2000-346(IT)I
BETWEEN:
ALEC MCDOUGALL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of
Alec McDougall(2000-347(GST)I) on November 3, 2000 at
Calgary, Alberta by the Honourable Judge D. W. Beaubier
Appearances
Counsel for the Appellant: Douglas Forer
Counsel for the Respondent: Perry Derksen
JUDGMENT
The appeal from the assessment made under the Income Tax Act, notice of which is dated January 13, 1999 and bears number 11890 is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 15th day of November, 2000.
|
"D.W. Beaubier" |
J.T.C.C.
2000-347(GST)I
BETWEEN:
ALEC MCDOUGALL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of
Alec McDougall(2000-346(IT)I) on November 3, 2000 at
Calgary, Alberta by the Honourable Judge D. W. Beaubier
Appearances
Counsel for the Appellant: Douglas Forer
Counsel for the Respondent: Perry Derksen
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is dated January 13, 1999 and bears number 64858 is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada this 15th day of November, 2000.
|
"D.W. Beaubier" |
J.T.C.C.
Date: 20001115
Docket: 2000-346(IT)I
BETWEEN:
ALEC MCDOUGALL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AND BETWEEN:
2000-347(GST)I
ALEC MCDOUGALL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Beaubier, J.T.C.C.
[1] These appeals pursuant to the Informal Procedure were heard together on common evidence by consent of the parties at Calgary, Alberta, on November 3, 2000. The Appellant testified. The Respondent called Louise Marischuk, who was a collections officer of Revenue Canada at the pertinent times. The Appellant has been assessed respecting withholdings under Section 227.1 of the Income Tax Act ("ITA") and respecting Goods and Services Tax ("GST") under Section 323 of the Excise Tax Act ("ETA"). He has denied liability on the basis that he was not a legal or de facto director of Columbia Birch Wood Products Ltd. ("Columbia") and that, if he was, he exercised due diligence.
[2] The assumptions in paragraph 18 of the Reply under the Excise Tax Act read:
18. In so assessing the Appellant, the Minister made the following assumptions of fact:
(a) the facts admitted or stated in this Reply, some of which are repeated here for ease of reference;
(b) the Corporation was incorporated on or about April 13, 1994;
(c) at all material times the Corporation was a valid and subsisting corporation;
(d) at all material times the Corporation operated a sawmill;
(e) at all material times the Corporation was engaged in commercial activities and made supplies which were taxable at 7 percent;
(f) the Corporation registered for the purposes of the ETA effective July 1, 1994 and was assigned GST registration number 139142012;
(g) at all material times the Corporation was a registrant for the purposes of the ETA;
(h) at all material times the Corporation collected tax pursuant to Part IX of the ETA on the supplies it made;
(i) the Corporation was required to file returns on a quarterly basis;
(j) the Corporation filed returns reporting tax collected/collectible, input tax credits and net tax as follows:
|
Period End Date |
Date Filed |
Date Due |
Tax Collected |
Input Tax Credits |
Net Tax |
Remitted with Return |
|
95/03/31 |
95/05/08 |
95/05/01 |
4,004.27 |
3,821.37 |
182.90 |
no |
|
95/06/30 |
95/11/27 |
95/07/31 |
1,678.92 |
2,714.01 |
-1,035.09 |
* |
|
95/09/30 |
97/02/10 |
95/10/31 |
3,313.98 |
1,777.06 |
1,536.92 |
no |
|
95/12/31 |
97/02/10 |
96/01/31 |
3,313.98 |
1,777.06 |
1,536.92 |
no |
|
96/03/31 |
97/02/10 |
96/04/30 |
3,313.98 |
1,777.06 |
1,536.92 |
no |
|
96/06/30 |
97/02/10 |
96/07/31 |
3,313.98 |
1,777.06 |
1,536.92 |
no |
|
96/09/30 |
98/10/15 |
96/10/31 |
1,388.12 |
1,668.54 |
-280.42 |
|
|
96/12/31 |
98/10/15 |
97/01/31 |
2,650.64 |
1,319.48 |
1,331.16 |
no |
|
Total |
|
|
22,977.87 |
16,631.64 |
6,346.23 |
|
* the Corporation originally reported net tax of $4,643.21, claimed input tax credits of $2,714.01 and net tax remittable of $1,929.20 by a return filed on August 7, 1995 and the payment did not accompany the return.
(k) the Corporation failed to remit all or part of the amount reported as positive net tax on all of the returns for the reporting periods ending between January 1, 1995 and December 31, 1996, on or before the day on which the remittance was required to be made;
(l) the Appellant did not file a return for the reporting period of January 1, 1997 to January 31, 1997;
(m) on or about January 31, 1997, the Corporation ceased carrying on its business activities;
(n) On or about May 13, 1996, June 26, 1996, August 15, 1996 and October 2, 1996 the Corporation received requests to file its outstanding returns for the reporting periods ending between July 1, 1995 and June 30, 1996;
(o) on or about October 25, 1996, the Corporation was assessed net tax of $3,999.96, penalty of $152.70 and interest of $142.33 with respect to the reporting periods ending between July 1, 1995 and June 30, 1996;
(p) the Corporation was subsequently reassessed for the reporting periods referred to in the previous subparagraph;
(q) the Corporation received Notices of Assessment for the positive amounts of net tax it reported but had failed to remit with the returns for the reporting periods ending between July 1, 1995 and June 30, 1996;
(r) on or about March 18, 1997, the Corporation was assessed net tax of $27,797.44, penalty of $614.30 and interest of $422.86 with respect to the reporting period of July 1, 1996 and December 31, 1996;
(s) the Corporation was subsequently reassessed for the reporting periods referred to in the previous subparagraph;
(t) on or about May 27, 1997, the Corporation was assessed net tax of $523.28, penalty of $7.57 and interest of $3.59 with respect to the reporting period of January 1, 1997 to January 31, 1997;
(u) the Corporation did not file a Notice of Objection to any of the Notices of Assessment referred to in subparagraphs 18(o), 18(q), 18(r) and 18(t) supra;
(v) the Corporation failed to remit net tax of at least $7,721.70 for the reporting periods ending between July 1, 1995 and January 31, 1997, to the Receiver General of Canada as required by the provisions of the ETA;
(w) the Corporation failed to pay penalties and interest relating to the net tax referred to in the previous subparagraph as required by the provisions of the ETA;
(x) the net tax that was not remitted as and when required by the provisions of the ETA was used by the Corporation to carry on its operations and to satisfy other creditors;
(y) the Corporation never, during the relevant periods, maintained a separate account or separate deposits in respect of the tax it collected from its customers, which were trust funds;
(z) the Corporation did not make an assignment under the Bankruptcy and Insolvency Act;
(aa) a receiving order was not made against the Corporation under the Bankruptcy and Insolvency Act;
(bb) a Certificate was issued and registered at the Federal Court of Canada on June 25, 1997, certifying that the Corporation's liability was $36,838.01, plus penalty and interest relating thereto;
(cc) a Writ of Fieri Facias was issued on June 25, 1997;
(dd) execution of the Writ of Fieri Facias was returned unsatisfied in whole;
(ee) at all material times the Appellant was a director of the Corporation; and
(ff) the Appellant did not exercise the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances to prevent the failure of the Corporation to remit the net tax in that, among other things:
(i) he knew or ought to have known of the Corporation's failure to file returns when required by the ETA and he knew or ought to have known that the positive amounts of net tax reported on the returns prior to the periods at issue was not remitted when required by the ETA and he took no steps to prevent the Corporation's failure to remit the tax collected to the Receiver General;
(ii) he did not implement or ensure that the Corporation had an effective internal control system in place to ensure the timely and periodic remittance of the net tax to the Receiver General; and,
(iii) he did not take any steps to ascertain the Corporation's position with respect to the tax.
Assumptions (a) to (dd) inclusive were not refuted. The remaining assumptions are in dispute.
[3] The assumptions in paragraph 18 of the Reply under the Income Tax Act read:
18. In so assessing the Appellant, the Minister made the following assumptions of fact:
(a) the facts admitted or stated in this Reply, some of which are repeated here for ease of reference;
(b) at all material times the Corporation was a valid and subsisting corporation;
(c) at all material times the Corporation operated a sawmill;
(d) at all material times the Corporation withheld tax from its employees pursuant to the ITA;
(e) on or about January 31, 1997, the Corporation ceased carrying on its business activities;
(f) the Corporation failed to remit part of its payroll source deductions for the 1995 taxation year on or before the day on which the remittance was required to be made;
(g) on or about April 30, 1996, the Corporation received an assessment with respect to the payroll source deductions for the 1995 taxation year that it had failed to remit on or before the day on which the remittance was required to be made, plus interest;
(h) the Corporation failed to remit all of the amounts it withheld from its employees during 1996 on or before the day on which the remittances were required to be made;
(i) on or about May 1, 1996, the Corporation received a Notice of Assessment for payroll source deductions in the amount of $1,978.62 that it had filed to remit when required, plus penalties and interest (the "May assessment");
(j) on or about September 26, 1996, all but $7.44 of the May assessment was paid by way of a garnishee;
(k) between January 1, 1996 and September 25, 1996, the Appellant did not remit any amounts that had been withheld as payroll source deductions in 1996;
(l) on or about November 19, 1996, the Appellant made a remittance of $2,659.54, which included payroll source deductions withheld in October 1996;
(m) the Corporation had insufficient funds in its chequing account to cover the remittance referred to in the previous subparagraph;
(n) on or about December 6, 1996 the Corporation received a Notice of Assessment for payroll source deductions in the amount of $2,659.54 that it had failed to remit when required, plus penalties and interest;
(o) on or about January 29, 1996, February 26, 1996, May 1, 1996, September 25, 1996, October 28, 1996, November 20, 1996, December 5, 1996, December 23, 1996 and December 30, 1996, the Corporation received assessments with respect to arrears of penalty and interest arising from late remittances of payroll source deductions;
(p) during 1997 the Corporation received the following assessments with respect to its unremitted payroll source deductions
|
Date Issued |
Amount Assessed |
relates to |
|
Jan 30 |
1,172.68 |
November & December 1996 remittances |
|
Mar 19 |
2,577.09 |
January 1997 remittance |
(q) the Corporation did not file a Notice of Objection to any of the Notices of Assessment;
(r) the Corporation failed to remit payroll source deductions of at least $2,687.69 for the period of October 1, 1996 to January 31, 1997 to the Receiver General of Canada as required by the provisions of the Acts;
(s) the Corporation's liability for the amounts referred to in the previous subparagraph remains outstanding;
(t) the Corporation failed to pay penalties and interest relating the remittances of payroll source deductions for the months of October, November and December 1996 and January 1997 as required by the provisions of the Acts;
(u) the payroll source deductions that were not remitted as and when required by the provisions of the ITA were used by the Corporation to carry on its operations and to satisfy other creditors;
(v) the Corporation never, during the relevant periods, maintained a separate account or separate deposits in respect of the tax it collected from its employees, which were trust funds;
(w) the Corporation did not make an assignment under the Bankruptcy and Insolvency Act;
(x) a receiving order was not made against the Corporation under the Bankruptcy and Insolvency Act;
(y) a Certificate was issued and registered at the Federal Court of Canada on June 18, 1997, certifying that the Corporation's liability was $3,862.05, plus interest relating thereto;
(z) a Writ of Fieri Facias was issued on June 18, 1997;
(aa) execution of the Writ of Fieri Facias was returned unsatisfied in whole;
(bb) the Appellant had considerable experience in business and business acumen to prevent the Corporation's failure to remit the payroll source deductions;
(cc) at all material times the Appellant was involved in the financial affairs of the Corporation and could have influenced the course of events;
(dd) at all material times the Appellant held himself out to be a director of the Corporation;
(ee) at all material times the Appellant was a director of the Corporation; and
(ff) the Appellant did not exercise the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances to prevent the failure of the Corporation to remit the payroll source deductions in that, among other things:
(i) he had knowledge of the Corporation's failure to remit part of the payroll source deductions owing for the 1995 taxation year and of the Corporation's failure to remit the payroll source deductions in 1996 when required by the statutes and he took no steps to prevent the Corporation's failure to remit the payroll source deductions to the Receiver General;
(ii) he did not implement or ensure that the Corporation had an effective internal control system in place to ensure the timely and periodic remittance of the payroll source deductions to the Receiver General; and
(iii) he did not take any steps to ascertain the Corporation's position with respect to the payroll source deductions.
