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Docket: 2000-3139(GST)G |
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BETWEEN: |
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LARRY MACHULA, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on common evidence with the appeals of
Larry Machula (2000-3140(GST)G) and (2000-3141(IT)G)
on August 6, 2003 at Saskatoon, Saskatchewan.
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Before: The Honourable Justice D.W. Beaubier |
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Appearances: |
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Counsel for the Appellant: |
Michel Bourque |
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Counsel for the Respondent: |
Tracey Telford |
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is dated October 8, 1999 and bears number 46883 is dismissed in accordance with the attached Reasons for Judgment.
Signed at Saskatoon, Saskatchewan, this 2nd day of September 2003
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"D.W. Beaubier" |
Beaubier, J.
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Docket: 2000-3140(GST)G |
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BETWEEN: |
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LARRY MACHULA, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on common evidence with the appeals of
Larry Machula (2000-3139(GST)G) and (2000-3141(IT)G)
on August 6, 2003 at Saskatoon, Saskatchewan.
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Before: The Honourable Justice D.W. Beaubier |
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Appearances: |
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Counsel for the Appellant: |
Michel Bourque |
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Counsel for the Respondent: |
Tracey Telford |
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is dated October 8, 1999 and bears number 46884 is allowed in accordance with the attached Reasons for Judgment and the matter is referred to the Minister of National Revenue for reconsideration and reassessment accordingly.
Signed at Saskatoon, Saskatchewan, this 2nd day of September 2003
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"D.W. Beaubier" |
Beaubier, J.
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Docket: 2000-3141(IT)G |
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BETWEEN: |
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LARRY MACHULA, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on common evidence with the appeals of
Larry Machula (2000-3139(GST)G) and (2000-3140(GST)G)
on August 6, 2003 at Saskatoon, Saskatchewan.
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Before: The Honourable Justice D.W. Beaubier |
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Appearances: |
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Counsel for the Appellant: |
Michel Bourque |
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Counsel for the Respondent: |
Tracey Telford |
____________________________________________________________________
JUDGMENT
The appeal from Notice of Assessment No. 08240 dated October 8, 1999, made under the Income Tax Act, the Income Tax Act - Saskatchewan, Canada Pension Plan and the Employment Insurance Actis dismissed.
Signed at Saskatoon, Saskatchewan, this 2nd day of September 2003
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"D.W. Beaubier" |
Beaubier, J.
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Citation: 2003TCC563 |
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Date: 20030902 |
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Docket: 2000-3139(GST)G 2000-3140(GST)G 2000-3141(IT)G |
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BETWEEN: |
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LARRY MACHULA, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
REASONS FOR JUDGMENT
Beaubier, J.
[1] These appeals pursuant to the General Procedure were heard together at Saskatoon, Saskatchewan on common evidence on August 6, 2003. The Appellant was the only witness. An outline of each corporation involved in these director's liability assessments will be set out followed by chronological descriptions of the facts in evidence. As the facts will establish, the Appellant was an inside director of all three of these corporations.
[2] Respecting 2000-3139(GST)G:
1. Corporate name - 568969 Saskatchewan Ltd., ("969").
2. Incorporated February 3, 1984 in Saskatchewan.
3. A personal service type corporation which supplied Mr. Machula's services to other businesses.
4. Mr. Machula was 969's sole shareholder, director and signing officer.
[3] Respecting 2000-3140(GST)G:
1. Corporate name - 600987 Saskatchewan Ltd. ("987").
2. Incorporated July 6, 1992 in Saskatchewan.
3. Took over a bankrupt condominium from Standard Trust which was under construction at 611 University Drive, located at Broadway Avenue and University Drive in Saskatoon. In a joint venture with the previous owner or contractor, Farouk Shah, the condominium was finished in 9 months at around the end of 1993 and the lowest three floors were leased to an immigrant investment corporation, First Choice Capital Fund (III) Ltd. ("FCC III") of which had been founded by the Appellant and others. FCC III owned the "Saskatoon Fitness Corner" equipment and premises on the main floor.
4. 987 had two shareholders owning 50% each and two directors, the Appellant, Larry Machula, and James O'Brien. The evidence is that James O'Brien was in British Columbia at all material times and Larry Machula was in Saskatoon, Saskatchewan, from where all of the corporations in question were operated. Larry Machula was a bank-signing officer of 987 in Saskatoon as an alternate with Diane Kindrachuk (Exhibit R-2) dated January 7, 1995).
[4] Respecting 2000-3141 (IT)G:
1. Corporation name - 601161 Saskatchewan Ltd. ("161").
2. Incorporated July 27, 1992 in Saskatchewan.
3. Operated Saskatoon Fitness Corner and leased the premises and equipment from FCC III.
4. The two 50 - 50 shareholders and directors were Larry Machula in Saskatoon and James O'Brien in British Columbia, all as described in subparagraph [3]4. Larry Machula was a signing officer of 161. (See Exhibit R-2).
[5] Mr. Machula has a B.A. and a B.Comm. He graduated from university in about 1975 and went to work for the Royal Bank of Canada. He then became a real estate developer. After that he entered into the business of forming and making public offerings of tax shelter syndicates. In 1988 he established First Canadian Capital Fund Ltd. respecting a Vancouver real estate project which he marketed in Hong Kong. In Hong Kong he encountered inquiries about immigration into Canada. As a consequence he developed and was a director of three immigrant investor corporations, First Choice Capital Fund Ltd., First Choice Capital Fund II Ltd., and FCC III (referred to collectively as the "Funds"). They were marketed to immigrants from the Middle East, Southeast Asia and Europe. In Saskatchewan these required an investment of at least $150,000 in a business for 3 to 5 years before there could be any redemption. The three corporations raised $47,000,000. Mr. Machula testified that the Asian investors wanted a redemption of 75% in the three-year period and began a lawsuit to bring this about. These actions were begun in the Saskatchewan Court of Queen's Bench in January, 1995 and judgments were issued by Laing J. on the basis of "oppression" which removed directors of the Fund corporations, including the Appellant, on April 19, 1995 and March 22, 1996.
[6] 2000-3139(GST)G - 969, the Appellant's personal service corporation, is assessed for tax of $27,832, and penalties and interest, for the period 92-06-30 to 94-12-31. The Appellant has appealed a later dated assessment of $27,814.11 and interest and penalties respecting the unpaid 969 assessment. 969's income was management fees. Two of these sets of fees were large:
1. $352,700 from 987 for the GST quarter period ending September 30, 1993, for which period 969 paid $2,100 in GST.
2. $44,900 in its 1994 taxation year which ended on September 30, 1994, for which GST quarter it paid $2,100 in GST.
It did not claim input tax credits for either quarter. The Appellant was the person who signed the GST cheques for 969. Given his business experience, education and knowledge, the fact that 969's income was his income and that he was the only individual with any investment in, or benefit from 969's operations, he had to have known that cheques for $2,100 did not represent 7% of the fees received by 969 at each of these times.
[7] Respecting 969, Mr. Machula's answer is that, for 969, he had set up an accounting system with qualified staff, good computer equipment and accounting programmes and 969 had a reputable chartered accounting firm filing tax returns and that he relied on them. On the evidence, all of that is true. However, 969's ordinary quarterly GST cheque was $2,100 with three exceptions recorded in each of 1993, 4 and 5, each of which was a payment of over $23,000. Particularly in 969's case, in which Mr. Machula was the sole cheque signer and recipient of benefits, and where these large sums of GST were as a result of direct income, it is clear that Mr. Machula failed to exercise the degree of care, diligence and skill to prevent the failure to pay. Because these two failings are clearly representative of the Appellant's mind set and actions respecting 969, the appeal in 2000-3139(GST)G is dismissed.
[8] 2000-3140(GST) G - 987 was an operating construction corporation. The fiscal year end was October 31. The assumptions state that it did not remit $13,536.33 GST during the period March 31, 1993 to December 31, 1994 and claimed input tax credits of $36,927.19 to which it was not entitled during the same period. The assumptions also state that part of the unpaid GST related to a portion of the GST charges for the Appellant's residence (7% of $ 697,135.55) which was built and owned by 987. These assumptions were not refuted. 987's quarterly GST reports and payments for 1992 - 1995 were wide ranging and substantial; in one quarter they were $146,043.40 and in another they were -$136,899.00.
[9] Respondent's counsel directed the Court to the following quotation from the reasons of the Federal Court of Appeal in Ann Drover v. The Queen 98 DTC 6378 at 6380 and 6381:
[8] The present case adds a further dimension to the principles set out in Soper. The obligation imposed on directors is not limited to that of exercising the requisite standard of care in ensuring that GST as calculated was remitted. There is also an obligation to exercise the same standard with respect to ensuring that GST is properly calculated. To interpret s.321(1) of the Excise Tax Act, (or for that matter s.227.1(1) of the Income Tax Act) in a contrary manner would undermine the purpose of that section. Carelessness in calculation is as unacceptable as carelessness in remittance. The obligation to properly calculate GST flows from ss.228(1) of the Excise Tax Act which reads as follows:
Every person who is required to file a return under this Division shall in the return calculate the net tax of the person for the reporting period for which the return is required to be filed
[9] Utilizing the language adopted in Soper , the issue in the present case may be recast as follows: Did the taxpayer exercise the required standard of care as to ensure that Conestoga did not fail in its obligation to properly calculate and remit GST to the Receiver General? Having regard to the surrounding circumstances and the taxpayer's business experience and acumen should she have been aware that there was a problem with respect to the proper calculation of GST? Correlatively, if the taxpayer knew or ought to have known that there was a problem with respect to its proper calculation, did she exercise the requisite standard of care in ensuring that the problem was resolved. Though the taxpayer was an "inside director" (involved in the day to day operation of the business) it is evident that other persons, including an accountant, were responsible for calculating and remitting all taxes. I should add that no evidence was drawn to this Court's attention in support of the understanding that the taxpayer was actually aware of a problem with respect to the proper calculation of GST.
