2000-4608(GST)G
BETWEEN:
ANDREW NETUPSKY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on October 7, 2002 at Vancouver, British Columbia, by
the Honourable Judge R.D. Bell
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Kristy Foreman-Gear
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is dated January 15, 1998 and bears number 20912, is allowed, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada this 21st day of January, 2003.
|
"R.D. Bell" |
J.T.C.C.
Date: 20020121
Docket: 2000-4608(GST)G
BETWEEN:
ANDREW NETUPSKY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bell, J.T.C.C.
GENERAL
All sections referred to in these Reasons are sections of Part IX of the Excise Tax Act respecting Goods and Services Tax unless otherwise stated.
ISSUE
[1] The issue is whether the appellant resigned as a director of No. 2 Corporate Ventures Ltd. ("Ventures") more than two years before January 15, 1998, the date of the Notice of Assessment - Third Party ordinary issued by the Minister of National Revenue ("Minister") for tax, interest and penalty in the sum of $794,698.04 respecting Ventures' failure to remit net tax as required under subsection 228(2).
If the appellant did resign more than two years before such reassessment he will, by virtue of subsection 323(5), not be liable as a director under the provisions of subsection 323(1).
Subsection 228(1) and (2) require Ventures to calculate the net tax and to remit it on a timely basis to the Receiver General for Canada. Subsection 323(1) provides that where a corporation fails to remit tax as so required the directors of the corporation at the time the corporation was required to remit the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest thereon or penalties relating thereto. Subsection 323(5) provides that an assessment of any amount payable by a person who is a director of a corporation shall not be made more than two years after the person last ceased to be a director of the corporation.
FACTS
[2] The appellant's first witness, Roderick Hunter McCloy, solicitor for Ventures, testified that a written resignation as a director of Ventures was deposited by the appellant in his office on December 14, 1995 and that, in his opinion, it was an effective resignation. The appellant subsequently testified that McCloy's office was the registered office of the company.
[3] The appellant testified that he became the sole director and president of Ventures in 1988. He stated that the shareholdings were altered in 1988 with him having 50% of the issued shares, a public company, KSB Enterprises trading on the Hong Kong Exchange, having 41% of the issued shares and Good Land Ltd., a Hong Kong company, owning the remaining 9% of the shares. He stated that Ventures, in 1992, acquired property and engaged in development of the site into six residential units, construction having been commenced in the summer of 1992 and completed in the spring of 1994. The appellant then explained that he had, on December 14, 1995, given the written resignation as Director and a written resignation as president, each signed by him on December 6, 1995 to a Karen MacLean in "McCloy's" office, that she directed him to "a paralegal" who showed him where the minute book was and that he put that resignation in the minute book. He explained that Ventures had ceased its business, that there were problems in British Columbia respecting leaky condominiums, that he did not wish to be a director and that the company would not be used in the future.
[4] The document respecting his resignation as Director reads as follows:
RESIGNATION OF DIRECTOR
TO: NO. 2 CORPORATE VENTURE LTD. (the "Company")
I resign as director of the Company, effective immediately.
DATED as of the 6th day of December, 1995.
ANDREW NETUPSKY
[5] The document respecting his resignation as president reads as follows:
RESIGNATION OF OFFICER
TO: NO. 2 CORPORATE VENTURES LTD. (the "Company")
I resign as President of the Company, effective immediately.
DATED as of the 6th day of December, 1995.
ANDREW NETUPSKY
Among the documents filed by the appellant was a Statutory Declaration from Karen McLean reading, in part as follows:
THAT I recall that Andrew Netupsky attended the offices of Jones, McCloy, Peterson affiliated law practices situated at 1700 - Three Bentall Centre, 595 Burrard Street, Vancouver, British Columbia on or about December 14, 1995 and that I directed him at that time to a corporate paralegal in the office who was responsible for maintaining the corporate records of No. 2 Corporate Ventures Ltd.
The appellant then produced a Statutory Declaration from McCloy stating inter alia, that he had
"... no reason to believe that the Notice was not delivered to the registered office of No. 2 Corporate Ventures Ltd. by Andrew Netupsky on December 14, 1995."
The appellant testified that he did not, because of the cost of so doing, take any action with respect to terminating the existence of the Company. He said that McCloy advised him that the Company would be struck off in two years if appropriate statements were not filed.
On cross-examination the appellant said that he had not corrected the record of directors. Presumably, this refers to notices filed with the British Columbia corporate registry. He said that, to his knowledge, no other directors were appointed on or after December 14, 1995. He said further that he was the sole shareholder on December 5, 1995, the aforesaid shares having been transferred to him on November 8, 1995. The appellant testified that a letter from McCloy to him dated June 9, 1998 was sent to the address in Vancouver of his engineering company.
[6] Respondent's counsel produced a copy of a letter from the Hongkong Bank of Canada, Vancouver main branch, dated September 17, 1996 to Ventures at the engineering company's address. The letter concerned a $70,000 loan owing by the appellant to the Hongkong Bank of Canada in respect of Ventures' project. That letter describes Ventures as THE BORROWER and the appellant as THE GUARANTOR. He stated that he had signed the letter on behalf of Ventures.
[7] Respondent's counsel produced a copy of a letter dated December 9, 1996 from Manet Developments (1994) Ltd. and Ventures to Revenue Canada, attention Mr. Marc Roy respecting GST owing. It was signed by the appellant on behalf of Ventures.
[8] Respondent's counsel then produced a copy of a letter dated November 20, 1966 addressed to Ventures to the attention of Mr. Andrew Netupsky, president. In response to her question as to whether he had advised Revenue Canada that he was no longer president, he responded in the negative. In response to counsel's query as to whether he would have retained authority to designate one Douglas Reid, Accountant, to represent Ventures respecting GST discussions with Revenue Canada, he responded affirmatively.
[9] Respondent's sole witness, Marc Roy ("Roy"), testified that he audited Ventures in 1996, having first contacted it on April 2, 1996. He said that the appellant was still listed on the GST computer system as the person to contact. Roy testified that the appellant had said some documents had been purged. In response to Respondent's counsel's question as to whether he was made aware that the appellant was no longer president, he replied in the negative. He also said that the appellant had not advised him that he had resigned as a director. On cross-examination, Roy said that he had searched "BC Online" and that the appellant was listed as a director and president.
APPELLANT'S SUBMISSION
[10] The appellant, acting for himself, said that he resigned as a director and officer of Ventures on December 6, 1995 and that the written resignation was delivered to the company's corporate offices where the minute book was kept on December 14, 1995. He then said that he had been assessed as aforesaid on January 15, 1988 and had, therefore, resigned more than two years before such assessment. He referred to a letter dated October 28, 1998 sent by McCarthy Tétrault to a Revenue Canada Appeals Officer[1], reading, in part, as follows:
The Notice of Assessment is invalid due to the application of subsection 323(5) of the Excise Tax Act because the assessment was made by the Minister of National Revenue more than two years after the date that Andrew Netupsky ceased to be a director of the Company.
Subsection 323(5) states:
"323.(5) An assessment under subsection 323(4) of any amount payable by a person who is a director of a corporation shall not be made more than two years after the person last ceased to be a director of the corporation."
The Excise Tax Act does not define when a person ceases to be a director of a corporation. It is therefore necessary to refer to the applicable law governing the Company.
The Company Act
The Company was incorporated under the Company Act (British Columbia). Therefore the provisions of that statute are relevant in determining when Andrew Netupsky ceased to be a director of the Company.
A director ceases to hold office when he resigns. At the relevant time, paragraph 154(1)(a) and subsection 154(2) of the Company Act, R.S.B.C. 1979, c.59 (the "Company Act") states:
"154.(1) A director ceases to hold office ... when he
(a) dies or resigns".
"154.(2) Every resignation of a director becomes effective at the time a written resignation is delivered to the registered office of the company or at the time specified in the resignation, whichever is later."
The Resignation specifies that Andrew Netupsky's resignation is effective immediately. Therefore, Andrew Netupsky ceased to be a director of the Company pursuant to subsection 154(2) of the Company Act on the date that the Resignation was delivered to the registered office of the Company namely, on 14 December 1995.
The effectiveness of the resignation of Andrew Netupsky does not depend in any way on whether or not the date of the resignation is entered in the Company's register of directors.
It is true that the Company is required under the provisions of the Company Act to keep a register of directors. Paragraph 140(c) of the Company Act states:
"140. Every company shall keep a register of its directors and enter in it the ...
(c) date on which each former director ceased to hold office as a director".
However, it is not an offence for a company not to update the register of its directors. Moreover, the omission by the Company to enter the date on which Andrew Netupsky ceased to hold office in the register of its directors does not render his resignation ineffective. On the contrary, the effectiveness of Andrew Netupsky's resignation is determined strictly with reference to subsection 154(2) of the Company Act.
Similarly, the effectiveness of the resignation of Andrew Netupsky does not depend in any way on whether or not a notice of the resignation was filed with the Registrar of Companies. It is the Company, rather than Andrew Netupsky, which is required under the provisions of the Company Act to file a notice of resignation with the Registrar of Companies. Subsections 156(1) and (2) of the Company Act state:
"156.(1) Every company shall, within 14 days after the resignation or removal of a director or the company becoming aware of his not being qualified, file with the registrar a notice, in Form 11 of the Second Schedule, of a director ceasing to hold office ...."
"156.(2) A company that contravenes subsection (1) commits an offence and is liable to a fine not exceeding $50 for each day it is in default."
In addition, any officer or director who authorized, permitted or acquiesced in an offence committed by a company has committed an offence and is liable to a fine. Section 366 of the Company Act states:
"366. Where a corporation commits an offence against this Act, every director or officer of it who authorized, permitted or acquiesced in the offence commits an offence and is liable on conviction to a fine of not more than $2,000."
It may be true that the Company has committed an offence under subsection 156(2) of the Company Act it if has failed to file a notice of Andew Netupsky's resignation in prescribed form with the Registrar of Companies. Although the Company's omission renders it liable to a fine pursuant to subsection 156(2) and renders any director or officer who authorized, permitted or acquiesced in the omission liable to a fine pursuant to section 366, it does not render Andrew Netupsky's resignation ineffective. Therefore, no adverse inference can be drawn regarding the effectiveness of Andrew Netupsky's resignation from the fact that the Company did not file a notice of resignation with the Registrar of Companies as required under subsection 156(1).
The foregoing discussion is supported by jurisprudence on the issue.
Relevant Jurisprudence
The effectiveness of a director's resignation under the Company Act (British Columbia) was recently considered by MacKay, J. in The Queen v. Wellburn and Perri (1995) 95 DTC 5417 (Federal Court - Trial Division). A copy of the Reasons for Judgment are enclosed for your reference.
The issue in The Queen v. Wellburn and Perri was whether subsection 227.1(4) of the Income Tax Act (Canada) (the "Income Tax Act") applied to invalidate a notice of assessment issued by the Minister of National Revenue against the defendants as the former directors of Olympic Hotels Ltd. for liability purportedly arising under subsection 227.1(1) of the Income Tax Act as a result of the failure by that company to remit certain amounts withheld from its employees' remuneration contrary to paragraph 153(1)(a) of the Income Tax Act.
Subsection 227.1(4) of the Income Tax Act is identical in effect to subsection 323(5) of the Excise Tax Act. Subsections 227.1(1) and (4) state:
"227.1(1) Where a corporation has failed to deduct or withhold an amount as required by ... section 153 ... or has failed to remit such an amount ... the directors of the corporation at the time the corporations was required to deduct, withhold, remit or pay the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest or penalties relating thereto."
"227.1(4) No action or proceedings to recover any amount payable by a director of a corporation under subsection (1) shall be commenced more than two years after the director last ceased to be a director of that corporation."
The jurisprudence pertaining to section 227.1 of the Income Tax Act is relevant in considering the application of section 323 of the Excise Tax Act because of the similarities in the wording and effect of their provisions. In considering the application of section 323, a court may refer to judicial decisions made in respect of section 227.1.1 Therefore, although the issue in The Queen v. Wellburn and Perri pertains to the application of subsection 227.1(4), the decision of the Federal Court - Trial Division in that case is relevant in determining the application of subsection 323(5).
The facts in The Queen v. Wellburn and Perri are remarkably similar to the facts set out above. The defendants in that case (namely, Wellburn and Perri) were the sole directors and officers of Olympic Hotels Ltd., a company incorporated under the Company Act (British Columbia). All of the issued and outstanding shares of Olympic Hotels Ltd. were owned indirectly by the defendants through their respective holding company.
The company operated a hotel but eventually fell into financial difficulties and failed to remit certain amounts that it deducted during October 1984 from its employees' remuneration contrary to paragraph 153(1)(a) of the Income Tax Act. A receiver-manager was appointed by the Supreme Court of British Columbia on 28 November 1984 charged with the responsibility of managing the company's property and affairs. The company was assessed by the Minister of National Revenue on 20 February 1985 in regard to its failure to remit the deductions made by it during October 1984.
On 25 February 1985 the defendants both signed a memorandum addressed to Olympic Hotels Ltd. whereby they purported to tender their resignations as directors and officers of the company.
On 24 March 1987 the Minister of National Revenue issued a notice of assessment against each of the defendants as directors of Olympic Hotels Ltd. pursuant to subsection 227(1) of the Income Tax Act. The notice of assessment was in the amount of $16,089 representing the unremited source deductions together with interest and penalties.
1 See for example Drover v. The Queen [1998] G.S.T.C. 45 (Federal Court of Appeal) pertaining to section 323 of the Excise Tax Act which applied the decision in Soper v. The Queen (1997) 97 DTC 5407 (Federal Court of Appeal) pertaining to section 227.1 of the Income Tax Act.
Notwithstanding the defendants' objections to the notice of assessments, the assessments were confirmed in July of 1988. However, the Tax Court of Canada ultimately allowed the defendants' appeal. The Minister of National Revenue appealed to the Federal Court - Trial Division by way of trial de novo.
The defendants argued, among other things, that the notices of assessment were invalid pursuant to subsection 227.1(4) of the Income Tax Act because they were issued more than two years after they resigned as directors of Olympic Hotels Ltd.
The issue is succinctly stated by MacKay, J. at p. 5422 as follows:
"If the defendants effectively resigned from office as directors by their memorandum of February 25, 1985, and that resignation was effective more than two years before the assessments were issued on March 24, 1987, the defendants are entitled to the benefit of the two-year prescription period established under ss. 227.1(4)."
At trial, the defendants both testified that Wellburn prepared the memorandum of their resignations and that they both signed it.
Wellburn testified that he delivered the memorandum to the company's registered office namely, the office of the company's lawyer, and left the memorandum with a secretary or receptionist to place it in the company's minute book. Perri could not corroborate Wellburn's testimony in this regard as he did not accompany Wellburn to the company's registered office. Indeed, Wellburn was unable to fix a time on 25 February 1985 when he actually delivered the memorandum.
When Wellburn delivered the memorandum to the company's registered office, he did not ask to see the lawyer about the matter nor that it be brought to the lawyer's attention. Wellburn testified that "he did not think of it as a very significant document, that it was executed merely to placate Perri who was upset, that it did not affect their efforts to try to save the company or to sell its assets and that he did not want to incur legal costs for the solicitor's services." In this regard, MacKay, J. expressed some surprise that Wellburn, a chartered accountant, "paid less attention to legal formalities of his own corporation than he could have done in a professional manner for someone else".
Neither Wellburn nor Perri subsequently referred to their memorandum of resignation until 1987 when reference to the memorandum was made by them in their respective notice of objection. Indeed, Wellburn testified that he regarded the memorandum to be so insignificant that he had forgotten about it until their counsel was preparing their respective notice of objection. It was at that point that Perri remembered that they signed a memorandum of resignation and that it was delivered by Wellburn to the company's registered office. As a result, the defendants requested the company's lawyer to review the company's records whereupon the memorandum was found in the company's minute book.
Based on the provisions of section 154 of the Company Act (British Columbia) MacKay, J. noted that the issue of the defendants' liability under section 227.1 of the Income Tax Act depended entirely on the determination of when the memorandum of resignation was delivered to the company's registered office.
For their part, council for the Minister of National Revenue argued that there was no credible evidence on which the Court could conclude that the memorandum was delivered to the company's registered office more than two years before the date that the notices of assessment were issued under subsection 227.1(1) of the Income Tax Act. Counsel based their argument on the fact that there was no corroborating evidence of when the memorandum was delivered by Wellburn to the company's registered office and on evidence that the defendants continued to act as the company's directors. The evidence also indicated that the company's register of directors was not updated with the date of the defendants' resignation and a notice of the defendants' resignation in prescribed form was not filed with the Registrar of Companies as required by subsection 156(1) of the Company Act (British Columbia). This omission supported the testimony of the company's lawyer which was to the effect that he was not aware in February or March of 1985 of the defendants' resignations or of the memorandum of resignation being left at his office. Indeed, the company's lawyer testified that he did not recall seeing the memorandum of resignation at the time it was purportedly delivered to his office by Wellburn even though he would have expected that it would have been brought to his attention in light of the established procedures of his office. Nevertheless, the lawyer could not attest to there never being errors made by those of his staff responsible for the office routine systems.
MacKay, J. indicates in his reasons for judgement that the evidence in regard to the delivery by Wellburn of the memorandum of resignation to the company's registered office is unsatisfactory. Nevertheless, he finds as a fact that the memorandum was delivered to the company's registered office by Wellburn within a few days of signature of that document on 25 February 1985 and that the delivery is within the terms of subsection 154(2) of the Company Act (British Columbia). Consequently, he finds that the defendants ceased to be a director of the company more than two years before the defendants were assessed under subsection 227.1(1) of the Income Tax Act on 24 March 1987.
In arriving at his decision, MacKay, J. expressly refers to the requirements under the Company Act (British Columbia) imposed on a company to file a notice in prescribed form with the Registrar of Companies within 14 days after the resignation of a director and to maintain a register of directors and to record therein the date when every director ceases to hold office. With respect to these and other requirements under the Company Act (British Columbia), MacKay, J. makes the following statement at p. 5425:
"In my opinion, these provisions ... deal with consequences of failures by companies to properly report for their own records and to the provincial registrar when there is a resignation of a director. There is no evidence here that any report was made in the company's own records and no report was made to the provincial registrar. Nevertheless, the termination of office of a director who resigns is established by ss. 154(2), in this case when the written resignation signed by the defendants was delivered to the registered office of the company. In my opinion that provision makes the resignation effective, and other provisions of the Act, referred to by the Crown, deal with consequences arising from failure to report a resignation in light of the requirement that there be a director or directors. In the result, I find that the appeal by Her Majesty is dismissed."
[11] The appellant then referred to a letter of November 24, 1998 from McCarthy Tétrault to the same Appeals Officer respecting a Revenue Canada allegation that the appellant was a de facto Director and commenting on other matters. That letter, adopted by the appellant as part of his submission is reproduced here in its entirety.
We are writing in response to your letter of 19 November 1998 which raises several specific issues. Our responses to each issue is set out below.
DE FACTODIRECTOR
Your letter alleges that Andrew Netupsky continued to dischange "senior corporate functions" after his resignation as a director of No. 2 Corporate Ventures Ltd. (the "Company") on 14 December 1995. It is therefore asserted by Revenue Canada that he continued to be a director of the Company within the meaning of the Company Act, R.S.B.C. 1979, c. 59 (the "Company Act") and the meaning of subsection 323(4) of Part IX of the Excise Tax Act (Canada).
Revenue Canada's assertion that Andrew Netupsky continued to be a director of the Company after 14 December 1995 is based on the definition "director" in subsection 1(1) of the Company Act which states ""director" includes every person, by whatever name he is designated, who performs functions of a director".
Although not well articulated in the letter, Revenue Canada appears to rely on this extended definition "director" in the Company Act to support its theory that a person who has not been properly appointed under the applicable corporate law as a director of a company or who has since effectively resigned from that office (i.e. a person who is not a de jure director of a company) can nevertheless be a director of that company if he or she performs the functions of a director of that company (i.e. a de facto director of the company).
Since your letter does not specify the "senior corporate functions" that Andrew Netupsky is alleged to have discharged after 14 December 1995, it is only possible to respond to Revenue Canada's assertion in the abstract.
There are essentially two responses to the issue raised by Revenue Canada. Firstly, Andrew Netupsky expressly denies that he has performed any functions relating to the Company after 14 December 1995. However, even if he had, he did so in his capacity as the sole shareholder of the Company and not as its director.
You may recall that Revenue Canada asserted that the appellants in The Queen v. Wellburn and Perri (1995) 95 DTC 5417 (Federal Court - Trial Division) had performed certain activities as though they continued to hold the office of directors and therefore continued to be directors of the company pursuant to the definition "director" in subsection 1(1) of the Company Act. However, this argument was rejected by the MacKay, J. on the basis that the actions of the appellants were or could have been taken in their capacity as shareholders rather than as directors of the company.
Secondly, no jurisprudence has been cited by Revenue Canada to support its assertion that a person who is not a de jure director of a company but is merely a de facto director of that company can be subject to liability as a director under subsections 323(4) of the Excise Tax Act or 227.1(4) of the Income Tax Act (Canada). On the contrary, the decision of O'Connor, T.C.C.J. in Wheeliker et al. v. The Queen (1997) 98 DTC 1110 (a copy of the reasons for judgement are enclosed) stands for the proposition that a person who has not been a de jure director of a company for at least two years cannot thereafter be liable to assessment under subsection 227.1(4) of the Income Tax Act (and by extension, under subsection 323(4) of the Excise Tax Act) even if he has thereafter acted as a de facto director of the company.
Wheeliker et al. v. The Queen involved an assessment issued by Revenue Canada under subsection 227.1(4) of the Income Tax Act against 6 appellants who were the apparent directors of a company incorporated under the Companies Act (Nova Scotia).
The appointment of the appellants as directors of the company was defective under the applicable corporate law. O'Connor, T.C.C.J. therefore held that the appellants were not de jure directors of the company. Nevertheless, Revenue Canada argued that because each of the appellants acted in the capacity of a director of the company and performed the functions of director, they were still subject to liability under subsection 227.1(4) of the Income Tax Act because they were de facto directors of that company. In this regard, Revenue Canada relied on paragraph 2(l)(f) of the Companies Act which defined "director" as, including "any person occupying the position of director by whatever name called".
O'Connor, T.C.C.J. agreed with Revenue Canada that each of the appellants was in fact a de facto director of the company. The evidence showed that each appellant was, and allowed himself to be, identified as a director of the company and regularly attended meetings (referred to in the minutes as directors' meetings) at which the company's business was conducted by them in a manner compatible with the discharge of responsibilities of directors. As well, each appellant was publicly identified as a director of the company in its annual corporate filings. Nevertheless, O'Connor, T.C.C.J. held that the appellants were not liable under subsection 227.1(4) even though they were clearly de facto directors of the company.
SECTION 158 OF THE COMPANY ACT
Section 158 of the Company Act states that "no person shall be the ... president of a company unless he is a director of the company".
Section 158 establishes a condition which must be satisfied in order for a person to hold the office of president of a company. If that condition is not satisfied in relation to a particular person, that person cannot hold, or continue to hold, the office of president.
Whereas section 158 may be relevant to the issue of whether Andrew Netupsky could continue to hold the office of president of the Company after his resignation as the Company's director, it is completely irrelevant to the issue of whether his resignation as a director of the Company was effective.
The words of section 158 simply do not support the assertion that the effectiveness of Andrew Netupsky's resignation as a director of the Company depends on his concurrent resignation as the president. In any event, the issue is moot because Andrew Netupsky in fact resigned from the office of president of the Company on 14 December 1995 by delivering a notice of such resignation (a copy of which is attached) to the registered office of the Company at the same time as he delivered his notice of resignation as a director of the Company.
THE COMPANY'S REGISTER OF DIRECTORS
Your letter indicates that on 19 March 1997 a Collections Officer attended the Company's registered office to inspect the Company's Register of Directors and that he or she found no evidence of any resignation.
As indicated in our letter of 28 October 1998 and for the reasons set out in the decision of MacKay, J: in The Queen v. Wellburn and Perri, the effectiveness of a director's resignation is not affected by the company's failure to update its Register of Directors to reflect that resignation. The effectiveness of a director's resignation depends entirely on whether he complied with the conditions in subsection 154(2) of the Company Act namely, that the resignation be in writing and that it be delivered to the registered office of the company.
It is therefore irrelevant whether or not the Collections Officer found any evidence of Andrew Netupsky's resignation by inspecting the Company's Register of Directors. Andrew Netupsky's resignation as a director of the Company was effective on 14 December 1995 when he complied with the provisions of subsection 154(2) and the legal result which flows from that compliance is not affected by the Company's failure to reflect the resignation in its Register of Directors.
NOTICE OF RESIGNATION FILED WITH THE REGISTRAR
Your letter indicates that a corporate search made on 26 September 1997 disclosed that Andrew Netupsky was the director, president and secretary of the Company at that time. The inference is that his resignation was not effective because the Company did not file the appropriate notice with the registrar of companies as required under the Company Act.
This issue has already been fully addressed in our letter of 28 October 1998. As previously stated, Andrew Netupsky's resignation as a director of the Company was effective on 14 December 1995 when he complied with the provisions of subsection 154(2) and it is irrelevant whether or not the Company filed the appropriate notice with the registrar.
OTHER COMMENTS
You indicate in your letter that Andrew Netupsky's "suggestion of resignation" on 14 December 1995 is of recent date yet you acknowledge that he stated during an interview with Revenue Canada on 6 November 1996 and again on 28 January 1997 that he resigned in April 1995. We therefore assume that Revenue Canada's real concern is with this purported inconsistency.
The negative inference which Revenue Canada has apparently drawn on the basis of the purported inconsistency is ill founded. It is not surprising in the least that Andrew Netupsky could not precisely recall the date or even the month of his resignation in view of the fact that he did not review the Company's minute book during the interview and therefore did not have the opportunity to refresh his memory as to the actual date of his resignation. Moreover, he did not have counsel present during the interview and was therefore not advised on the issue. In these circumstances, any inconsistency of the nature described above it is entirely inconsequential.
Revenue Canada also appears to have drawn a negative inference from the alleged fact that no "resignation defence" was raised by Andrew Netupsky during a Revenue Canada interview held on 16 April 1997. However, there are at least three explanations for the failure to raise the resignation defence.
Firstly Andrew Netupsky was not advised by his lawyer, George Davis, regarding the possible application of subsection 323(5) of the Excise Tax Act as a defence to the proposed assessment. Mr. Davis does not practice in the area of taxation and therefore could not have possibly advised him in respect of subsection 323(5).
Secondly Andrew Netupsky's resignation was not actually effective until 14 December 1995. Therefore, no resignation defence was available to him at the time of the interview on 16 April 1997. Moreover, the resignation defence would not necessarily have been available to him at the time of the interview even if he had actually resigned in April 1995.
Thirdly even if the resignation defence was available to Andrew Netupsky at the time of the interview on 16 April 1997, he was under no obligation to raise the defence at that time. The Excise Tax Act sets out the procedure for appealing an assessment issued under subsection 323(4) and he is entitled under that procedure to raise any relevant defence possible in his notice of objection even if the defence was not previously raised.
CONCLUSION
We fully expect that the foregoing discussion has satisfactorily addressed the concerns raised by Revenue Canada and we hope that the appeal by Andrew Netupsky will be confirmed. However, if you are unable to confirm Andrew Netupsky's appeal based on our submissions to date, we hereby request a meeting with you and your supervisor to address any remaining concerns that you may have.
[12] Appellant then produced a third letter from McCarthy Tétrault to the same Appeals Officer and it is reproduced in its entirety as his submission.
We are writing at your invitation to discuss the implications of the recent decision of the Federal Court of Appeal in The Queen v. Wheeliker et al (unreported).
We are also writing to request an update of Revenue Canada's position regarding this appeal and to obtain a copy of any additional information which Revenue Canada has obtained relevant to this appeal which has not previously been provided to us. Ed Kroft or I will contact you shortly to follow up on these requests. We also take this opportunity to confirm that the minute book of No. 2 Corporate Ventures Ltd. has not yet been returned to us.
BACKGROUND
The Queen v. Wheeliker involves the assessment of directors of a particular corporation under subsection 227.1 (1) of the Income Tax Act (Canada).
The particular corporation, Louisbourg Harbourfront Park Ltd., was formed in 1980 under the Companies Act (Nova Scotia). The Articles of Association of Louisbourg Harbourfront Park Ltd. (the "Corporation") required that each of its directors hold at least one of its shares. Although each of the respondents was purportedly appointed a director of the Corporation and acted in that capacity, none of them actually owned any of its shares as required by the Articles.
During the period January 1992 to October 1993 the Corporation failed to remit to the Receiver General federal income tax withheld from the wages paid to its employees. The respondents were assessed by the Minister of National Revenue for source deductions not remitted during the period pursuant to subsection 227.1(1) of the Income Tax Act.
THE DECISION OF THE COURT
As the Income Tax Act does not define the word "director", it is necessary to consider the ordinary meaning of that word.
The Court held that a director under the Companies Act does not include those individuals who do not meet the requirements prescribed by that statute. Therefore, the respondents were not directors for purposes of the Companies Act because they failed to satisfy the requirement of owning at least one share in the Corporation.
However, the Court allowed the Minister's appeal based on the common law principal that "a person who has not obtained the requisite qualifications [to be duly appointed as a director of a corporation] is prevented from pleading this failure in order to escape liability attaching to a director". This principal has evolved from the need "to assist third parties who deal with persons who act as directors although they lack the required qualification or authority".
THE IMPLICATIONS OF THE COURT'S DECISION
The decision of the Court in The Queen v. Wheeliker has absolutely no relevance to Andrew Netupsky's appeal. The Court's decision is based on the specific facts in that case. Those facts are clearly distinguishable from those pertaining to this appeal.
Firstly, the respondents in The Queen v. Wheeliker held themselves out to the public as directors of Louisbourg Harbourfront Park Ltd. while acting on behalf of that corporation notwithstanding that they failed to comply with the corporate requirements for attaining the office of director. Andrew Netupsky on the other hand was duly appointed as a director of No. 2 Corporate Ventures Ltd. and acted accordingly during the tenure of his office but had duly resigned that office on 6 December 1995. Whereas Louisbourg Harbourfront Park Ltd. carried on its activities in the normal course during the relevant period throughout which the respondents acted as its director, No. 2 Corporate Ventures Ltd had actually disposed of all of its asscts, and ceased to carry on business, before Andrew Netupsky's resignation in December 1995. Therefore, except for the company's existing creditors, no third party was dealing with, or became interested in the company after his resignation. Hence, the policy concern that is the basis for the Court's decision in The Queen v. Wheeliker isnot present in this appeal.
Moreover, at no time after his resignation did Andrew Netupsky hold himself out to the public as a director of No. 2 Corporate Ventures Ltd. On the contrary, he expressly informed persons who were interested in No. 2 Corporate Ventures Ltd. that he was no longer a director. For example, we attach a copy of the letter written by Andrew Netupsky shortly after his resignation informing Mr. Mike Cepin of Hongkong Bank of Canada of his resignation in December 1995. This letter substantiates not only the fact of Andrew Netupsky's actual resignation in December 1995 but also the fact that he informed interested parties of his resignation in order to avoid giving the appearance that he continued to be a director of No. 2 Corporate Ventures Ltd. after December 1995.
We hope that the foregoing discussion clarifies our position that the Court's decision in The Queen v. Wheeliker is irrelevant to Andrew Netupsky's appeal. However, we would be pleased to discuss this matter further if you have any specific concerns regarding the implications of the Court's decision in light of our client's course of action after his resignation in December 1995.
Yours truly,
McCARTHY TETRAULT
Thomas D. Ciz
Enclosure
cc: Andrew Netupsky
Ed Kroft
[13] The letter to Mr. Mike Cepin, from the appellant, dated February 19, 1996 referred to in the above submission sets out, in part, that:
...
2. Concerning #2 Corporate Ventures:
- The project and the company are finished.
- Paul Tse resigned as an officer in 1995
- I resigned as a Director and Officer in December 1995.
[14] In closing the appellant said that the issue of his title, when talking to the Revenue Canada auditor, "never came up". He said that he had resigned as a director. He further said they were speaking to him as a shareholder or member but not a director because there was nothing to direct.
RESPONDENT'S SUBMISSIONS
[15] Respondent's counsel said that the appellant's December 14, 1995 resignation was not effective because section 108 of the Company Act provides that:
"Every company must have at least one director ... "
Counsel submitted that the sole director of a company could not "effectively resign". She referred to Zwierschke v. M.N.R., [1991] 2 C.T.C. 2783. This Court held in that case that the taxpayer's resignation as director was ineffective. The resignation was addressed to the company and signed by the appellant stating:
I hereby tender my resignation as President of the Corporation, such resignation to take effect immediately.
Section 119(2) of the Ontario Business Corporations Act, applicable at the time, reads as follows:
No director named in the articles shall be permitted to resign his office unless at the time the resignation is to become effective a successor is elected or appointed.
Counsel submitted that it was common sense that a company must have a director and concluded her submission on that point by saying that the last one standing "can't leave the ship".
Counsel then said if the appellent, if not a de jure director, was a de facto director. Counsel submitted that the Appellant held himself out as a director in that he was listed as the contact person on the GST "mainframe" and was the only person that could be the company. She stated that he did not change the information about being a director, provided books and records to Revenue Canada, and authorized the accountant to deal with Revenue Canada respecting GST. Counsel pointed to the fact that the Appellant had signed a loan document for the Hongkong Bank and also an assignment of debts on behalf of Ventures. She said that he used his corporation's address for Ventures and received correspondence for it. She said that he had not filed a notice of resignation with the registrar of companies.
[16] Counsel then referred to McDougall v. R., [2001] 1 C.T.C. 2283. In referring to this Court's decision she referred to paragraph 15 of that case which reads as follows:
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.
She also presented paragraph 22 which reads as follows:
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 a cheque, dated January 29, 1997 was to Revenue Canada.
And paragraph 25, reading as follows:
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.
Counsel then, in paragraph 26, referred to the Wheeliker v. R decision and quoted Letourneau, J.A., who said:
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.
Then counsel read paragraph 28 in this Court's judgment, as follows:
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.
The Court concluded in the McDougall v. R. case that the appellant was a de facto director.
ANALYSIS AND CONCLUSION
[17] The words of section 108 of the Company Act, namely:
"Every company must have at least one director ... "
are markedly different from those found in section 119(2) of the Ontario Business Corporations Act referred to in Zwierschke v. M.N.R. which read as follows:
No director named in the articles shall be permitted to resign his office unless at the time the resignation is to become effective a successor is elected or appointed.
The facts indicated that the appellant was named in the company's articles of incorporation as its first director. One notes that the word "articles" is used in that section. There is no evidence to suggest that this was the situation in the present appeal. Indeed, the appellant testified that the company had been a shelf corporation. The MEMORANDUM of Ventures, dated March 28, 1988 shows Philip J. Jones, solicitor as the sole shareholder, owning one common share. Philip Jones is also the only signatory to the ARTICLES, section 12.2 of which reads, in part as follows:
"The subscribers to the Memorandum are the first directors.
It appears that this reflects the wording of section 108 in that section 12.2 states that the number of directors may be changed from time to time:
... but shall never be less than one while the company is not a reporting company and three while the Company is a reporting company.
[18] In my view this court's decision in Zwierschke has no application to the present appeal. Furthermore, I cannot subscribe to the theory that section 108 means that a sole director cannot resign. When I posed to Respondent's counsel the proposition of nine directors rushing to resign and asked whether if the ninth, being incapacitated and, therefore, the last so to do, would be unable to resign she replied affirmatively, suggesting that he "was stuck".
It seems to me that the words
"Every Company must have at least one director"
should be interpreted as meaning that a company cannot validly exist without at least one director. Had the British Columbia legislators wished to incorporate the type of language that is found in Zwierschke one assumes that it would have done so.
[19] Zwierschke refers to subsection 199(2) of the Ontario Business Corporation's Act, R.S.O. 1990, c. B.16 ("OBCA"). Section 119 of the OBCA refers to the first directors, those named in the Articles of Incorporation. Subsection 119(2) states:
119(2) Until the first meeting of shareholders, the resignation of a director named in the articles shall not be effective unless at the time the resignation is to become effective a successor has been elected or appointed. 1994, c. 27, s. 71 (1).
[20] K.P. McGuinness, The Law and Practice of Canadian Business Corporations, (Markham, Ontario: Butterworths, 1999) at 663, interprets subsection 119(2) of the OBCA as follows:
8.66 Subsection 119(2) of the OBCA provides that no director named in the articles may resign his office unless at the time the resignation becomes effective a successor has been elected or appointed. The prohibition on resignation does not apply to successor directors who may be elected or appointed once the corporation has been organized, but the wording of the provision is such that it is at least arguable that a fist director named in the articles who remains in office following organization is also barred from resigning unless and until a successor is appointed or elected. From time to time, the Ministry of Consumer and Commercial Relations has considered expanding the scope of the section to prohibit any resignation of directors where the effect would be to reduce the number of directors remaining to less than a quorum, but to date no such change has been made in the legislation. Given the range of duties to which directors are subject, and their potential liability in respect of those duties, any such change would be undesirable, as it could prevent a director who is dissatisfied with the manner in which a corporation is conducting its business or affairs from taking the only real step that is available for his or her won protection. Nor is it clear why a person should be required to continue acting as a director when he or she is not being remunerated as such. There is no equivalent provision to subsection 119(2) in the CBCA, nor is this provision found in certain of the other provincial business corporations statutes. In Brown v. Shearer, the Manitoba Court of Appeal held that there was no implied restriction under the CBCA on director resignations.
(Emphasis added)
[21] In Brown v. Shearer, [1995] M.J. No. 182, Huband, J.A. said:
Section 108(1) of the Canada Business Corporations Act states that a director ceases to hold office when he dies or resigns, and 108(2) specifies that a resignation becomes effective at the time that the written resignation is sent to the corporation, or at the time specified in the resignation, whichever is later. There is nothing in the Act which limits the right of a director to resign. (This is in contrast to the Ontario Business Corporations Act, as an example, which specifies that a director is not permitted to resign unless a successor is available.)
Counsel for the plaintiff Brown suggests that it is impossible to conceive of a corporation continuing to operate without directors, but the Canada Business Corporations Act, under s. 111(2), contemplates that very situation. It provides that if there is no quorum of directors, or if there has been a failure to elect the required number of directors, the directors then in office shall call a special meeting of shareholders to fill the vacancy and if they fail to call a meeting, or if there are no directors then in office, the meeting may be called by any shareholder.
Apart from a statutory limitation, no authority was cited to us to support the proposition that a director of a company must continue to serve as a director against his will after having tendered his resignation.
[22] From these excerpts, one could say that the effect of subsection 119(2) of the OBCA does not prevent the appellant from resigning and the policy supporting that effect is that directors should be afforded the protection of resigning given the potential liabilities they can incur. This policy can reasonably be applied to further justify the interpretation that section 108 of the Company Act does not prevent a sole director from resigning.
[23] Director resignations are specifically provided for in section 130 of the British Columbia Company Act (formerly section 154) which read:
130(1) A director ceases to hold office when his or her term expires in accordance with the articles or when he or she
(a) dies or resigns,
(b) is removed in accordance with subsection (3),
(c) is not qualified under section 114, or
(d) is removed in accordance with the memorandum or articles.
(2) Every resignation of a director becomes effective at the time a written resignation is delivered to the registered office of the company or at the time specified in the resignation, whichever is later.
(3) A company may, despite any provision in the memorandum or articles, remove a director before the expiration of the director's term of office by special resolution, and, by ordinary resolution, may appoint another person in his or her stead.
Nothing in this section infers that it is subject in any way to section 108 of the Company Act. The clearest indication that section 108 of the Company Act does not prevent a sole director from resigning is contained in section 131 of that Act (formerly section 155):
131(1) Unless the articles otherwise provide, a casual vacancy that occurs among the directors may be filled for the unexpired term by the remaining directors.
(2) If the number of directors of a company is reduced below the number set by, or under, the articles as the necessary quorum for directors, the continuing directors may act for the purpose of filling the vacancies up to that number, or of summoning a general meeting of the company, but for no other purpose.
(3) If there are no directors, the members holding a majority of the shares entitled to elect directors may, by instrument in writing, designate one director to exercise the rights of continuing directors under subsection (2).
(emphasis added)
Section 131(3) of the Company Act expressly contemplates that it is possible that a corporation have no directors. This subsection can be reconciled with section 108 in that section 108 seems clearly to provide the requisite directorship for a company's valid operational existence. It appears that when a sole director resigns, the corporation is in limbo (cannot legally operate) until another director is elected as set out in section 131(3).
[24] With respect to the second argument that the Appellant was a de facto director, I do not find a factual situation such as existed in McDougall. McDougall was apparently active in the capacity of a director. The present Appellant simply responded to communications from the Hongkong Bank and Revenue Canada. Although Respondent's counsel attempted to make much of the fact that no notice of resignation had been filed with the appropriate authority and no notice had been given to Revenue Canada, I do not find such omissions fatal to the Appellant's position. In so concluding, I adopt the submissions contained in the McCarthy Tetrault submissions.
[25] Therefore, I conclude that the appellant,
(a) effectively resigned more than two years before January 15, 1998, the date of the Notice of Assessment, and
(b) was not, at any time, a de facto director
with the result that the Notice of Assessment is, by virtue of section 323(5) invalid.
[26] Accordingly the appeal is allowed.
Signed at Ottawa, Canada this 21st day of January, 2003.
|
"R.D. Bell" |
J.T.C.C.
COURT FILE NO.: 2000-4608(GST)G
STYLE OF CAUSE: Andrew Netupsky v. Her Majesty the Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: October 7, 2002
REASONS FOR JUDGMENT BY: The Honourable Judge R.D. Bell
DATE OF JUDGMENT: January 21, 2003
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Kristy Foreman-Gear
COUNSEL OF RECORD:
For the Appellant:
Name:
Firm:
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
[1] this letter and subsequent letters from Revenue Canada to McCarthy Tétrault were entered in their full text in evidence.