Assumptions (a) to (bb), inclusive, were not refuted. The remaining assumptions are in dispute.
[4] The evidence respecting this appeal will be described chronologically. However before doing so, it is necessary to deal with two evidential items, one of which was filed and the other of which was not. The alleged Minute Book of Columbia was filed. The Court believes Mrs. Marischuk who testified that she asked Alec McDougall for it, apparently on both January 21, 1997 and March, 1997, and that on one of these occasions Mr. McDougall said that it had disappeared or was stolen. The alleged Minute Book was not placed in evidence by the Corporate Secretary or any officer of the Corporation. It was submitted by Mr. McDougall who identified the signatures in it. It is not known when the alleged minutes were made, if they are in fact the minutes, if they are the only minutes or if in fact it is the Minute Book. Therefore the documents in it may be referred to from time to time for chronology, but they may not be minutes or correct. At best, they are pieces of paper with these peoples' signatures. The second set of documents which is not in evidence is a complete, certified, record of the British Columbia Registrar of Companies respecting Columbia. Mrs. Marischuk testified that she did a phone search on a given date with that office. That is hearsay and it may indicate something to her on that date, but that information could also be mistaken and does not indicate other such information on other dates.
[5] Alec McDougall graduated as a civil engineer from the University of Calgary in 1971. He worked for the City of Calgary and then for various small corporations, some of which he and a few others formed, and for various businesses which appear to have been related to waste disposal. He is presently involved in three corporations. By 1994 he had extensive corporate and business experience and testified that then, or now, he signs as many as 200 documents each business day. At the material periods he was, and he still is, an officer of the various corporations.
[6] On April 13, 1994, 470674 B.C. Ltd. was incorporated in British Columbia.
[7] On April 13, 1994 the incorporating person, Cheryl Woronchak transferred her share to Charles Rea, and the following shares were issued:
51 "A" shares, Charles Rea
49 "A" shares, Altess Investments Ltd. ("Altess")
Alec McDougall signed Altess' share subscription as President of Altess (Exhibit A-l, Tab 9). Altess is owned by Alec McDougall and his wife, Theresa. Charles Rea had raised and been a father figure to Alec for a period after Alec's father died when Alec was nine years old. Alec's father was a half brother to Charles's father.
[8] On April 13, 1994 (Exhibit A-1, Tab 2) Columbia registered the following officers and directors:
Charles Rea - President and Director
Theresa McDougall - Secretary-Treasurer and Director
This was signed by Charles Rea on August 1, 1995 (Exhibit A-1, Tab 6).
[9] On June 10, 1994 Columbia borrows from Shuswap Ventures Development Association. Alec guarantees $75,000 of the loan, as does Theresa (Exhibit A-1, Tab 10). In addition:
1. Their family corporation lent Charles Rea about $50,000 capital to set Columbia up initially.
2. Alec personally guaranteed 50% of a $100,000 loan by Federal Business Development Bank to Columbia.
3. Alec personally guaranteed the credit that "Bell Pole" gave Columbia in 1994 or 1995.
[10] On June 13, 1994, 470674 B.C. Ltd. changes its name to Columbia Birch Wood Products Ltd. (Exhibit A-1, Tab 1).
[11] On August 25, 1994 Columbia registers with GST, signed "Casey Rea" (Charles' son) and shows Charles Rea as president and both Theresa and Alec as directors. This was filed September 7, 1994 (Exhibit R-2).
[12] On August 2, 1995 Columbia opens a bank account with the Bank of Nova Scotia in Calgary. (It already had an account with the Royal Bank of Canada at Chase, B.C. near its base operations. Alec signs the statement of particulars as "director" (Exhibit R-3, page 1) and the Agreement re Operation of Account as "director" of Columbia (Exhibit R-3, page 5). Page 5 is also signed by Alec McDougall as "director", and by Charles Rea and Theresa McDougall as both officers and directors. The initial deposit of $16,158.24 is described on page 1 as relating to Paul Bunyan Timber Ltd., ("Paul Bunyan") an Alberta contractor with Columbia. Alec was supervising this contract, apparently for both parties. Page 1, signed by Alec, states that he has been a director of Columbia for one year, as have Theresa and Charles Rea.
[13] On October 7, 1995 Theresa McDougall allegedly resigns as a director of Columbia (Exhibit A-1, Tab 2).
[14] From January 1, 1996 to January 29, 1997 Alec signed various cheques on the Bank of Nova Scotia account for Columbia as the sole signatory (Exhibit R-6). Some were to him personally for expense claims on behalf of Columbia for several hundred dollars each. On January 29, 1997 the cheque was to Revenue Canada for $4,389.08 (#0072). Simultaneously Alec was authorizing wire transfers for Columbia from the Calgary account to Columbia's Royal Bank account at Chase, B.C. (Exhibit R-7).
[15] On January 21, 1997 Louise Marischuk, a collections officer for Revenue Canada at Penticton, B.C., telephones Alec McDougall in Calgary to inquire about GST and payroll instalments of Columbia. Alec was listed with GST as a director of Columbia. She testified that she told him about directors' liability and asked him to fax to her within 7 days (1) a list of Columbia's accounts receivable, and (2) the unfiled GST returns, and in addition to pay Columbia payroll remittances for November and December. Alec never told Louise that he was not a director of Columbia. He also denied that he was a director of Columbia in his testimony, or that he would have told Louise at that time that he was a director of Columbia.
[16] On January 24, 1997, Alec signs Columbia's 31/07/1996 fiscal year end Income Tax Return (T2) as a director (Exhibit R-4). It is filed February 6.
[17] On January 31, 1997 Columbia ceases business.
[18] On February 4, 1997 Alec signs:
1. T2013, the income tax agreement among associated corporations and hand inserted his title as "Director" for all of Columbia, 630303 Alberta Ltd. and Altess (Exhibit R-4).
2. Columbia's GST quarterly returns for quarters ending 95/09/30; 95/12/31; 96/03/31; and 96/06/30 as director (Exhibit R-5).
They are filed February 10, 1997.
[19] In March, 1997 Louise Marischuk telephones Alec McDougall who denies that he is a director of Columbia. Alec does not recall this telephone call.
[20] On September 28, 1998 Alec signs Columbia's 96/09/30 and 96/12/31 quarterly GST returns as "owner". The are filed October 15, 1998 (Exhibit R-5).
[21] Columbia held out that Alec was a director on August 2, 1995, to the Bank of Nova Scotia when Charles Rea, Theresa McDougall and Alec McDougall signed Exhibit R-3, pages 3, 4 and 5, the Agreement re Operation of Account. By comparison, the last and only corporate filing listing directors in evidence is signed August 1, 1995 (Exhibit A-1, Tab 6, described in paragraph [8] herein.)
[22] Alec held out that he was a director of Columbia
1. August 2, 1995 to the Bank of Nova Scotia (Exhibit R-3, p. 1, and pp. 3, 4 and 5)
2. January 24, 1997 to Revenue Canada (Income Tax) when he signed Columbia's 31/07/1996 T2 Income Tax Return (Exhibit R-4).
3. February 4, 1997 to Revenue Canada (GST) when he signed the quarterly GST returns.
4. Similarly, when he signed Columbia's cheques contained in Exhibit R-6, he did not describe his position with Columbia on the cheques, but anyone inquiring with the Bank of Nova Scotia respecting his position with Columbia would have learned that their records showed him as a director of Columbia. One such cheque, dated January 29, 1997 was to Revenue Canada.
[23] In 2000-346(IT)I, the Income Tax appeal, assumptions 18(dd) and (ee) are that Alec held himself out as a director at all material times and that he was a director of Columbia. In 2000-347 (GST)I, the GST appeal, assumption 18(ee) is that at all material times Alec was a director of Columbia.
[24] The facts are that:
1. August 1, 1995, Charles Rea as President of Columbia signs corporate registry forms that do not show Alec as a director of Columbia (Exhibit A-1, Tab 6).
2. August 2, 1995 Charles Rea, Theresa McDougall and Alec McDougall all sign Bank of Nova Scotia forms that do show Alec as a director of Columbia.
3. There is no record in evidence of subsequent corporate filings by Columbia.
4. Neither Charles Rea nor Theresa McDougall testified. Alec said that Charles has disappeared. No reason was given for Theresa's failure to testify.
[25] The evidence is that both Columbia and Alec held out that Alec was a director of Columbia. Alec did so after August 1, 1995 and until at least February 4, 1997. Alec held this out by his own signature to Revenue Canada. Employees and officers of the corporation also signed documents to that effect, including Casey Rea's filing of Columbia's GST registration on September 7, 1994 (Exhibit R-2). Both the Bank of Nova Scotia and Revenue Canada relied on those representations.
[26] In The Queen v. Corsano (F.C.A.) 99 DTC 5658, Noel, J.A., reviewed the concept of de facto director under the ITA. He concluded at paragraph [18] to [21]:
[18] In my view, the Act cannot be construed as giving those acting as directors without the requisite qualifications the status of director, nor can it be said that the common law has provided such individuals this status. What the courts have done over the years, however, is devise remedies to assist third parties who deal with persons who act as directors or who are held out by the company as directors although they lack the required qualification or authority.
[19] As I understand it, one principle underlying these common law remedies is that a person who has not obtained the requisite qualifications, is prevented from pleading this failure in order to escape liability attaching to a director. As held by Richards, J.A. in MacDonald v. Drake,
I cannot assent to the contention that a director, who, with his consent, has been elected and has acted as a director, should, merely because he was not qualified to hold the office, escape liability that he would have incurred if he had been qualified. The true principle seems to be that a man cannot take advantage of his own wrong.
It being recognized in this instance that the respondents acted as directors, in conformity with the will of the shareholders, I see no reason why they should be allowed to assert their lack of qualification to escape the liability cast upon directors by virtue of section 227.1 of the ITA.
[20] Thus, while I would agree with the conclusion of the Tax Court judge that those acting as directors without having the requisite qualifications are not directors under the Act, I do not believe that the respondents can raise this lack of qualification as a defence to their liability under subsection 227.1(1) of the ITA.
[21] On the issues of the applicable standard of care and its application to the facts of this case, I agree with the reasons of my colleague, Létourneau, J.A. and would dispose of these appeals as he suggests.
Similarly Letourneau, J. A. said at paragraphs [4], [5], [6] and [9] to [12] inclusive:
[4] As a matter of fact, the governing provision which is in dispute here is subsection 227.1(1) of the Act. It is the scope of this provision which falls to be determined, not the scope of the Nova Scotia Companies Act. Much of the focus has been put, unnecessarily in my view, on the ambiguous and free use of the word "director" in the Nova Scotia Companies Act and on the proper scope and interpretation of that Companies Act. This is, as we shall see, the result of the respondents misconstruing an earlier decision of this Court and the purpose of subsection 227.1(1) of the Act.
[5] Subsection 227.1(1) of the Act imposes liability on all the directors of a corporation who have failed to remit to Revenue Canada the sums due. The word "directors" in the said subsection is unrestricted and unqualified. It is a basic rule of legislative drafting, based on the corresponding rule of interpretation which conditions drafting, that the use of a generic word without restrictions or qualifications conveys the legislator's intention that the word be given a broad meaning. Here, by using the word "directors" without qualifications in subsection 227.1(1), Parliament intended the word to cover all types of directors known to the law in company law, including, amongst others, de jure and de facto directors.
[6] It bears repeating that there is no disagreement between the parties, and the Tax Court judge so found, that the Nova Scotia common law has developed the concept of de facto director. I hasten to add that, in this regard, the legal situation is practically the same in all common law jurisdictions across Canada.
...
[9] In addition, our Court never decided that, in interpreting the word "director" in subsection 227.1(1) of the Act, one can only look at the company's incorporating legislation and not at the common law. Here is what our colleague McDonald, J.A. wrote:
The Income Tax Act neither defines the term director, nor establishes any criteria for when a person ceases to hold such a position. Given the silence of the Income Tax Act, it only makes sense to look to the company's incorporating legislation for guidance.
(emphasis added)
[10] There was no need in that case to look at the common law because the statutory law determined when a person ceased to be a director.
