Date: 20020218
Docket: 2001-393-GST-I
BETWEEN:
JOHN ARIE VANDERPOL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Amended Reasons for Judgment
Sarchuk J.
[1] This is an appeal by John Arie Vanderpol from a goods and services tax assessment no. 31217 made pursuant to subsection 323(1) of the Excise Tax Act (the "Act") in respect of the failure of Allard's Home Centre Ltd. (carrying on business as Jonathan Interiors) (the "company") to file GST returns and remit the appropriate tax for the reporting periods from September 1, 1994 to June 30, 1995.
[2] The following facts are not in dispute. The company was incorporated in the province of British Columbia on March 4, 1976. It was registered under Part IX of the Act effective January 1, 1991 and was assigned a GST registration number. As such it was required to file its GST returns monthly. It operated a retail furniture store and provided in-home decorating services under the name Jonathan Interiors and collected or was required to collect GST on its taxable supplies. Prior to January 1, 1991, the Appellant became a director of the company and at all times material to this proceeding continued to act both as director and officer of the company.
[3] The company failed to file GST returns for the reporting periods from September 1, 1994 to June 30, 1995. On or about July 18, 1995, it made a proposal to its creditors under the Bankruptcy and Insolvency Act (the proposal).[1] At that time, the company was in default of its filing and remittance obligations under the Act. On September 6, 1995, the creditors defeated the proposal deeming the company to have made an assignment into bankruptcy as of July 18, 1995. Following defeat of the proposal, the Royal Bank, which had a general security agreement over all of the company assets, appointed Earl Sands, a licensed trustee in bankruptcy, to act as a receiver.
[4] By notices of assessment issued on September 20, 1995, the Minister of National Revenue ("Minister") assessed the company in the amount of $66,954.17 representing estimated tax, interest and penalties in respect of the company's failure to file and remit net tax as required under the Act for the reporting periods from September 1, 1994 to May 31, 1995.[2] On the same date, the Minister filed a proof of claim with the trustee in bankruptcy for the amount of $65,880.31 in respect of unremitted GST owing by the company for the periods from September 1, 1994 to July 18, 1995.[3]
[5] In October 1995, the receiver, Sands, asked Revenue Canada for assistance in reviewing the records to enable him to fulfil his responsibility to file the requisite GST returns for the periods September 1, 1994 to July 18, 1995. Colleen J. Browne was assigned to the task. She testified that their examination of the records disclosed that the first four returns for September, October, November and December, 1994 had been prepared by someone and formed part of the corporate records. Those returns were accepted as prepared. With respect to the period from January to July, they reviewed what documents were available in an attempt to determine the total GST payable as well as the total input tax credits (ITCs) allowable. At the conclusion of this exercise, Sands signed off on each of the pre-bankruptcy returns and on October 31, 1995, the company's GST returns were filed for the reporting period September 1, 1994 to July 18, 1995. Total net tax of $172,128.34 was reported.[4] As a result of the foregoing on March 19, 1996, the Minister submitted an amended proof of claim to the trustee in bankruptcy for the amount of $177,806.62 in respect of the company's liability for unremitted GST.[5]
[6] It is not disputed that the Minister was an unsecured creditor and that ultimately, the trustee in bankruptcy reported that the administration of the company's bankruptcy was complete and that there were no funds available to issue a dividend to the Minister. The company did not object to the assessment by the Minister for unremitted GST, interest and penalties. In due course, the assessment made pursuant to subsection 323(1) of the Act against the Appellant as director followed.
Appellant's position
[7] (a) The Appellant contends that paragraph 323(2)(c) of the Act provides that a director of a corporation is not liable under subsection 323(1) where a corporation has made an assignment under the Bankruptcy and Insolvency Act unless the corporation's liability referred to in subsection 323(1) has been proven within six months after the date of its assignment. The Appellant's submission is that the phrase "proved within six months" set forth in paragraph 323(2)(c) is to be determined having regard to the provisions of and requirements of the Bankruptcy and Insolvency Act. The Appellant concedes that the Respondent submitted a proof of claim to the company's trustee in bankruptcy within six months of the date of its deemed assignment into bankruptcy, but says that such proof of claim, which was in the amount of $65,880.31, did not meet the requirements of the Bankruptcy and Insolvency Act. Specifically, the Appellant pleads that the Respondent's Proof of Claim was deficient in that:
(i) it did not include a Notice of Assessment or was based on an arbitrary assessment; and
(ii) in preparing same, the collections officer did not have knowledge of "all the circumstances connected with the claim" notwithstanding his assertion to the contrary.
