GST returns with the ministère du Revenu du Québec (hereinafter the ministère) and remitted no net amount in respect of the goods and services tax;
(g) as a result of a goods and services tax audit of Dualco Inc., the ministère du Revenu du Québec made an assessment in December 1992 to claim duties of $30,921.49 from the registrant;
(h) on or around March 17, 1994, a certificate was registered in the Federal Court under section 316 of the Excise Tax Act, R.S.C. 1985, c. E-15, in respect of Dualco Inc.;
(i) on or around May 17, 1994, the serving bailiff confirmed that the execution of the writ in respect of Dualco Inc. had been returned unsatisfied;
(j) on or around December 9, 1994, the ministère made an assessment under section 323 of the Excise Tax Act to claim $43,599.24 from the appellant in respect of Dualco Inc.'s tax liability.
[4] Testifying at the hearing were Mr. Marceau, his co-director Mr. Derome, the Minister's auditor and a tax advisor from the Minister's office in Longueuil. Their testimony revealed the following additional facts.
[5] During the relevant periods, Messrs. Marceau and Derome held equal numbers of Dualco's common shares through a holding company of which they were the only two directors. There had previously been a third shareholder and director, a certain André Boucher, but Dualco redeemed his shares and he resigned as director. The redemption price of $50,000 for Mr. Boucher's shares apparently represented a heavy burden for Dualco's financial resources. Mr. Boucher's accounts payable were apparently used to pay for his shares.
[6] When its operations began, Dualco purchased heating equipment in order to take advantage of a Hydro-Québec subsidy program designed to promote the use of dual energy. Since that program's implementation was delayed by approximately one year, Dualco had to bear some $40,000 in inventory costs over a period of a year and a half. Sales did not begin until the end of summer 1991. It was Mr. Marceau who was responsible for the promotion of Dualco's sales on a full-time basis, while Mr. Derome handled equipment purchasing and delivery as well as the management of the corporation. Dualco relied on a bookkeeper, a certain Mr. Asselin, to prepare invoices for its customers. Mr. Asselin also had to calculate the amounts of GST and QST that those customers had to pay. Mr. Asselin was also the one who did what was needed to register Dualco for GST purposes.
[7] During the relevant period, Dualco purchased $234,456 worth of taxable supplies, to which must be added GST of $16,411. Mr. Marceau produced a worksheet in support of this information, but no invoice containing the information required by the Act was filed at the hearing. In the course of his audit, the Minister's auditor tried to obtain those invoices from Mr. Asselin, but Mr. Asselin was unable to provide them, even within the 21-day time period allowed him.
[8] For the same period, Mr. Marceau estimated Dualco's sales at $217,199, to which must be added GST of $15,203. A very large portion of those sales, that is, $166,633, was made to Hydrogain. Of that amount, $100,906 was not paid. A demand letter was sent by Dualco in April 1992 and legal proceedings were instituted before the Superior Court of Quebec in June 1992. An interim order of that Court dated April 30, 1993, required Hydrogain to pay Dualco the sum of $34,644, and that an expert opinion of an accountant be obtained with respect to the balance of the debt.
[9] That sum of $34,644 was apparently never paid, nor was the rest of the debt. Mr. Marceau stated that Dualco had discontinued its action in view of the fact that it was impossible to execute the order and every hope of being paid had disappeared. For the other sales for which it was paid, Dualco collected amounts of GST, which, in Mr. Marceau's calculations, amounted to $8,140.
[10] The Minister's auditor met Dualco's representative, Mr. Asselin, who provided him with a summary of purchases and sales as well invoices for Dualco's sales to its customers. Analysis of those invoices revealed to the auditor that the total sales for the relevant period had amounted to $415,857, whereas the taxpayer's summary indicated a figure of $439,210. Since there were no invoices for the month of August and Mr. Asselin's summary showed sales of $24,706, the auditor accepted the figure from the summary provided by Mr. Asselin.
[11] Messrs. Marceau and Derome knew they had an obligation to pay the Minister GST. However, because Dualco had exhausted its line of credit and had to pay its suppliers, they decided by mutual agreement to give priority to the most urgent accounts payable, which of course ruled out the Minister.
