Date: 20021112
Docket: 2001-190-IT-G,
2001-191-GST-G
BETWEEN:
JAMES AXFORD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
McArthur J.
[1] These are appeals heard on common evidence from assessments by the Minister of National Revenue under the director's liability provisions of the Income Tax Act and the Excise Tax Act. The Appellant was assessed $19,152 for non-remitted source deductions and $25,943 in respect of non-remitted goods and services tax, both amounts owing by Axford Consulting Inc. (the Corporation).
[2] The parties filed an Agreed Statement of Facts, which provides as follows:
1. The Appellant was at all material times an individual resident in Canada.
2. The Appellant became the sole director of Axford Consulting Inc. (the "Corporation") on October 15, 1983. He continued as sole director until his resignation on March 1, 1998.
3. Throughout the period October 15, 1983 to March 1, 1998, the Corporation operated a home siding and renovation business.
4. The Corporation ceased its operations in August of 1998.
5. The Corporation failed to remit to the Receiver General of Canada (the "Receiver General") source deductions of its employees in the amount of $15,969.11, which were owing pursuant to section 153 of the Income Tax Act. Schedule B of the Reply to Notice of Appeal 2001-190(IT)G herein, ("the tax Reply"), accurately sets out the non-remitted amounts as well as the corresponding periods of time from which they arose.
6. The Corporation was assessed for the non-remitted source deductions as well as corresponding interest and penalties (cumulatively the "tax amounts owing"), on November 10, 1997, December 8, 1997, June 4, 1998, July 8, 1998, September 1, 1998 and October 29, 1998 as also set out in Schedule B of the Tax Reply.
7. The Corporation was liable to pay the tax amounts owing but failed to remit these amounts except as described in Schedule B of the Tax Reply.
8. A certificate for the Corporation's liability was registered in the Federal Court under section 223 of the Act and execution for the amount of the liability was returned unsatisfied in whole on September 28, 1999.
9. By Notice of Assessment dated October 28, 1999 the Appellant was assessed in the amount of $19,152.97 as prescribed by subsection 227.1(10) of the Income Tax Act, for failure of the Corporation to pay the tax amounts owing.
10. The Corporation filed GST returns and reported net income tax from its commercial activities for the reporting periods set out in Schedule C of the Reply to Notice of Appeal 2001-191(GST)G herein, (the "GST Reply").
11. For the reporting periods as set out in Schedule C of the GST Reply, the Corporation did not remit to the Receiver General, on or before the date on which the remittances were required to be made, the positive amounts of net tax owing to the Receiver General.
12. The Corporation was issued assessment notices on May 23, 1997 for the reporting periods ending September 30, 1996, December 31, 1996 and March 31, 1997, on October 31 1997 for the reporting period ending June 30, 1997, and on October 9, 1998 for the reporting periods ending December 31, 1997 and March 31, 1998.
13. The Corporation failed to remit to the Receiver General the following amounts of net tax for the following reporting periods:
a) 31-March-97 0.00
b) 30-June-97 $17,919.57
c) 31-Dec-97 $ 2,384.77
14. The Corporation failed to pay penalties and interest relating to the net tax referred to in the previous paragraph, (the "GST amounts owing"), as required by the provisions of the Excise Tax Act.
15. The Appellant was assessed by Notice of Assessment dated October 29, 1999 under subsection 323(1) of the Excise Tax Act in the amount of $25,943.03 representing the balance of the GST amounts owing on that date, for failure of the Corporation to remit GST amounts owing.
16. On or about March 1, 1998, the Appellant arranged to sell the Corporation to Mr. Mark Baskin.
17. On or about March 1, 1998, certain property in the City of Red Deer, (the "property") was sold for $225,000.00, pursuant to a resolution of the Corporation dated February 28, 1998 and signed by the Appellant.
18. The proceeds from the sale of the property were distributed pursuant to an Order for payment of the Corporation dated March 4, 1998 signed by the Appellant and Mr. Mark Baskin.
[3] The issue in these appeals is whether the Appellant exercised the degree of care, diligence and skill that a reasonably prudent person in comparable circumstances would have exercised, to prevent the failure by the Corporation to remit source deductions and GST pursuant to subsection 227.1(3) of the Income Tax Act and subsection 323(3) of the Excise Tax Act. James Axford testified on his own behalf and Mark Baskin testified for the Respondent.
Facts
[4] The Appellant has been a successful, self-employed entrepreneur for over 25 years. He has a grade 8 formal education but is well-educated in the school of hard knocks, to use his expression. After being an employee in a hardware store, he eventually purchased it through a Corporation. He subsequently was the controlling mind of several corporations. The Corporation operated a home siding and renovation business from 1983 to August 1998. The Appellant sold his shares in the Corporation to Baskin and resigned as director in March 1998. The Corporation appears to have been successful at least until 1996.
[5] Up until 1997, the Appellant took a full-time active role in the Corporation. He was involved in all facets of the business although his expertise was primarily sales. His evidence was focused on establishing that he understood little to nothing in the field of accounting and he hired competent people to do the bookkeeping, accounting and office management.
[6] In 1995, the Appellant on behalf of the Corporation hired Mark Baskin to replace the Corporation's existing bookkeeper. Mark was a self-trained bookkeeper with general office management experience. It was a two-person office overseen by the Appellant who no doubt was the boss. He was in the office almost daily up to January 1997 overseeing the operation although, by far, most of his time was devoted to sales.
[7] In 1996, he got involved in an operation, Usana, a pyramid marketing business which took up most of his time and attention. In January 1997, he directed Baskin to take over the day-to-day office management of the Corporation. He immersed himself into his new business spending much of his time on the road developing customers in Saskatchewan, Alberta and British Columbia. Usana became very profitable for him while the Corporation continued to struggle.
[8] Mr. Baskin was an impressive witness and I accept his evidence over that of the Appellant when their versions are in conflict.
[9] The Appellant portrayed himself as a salesman with no understanding of bookkeeping and finances. He testified that he hired Mr. Baskin to look after the financial affairs because he did not understand it nor could he interpret a financial statement. He added that he knew nothing of employee deductions, GST filings and remittances. While the Corporation cheques required his signature, he signed them in blank for Mr. Baskin.
[10] In my finding of facts, I reject part of the Appellant's evidence. In attempting to recall the past, he saw events in the light of his present-day interest. I believe this was done in part unconsciously, but for the most part, deliberately.
[11] The parties further agree to the following: (i) the Minister complied with subsection 323(2) of the Excise Tax Act and with subsection 227.1(2) of the Income Tax Act; (ii) at all material times, the Appellant was the sole director of the Corporation and he was assessed within the time periods set out in both Acts; and (iii) it was properly assessed for failure to remit GST and source deductions.
[12] Again, the question is whether the Appellant exercised due diligence to prevent the Corporation's failure to remit payroll deductions and GST. There are many relevant instances of conflicting evidence from the two witnesses. I will attempt to refer to some of those.
(a) The Appellant stated and implied that he had little or nothing to do with office management particularly after January 1, 1997. He stated that he was very seldom in the office and gave Mark Baskin a free hand to do everything.
(b) Baskin stated that from the outset of his employment in 1995, the Appellant was in the office almost everyday until January 1997. From then until March 1998, the Appellant was seldom in the office but telephoned Mr. Baskin almost everyday to be brought up-to-date. He was aware of the day-to-day operation.
(c) The Appellant testified that the Corporation was operating smoothly and paying its expenses up to the sale of his shares to Mr. Baskin in March 1998. He added that he had no idea that the Corporation was not meeting its financial obligations and the first time he heard that money was owing to Revenue Canada was when he was assessed in October 1999.
(d) Baskin was not present when the Appellant gave his evidence and he related that the Corporation began having difficulty meeting its obligations in mid-1996 when it appears to have first failed to remit payroll deductions and GST. The Appellant instructed Mr. Baskin to pay in priority: (i) the Appellant's personal credit card bills; (ii) insurance; (iii) his mother's nursing home; and (iv) suppliers. Mr. Baskin added that in 1997, the Appellant was well aware that the Corporation was not paying its suppliers and in particular, Mr. Murphy, a long-time, close friend of the Appellant. The Corporation owed Murphy at least $60,000 and he was very concerned. Both Murphy and his wife spoke to the Appellant. The Appellant made no mention of the Murphy indebtedness.
[13] Many suppliers would only sell to the Corporation on a cash on delivery basis. Mr. Baskin recalls specifically discussing the Revenue Canada remittance problems they were having and advising the Appellant that he had received a call or calls from Revenue Canada demanding immediate payment. The Appellant advised Mr. Baskin to do what he could. Mr. Baskin recalls another conversation he had with the Appellant in February 1998 when they were discussing the purchase and sale of shares. He advised the Appellant that arrangement for the arrears to Revenue Canada had to be made before any sale could be completed. The Appellant gave Baskin the authority to negotiate an arrangement for payments to Revenue Canada. Baskin also spoke of the considerable efforts the Appellant made to raise funds for the troubled Corporation in 1997, including considering a second mortgage on his home and finally settling on a high rate risk capital loan of $30,000. The Appellant did not mention this in his evidence.
[14] Perhaps the most startling contrast in their versions of events was the following. The Appellant testified that to make the purchase easier for Mr. Baskin, he would take over the warehouse real property personally. He believed it was owned by the Corporation.[1] At this point, he stated that a supplier out of the blue, made an acceptable offer to purchase the commercial building.
[15] Mr. Baskin stated that John Murphy and his wife, Jean, had been pressing the Appellant to settle the large debt. The Appellant made considerable efforts to satisfy his friend and finally, he approached Murphy in February 1998 with an offer to sell the real property to him for $225,000. The agreement reflected a deposit of approximately $40,000. Mr. Murphy did not pay the deposit. The Corporation's debt to Murphy was reduced by the amount of the deposit. Baskin stated that this was a solution the Appellant came up with to resolve the issue with his friends. This was the largest debt outstanding of the Corporation. The remaining proceeds of the sale were paid as follows: the payout is approximately $170,000 leaving $55,000 unaccounted for.[2] This is one of several instances where I find that the Appellant deliberately attempted to mislead the Court.
[16] The Appellant portrayed himself as an outside director not knowing that the Corporation was not up-to-date with required remittances to Revenue Canada. In accepting Baskin's evidence, I have no difficulty in finding he was an inside director. I do not accept the Appellant's contention that financial statements were of no use to him because he could not understand them. I accept Baskin's evidence that the Appellant went over the Corporation's statements with his accountants annually and he had Baskin prepare interim statements that he took to the bank during the latter part of 1997 seeking financing. The Appellant knew or ought to have known that in late 1997 and early 1998, the Corporation was on the brink of bankruptcy. There is no doubt he was aware of the remittance arrears prior to the sale of his shares.
[17] During cross-examination, Baskin stated that the Corporation had other directors prior to 1996. These directors were salesmen for the Corporation. Appointing them directors was part of a plan to avoid paying Worker's Compensation for them. Apparently, it did not work.
Analysis
[18] The due diligence subsections of both the Income Tax Act and the Excise Tax Act, 227.1(3) and 323(3) are identical. The cases that consider either provision are interchangeable. Both parties referred to Soper v. Canada[3] which case is of great assistance in determining if a due diligence defence has been established. Robertson J. described at page 5409 what gave rise to imposition of director's liability:
... Faced with a choice between remitting such amounts to the Crown or drawing on such amounts to pay key creditors whose goods or services were necessary to the continued operation of the business, corporate directors often followed the latter course. Such patent abuse and mismanagement on the part of directors constituted the "mischief" at which section 227.1 was directed ...
Liability is not dependent simply on whether a person is an inside or outside director. At page 5417, he went on to say:
... it is difficult to deny that inside directors, meaning those involved in the day-to-day management of the company and who influence the conduct of its business affairs, will have the most difficulty in establishing the due diligence defence. For such individuals, it will be a challenge to argue convincingly that, despite their daily role in corporate management, they lacked business acumen to the extent that that factor should overtake the assumption that they did know, or ought to have known, of both remittance requirements and any problem in this regard. In short, inside directors will face a significant hurdle when arguing that the subjective element of the standard of care should predominate over its objective aspect.
[19] An inside director ought to have known if the corporation was facing financial difficulties. Robertson J. suggests that when a director knows of financial difficulties, he or she has a duty to take positive action to prevent a failure to make remittances. An inside director has a difficult time to establish not knowing there were financial problems.
[20] I find that the Appellant was involved in the Corporation's affairs on almost a daily basis. It was his Corporation. Certainly he was an inside director. He was told of the Revenue Canada remittance delinquency. He struggled to obtain interim financing. He is a capable businessman with a wealth of experience as a sale director of five or six personal corporations over the years. On the balance of probabilities, he must have known of its financial difficulties. He, over anyone else, had the most influence on the priority of payments. At page 5418 of Soper, Robertson J. states:
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. ...
[21] Applying this view, the Appellant was under a positive duty to act, commencing at the latest, in October 1997 when Baskin advised him that a representative of Revenue Canada was demanding payment of remittance arrears. The Appellant took no action other than directing Baskin to do the best he could. At page 5420 of Soper, Robertson J. added:
... this case concerns an experienced businessman who took no positive steps to ensure remittance of employee withholdings despite the fact that he should have been alerted to a potential problem in that regard. He did absolutely nothing but close his eyes. As a consequence, it can hardly be said that the taxpayer in this case exercised, in his capacity as director of RBI, the degree of care, skill and diligence required by the Act.
This statement applies equally to the present Appellant.
[22] What Mr. Axford did when he knew of the non-remittances was inadequate for the purpose of discharging the burden imposed on him by subsection 227.1(3) of the Income Tax Act and by subsection 323(3) of the Excise Tax Act. It is not sufficient to direct the bookkeeper to "do the best you can" and then impose personal debt priority payments for the cash-starved Corporation and ignore Revenue Canada.
[23] For the above reasons, the appeals are dismissed, with costs.
Signed at Ottawa, Canada, this 12th day of November, 2002.
|
"C.H. McArthur" |
J.T.C.C.
COURT FILE NO.: 2001-190(IT)G and 2001-191(GST)G
STYLE OF CAUSE: James Axford and Her Majesty the Queen
PLACE OF HEARING: Calgary, Alberta
DATE OF HEARING: October 24, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge C.H. McArthur
DATE OF JUDGMENT: November 12, 2002
APPEARANCES:
Counsel for the Appellant: Jonathan D. Warren
Counsel for the Respondent: Dan Misutka
COUNSEL OF RECORD:
For the Appellant:
Name: Jonathan D. Warren
Firm: Warren Tettensor
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-190(IT)G
BETWEEN:
JAMES AXFORD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of James Axford (2001-191(GST)G), on October 24, 2002, at Calgary, Alberta, by
the Honourable Judge C.H. McArthur
Appearances
Counsel for the Appellant: Jonathan D. Warren
Counsel for the Respondent: Dan Misutka
JUDGMENT
The appeal from the assessment of tax made under section 227.1 of the Income Tax Act, notice of which is dated October 28, 1999 and bears number 11823 is dismissed, with costs.
Signed at Ottawa, Canada, this 12th day of November, 2002.
|
"C.H. McArthur" |
J.T.C.C.
2001-191(GST)G
BETWEEN:
JAMES AXFORD,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of James Axford
(2001-190(IT)G), on October 24, 2002, at Calgary, Alberta, by
the Honourable Judge C.H. McArthur
Appearances
Counsel for the Appellant: Jonathan D. Warren
Counsel for the Respondent: Dan Misutka
JUDGMENT
The appeal from the assessment of goods and services tax made under section 323 of the Excise Tax Act, notice of which is dated October 28, 1999 and bears number 06322 is dismissed, with costs.
Signed at Ottawa, Canada, this 12th day of November, 2002.
|
"C.H, McArthur" |
J.T.C.C.