[11] In addition, as our Court indicated, the statutory law is to be looked at "for guidance". It is certainly not exclusive and determinative, especially in the circumstances of the present appeal where the issue is not to determine for the purpose of section 227.1 of the Act whether a person had ceased to be a director (an issue generally governed by statutory provisions), but rather whether a person ostensibly acted as a director and therefore was a de facto or acting director (an issue generally governed by common law principles). To use the terms of McDonald, J.A., "it only makes sense for guidance" to look at the body of law which can provide the answer to the silence of the Act. In the present instance, such body is the common law.
[12] I should reiterate here that what is in issue through subsection 227.1(1) of the Act is the liability of the directors of a company, as directing minds of that company, for their own failure to prevent the prohibited act, not whether they engage the responsibility of the company, as I think they do. As early as 1906, the Manitoba Court of Appeal in MacDonald v. Drake rejected the defendants' contention that a statutory provision making directors jointly and severally liable for unpaid wages could only be enforced against de jure directors. The Court found that although the defendants were not de jure directors because they did not hold the required shares in their own right, they were ostensibly elected, attended and took part in the meetings as well as acted as directors. They were de facto directors and, therefore, personally liable. Phippen, J.A., at pages 229 and 230 wrote:
The law is clear that the actions of directors "de facto" within the powers of the Company are binding upon both the Company and the directors ...
I do not think these defendants can now be permitted to set up a defect in their own title to the office, of which they have enjoyed the benefit, to escape a debt, which I do not consider a penalty, to employees in whose favour the statute grants relief.
[27] The ETA provisions respecting directors' liability are similar to those in the ITA under which Corsano was found liable.
[28] Moreover Columbia registered under the ETA showing Alec as a director; Alec completed ETA forms as a director of Columbia; and Alec both signed Columbia cheques on the Bank of Nova Scotia and failed to withdraw Columbia's ETA filing of his name as a director after Louise Marischuk had first notified him on January 21, 1997 that he was recorded as a director of Columbia.
[29] In these circumstances, the Court finds that Alec McDougall was, as assumed in both Replies, a director of Columbia. Certainly he was a de facto director. The subparagraphs in both Replies assuming his directorship are confirmed.
[30] On the evidence did Alec McDougall, as a director of Columbia, fail to exercise due diligence respecting Columbia's failure to pay under both appeals?
[31] Alec testified that from Columbia's very beginning Charles Rea began telephoning him for money. Therefore he knew that Columbia was having financial problems from its very first days of operation. Its failure to remit under the ETA began on May 1, 1995. Its failure to remit payroll source deductions began in its 1995 taxation year concerning which it was assessed on April 30, 1996. Columbia was garnisheed for payroll source deductions on September 26, 1996.
[32] Alec's testimony did not concentrate on due diligence. Rather, it was devoted to the fact that he was not a director. However, the evidence is:
1. Alec knew from the beginning of Columbia's financial problems.
2. He participated as "director" in opening the Calgary bank account on August 2, 1995. He said that the account's purpose was to deposit "Paul Bunyan" cheques payable to Columbia. No acceptable reason was given as to why they could not have been deposited at the Columbia's Royal Bank account in Chase.
3. He went to Chase, B.C. a few times respecting Columbia's operations and signed various guarantees there from time to time including a guarantee of one of Columbia's ordinary trade creditors.
4. He supervised the Paul Bunyan contract for Columbia.
5. His family corporation "Altess" purchased a loader for Columbia's use and made the payments on it with some reimbursement from Columbia, by transfers from the Bank of Nova Scotia account (Exhibit R-7). This occurred beginning on at least March 27, 1996 and indicates that at that time Alec and Theresa knew that Columbia was in sufficient difficulty that it could not afford a necessary piece of equipment and could not obtain credit for it to Alec's knowledge.
6. Alec signed Columbia cheques to his and his corporation's benefit as follows:
1. August 23, 1996, Alec McDougall, $1,755.97
2. November 7, 1996, Alec McDougall, $ 834.80
3. January 27, 1997, 630303 Alberta Ltd., $3,210.00
4. July 28, 1997, Alec McDougall, $1,169.20
(Exhibit R-6)
7. The cheque signed by Alec to Revenue Canada of $4,389.08 on January 29, 1997 is evidence of some diligence by Alec before Columbia ceased operations on January 31, 1997 and after Mrs. Marischuk's telephone call January 21, 1997.
[33] But Alec admitted that:
1. From the beginning of its operations Columbia was short of funds and Altess and Alec were sending funds to Columbia. Thus he knew that Columbia had cash shortages from its first moment of operation and continuously thereafter.
2. He was writing cheques copied in Exhibit R-6 on the Bank of Nova Scotia to himself to cut his own losses from Columbia in preference to other creditors, including the Respondent.
[34] The Reply in 346(IT)I assumes that Columbia failed to remit for the 1995 taxation year 18(f), during 1996 18(h), did not remit between January 1 and September 25, 1996 and was garnisheed 18(j). Thereafter no withholdings were received from Columbia except the cheque signed by Alec McDougall dated January 29, 1997. The Reply in 347(GST)I, states in subparagraph 18(j) that Columbia's GST net liability commenced with failures to pay commencing at the end of the 95/09/30 quarter. Thus both sets of net liabilities occurred after August 2, 1995 when Columbia opened its Calgary Bank of Nova Scotia account and both Alec and Columbia described Alec as a director of Columbia.
[35] In The Attorney General of Canada v. McKinnon et al, FCA #A-421-98 etc., Evans, J.A. set out six tests to determine whether a director has exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have shown in comparable circumstances, beginning at paragraph 26. They are:
1. What were the characteristics of this director? The Court finds that the Appellant had well above average skill, experience and knowledge in corporate matters.
2. Would such a director act the same way if reasonably prudent? The Court finds that the Appellant was active in the business and financial operations of Columbia throughout its business history on at least a month to month basis and had full knowledge of its financial problems throughout its existence. Of Charles Rea, Theresa McDougall and Alec, the evidence is clear that Alec was the most sophisticated in both corporate and financial matters. For this reason, of all of them, from the very beginning, he should have been the one to make sure that the remittances were made to the Respondents. The evidence is clear that from at least August 2, 1995, he was a director of Columbia. What is not clear is whether he was a director both de jure and de facto, and whether he was a director at least de facto before August 2, 1995. In these circumstances, the assumption that he was a director was not refuted. On the evidence, Alec was aware or should have been aware of every failed remittance by Columbia and only took one positive step to cure that failure: that was the remittance cheque of January 29, 1997, which practically speaking was too late. It occurred at the very end and after he had taken steps to pay his own debts from a failed Columbia.
3. When he was aware of Columbia falling behind with its remittances, what positive steps to prevent the default did he take? Alec was aware of the defaults from their very beginning and his only positive step to cure the defaults was the payment of January 29, 1997. That was far too late.
4. What did the director do to prevent the default? The cheque of January 29, 1997 was written long after he knew that the defaults had occurred. He had known that the defaults had been going on for a long time by then, and he did nothing to prevent them.
5. Was Columbia's debt to Revenue Canada discharged so that there is no liability? No.
6. Did Alec lose legal control over Columbia so that he was not liable to Revenue Canada? No, if anything, he was the only person operating Columbia when it closed for business.
[36] Based on these facts and reasons, the Court finds that the Appellant has failed to refute assumption 18(ff), in appeal number 347(GST)I and assumption 18(ff) in number 346(IT)I.
[37] The appeals are dismissed.
Signed at Ottawa, Canada this 15th day of November, 2000.
|
"D.W. Beaubier" |
J.T.C.C.
COURT FILE NO.: 2000-346(IT)I and 2000-347(GST)I
STYLE OF CAUSE: Alec McDougall v. Her Majesty the Queen
PLACE OF HEARING: Calgary, Alberta
DATE OF HEARING: November 3, 2000
REASONS FOR JUDGMENT BY: The Honourable Judge D.W. Beaubier
DATE OF JUDGMENT: November 15, 2000
APPEARANCES:
Counsel for the Appellant: Douglas Forer
Counsel for the Respondent: Perry Derksen
COUNSEL OF RECORD:
For the Appellant:
Name: Douglas Forer
Firm: Miller Thomson
Edmonton, Alberta
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada