[OFFICIAL ENGLISH TRANSLATION]
2000-3477(GST)I
BETWEEN:
JEAN-MARIE PLAMONDON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 10, 2002, at Québec, Quebec, by
the Honourable Judge François Angers
Appearances
Counsel for the Appellant: Léonce-E. Roy
Counsel for the Respondent: Louis Cliche
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is dated June 8, 1999, and bears number PQ-994335 for the assessment period from June 30, 1996, to December 31, 1997, is allowed, and the assessment is vacated in accordance with the attached Reasons for Judgment.
Signed at Edmundston, New Brunswick, this 15th day of July 2002.
|
"François Angers" |
J.T.C.C.
Translation certified true
on this 21st day of October 2003.
Sophie Debbané, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020715
Docket: 2000-3477(GST)I
BETWEEN:
JEAN-MARIE PLAMONDON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Angers, J.T.C.C.
[1] The appellant is appealing from an assessment made under the Excise Tax Act (the "Act") with respect to the Goods and Services Tax ("GST"). The issue dealt with in this appeal is whether the appellant, Jean-Marie Plamondon, is required to pay an amount of net tax under subsection 323(1) of the Act with related interest and penalties given the failure of Bar les yeux bleus inc. to pay the tax. The assessment dated June 8, 1999, covers the period from June 30, 1996, to October 31, 1997. It was confirmed by the Minister of National Revenue (the "Minister") on May 16, 2000.
Facts
[2] The appellant, Jean-Marie Plamondon, is 71 years old and lives in St-Raymond, Quebec. He has been retired for six years, that is, since the transfer of his car business to his son. He had operated that business with other shareholders since 1970 and, later, with his son alone until he sold him the business. Before operating this business, he ran a service station. He managed to raise the sales figure in that business from $100,000 in the early 1970s to more than $4 to $5 million in 1995 and 1996.
[3] When he first retired in 1996, after he sold his interest in that business, he invested part of his money in a corporation known as Bar les yeux bleus inc. The corporation operated a bar in Drummondville, Quebec, about 160 kilometres from his residence. The corporation belonged to four shareholders, including one Daniel Côté, who was the brother-in-law of the appellant's son. The appellant made the acquaintance of Daniel Côté in 1996 and, on July 2 of that year, the appellant and Daniel Côté signed an agreement to purchase the shares from the other three shareholders in such a proportion that the appellant and Daniel Côté became, respectively, holders in equal shares of all of the shares issued by the corporation Bar les yeux bleus inc.
[4] The purchase price of these shares was symbolic. This was undoubtedly due to the fact that the financial statement attached to the agreement for the purchase of the shares indicated that the corporation in question, as at December 31, 1995, had realized a loss of $51,522. In an excerpt from the minutes of a directors' meeting of the corporation dated June 7, 1996, it can be read that the appellant was appointed director on that date, that he held the position of secretary-treasurer, and that Daniel Côté was the president.
[5] In the agreement, the new shareholders agreed to see to it that the shareholder-vendors were reimbursed by the corporation for what it owed them. The terms of the repayment were set out for this purpose in the agreement and included a payment of $18,000 on signing. In addition, the agreement acknowledged that tax expenses were due and owing by reason of a deficit arising in the final months of operation. No amount was indicated, however.
[6] According to the appellant, he and Mr. Côté were to make equal investments in the corporation but this did not happen. At the start of his participation, the appellant invested almost $35,000 in the corporation. Subsequently, he made a series of investments totalling $108,665.30 at various intervals. Part of this money came from his registered retirement savings plan. Those investments in the corporation allowed it to meet its commitments to its creditors, including the Minister.
[7] The appellant testified that he embarked on this venture to assist Daniel Côté. He thought that tighter management, cutting costs and increasing sales would ensure a better return. He also thought that Daniel Côté had the skills required to achieve that objective because the appellant did not take part in the day-to-day management of the corporation. In fact, the Bar les yeux bleus inc. was managed and directed by Daniel Côté. The appellant testified that everything was going well until September 1996 when the ministère du Revenu du Québec (the MRQ), the CSST and SOCAM (copyrights) claimed what was owed to them.
[8] The corporation's operating funds were not sufficient to pay the amounts owed to the government agencies and the appellant had to make further investments so that the corporation could meet all of its obligations. The appellant testified that he had frequently contacted the corporation's accountant, Josée Béchard, to inquire how the corporation was doing. She reassured him, saying that things were tight but that the corporation would pull through. The appellant also went to see Ms. Béchard several times. He relied on her to assess the corporation's profitability. She faxed him the house financial statements and, on the October 1996 statements, the amounts claimed by the MRQ, CSST and SOCAM were clearly less than what they ultimately demanded. Ms. Béchard was a member of an accounting firm that was independent from the corporation and her mandate was to keep the corporation's books and file the GST and QST returns on a monthly basis.
[9] The amounts owed to the MRQ related to a debt that had arisen before the appellant purchased the shares. The appellant knew that the GST and QST returns had to be made every month and, according to him, they were prepared by the accountant. In fact, he states that all of the returns were filed because the corporation was invoiced by Ms. Béchard for this work, as is shown in a set of invoices for professional fees relating to the filing of GST returns from July 1996 to July 1997 and produced in evidence as Exhibit A-19.
[10] In December 1996, the appellant and Daniel Côté met with the Minister's representatives to negotiate, on behalf of the corporation, the terms and conditions for the repayment of the debt. They agreed that an initial payment of $1,300 would be made on January 23, 1997, and that a series of eleven cheques of $2,500 each, cashable each month thereafter, would be applied against the balance. The appellant testified that, after December 1996, from time to time the accountant made some verifications to ensure that the internal cash corresponded to the information reported in her monthly GST and QST returns. The GST returns produced in evidence by the appellant concerned the months of February, March and May of the year 1997, and the GST refund cheques produced in evidence concerned the period from January to May 1997. According to Pierre Lévesque, a tax collection officer with the Department, GST returns were filed until June 1997. Even though the appellant had cheque-signing authority for the GST repayment cheques, the cheques were all signed by Daniel Côté.
[11] On cross-examination, the appellant reiterated his satisfaction with the corporation's performance as reflected in the October 1996 financial statement. He stated that it was the unanticipated invoice of $25,000 from the MRQ that had disconcerted them. He said he had advised Daniel Côté at that time to stop giving premiums to the customers. His confidence in Daniel Côté was not affected since the cause of the financial problems predated 1996. He accordingly continued to rely on him. He stated, however, that such confidence in others had already cost him $25,000, an amount that he had invested in a restaurant belonging to his son-in-law, which he had eventually lost.
[12] The corporation wound up its activities in November 1997. Pierre Lévesque, tax collection officer, explained what the Department had done to recover the amounts owed by the corporation including for GST and QST. When he received the file in February 1997, the corporation was late but everything was settled as a result of the agreement of December 1996 and January 1997. Subsequently, there were no other late payments. The agreement was respected, the monthly returns were filed and the cheques were cashed until the end of the summer of 1997. Since the July and August 1997 returns had not been filed, he proceeded with an application for security to put an end to the agreement. He explained that the Department had obtained a judgment against the corporation and had conducted an audit. A new judgment against the corporation was obtained following the audit, and the Department attempted unsuccessfully to seize the corporation's assets.
[13] The Department's audit showed that the corporation had not paid GST on the premiums offered to the customers. Consequently, the amount of the GST owed increased significantly.
[14] On cross-examination, counsel for the appellant tried to cast doubt on the amount assessed by the Department and, above all, on the period covered by the assessment. He also wanted to raise doubts on the meaning the notices of assessment and other documents could have had for the corporation since the name of the corporation appearing on those documents could give rise to some ambiguity. However, the attempts of counsel for the appellant were unsuccessful. I am satisfied that the Minister's assessment covers only the period where the appellant was a director of the corporation, that the judgment of the Federal Court was issued against the corporation in question and that there were no more corporate assets to be seized. The amount of the assessment and the amounts awarded by the court against the corporation were not challenged by it, and no evidence to the contrary was introduced.
[15] A number of documents reporting the appellant's testimony and the actions of the Minister's officers to recover the taxes owed by this corporation were submitted in evidence. The Minister's position was excellently argued by legal counsel in a memorandum on objection, which the appellant agreed with, excepting of course the conclusions. A judgment of the Court of Québec concerning the parties to the agreement to purchase the shares was also filed. I am not bound by the conclusions of fact set out in that judgment, but the parties agreed to file them. I am aware of the difficulties experienced by the appellant, especially in relation to Daniel Côté.
Analysis
[16] The relevant statutory provisions concerning the issue in dispute are found in section 323 of the Act:
323. (1) Liability of directors - 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.
323. (2) Limitations - 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;
(b) the corporation has commenced liquidation or dissolution proceedings or has been dissolved and a claim for the amount of the corporation's liability referred to in subsection (1) has been proved within six months after the earlier of the date of commencement of the proceedings and the date of dissolution; or
(c) the corporation has made an assignment or a receiving order has been made against it under the Bankruptcy and Insolvency Act and a claim for the amount of the corporation's liability referred to in subsection (1) has been proved within six months after the date of the assignment or receiving order.
[17] The appellant relies on the defence of due diligence under subsection 323(3), which reads as follows:
323. (3) Diligence - 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.
[18] In his submissions, counsel for the respondent strongly emphasized the fact that the appellant was a knowledgeable and experienced businessman. He added that the appellant had been naïve to rely on the president, Daniel Côté, and that he had done nothing to prevent the failure to pay the net tax as required by the Act. I believe that the appellant's decision to invest in that corporation was definitely not prompted by what an experienced and knowledgeable businessman normally looks for, that is, a reasonable return resulting from the making of profits. The corporation's financial statements at the time the shares were acquired by the appellant hardly augured a profitable return. There is no doubt that the appellant took a significant risk in purchasing shares in that corporation. The agreement for the purchase of shares left the door open to all kinds of surprises, including unidentified and unquantified government charges, which eventually dealt the fatal blow to what was already a precarious undertaking. The fact that the business establishment was located at 160 km from the appellant's residence, that the appellant was retired and that the corporation had financial obligations to meet and to pay on the signing of the agreement for the purchase of the shares are all indications contributing to the risk. The evidence has not clarified the reasons that led the appellant to invest in the enterprise, except that Daniel Côté was his son's brother-in-law.
[19] The appellant therefore chose to invest in that corporation and he testified before us about his confidence that Daniel Côté would make it successful. He told us in fact that the return on investment was adequate up until the corporation was informed that it owed substantial amounts to the two Revenue departments, the CSST and SOCAM. He was aware of the amount of these debts, which appeared on the financial statements, but did not really realize the scope of the amounts until after the shares were purchased. Despite all this, the appellant personally intervened to settle this debt and he negotiated a repayment agreement with the Department. In addition, he made further investments in the corporation so that it could meet its financial obligations. He became aware of the corporation's difficulties in making its GST and other payments in December 1996, or barely five months after becoming shareholder and director.
[20] He testified that on several occasions he had contacted Josée Béchard, an independent accountant retained by the corporation, to inquire about the corporation's financial status and to ensure that the GST and QST returns were prepared, submitted and paid, and that the corporation was meeting its financial obligations to all its creditors.
[21] He continued to make personal and regular investments, not only in the fall of 1996 but also in 1997, that is, from January to July and again in October 1997. The corporation had in fact been invoiced by the accountant for producing the corporation's GST returns beginning on the date that the appellant's participation began until the cessation of the business' activities. The appellant had therefore no reason to suspect that Daniel Côté was not providing the accountant with all the information needed to produce the GST and QST returns. In fact, it was only after the audit by the Department's auditors that he realized that the GST had not been paid and that it primarily related to the premiums offered to the customers by Daniel Côté.
[22] Because of his contacts with Daniel Côté and the accountant, the accountant's verification of the invoices and the regular investments that he was making, the appellant was satisfied that the GST returns were filed and that the remittances were made. The returns were in fact produced and the net tax was paid up to the end of June 1997.
[23] I conclude that the appellant was an outside director of the corporation, that he was a financial backer and not the managing director. The liability of an outside director was determined by Mr. Justice Robertson of the Federal Court of Appeal in Neil Soper v. Her Majesty the Queen, [1998] 1 F.C. 124. At pages 160 and 161, he describes that obligation as follows:
Accordingly, an outside director cannot be required to go to the lengths outlined above. As an illustration, I would not expect an outside director, upon appointment to the board of one of Canada's leading companies, to go directly to the comptroller's office to inquire about withholdings and remittances. Obviously, if I would not expect such steps to be taken by the most sophisticated of business-persons, then I would certainly not expect such measures to be adopted by those with limited business acumen. 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.
He adds at pages 162-163:
... In each case it will be for the Tax Court Judge to determine whether, based on the financial information or documentation available to the director, the latter ought to have known that there was a problem or potential problem with remittances. Whether the standard of care has been met, now that it has been defined, is thus predominantly a question of fact to be resolved in light of the personal knowledge and experience of the director at issue.
[24] In the case at bar, the appellant did not really become aware of the seriousness of the problem of the corporation's payments until the fall of 1997, when the Minister's officers informed him of the real amount of the arrears, which were greater than what was indicated on the financial statements at the time the shares were purchased. It is at this time that he made arrangements to pay back the amounts owed and personally invested the funds needed in the corporation so that it could meet its obligations even though the debts had arisen before he became a shareholder of the corporation.
[25] He checked with the accountant to ensure that the GST returns were filed and that the tax was paid. He was satisfied of this after communicating with the accountant and Daniel Côté. The returns were indeed filed and the taxes were paid. For the appellant, the question of the debt was settled. It was only after the audit by the Minister's officers that the issue of the GST payments on the premiums for the customers was raised. The appellant's understanding of the problem for the corporation with respect to the premiums was that Daniel Côté had given out too many premiums. He did not know that the GST on these premiums was not paid. The accountant did not note this omission either.
[26] I conclude that the appellant was an outside director without special knowledge of the activities of this corporation; one who, by making regular investments, wanted to ensure that the corporation met its financial obligations to all the creditors, including payment of the GST. He undoubtedly thought that in time, the corporation's performance would improve and, during the brief time that he was a director, he had reason to believe that the GST returns were filed and that the remittances were made, which was the case. He discovered the failure after the Department's audit. It was impossible for him at that time to do anything to remedy the situation. For these reasons, I conclude that the appellant exercised the degree of care, diligence and skill to prevent the failure referred to by the Act, that is, the failure to remit the net tax, that a reasonably prudent person would have exercised in comparable circumstances.
[27] The appeal is allowed, and the Minister's assessment against the appellant is vacated.
Signed at Edmundston, New Brunswick, this 15th day of July 2002.
|
"François Angers" |
J.T.C.C.
Translation certified true
on this 21st day of October 2003.
Sophie Debbané, Revisor