(b) The Appellant also pleaded that the proof of claim was, by its terms, "subject to contingent liability" and therefore could not be treated as a proven claim until properly assessed by the Respondent or made subject to a determination by the trustee in bankruptcy under subsection 135(1.1) of the Bankruptcy and Insolvency Act.
(c) In the alternative, the Appellant says and the fact is that the amount of tax, net tax, rebate, interest and penalty of the company has not been properly determined by the Respondent.
Analysis
[8] The relevant provision of the Bankruptcy and Insolvency Act is subsection 124(4) which reads:
124(4) The proof of claim shall contain or refer to a statement of account showing the particulars of the claim and any counter-claim that the bankrupt may have to the knowledge of the creditor and shall specify the vouchers or other evidence, if any, by which it can be substantiated.
I am satisfied that the proof of claim filed by Revenue Canada does refer to a statement of account showing the particulars of the claim.[6] With respect to the Appellant's assertion that the proof was deficient because it did not include the assessment, there is no requirement in the Bankruptcy and Insolvency Act that a notice of assessment be attached. Furthermore, with respect to the Appellant's submission that it was deficient because it followed an arbitrary assessment, reference must be made to subsection 299(1) of the Act which provides:
299(1) The Minister is not bound by any return, application or information provided by or on behalf of any person and may make an assessment, notwithstanding any return, application or information so provided or that no return, application or information has been provided.
299(2) Liability under this part to pay or remit any tax, penalty, interest or other amount is not affected by an incorrect or incomplete assessment or by the fact that no assessment has been made.
(emphasis added)
It is settled law that an arbitrary assessment like any other assessment establishes a debt legally enforceable pursuant to the Act. As well, the evidence before me establishes that in this particular situation it was quite appropriate for Revenue Canada to have analysed the taxpayer's history of returns and made an arbitrary assessment on that basis.
[9] The Appellant's argument that the collection officer did not have knowledge of "all the circumstances connected with the claim" must also fail. Aside from the fact that no evidence was adduced to support the position advanced, the fact is that on the date the proof of claim was submitted by the collection officer, an assessment had been issued against the company. The amount assessed is identical to the amount referred to in the statement of account attached to the proof of claim. The logical conclusion is that the collection officer was aware of the assessment and the fact that it represented an amount due and owing to the Crown.
[10] With respect to the Appellant's submission that the Minister's claim was not a "proven claim", I note that subsection 135(1.1) of the Bankruptcy and Insolvency Act was added by amendment 1997 c.12 s. 89(1) and (2) and applies to bankruptcies of which proceedings are commenced after September 1997. Thus the section and the Appellant's pleading in this regard is not applicable to the present appeal. Had I ruled otherwise I would have found that the company's debt for unremitted taxes, penalty and interest was not in fact a contingent liability. In Wawang Forest Products Ltd. v. The Queen,[7] the Court observed:
The generally accepted test for determining whether a liability is contingent comes from Winter and Others (Executors of Sir Arthur Munro Sutherland (deceased)) v. Inland Revenue Commissioners, [1963] A.C. 235 (H.L.), in which Lord Guest said this (at page 262):
I should define a contingency as an event which may or may not occur and a contingent liability as a liability which depends for its existence upon an event which may or may not happen.
...
Returning to the Winter test, the correct question to ask, in determining whether a legal obligation is contingent at a particular point in time, is whether the legal obligation has come into existence at that time, or whether no obligation will come into existence until the occurrence of an event that may not occur. ...
The fact is that the assessment created a legal obligation which was in existence at the point of time the proof of claim was filed.
[11] The last issue relates to the amount of tax payable. The evidence before the Court is that the arbitrary assessment dated September 20, 1995 in the amount of $65,880.31 was based on the estimated tax the company would have reported for that period of time. Subsequently, based on the returns filed by the trustee the net tax due was amended to $172,128.34.[8] During the objection process[9] further documentation was provided to the auditor. As a result, additional ITC's of $46,154 were allowed and the company was reassessed tax in the amount of $131,651.72. Prior to trial, further consideration was given by the Respondent to Canada Customs K84 statements with the result that a further $102,410.70 in ITCs was allowed. According to counsel for the Respondent as a result of the foregoing, the tax, interest and penalty due and payable by the company (and thus the liability of the directors) is $73,869.32.
[12] With the exception of the tax relating to the periods from June 1 to June 30 and July 1 to July 18, 1995, the Appellant agrees with the amounts of tax assessed. He argues that the returns and remittances should (and only could) have been attended to by Deane Gurney who had been appointed to act as monitor during the period July 18 to September 6, 1995. The Appellant's position is that once Gurney was appointed the directors lost control of the finances and, therefore, the failure to file the returns and make the remittances in the amounts of $6,111.61 and $10,807.55 for those periods cannot be attributed to them.
[13] The evidence does not support the Appellant. Gurney described his role under the Bankruptcy and Insolvency Act as different than that of a receiver in bankruptcy. More specifically, he was required to monitor the company's activities. To do so, he instructed that a daily cash report be set up which set out the daily receipts as well as the disbursements and which included all cheques written during that period of time. This list, prepared by the company accountant, Harold Jensen, was examined to ascertain whether there were any unusual items. Gurney noted that no controls were placed by him on the company's ability to write cheques nor did he have any power to interfere with the cheques being written. He indicated that if he concluded that a particular cheque should not be issued, he as trustee would say so and if the company declined the matter would have been reported to the creditors and the superintendent in bankruptcy. Gurney also testified that at a meeting he specifically told the directors that they remained responsible for the appropriate filings and remittances and that they might be personally liable if they did not. The evidence does not support the Appellant's position that the directors had lost control during this period. Accordingly, the amounts of $6,111.61 and $10,807.55 were properly included in the calculation of the tax due and payable by the directors.
Director's Liability
[14] In the course of his examination and cross-examination of the witnesses, the Appellant elicited evidence clearly directed at the due diligence issue. He made particular reference to the role of the company's accountant Jensen and the fact that he was competent in the performance of his duties and could be relied upon "by a director like myself" to have prepared the documents properly and "to have filed all the returns". The Appellant also directed his examination of Gurney to establish that during the period July 18 to September 16, 1995, the Royal Bank as primary creditor had control and was "restrictive in the ability" of the company "to update the GST payments".[10]
[15] The Appellant in his Notice of Appeal did not raise the issue of due diligence, and given the fact that it had been drafted and filed by his solicitor, it cannot be argued that it was an inadvertent oversight. Counsel for the Respondent submitted that as a result of the Appellant's failure to do so in his pleadings the issue was not canvassed in his examination and cross-examination of witnesses. This, he argued, was sufficient to dispose of this aspect of the appeal without further comment. I am unable to agree. Although the Notice of Appeal did not directly raise the issue, it is arguable that the sections of the Act giving rise to the assessment in a sense themselves raise the issue. They read:
323(1) 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 or jointly and severally liable, together with the corporation, to pay that amount and any interest thereon or penalties relating thereto.
323(3) A director of a corporation is not liable for a failure under subsection (1) where the director exercise a degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.
In addition, I cannot ignore the fact that the Reply to the Notice of Appeal specifically refers to the due diligence issue in clear and unambiguous language.[11]
Analysis
[16] With respect to subsections 323(1) and 323(3), the Federal Court of Appeal in Smith v. The Queen,[12] made the following observations:
The Soper decision, supra, established that the standard of care described in the statutory due diligence defense is substantially the same as the common law standard of care in Re City Equitable Fire Insurance Co., [1925] Ch. 407 (Eng. C.A.). It follows that what may reasonably be expected of a director for the purposes of s. 227.1(1) of the Income Tax Act and s. 323(1) of the Excise Tax Act depends upon the facts of the case, and has both an objective and a subjective aspect.
The subjective aspect of the standard of care applicable to a particular director will depend on the director's personal attributes, including knowledge and experience. Generally, a person who is experienced in business and financial matters is likely to be held to a higher standard than a person with no business acumen or experience whose presence on the board of directors reflects nothing more, for example, than a family connection. However, the due diligence defense probably will not assist a director who is oblivious to the statutory obligations of directors, or who ignores a problem that was apparent to the director or should have been apparent to a reasonably prudent person in comparable circumstances (Hanson v. Canada (2000), 261 N.R. 79, [2000] 4 C.T.C. 215, 2000 DTC 6564 (F.C.A.)).
In assessing the objective reasonableness of the conduct of a director, the factors to be taken into account may include the size, nature and complexity of the business carried on by the corporation, and its customs and practices. The larger and more complex the business, the more reasonable it may be for directors to allocate responsibilities among themselves, or to leave certain matters to corporate staff and outside advisers, and to rely on them.
The inherent flexibility of the due diligence defense may result in a situation where a higher standard of care is imposed on some directors of a corporation than on others. For example, it may be appropriate to impose a higher standard on an "inside director" (for example, a director with a practice of hands-on management) than an "outside director" (such as a director who has only superficial knowledge of and involvement in the affairs of the corporation).
[17] It was also observed in Smith that "in certain circumstances, the fact that a corporation is in financial difficulty and thus may be subject to a greater risk of default and tax remittances than other corporations, may be a factor that raises the standard of care. For example, a director who is aware of the corporation's financial difficulty and who deliberately decides to finance the corporation's operation with unremitted source deductions may be unable to rely on the due diligence defence (Ruffo v. Canada, 2000 DTC 6317 (F.C.A.)). In every case, however, it is important to bear in mind that the standard is reasonableness, not perfection".
[18] In the present appeal, it is obvious that the company had been in financial difficulties for a substantial period of time and that commencing in August 1994, it stopped filing goods and services tax returns and making the appropriate remittances. It is also a fact that the first four returns for September, October, November and December, 1994 had been prepared, likely by the accountant Jensen, and were in the corporate records. The subsequent returns were neither prepared nor remitted until after the bankruptcy occurred when the returns were provided by the trustee. That course of conduct suggests a deliberate attempt to keep the company alive by using the remittances to satisfy creditors. Furthermore, although an effort was made by the Appellant to deflect responsibility onto the shoulders of Jensen, it is clear that the Appellant as an inside director, and experienced, knowledgeable and active in the company's business, should have been, and in my view was aware, that the company was not, for an extended period, making its remittances.
[19] The due diligence required by the Act is to "prevent the failure to remit". No evidence whatsoever was presented to suggest that any steps had been taken or even considered to prevent the default. In fact, the evidence suggests that the failure to remit was a conscious and deliberate decision made by the directors. I have concluded that the evidence falls short of establishing that the standard of care exercised by the Appellant was that what may reasonably be expected of him for the purposes of subsection 323(1) of the Act.
[20] For the above reasons, the appeal is allowed on the basis that the assessment in the amount of $131,651.72 is varied and reduced to $73,869.32.
Signed at Ottawa, Canada, this 18th day of February, 2002.
|
"A.A. Sarchuk" |
J.T.C.C.
COURT FILE NO.: 2001-393(GST)I
STYLE OF CAUSE: John Arie Vanderpol and
Her Majesty the Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: October 11, 2001
REASONS FOR JUDGMENT BY: The Honourable Judge A.A. Sarchuk
DATE OF AMENDED JUDGMENT: February 18, 2002
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Eric Douglas
COUNSEL OF RECORD:
For the Appellant:
Name: N/A
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-393(GST)I
BETWEEN:
JOHN ARIE VANDERPOL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on October 11, 2001, at Vancouver, British Columbia, by
the Honourable Judge A.A. Sarchuk
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Eric Douglas
AMENDED JUDGMENT
The appeal from the Notice of Assessment - Third Party made under the Excise Tax Act, notice of which is dated October 30, 2000 and bears number 76053 in the amount of $131,651.72 is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the assessment is varied and reduced to $73,869.32.
The Appellant is not entitled to any further relief.
Signed at Ottawa, Canada, this 18th day of February, 2002.
|
"A.A. Sarchuk" |
J.T.C.C.
[1] Exhibit R-1 - the statement of affairs in relation to the proposal shows Revenue Canada as both a secured creditor re: employee payroll and as an unsecured creditor with respect to unpaid GST in the amount of $75,000. The affidavit forming part of this proposal was signed by the Appellant.
[2] See Exhibit A-1, schedule "D".
[3] Exhibit A-2.
[4] Exhibit A-1, schedule "E".
[5] Exhibit R-1.
[6] Exhibit A-2, page 3.
[7] 2001 DTC 5212 at 5215-5216.
[8] This amendment was dated March 19, 1996. According to Deane Gurney, trustee in bankruptcy, such an amendment is common and is not considered to be a new claim against the bankrupt but is a revision of the existing claim.
[9] These objections relate to the assessment of the directors.
[10] The Act requires the company to file the returns and pay the tax no later than one month after the end of its reporting period. Thus, since the bankruptcy occurred as of July 18, 1995, the "loss of control" argument relates only to returns and remittances required for the periods June 1 to June 30 and July 1 to July 18, 1995.
[11] 10. In so reassessing the Appellant, the Minister relied on the following assumptions of fact:
(t) the Appellant knew, or reasonably ought to have known of the Company's failure to file GST returns and remit GST collected as required;
(u) at all material times, the Appellant was an informed business person with considerable experience, was knowledgeable as to the responsibility of a director, was aware of the obligation to collect and remit GST, and knew of his statutory liability as a director for the Company's failure to remit GST; and
(v) the Appellant did not exercise the degree of care, diligence and skill to prevent the failure to remit that a reasonably prudent person would have exercised in comparable circumstances.
[12] 198 D.L.R. (4th) 257.