[12] The Minister's tax advisor testified in order to file the report of the bailiff, who confirmed that he had tried to execute the certificate registered with the Federal Court and to carry out the seizure of Dualco's property but to no avail.
Analysis
[13] For the purposes of this appeal, the most relevant statutory provisions are cited below. First there is section 323 of the Act, which provides, in particular, 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.
(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.
...
(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.
Subsection 228(2) describes the duty to pay the net tax to the Minister:
228(2) Where the net tax for a reporting period of a registrant is a positive amount, the registrant shall remit that amount to the Receiver General on or before the day on or before which the return for that period is required to be filed.
Subsection 225(1) of the Act defines the amount of the net tax as follows:
225(1) Net tax - Subject to this Subdivision, the net tax for a particular reporting period of a registrant is the positive or negative amount determined by the formula
A - B
where
A is the total of
(a) all amounts that became collectible and all other amounts collected by the registrant in the particular reporting period as or on account of tax under Division II, and
(b) [Immaterial]
B is the total of
(a) all amounts each of which is an input tax credit for the particular reporting period or a preceding reporting period of the registrant claimed by the registrant in the return under this Division filed by the registrant for the particular reporting period, and
(b) [Rest is immaterial]
[My emphasis]
Subsection 225(4) specifies the time limit that must be met in order to claim ITCs:
An input tax credit of a registrant for a particular reporting period of the registrant shall not be claimed by the registrant unless it is claimed in a return under this Division filed by the registrant on or before the day that is four years after the day on or before which the return under this Division for the particular reporting period of the registrant is required to be filed.
[My emphasis]
Paragraph 169(4)(a) of the Act concerns the documents that must be obtained in order to deduct ITCs:
A registrant may not claim an input tax credit in respect of a supply of property or a service for a reporting period unless, before filing the return in which the credit is claimed,
(a) the registrant has obtained sufficient evidence in such form containing such information as will enable the amount of the input tax credit to be determined, including any such information as may be prescribed; and
Subsection 231(1) states when the net tax may be reduced by the amount of the tax relating to bad debts:
231(1) Where a particular person has made a taxable supply (other than a zero-rated supply) in the course of a commercial activity for consideration to a person with whom the particular person was dealing at arm's length and has filed a return accounting for, and remitted tax under Division II in respect of, the supply as required under this Division, to the extent that it is established that the consideration and tax have become in whole or in part a bad debt, the particular person may, in determining the net tax for the reporting period of the particular person in which the bad debt is written off in the particular person's books of account or for a reporting period that ends within four years after the end of that period, deduct an amount equal to the tax fraction of the bad debt written off.
[My emphasis]
Lastly, subsection 280(1) of the Act provides for penalties and interest:
280(1) Subject to this section and section 281, where a person fails to remit or pay an amount to the Receiver General when required under this Part, the person shall pay on the amount not remitted or paid
(a) a penalty of 6% per year, and
(b) interest at the prescribed rate, computed for the period beginning on the first day following the day on or before which the amount was required to be remitted or paid and ending on the day the amount is remitted or paid.
[14] The burden was on Mr. Marceau to prove the facts of which he had knowledge, in particular, those relating to his office of director and those relating to his due diligence defence. However, he had no burden of proof with respect to the facts concerning Dualco, such as those relating to the existence of Dualco's tax liability, to the Minister's registration of the certificate with the Federal Court and the failure to execute that certificate. The onus was on the Minister to prove those facts.
[15] First of all, Mr. Marceau admitted that he was a director during the relevant period. Furthermore, the evidence showed that the Minister's assessment was made within the two-year time period provided for in subsection 323(5) of the Act, since it is dated December 1992, and Mr. Marceau admitted that he was still a director during the relevant period and that this period ended in May 1992. Mr. Marceau also admitted that the Minister had registered the certificate with the Federal Court and that the respondent had proven the failure to execute the certificate.
[16] There remains the question of the tax liability. What evidence did the Minister adduce on this point? In my view, he adduced prima facie evidence showing on a balance of probabilities that there was an amount of net tax unpaid by Dualco. The Minister first filed the notice of assessment concerning the corporation. I believe, however, that the mere filing of that notice would not have been sufficient if that had been the only evidence. The testimony of the Minister's auditor, however, revealed additional facts. It showed that the auditor had met Mr. Asselin at 1475 Rue Bégin in Saint-Laurent, the address of Dualco's place of business appearing in the Minister's records.
[17] In his cross-examination of the auditor, Mr. Marceau insinuated that, in the fall of 1992, Dualco was no longer operating a business at that address and that it might have been the address of Hydrogain's office. Mr. Marceau did not testify in rebuttal to establish this fact. In addition, in his own testimony, Mr. Marceau revealed that Dualco had leased premises from Hydrogain, that Hydrogain had kept certain records belonging to Dualco and even that certain documents had been handed to him by a secretary of Hydrogain who admitted that she had received instructions not to hand over or disclose them either to Dualco or its directors.
[18] To understand the situation more clearly, it must be recalled that an action was instituted in the Superior Court in June 1992 and an order issued in April 1993, after the meeting between the auditor and Mr. Asselin. It is therefore highly likely, even if Dualco no longer had its place of business on Rue Bégin, that the auditor might nevertheless have met with Mr. Asselin at Hydrogain's office, where he had access to Dualco's accounting records, and that Mr. Asselin was able to provide him with the sales contracts, which he himself had prepared, as Mr. Derome confirmed. It must also be recalled that Mr. Asselin was the one in charge of registering Dualco for GST purposes. It is therefore not surprising that Mr. Asselin was treated as the person duly mandated to represent that corporation.
[19] The auditor had the opportunity to consult the sales contracts, which, based on his testimony, included a contract number. His worksheet moreover provides us with this information as well as the amount of the contract, the name of the customer, the contract date and the GST amounts. The worksheet reveals that there were sales invoices for the period from September 1991 to April 1992. Mr. Marceau admitted in his testimony that Dualco's sales commenced in July or August 1991 and continued until April 1992. It is therefore reasonable to believe that Dualco had sales for the month of August and that the auditor was justified in including them in the total sales for the relevant period, on the basis of the taxpayer's summary. Furthermore, it should be noted that the sales contracts stopped in April, even though the auditor examined the period ending on May 31, 1992. These facts as a whole lend credence to the information gathered by the Minister's auditor.
[20] The total sales audited by the auditor amount to $439,210, which corresponds to GST of $30,745, not the amount of $30,921 established by the Minister in his assessment. There is thus a minor difference of $176, which was not explained at the hearing. Furthermore, Mr. Marceau did not adduce evidence that might have contradicted the amounts stated in the summary, which Mr. Asselin provided to the auditor.
[21] Nor is there any convincing evidence that the figures provided by Mr. Marceau as representing the total sales are a more accurate reflection of the situation. It should be kept in mind that no invoice was filed at the hearing. In addition, no evidence was adduced as to the amounts of the ITCs: no return was provided to the Minister or to the Court. Nor were any invoices filed containing the prescribed information, which would make it possible to ensure that the GST amounts were actually paid by Dualco. In addition, the four-year time period for claiming those ITCs had already elapsed.
[22] As to the allegation that the Minister did not take into account a bad debt of $100,906, I have no evidence that the debt was written off during the relevant period or that this amount was not claimed in a return subsequently filed by Dualco. In his notice of appeal, Mr. Marceau also refers to a bad debt of $60,000 relating to the supplies made to André Boucher Climatisation. In his testimony, he brought no convincing evidence of this unpaid debt. In fact, it appears that Dualco was paid since the redemption price of the shares that Mr. Boucher held in Dualco was set off against that debt. Having regard to these facts, it is impossible for me to determine whether credit could be granted in respect of bad debts. Consequently, in my view, the positive amount of the net tax is $30,745.
[23] Furthermore, Mr. Marceau was unable to show that, as a director, he had exercised care and diligence during the relevant years to prevent Dualco's failure to discharge its duty to remit the net tax owed to the Minister. On the contrary, it appears that this corporation administered by Messrs. Marceau and Derome, in full knowledge of the facts, used the amounts of GST collected to pay its suppliers¾its most urgent accounts payable. According to Mr. Derome, the two directors had decided that Dualco would use a portion of the GST amounts collected to supply its working capital. It should also be added that Dualco never filed a GST return with the Minister and remitted no GST for the relevant period.
[24] Even if Mr. Marceau had been unaware of his tax liabilities, this would not have constituted a valid defence. In Cadrin v. The Queen, F.C.A., No. A-112-97, December 17, 1998 (99 DTC 5079), the point at issue was the application of section 227.1 of the Income Tax Act, which is similar to section 323 of the Act. Décary J.A. of the Federal Court of Appeal wrote at pages 2 and 3 (DTC, at pages 5080 and 5081):
First, counsel for the appellant argued that the simple fact that an outside director is unaware and does not take steps to learn of the duties which the law imposes on him is sufficient, according to Soper, to exonerate him from all liability. This argument is without merit. . . . If the appellant's only excuse were total passivity based on total ignorance, he would not escape liability under subsection 3 of section 227.1.
[25] In Ruffo v. M.N.R., F.C.A., No. A-429-97, April 13, 2000 (2000 DTC 6317), the Federal Court of Appeal describes the essence of the duty of a director of a corporation, at page 4 (DTC, at page 6319):
The appellant's duty as a director was to anticipate and prevent the failure to pay the sums owing and not to commit such failure or perpetuate it as he did from March 1992 on in the hope that at the end of the day the firm would again become profitable or there would be enough money, even if it were wound up, to pay all the creditors.
[26] In support of his decision, Létourneau J.A. writes:
As Vinelott J. said, in relation to the duty of a company manager to make the aforementioned deductions and remittances:
The directors of a company ought to conduct its affairs in such a way that it can meet these liabilities when they fall due, not only because they are not moneys earned by its trading activities, which the company is entitled to treat as part of its cash flow... but, more importantly, because the directors ought not to use moneys which the company is currently liable to pay over to the Crown to finance its current trading activities.
[27] Thus, the fact that Mr. Marceau did not personally benefit from the GST amounts kept by Dualco is completely irrelevant for the purposes of section 323 of the Act.
[28] There remains the question of the penalty. My colleague Judge Bowman has acknowledged in certain decisions that it is possible to raise a due diligence defence against the application of this penalty. The Federal Court of Appeal confirmed this interpretation in Attorney General of Canada v. Consolidated Canadian Contractors Inc., 98 GTC 6303. I quote a portion of the summary of the issue given in that case:
In allowing C Inc.'s appeal in part ([1997] 5 GTC 1074), Bowman, T.C.C.J. of the Tax Court of Canada affirmed a portion of the GST assessed. He also found that C Inc. had done everything reasonable to ensure that the GST in issue had been properly collected and paid, and hence that it had shown due diligence. Then, as a matter of law, (applying his own reasoning in Pillar Oilfield Projects Limited v. The Queen ([1997] 2 GTC 1005), Bowman, T.C.C.J. concluded that the section 280 penalty was subject to a defence of due diligence, and hence that the taxpayer should be relieved of such penalty. The Crown applied to the Federal Court of Appeal for a judicial review of Bowman, T.C.C.J.'s findings.
[29] In this instance, Mr. Marceau was held liable under section 323 to pay the positive amount of net tax and interest thereon and penalties relating thereto. It must therefore be determined whether the Minister rightly assessed the penalty. According to the evidence, the two directors decided in full knowledge of the facts not to remit the collected and/or collectable GST and they used those funds to supply Dualco's working capital and to pay that corporation's preferred creditors. It is therefore clear that Dualco did not exercise the necessary degree of diligence in order to remit the net tax owed to the Minister. Consequently, the penalty assessed under paragraph 280(1)(a) was correctly assessed. The interest applies to the amount of the net tax determined and there is no reason to alter its calculation, except to reflect my reduction of the amount of the net tax.
[30] For these reasons, the appeal is allowed and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the amount of Dualco's tax liability for which Mr. Marceau is jointly and severally liable is $30,745, not $30,921, which results in corresponding changes to the amount of interest and the penalty owed by that corporation.
Signed at Ottawa, Canada, this 19th day of October 2000.
|
"Pierre Archambault" |
J.T.C.C.
Translation certified true
on this 5h day of February 2003.
Sophie Debbané, Revisor