[10] The taxpayer seeks to persuade us that having regard to the requisite standard of care and the facts of this case, the tenets of the due diligence defence have been met. The Minister asserts that as this particular issue was not raised by her before the Tax Court, it is too late to raise it on the application for judicial review. In other words, since the taxpayer failed to raise the due diligence defence in the context of the $18,296 in dispute, thereafter she is precluded from raising it in this Court: on this point see generally Athey v. Leonati (1997), 203 N.R. 36 (S.C.C.) at 58, paras.50 & 51.
[11] I have two difficulties with the Minister's position. First, I doubt that the taxpayer would have been as quick to reach an agreement with respect to the other two amounts if she had known that the right to raise the due diligence defence would be inadvertently eliminated. Second, the argument ignores the fact that the Tax Court Judge committed a reviewable error of law. At the same time, I have difficulty in accepting that it is the proper role of this Court on a judicial review application to arrive at a finding of mixed fact and law when the Tax Court Judge was not asked to address what the parties would later identify as the pivotal issue. This difficulty is heightened by the realization that the taxpayer's plea of due diligence rests on transcript evidence. In my opinion, this application is more appropriately disposed of by referring the matter back to the Tax Court for a determination with respect to the $18,296 remaining in dispute.
[12] For the above reasons, the application for judicial review should be allowed and the judgment of the Tax Court dated April 3, 1997 set aside. The matter should be remitted to the Tax Court Judge for a determination in a manner consistent with these reasons and those found in Soper. The Tax Court Judge shall retain the discretion to determine whether the parties are entitled to adduce further evidence on the sole issue in dispute.
[10] Appellant's counsel countered with the following excerpt by Bowman A.C.J. from Lau and Lau v. The Queen 2002 DTC 2212 at 2214.
[23] There have been a number of cases in this court and in the Federal Court of Appeal involving directors' liabilities for unremitted tax under the Income Tax Act and the Excise Tax Act. I set them out in Fremlin v. R., (2002) G.S.T.C. 65 at paragraph 32 and they need not be repeated here. They demonstrate an evolution in the law with respect to the derivative liabilities of directors for unremitted tax. Some of the earlier cases in this court imposed in my view an unduly stringent obligation on directors. Section 323 of the Excise Tax Act and section 227.1 of the Income Tax Act do not demand the impossible. They do not require perfection. Directors are not insurers for the fisc. All that is needed is that the director "exercise the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances."
[24] One might ask the question "What did the director fail to do that ought reasonably to have been done?" The answer is, in this case, nothing. Once Patrick was satisfied that Agatha's mastery of the system was adequate and that she could rely on KPMG for any assistance she needed with respect to the GST filing and remittances I think it would be unreasonable to require him to go further and check her work, particularly when neither he nor Agatha were given any indication that anything was wrong.
[25] This conclusion is sufficient to dispose of the appeals. However a number of other arguments were advanced and out of respect to counsel I shall mention them briefly.
[11] Mr. Machula testified that the total number of individuals employed in his various corporate operations at one time amounted to 800. He is believed. In addition to fund raising and other enterprises, the corporations acquired and renovated the Saskatchewan Hotel in Regina, Saskatchewan, and 611 University Drive in Saskatoon. His counsel calculated that the amounts involved in 987's assessment amounted to 1.7% of 987's GST and 5.3% of 987's input tax credits claimed in 1992 - 1995 inclusive. 987's accounting was done centrally with other corporations in which Mr. Machula was involved. The accounting system had up to date software, computers, two supervisory staff including a very experienced woman, Diane Kindrachuk, and three or four other accounting staff. Mr. Machula was, himself, unable to enter the computer system. Rather, he relied on monthly printed financial reports for 987 and the other corporate entities in which he was involved. There was no indication that anything was wrong. Moreover, these discrepancies or failures were discovered during an audit which occurred after the periods in question. The assumptions suggest an innuendo that the assessment relates directly to the Appellant's residence, but there is no evidence of that.
[12] In these circumstances, there is no evidence that the Appellant knew or ought to have known that there was a problem respecting the calculation of 987's GST or ITCs for the period in question. The accounting system, equipment and staff used by 987, and its reporting system, together with 987's chartered accounting firm's actions constitute, in the Court's view, the exercise by the Appellant of the degree of care, diligence and skill to prevent a failure that a reasonably prudent person would have exercised in comparable circumstances. This appeal by the Appellant is allowed and the assessment is remitted to the Minister for reconsideration and reassessment accordingly.
[13] 2000-3141(IT)G - 161, is an assessment which Mr. Machula appealed relating to an assessment upon 161 for the period 01/01/96 to 12/31/96 for unremitted source deductions under the Income Tax Act, Employment Insurance Act, Canada Pension Plan and Income Tax Act - Saskatchewan. The tax is $26,746.12 and associated interest and penalties. 161 was the operator of "Saskatoon Fitness Corner" at 611 University Drive in Saskatoon.
[14] Mr. Machula was subjected to an Order of the Saskatchewan Court of Queen's Bench which effectively removed him as a director and officer of many of the corporations in which he was involved, including 987, on April 19, 1995 (Exhibit A-1). This was confirmed on March 22, 1996 (Exhibit A-2). He was actively involved in the foregoing litigation. All of this is recounted to indicate that Mr. Machula's other business activities during 1996 were reduced from what they had been in earlier years. In addition, Exhibit R-2 is a letter dated January 7, 1995 from the operating Manager of Saskatoon Fitness Corner to Mr. Machula which describes its outstanding GST account with Revenue Canada in December 1994 as a result of which Saskatoon Fitness Corner's bank account was attached on "this day" by Revenue Canada, as a result, a number of employees' pay cheques were returned NSF in December 23, 1995. The only bank signing officers of 161 were Diane Kindrachuk and Larry Machula.
[15] Given the Appellant's education, business experience, the ongoing business activities of 161 and the other business occurrences in which Mr. Machula was involved by 1996, the Court finds that the events described in Exhibit R-2 and Exhibit R-2 itself constitute evidence, in the words of Robertson J. in Soper v. The Queen (F.C.A.) 97 DTC 5407 at 5419 of extremely serious financial problems which should have alerted Mr. Machula to a possible problem with remittances. There is no evidence that these problems were of a temporary nature or that Mr. Machula changed his practises or took any steps after January 7, 1996 or made any inquiries to correct the situation except to speak to those who were already in charge, namely Diane Kindrachuk and Simon Lillyman. He testified that he accepted their reassurances.
[16] The facts described in paragraph [15] are evidence that on January 7, 1995 Mr. Machula became aware that 161 could not meet its ordinary monthly payroll expenses or its periodic GST liabilities as they came due. These were not extraordinary expenses. In such circumstances, a mere conversation with those in charge does not satisfy the duty cast upon the Appellant. Either 161's income had to be increased or its expenses had to be reduced to meet 161's normal day to day disbursements. In the Court's view physical intervention and evidence of active corrective measures and follow up by the Appellant director are called for where Revenue Canada takes garnishee action or employees' pay cheques are NSF. After January 7, 1995, he was on notice to prevent the failure which occurred.
[17] But Mr. Machula failed to exercise the degree of care, diligence and skill to prevent the failure in question that a reasonably prudent person would have exercised in comparable circumstances. The appeal respecting the assessment relating to 116, file 2000-3141(IT)G is dismissed.
[18] The total amounts in question respecting the appeal allowed and those dismissed are approximately the same. For this reason, no costs are awarded.
Signed at Saskatoon, Saskatchewan, this 2nd day of September 2003.
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"D.W. Beaubier" |
Beaubier, J.
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CITATION: |
2003TCC563 |
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COURT FILE NO.: |
2000-3139(GST)G 2000-3140(GST)G 2000-3141(IT)G |
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STYLE OF CAUSE: |
Larry Machula v. Her Majesty the Queen |
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PLACE OF HEARING: |
Saskatoon, Saskatchewan |
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DATE OF HEARING: |
August 6, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice D.W. Beaubier |
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DATE OF JUDGMENT: |
September 2, 2003 |
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APPEARANCES: |
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Counsel for the Appellant: |
Michel Bourque |
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Counsel for the Respondent: |
Tracey Telford |
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COUNSEL OF RECORD: |
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Counsel for the Appellant: |
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Name: |
Michel Bourque |
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Firm: |
Bennett Jones |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |