Date: 20000209
Dockets: 98-3440-IT-I; 98-3471-GST-I
BETWEEN:
GORDON E. SMITH,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Margeson, J.T.C.C.
[1] It was agreed at the commencement of trial that both of these appeals would be heard together and that the evidence given in one would be considered in the other where applicable.
[2] The appeal in the file number 98-3440(IT)I was from an assessment of the Minister of National Revenue (the "Minister"), notice of which was dated May 1, 1997, numbered 03674 in which the Minister assessed the Appellant in the amounts of $7,042.15 for unremitted source deductions, including interest of $6.00, for the 1995 taxation year. The Appellant was assessed as a director of ECO Superwood B.C. Limited (the "Company"), under the provisions of section 227.1 of the Income Tax Act (the "Act") for the failure of the Company to remit to the Receiver General the amounts withheld in accordance with section 153 of the Act.
[3] In the file number 98-3471(GST)I the appeal is from an assessment of the Minister, notice of which was numbered 20969 and dated October 15, 1998. By that assessment the Minister reassessed the Appellant for net GST of $17,569.05, interest of $1,434.14 and penalties of $1,339.78, under the provisions of subsections 323(1) and (3) of the Excise Tax Act (the "Act") for the failure by the Company, at a time when the Appellant was a director, to remit to the Receiver General the amounts of net tax as required by subsection 228(2) of the Act, together with interest and penalties thereon.
Evidence
[4] Gordon E. Smith was a retired school teacher and was elected a director of the Company in February of 1993.
[5] His position was that he was elected to represent the minority shareholders. He said that he was not elected to be a financial director nor was it intended that he participate in the day-to-day operations of the Company. He sought the advice of a lawyer with respect to his duties as a director. He was referred to the Company's Act and the duties of directors referred to therein. It was his position in the end that he was required as a director to exercise the care and skill of a competent person under the circumstances.
[6] He was not happy with the situation that the Company found itself in and at the next meeting he proposed a resolution that the outstanding accounts be paid to the Workers and then to the Government. This resolution passed. He was aware of the fact that that there were financial difficulties even at that early date. He knew that the directors were considering a merger and he was told that everything would be OK.
[7] The lawyers were not handling the Company's business well and the Appellant saw little money coming in. They attempted to obtain cash injections to support the Company and he did invest some money in it himself. They made arrangements with Revenue Canada to pay the outstanding amounts by instalments. He believed that Revenue Canada had accepted such arrangements. They had reports at each meeting.
[8] By early June of 1995 the Company was in severe financial difficulty. He then found out that the Company was in arrears on the Revenue Canada account. They met Revenue Canada and agreed to pay the current amounts and to who work on the arrears. He believed that the Company would be successful in obtaining a grant. He believed that Revenue Canada was happy with this arrangement.
[9] The Company obtained advise from tax consultants who indicated that it qualified for $100,000.00 grant but when he inquired of the tax consultants as to the status of the application he was told that they had no idea as to the status of the application.
[10] He was advised by Revenue Canada that the tax consultants had told them that the application had been approved by the science officer. The Appellant instructed Revenue Canada to set up an audit as soon as possible and he undertook to set up the appropriate meetings himself. He agreed with Karen Herle to meet at the Company's Office Security Audit. The Appellant undertook to ensure that Ms. Herle had access to whatever documents she needed to carry out the required audit. Although the tax consultants appeared they did not add anything to the meeting and merely annoyed Ms. Herle. It was the Appellant's position that at the completion of the audit Ms. Herle suggested that the grant could be in the nature of $90,000.
[11] The Appellant sought the agreement of the other directors and informed Mr. Looey of Revenue Canada that a cheque would be forthcoming with respect to the grant and suggested he take steps to see if the amount of the outstanding unremitted employee deductions could be subtracted from the cheque before it was issued. He said that he was advised by Mr. Looey that he would inform the GST accounts supervisor about the situation and suggest that he too get any money owing before the cheque was issued.
[12] The Appellant referred to his notice of appeal to confirm this information given therein with respect to what happened thereafter.
[13] He said that legal action was commenced against Mr. Cochran regarding the amount of $60,000 in funds of the Company.
[14] The Company's funds were used to sue Mr. Cochran and that these were not paid to Revenue Canada. It was the Appellant's position that Revenue Canada was a party to this action and that $35,000 of the amount went to Campbell Saunders who became the trustee in bankruptcy whereas the claim of Revenue Canada was $27,000.
[15] The Appellant said that other parties were jointly liable with the Company for payment of the debt including Mr. Gray and Mr. Saunders. No action has been taken against them. Further, he took the position that the Revenue Canada agent agreed to have Campbell Saunders keep the $35,000 referred to above.
[16] In cross-examination he testified that he possessed a Master of Arts Degree but that he had no previous business experience prior to February 1993 when he first became a director. He was then shown a notice and agreed that he first became a director November 30, 1993 and he disagreed with that. He invested $10,000.00 in the Company.
[17] He knew at the time he became a director that the Company was having difficulties. He knew that there was a proposal in bankruptcy. He became a director to represent the views of the minority shareholders and report back to them. They were disgruntled that the Company was not being run properly.
[18] Subsequent to June of 1995 he was involved in getting the Company out of trouble and getting it on to the Vancouver stock exchange. He tried to find investors for the Company and to obtain the research tax credit. He took steps to determine his responsibility as a director. He believed that he had exercised due diligence. He proposed the motion to pay the employees and Revenue Canada. He admitted that he set up no plan to see that Revenue Canada was paid. He saw no reason to set up a separate account. He trusted others. He only saw the financial report from the Company president. He never set up an appointment with an accountant to see that the accounts to Revenue Canada were paid.
[19] He was asked who was in charge of the GST accounts and he said that he assumed it was Mr. Cochran. He was there. He was owed money by the Company. He was drawing a salary in order to enable him to pay his rent and his telephone bill and the remainder was left to pay the bills of the Company. He was not a co-signee on the Company's account and did not seek to be one.
[20] He was asked whether of not reports were being sent out and if minutes were being taken. He said that they were. However, when referred to Exhibit R-1, which was a letter to him from one of the directors, Jim Lang, dated July 1st, 1994, he had to admit that that letter suggested to the contrary.
[21] He was asked whether of not he was aware that Revenue Canada was not up-to-date at that time and he said that he was not. That letter also referred to the $10,000 loan to Thane Cochran but the Appellant indicated that that loan was made before he became a director.
[22] He reiterated that he was not aware that the Company was behind in source deductions. He said that they were done every two weeks and that they held meetings every month. They were told that a cheque would be cut to pay them. The directors believed that they (Thane Cochran and Doug Cochran) were doing it. He had no reason to believe that it was not being done. The Company was paying the employees and the bulk of the suppliers, was paying its rent and was paying its telephone bill.
[23] On August 25, 1995 Doug Cochran resigned from the Board and the Appellant was appointed Chairman of the Board. He was elected to the Board of Directors on March 2, 1993 and referred to the earlier date as the date of filing of the information with the appropriate government department.
[24] He said that an audit was required in order to proceed with the research tax credit and he arranged for it. He first contacted Mr. Looey in June 1995. This was before he was Chairman of the Board. He also contacted Karen Herle before he became Chairman of the Board. He believed that the only way that the Company could survive would be to get the SRED grant. He told this to Mr. Looey from Revenue Canada in August 1995. He was aware of the failure by the Company to make remittances by that time and he was trying to pay them. By October 25, 1995 he had nothing to do with the Company.
[25] He was asked what he did specifically to ensure that the GST was paid. He said that he proposed the motion that it be paid. The Company was sent a letter saying that the account had been closed due to the fact that the Company had so many credits. He was not aware that the Company had not filed GST returns since 1993. The Company had a GST number and was carrying on business even after the GST number was cancelled. He did not believe that they were doing over $30,000.00 of sales and therefore it did not have to be registered. He believed that the GST number had been cancelled because Revenue Canada believed that the Company was not doing enough business and had enough credits.
[26] He asked Thane Cochran about it and he was told that the account was cancelled and that the Company owed no money for GST. He did not find that unusual. He did not know what amount of business the Company was doing. He did not think that they were selling the Company to a large United States Company. He knew that he was owed money. He had no reason to believe that Thane Cochran would pay himself first rather than pay Revenue Canada.
[27] Doug Cochran was owed between $250,000 and $300,000. He called the note in around October 28, 1995. He said that he would pay the outstanding accounts including Revenue Canada. The Appellant said that if they (Revenue Canada) had set up the audit in March 1995 and the cheque had been issued he would not be in front of the Court. During June, July and August 1995 he did what he could. Doug Cochran set up a similar Company. He did not know where the balance of the cheque went from the grant. On June 18, 1996 the Company went into bankruptcy. The directors voted to use the money to start the legal actions. He did not object that Revenue Canada had not filed proofs of claim with the trustee in bankruptcy but he had some concerns about the amounts. He did not know how Thane Cochran was reporting his draws.
[28] He assumed that the amount that was deducted from the grant money was for the unremitted source deductions. Mr. Looey told him that he did not know the state of the GST account. He never sent in a written resignation as a director.
[29] He was shown Exhibit A-1 which was a summary of arrears and could not assess the accuracy of that Exhibit.
[30] He became aware of the problems by early spring of 1995. He felt that the account had not been paid for one reporting period only. By September he told Mr. Looey that the Company could not continue to make the payments and that the Company was going out.
[31] Doug Cochran testified that he was a director of the Company at the time of their first proposal in bankruptcy. He arranged for the trustee and a proposal. The proposal was to make 52 monthly payments to pay creditors but no interest. This was accepted and the payment plan commenced. The trustee sent in a bill which was very high. Then a final bill of $14,000 was agreed to. In January 1996 the witness attended a meeting arranged by Campbell Saunders. They held $6,000 in trust. However this money should have been disbursed every six months. He was sued by Campbell Saunders. The matter was settled and the witness agreed to pay the creditors $35,000.
[32] He said that Revenue Canada was a creditor and filed a proof of claim with Campbell Saunders and they were a part of the agreement although they had objected to the earlier settlement offer of $30,000.
[33] This witness received Notices of Assessment with respect to the claims before the Court as a director of the Company. He asked for documents to support the claims such as working papers and he has not received them. He believed that they are wrong. He resigned as a director in August 1995 and he has not had access to any documents since then.
[34] He did not know how Campbell Saunders came up with the figures that went to Revenue Canada. He believed that they are in error. He believed that the numbers used by Revenue Canada to calculate sales were wrong and that the input tax credits were wrong. For two periods the Company received a refund because the majority of sales were outside of Canada and there were input tax credits available. He did not understand why there were no credits for the Company instead of GST allegedly owing.
[35] He advanced money specifically for remittances and sometimes to go into the general account. Between 1992 and 1995 he advanced $292,000 to the Company. He called the loan.
[36] He wrote the cheques for the deductions and he thought that they were made. As early as March he knew that the money for the research grant was on its way. Before he resigned as a director he was aware of negotiations by the Appellant with Revenue Canada for source deductions. It was a relief to him. He said that the Appellant was not involved in the day to day operations to the Company.
[37] In cross-examination he was shown Exhibit R-2 which was a letter to Mr. Bruce Cameron of Revenue Canada from T.J. (Thane) Cochran who was the President of the Company. The witness said that he likely received a copy of this letter with respect to GST deductions and source deductions. This letter was dated August 15, 1995 and detailed some of the difficulties of the Company and amongst other things discussed the fact that the Company was waiting for an auditor from Revenue Canada Taxation to confirm their claims for the SRED grant. The letter also indicated the intention to pay an amount of $5,000 before the end of August 1995 leaving an amount in interest and penalties levied plus further interest if the Company continued to be assessed. The letter also discussed the failure to file GST returns and indicated that the reason it was done was because they did not think about it. Once they stopped receiving notices they stopped filing any reports.
[38] An outside accountant had sent him a notice indicating that the account had been closed and at that point the filing stopped. He agreed that he had reviewed all of the invoices, that he had made proposals in the past for payments of money owing to Revenue Canada and had defaulted on them although it was not done intentionally. He asked for a short period of time to allow steps to be taken to solve their problems and told them that it would not happen again.
[39] This witness said that there was a letter from GST that the account had been closed. The majority of the product of the Company was sold outside Canada and this witness believed that the amount of GST owing would be small since there would be a credit balance. The witness would not agree that the letter in Exhibit R-2 was an admission that there was GST owing.
[40] In redirect, he indicated that the letter referred only to an amount of $5,000 that would be paid and that was all it referred to. He never saw such an enormous shift in sales that would require a payment of $4,971.43, during the period ending 1995-09-21.
[41] Mr. Greg Looey was an income tax and GST auditor. He had been with Revenue Canada since September 1991. He was a collection's officer in the case at bar. There was a balance owing by the Company for the period of July 1993 to December 1995. He spoke to the Appellant. (He was allowed to refer to his notes for the purpose of refreshing his memory.)
[42] He said that on September 14, 1995 there was a balance owing of $11,599.20. The July remittance was behind. Between November 1993 and October 1995, the Company had a history of poor reporting. The account was in arrears. He was sure that the amounts in issue were correct. Various payment arrangements made by the Company were broken. On September 18, 1995 Mr. Smith, the Appellant, said that he was to become the managing director and was to find out about the GST, the grant and make arrangement for payment of the arrears. On September 22, 1995 Mr. Smith provided figures for July and August but they were not paid. Mr. Smith indicated that the August 1st payment would be made soon but it was never paid. He also indicated that they had plans to set up a separate Revenue Canada account.
[43] Mr. Smith gave him the September remittance figures and indicated that there was to be a grant and that he was working on the GST returns. On October 5th he was told that the September remittance would be made but it was not. Mr. Smith called on October 13th and told him that the Company was receiving $100,000 and some accounts receivable and that he was to call back by October 24th. The witness called him on October 25th. He was told that Doug Cochran foreclosed on the assets of the Company. The witness told Mr. Smith that he would be raising an audit to determine the balance. Mr. Smith delivered no cheques personally for source deductions and the amount went up and not down. He instituted the Gurney-Taylor audit. They were advised that there would be a credit. They put a hold on the Company account and took money to cover the balance. They could not hold the money from the research grant to cover the balance as the audit had not been completed showing an amount owing.
[44] Gilbert Lowe was a trust examiner with Revenue Canada. He had been with Revenue Canada 17 to 18 years. He performed a second audit on the Company as a payroll auditor. This was done November 1995. One was done by Gurney-Taylor. He reviewed this audit. The amount in arrears was $18,587.20. This was paid in full. The second audit was raised because of the bankruptcy. There was also an employee complaint. This person alleged that he had received payments and that deductions may or may not have been made. The Company filed T4s for the 1995 taxation year.
[45] The records of the Company showed that there was a balance owing of $6,447.11. This did not mean that the first audit was wrong. The audit was done in November and the T4s were filed in February. He said that he had to confirm each T4 that was issued and that they may have been different from the payroll records. There were also some drawings by Thane Cochran from January to June. Wages were paid between January and June. The records were not kept well. They were sloppy. There was a minor adjustment of $616.75 which was an increase. He asked questions about the periods that the employees were paid and they were paid by the new Company according to him.
[46] In cross-examination he said that he did the audit in May of 1996. He did not know who filed the T4s but they were filed before the end of February 1996. The purpose of this audit was to confirm the T4s, to resolve the employee complaint and he noted that payments were made by the new Company for employees of the old Company and he had to make adjustments. Campbell Saunders told him that they had no payroll records. The amount in question that is owed came from the second audit. The first audit amount was paid off.
[47] In rebuttal Mr. Doug Cochran said that on October 20th he took over the employees and up until then the employees were paid by the Company. As far as he was concerned he started with a new slate.
[48] Shashi Jaswal was an income tax examinor and tax auditor. She had been with Revenue Canada for thirteen and a half years. She conducted a GST audit on the Company which was completed in January of 1996. This matter was referred to her from collections. The stop filing date was given in error. No returns were filed but the Company said that it was ongoing. If the stop filing order was issued in error the Company should have questioned it and they should have still collected GST.
[49] She was shown Exhibit R-3 which was introduced by consent. This was the GST audit conducted because of unfiled returns. She added up the invoices for each month and used the Company records for this purpose. She said that no returns were filed between August 31, 1994 and October 31, 1995 and that the amount of $16,051.91 was owing according to the Company's records. It would be difficult to understand why the Company would not know that GST had to be paid. The bulk of her adjustment was based upon the information from the Company.
[50] She gave credit for the input tax credits on the basis of amounts paid according to their own records. She gave full input tax credits based upon the Company's operating expenses. They received all credits to which they were entitled. She also checked bank statements and there were no great variances which would raise any alarm. Therefore, she believed that the amounts were correct. Sales summaries or sales invoices would tell you how much GST was owing. This was the only audit done.
[51] In cross-examination she confirmed that the sales figures came from the plant office. She indicated that the Appellant was there in the office and also Doug or Thane Cochran was there. She also met with someone else at the plant. Input tax credits were averaged. She looked at the invoices for the whole period and not just for September and part of October. She would have looked at a fifteen month period as this was the audit.
[52] There was nothing mentioned to her that there were any records at Campbell Saunders. She had all of the information at that time. The amounts were owing when the account was still active.
[53] Cosimo Stea referred to Exhibit A-3 which was admitted by consent. This was a GST return history for the Company for the relevant period. Further, it also showed a filing resulting in the credit of $1,237.64 which was taken into account.
[54] The witness said that this GST return summary shows the total amount owing at all times by the Company. From the first day of November, 1993, there was money owing. This record does not show that there was no GST owing when the Company went into bankruptcy.
[55] In redirect the witness said that the numbers were available to the auditor when the audit was done.
Argument on behalf of the Respondent
[56] Counsel for the Respondent took the position that the main issue in this case was whether or not the Appellant had made out the defence of due diligence, under the provisions of subsection 227.1(3) of the Income Tax Act and under the provisions of subsection 323(3) of the Excise Tax Act. In both cases the Appellant has failed to establish the defence of due diligence. Any actions that he took were remedial only and they did nothing to prevent the failure from taking place. He was at all times involved as an inside director and at the very least from the time that he became Chairman of the Board.
[57] In the event that the Court should find that he was an outside director, at all times he was aware that the Company was in serious financial difficulties and even if he was an outside director the liability is the same as that of an inside director because of his knowledge.
[58] Counsel referred to the case of Soper v. R., [1997] 3 CTC 242 in support of her position.
[59] The Appellant knew from the start that there were difficulties existing in the Company and it was behind in source deductions. He may not have known that the Company was behind in GST remittances until June of 1995. He may have believed that all products were being exported but the test under this section is not all subjective as indicated in Soper (supra).
[60] The Appellant should have known of the difficulties. He had a duty to find out about the GST and the source deductions and if the Company was in arrears. One witness called by the Appellant, Doug Cochran indicated that there was no attempt to hide information from the Appellant and the Appellant never asked to see the accounts.
[61] The records show that 70% of the products were domestic and there were over $300,000 in sales, yet no GST returns were filed since November 1993.
[62] The auditor said that the audit was based upon the Company's own records and invoices and any reasonable person would not have had trouble seeing that the amounts were owing. Exhibit A-2 indicates that returns had to be filed but in any event this is not a factor.
[63] The Appellant relied upon Thane Cochran to insure that the amounts were paid but this is not a valid argument. Even if the Appellant was an outside director he knew that Thane Cochran was owed money and was taking payments for rent and expenses out of the Company funds. He also knew that the accountant was no longer working for the Company. The Appellant made no efforts to check to see whether or not the accounts of Revenue Canada were being paid or they were up to date. The situation is similar to the actions of the taxpayer as referred to in the case of Dalke v. R., Carswell TaxPartner Cases 1999 - Release 8 page 1 at page 10 where the Court was not satisfied that the actions of the Appellant were sufficient to found the defence of due diligence.
[64] Similar circumstances existed in the case of Hingwing (C.D.) v. Canada (T.C.C.) [1997] G.S.T.C. 45 where the Court found that it was not enough to make inquiries and do nothing more concerning the Company's position with respect to GST remittances. The Company was in financial difficulty and that should have made the Appellant even more concerned to see that GST was being remitted and if it was not, he would become liable.
[65] In the case at bar the Appellant was an intelligent person, he possessed a Master of Arts Degree, he is well educated, but he should have realized it was not sufficient to rely upon Thane Cochran. He did not know him sufficiently well. He assumed that GST had been taken from the grant money but Revenue Canada was unable to pull back the grant money as an audit had not been completed.
[66] The actions of the Appellant amounted to wilful blindness. Since 1995 he was aware of the difficulties and should have insured that the monies were paid.
[67] Further, the taxpayer is not entitled to rely upon Revenue Canada audits to determine whether or not taxes are owing or whether or not remittances have been made. The taxpayers have to rely upon their own records in their possession.
[68] As Justice Robertson indicated in Soper v. R., (supra) page 265:
"...I wish to make it clear, however, that the purpose of subsection 227.1(3) is to prevent failure to make remittances and not to cure default after the fact (though, as a practical matter, the provision should have the latter effect as well)".
[69] In the case at bar the taxpayer took no positive actions, he did not set up any form of controls, he did not institute any form of checking to see that the remittances were being made. He never asked the accountant whether or not remittances were made. He put no controls in place to ensure the payments nor did he set up any separate account. He never insisted on being a co-signer on the remittance cheques. He knew that the employees were always being paid and the suppliers were being paid as necessary, yet he did nothing to ensure that Revenue Canada was being paid.
[70] It is clear that the Appellant did nothing to prevent the failure except to propose a motion at a shareholders' meeting that the amounts be paid but this motion was obviously never acted upon.
[71] By August 1995 the Appellant knew that Mr. Cochran was going to call in his note and resign and that the Company would effectively be put into bankruptcy. But not until September 14, 1995 did the Appellant contact Revenue Canada and by that time the account was in arrears by over $11,000. The Appellant was aware or ought to have been aware of the failure to pay the GST and to make the source deductions and be should have ensured that they were being paid.
[72] Further, some of the funds had already been collected and should have been remitted. These funds were in trust for Her Majesty The Queen under subsection 222(1) of the Excise Tax Act.
[73] The Appellant says that he relied upon the first audit which indicated to him that there were no monies owing and as a result of that he should not be held liable for source deductions. But there was no evidence of that audit before the Court, the Court has no idea what that audit did disclose and whether or not it was correct. In any event that offers no defence to the Appellant.
[74] In Drover (A.) v. Canada, Carswell GST Partner, 1999 - Release 8 at page 5, it is clear that the obligation imposed on directors does not only extend to ensuring that the GST that is calculated is remitted but it is their duty to ensure that it is properly calculated.
[75] In the case at bar it is not a question as to whether or not the Appellant had enough bookkeeping experience to pinpoint the problem. With his knowledge he should have been put on notice that the records might not be accurate or complete at the time of the first audit. The evidence in the case was that the records were badly kept and the Appellant would have been aware of this if he had only looked at the records.
[76] The Appellant knew that the job of the accountant had been taken over by Thane Cochran and the Appellant knew that he had no bookkeeping experience. The Appellant should have obtained the services of someone who knew what they were doing.
[77] The duty is not upon Revenue Canada to audit the taxpayer's account so that the taxpayer will know whether the remittances are being made or not. It is a self assessing system and the duty lies upon the taxpayer to do this work.
[78] Even if the Appellant were aware of the results of the first audit he should have been aware that something may have changed since the first audit. The audit was based upon the Company's own records.
[79] If the Appellant believed that the Minister's audit was incorrect then he should have called Mr. Cochran or the accountant to testify as to the inaccuracy of the information being relied upon by the Minister. However, he did not do so. The difference between the first and second audits basically was the reclassification of Thane Cochran's drawings.
[80] Counsel argued that the case of Fancy v. M.N.R., Carswell TaxPartner Cases, 1999 - Release 8 was a case which was decided before Soper v. R. (supra) and on the facts that case is really not relevant to the factual situation here.
[81] In the case at bar the Appellant did not act to rectify the situation on time and whatever he did was too little, too late. The Appellant cannot rely upon the first audit because he should have known that it was based upon incomplete information.
[82] The appeal should be dismissed.
Argument on behalf of the Appellant
[83] In argument the Appellant said there were three reasons why this appeal should be allowed and the assessment vacated. 1) Revenue Canada has not proved a failure to remit. 2) Actions should have been taken against Campbell Saunders for the outstanding balance in accordance with the provisions of paragraph 227(5)(b) of the Income Tax Act which makes the trustees jointly and severely liable with the payor to pay the amount to the Receiver General and under the corresponding provisions in the Excise Tax Act. 3) The Appellant has satisfied the due diligence test under the Income Tax Act and under the Excise Tax Act.
[84] The Appellant argued that in early 1996 Mr. Looey told him that the amount owing for source deductions would be taken from the research tax credit before the cheque was issued and that all outstanding amounts had been paid. The Appellant assumed that Ms Jaswal had followed his advice and that the GST account had been paid also.
[85] The Appellant first became aware of the problems that existed in 1995 and acted positively to correct these problems. From January to the end of May 1995 the account showed a plus balance. There was no reason for the Appellant to believe that the deductions were not being taken. The Appellant urged Revenue Canada to make a claim against the proceeds of the research grant. After June 1995, payments were made. The Appellant was not aware of any amount still owing. He was working to keep the payments up. When he became aware of the failure he acted. As a result of his actions the amount claimed by the first audit was paid.
[86] Then there was a second audit. There were no reasons to believe that the first audit was wrong. The Appellant was entitled to assume that the first audit was as accurate as the second. The only reason suggested for the difference was that there were changes since the first audit. Mr. Looey never went to Campbell Saunders but relied upon Revenue Canada records in the computer. Before October 26, 1995 the Company ceased to operate. What charges could there have been? The Appellant could not see what changes had been made. There was only an assertion that the first assessment was wrong and that the second audit was correct.
[87] The Appellant relied upon the provisions of subsection 227(5) of the Income Tax Act with respect to payments by trustees and upon the provisions of section 128 of the special rules applicable to bankruptcies which section makes the trustee jointly and severally liable with the payor to pay the amount to the Receiver General.
[88] It was the position of the Appellant that the assessment should have been raised against Campbell Saunders who had $6,000 in their hands and obtained $35,000 in an out of Court settlement. These funds should have been attached to answer to the debts. The Appellant said that he urged Revenue Canada to file a claim against Campbell Saunders as that was the only revenue available. This was not done. He acted in accordance with the provisions of the Act and in particular under the provisions of subsection 227.1(3) of the Income Tax Act. As soon as he was aware of the problem he acted. He should not be held liable.
[89] With respect to the claim under the Excise Tax Act the Appellant cited three reasons why his appeal should be successful.
Revenue Canada failed to produce evidence to justify the amount claimed.
Revenue Canada could have collected the amount from the trustee in bankruptcy.
The Appellant acted with due diligence.
[90] In November of 1995 the Appellant alleged that he arranged with the auditor of Revenue Canada to meet with him to audit the Company. He asked for a copy of the audit and asked the auditor to make a claim for any amount owing by the Company. Further the Company was not encouraged to file returns.
[91] On the question of the amount owing, the Appellant argued that his calculation showed that there was only $11,554.47 owing and that was less than the assessment showed. Further, one of the other exhibits showed that the amount of $10,316.83 was owned due to a further credit of $1,237.64. There was insufficient evidence to support the assessment of $20,342.97.
[92] Revenue Canada could have collected the original amount owing and it should have done so. It was responsible for the loss.
[93] The Appellant said that he urged everyone to pay the accounts. When he met Mr. Looey for the last time he was aware that the Company was going into bankruptcy and that the funds were available to pay the amount. He urged Revenue Canada to make the claim.
[94] As soon as he was aware of the amount available, he urged Revenue Canada to make a claim for the funds due under the SRED grant. He urged the Receiver to make the payments as well. He acted with due diligence. He acted in accordance with the requirement set out in Fancy v. M.N.R. (supra).
[95] The Appellant pointed out that he was a high school teacher without a previous business experience. He had never been a director before. He was an investor. He was a director for liaison purposes only between the majority shareholders and the minority shareholders. Approximately four of the shareholders owned over two-thirds of the shares of the Company.
[96] With respect to the argument of counsel for the Respondent that the Company had granted a $10,000 loan without interest to Mr. Cochran he said that that was given before he became a director and he had nothing to do with it. In any event this is not an uncommon or unwarranted action.
[97] He received legal advice on his responsibilities. Then he went to the Company's accountant. He believed that he had only to fulfill his role as a liaison officer. He also moved a motion that the Revenue Canada bill be paid up to October 1995. Payments were made on the income tax account and not on the GST account because he did not know about it. When he found out about it he did something. He would have resigned if he had thought that he would be in Court now.
[98] With respect to cheque signing authority he had no signing authority. He did not seek signing authority and there was no reason for him to do so. This still would have had to pass by the Board.
[99] His motion to the Board to remit was a positive action. He was not involved in the day to day operations of the Company. He could not find out about the arrears until they were old and as soon as he did find out he acted.
[100] Insofar as the case of Soper v. The Queen, (supra), is concerned, he considered himself to be an outside director. He did not have to go to the extent of going to the controller's office to check if the deductions have been made. There was no reason for him to do so.
[101] It was his position that a positive duty to act only arises where there is positive evidence of problems. That did not come about until June. Then he acted. He met with Mr. Looey of Revenue Canada and agreed to ensure that all amounts were received. Mr. Looey said that all amounts had been paid for source deductions and he was satisfied that there was no amount owing.
[102] When he became aware of the amounts of GST outstanding he made a motion to pay the amount out of the grant. He asked the official of Revenue Canada to make a claim and he relied on her to make the claim. No representative of Revenue Canada at the bankruptcy meeting mentioned any arrears to him. Revenue Canada made no effort to claim the money held by Mr. Gray, the receiver.
[103] If the first audit had been done correctly then the amounts would have been paid. He did not know that Mr. Cochran had no knowledge of books when he took over and he assumed that he had such knowledge. The appeal should be allowed.
[104] In rebuttal counsel for the Respondent said that the results of Mr. Taylor's audit was not before the Court. Therefore, the argument raised by the Appellant is not based upon the evidence and cannot carry any weight. It is entirely feasible that the two audits can be different and based upon different information. The records may have been confusing in light of the two audits but this does not change the fact that the amounts were owing and they have been shown to be owing. When the audit showed around $13,000 owing this showed only the change and not the total amount owing. This may have been confusing to the Appellant.
[105] In so far as the case of Soper v. The Queen (supra), is concerned, it still requires due diligence on behalf of the directors. The Appellant here had no reason to believe that Mr. Cochran had special qualifications to do the bookkeeping work.
Analysis and decision
[106] The Appellant argued that the Minister has failed to prove that the amounts in question were owing both on the issue of the source deductions and on the question of GST remittances.
[107] In the reply to the Notice of Appeal the Respondent set out a schedule of the unpaid balances that it was claiming. The Respondent is also entitled to rely upon the presumptions contained in the reply. The presumptions and schedule A have not been rebutted by the Appellant in any satisfactory way.
[108] The evidence of the Appellant himself and that of Douglas Cochran did not have the effect of destroying the presumptions contained in the reply.
[109] It seems to the Court that it should have been possible for the Appellant to satisfactorily question the basis for the claim by bringing forward evidence from the Company records that the Minister's assessment was wrong. The witness called on behalf of the Appellant was an officer of the Company and was basically in charge of the day to day operations of the Company. His evidence had no more effect than to suggest that the Company could not have sold the amount of goods that would have been needed to be sold to require the payment of the amount of tax which is claimed by the Minister. Neither this evidence alone nor this evidence in addition to the evidence of the Appellant satisfies the Court that the Minister's assessment was incorrect.
[110] The evidence is clear that the Minister made his assessment based upon an audit of the Company's own records. The auditor who testified indicated that this was the basis for the Minister's audit. It should have been a reasonably simple matter for the Appellant to have called the bookkeeper, the receiver, Mr. Cochran and to subpoena the Company's records including bank statements and other records to substantiate his position that the Minister's assessment was incorrect.
[111] The auditor who gave testimony not only indicated that the assessment was based upon information provided by the Company from its own records but also said that she checked certain bank statements and there did not appear to be any discrepancies which called into question the result of the second audit.
[112] It is true that there was a discrepancy between the first audit and the second audit but that has been sufficiently explained and the difference might very well have related to different information available from the Company records at the two different times and changes in the Company that had taken place between the first and the second audits.
[113] Further, it is insufficient for the Appellant merely to allege that he calculated an amount owing and that those amounts differed from the amounts claimed by the Minister.
[114] The Court is satisfied that this argument with respect to the accuracy of calculation of the amounts owing cannot be successful.
[115] The second argument is that Revenue Canada could have collected the amounts owing by taking actions against Campbell Saunders, by ensuring that the funds were attached from the SRED grant and that the Minister should have taken actions against other persons to collect the amount owing before it tried to collect the amount from him.
[116] It is trite to say that a director cannot escape liability for an amount owing by the Company of which he is a director by claiming that the Minister should have collected it from somebody else. If there was any liability on anyone else for the amounts owing here then the liability was joint and several as the statute indicates. Even though other persons might be responsible that does not relieve any particular director from the responsibility for paying the amount in the event that he is found liable. There is a provision in the statute for any director who is required to pay to take an action against the other directors for recompense but that still does not relieve the Appellant of liability for the amounts owing.
[117] With respect to the matter of the Bankruptcy Act the Minister has indicated in the pleadings that it filed a proof of claim with the trustee, Campbell Saunders Ltd., with respect to the outstanding liability of the Company as it was required to do. The Court can see nothing in the actions of the Respondent with respect to the bankruptcy proceedings that would disentitle it to make the claim as it did against the Appellant here.
[118] This argument raised on behalf of the Appellant is rejected.
[119] The third and main issue advanced on behalf of the Appellant was his position that under both statutes, he as a director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.
[120] One of the more recent cases to consider this issue was the case of Soper v. R. (supra). In that case the Court clearly enunciated that not all directors are equal. At page 255 Robertson, J.A. said as follows :
"...A director need not exhibit in the performance of his or her duties a greater degree of skill and care than may reasonably be expected from a person of his or her knowledge in experience. Thus, the standard of care is partly objective (the standard of the reasonable person), and partly subjective in that the reasonable person is judged on the basis that he or she has the knowledge and experience of the particular individual. It is a hybrid "objective subjective standard".
Further at page 265 the learned judge states as follows:
"...I wish to make it clear, however, that the purpose of subsection 227.1(3) is to prevent failure to make remittances and not to cure default after the fact (though, as a practical matter, the provision should have the latter effect as well)."
The case further discusses the position of an inside and an outside director. An inside director, so to speak, may be one who "was involved in the Company's affairs to a degree that she or he could not have been oblivious to its financial difficulties" whereas an outside director might be considered to be one who "took no part in the financial affairs of the Company and could not have influenced the course of events".
[121] This does not mean that even an outside director can be exonerated in every case merely because he or she is an outside director. As Robertson, J.A. made it clear at page 266 when he said :
" 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. Put differently, it is indeed incumbent upon an outside director to take positive steps if he or she knew, or ought to have known, that the corporation could be experiencing a remittance problem. The typical situation in which a director is, or ought to have been, apprised of the possibility of such a problem is where the company is having financial difficulties."
[122] It is this Court's position that even an outside director is not entitled to remain oblivious to financial difficulties or circumstances in which the Company finds itself even though he may not inquire as to those difficulties or even though he may be oblivious to them because he chose not to inquire. Surely in such a case the director may still be held liable, although an outside director, wilful blindness to what is going on around him will not be an excuse. Further, an outside director may be required to take positive steps such as setting up controls for remittances, by asking for regular reports from the Company's accountants or financial representatives and by obtaining confirmation from some outside source such as Revenue Canada at regular intervals to ensure that withholding remittances is taking place as the Act requires.
[123] It is not in every case that it is easy to conclude as to whether a particular director may be an "inside director" or an "outside director". However, in the case at bar this Court is satisfied that the Appellant should be considered to have been an "inside director". He was an educated man possessing a Master of Arts Degree, although he was not in business and in spite of the fact that until the time he became associated with the Company he was unfamiliar with such business affairs. This is a not a case where the Appellant was unaware of his position nor did he become a director reluctantly (even though he did indicate that he may have been pushed into it) and the actions that he took in allowing himself to be appointed as a director showed that he became so deliberately.
[124] Before he became a director he inquired of the legal duties of a director from a lawyer. He checked the provisions regarding a director's responsibility in the statute. He admitted himself that when he became a director in February of 1993 he was aware of the financial difficulties facing the Company. When he attended the first meeting of the Board of Directors he asked about the duties and responsibilities of a director and was authorized to consult the Company's lawyer about it. He was aware of the fact that a director had at least "to act at all times with the care, diligence and skill expected of a competent person in the circumstances".
[125] Presumably he consulted the dictionary to find some definitions of the word used and he checked the legislation himself. Armed with that information he went to the first meeting of the Board of Directors thereafter and moved a motion that any income from the sales of the products should go to paying the wages of their employees and keep the Revenue Canada accounts paid in full. This motion was unanimously endorsed by his fellow directors but there was no indication from him that he did anything to ensure that following the passing of the resolution that anything positive flowed from it. He did not move to set up any special account. He did not take any actions to verify from the accountants, from Revenue Canada or from anyone else in the Company that monies were actually being paid to Revenue Canada and that the accounts were indeed up to date.
[126] From his own evidence it is clear that he was aware of subsequent cash flow problems which caused the accounts of Revenue Canada to fall into arrears from time to time. He was aware that a schedule of repayment was worked out with Revenue Canada and that some payments were made but obviously he knew that the accounts were not kept up to date.
[127] As early as August 15th it is clear from the letter to Bruce Cameron of Revenue Canada from Thane Cochran that the Company was in difficulty, that it had fallen behind in the repayments schedule and that there were outstanding balances in both the GST account and the source deductions account.
[128] He was aware of attempts made to obtain more money for the Company and indeed made a cash infusion himself. He was aware that there were difficulties not only with trying to catch up on the arrears but of keeping current.
[129] As early as June of 1995 it was obvious to him that the Company was in severe financial difficulties. He said himself that the Company was in arrears on the Revenue Canada account and Revenue Canada was anxious to be paid. It was after that that he arranged to meet with officials of Revenue Canada to work out a payment schedule to pay current amounts and to begin to pay down the outstanding arrears. Despite the fact that he met with Mr. Looey on several occasions and despite the fact that he said that he had personally delivered some of the payments the accounts were not brought up to date.
[130] There can be no doubt in the Court's mind that the Appellant, as well as the other members of the Company were relying heavily upon the SRED grant to bail the Company out of its difficulties. But neither the Appellant nor the other members of the Company did anything to monitor the accounts with Revenue Canada despite the fact that the Company continued in business, continued making payments to its employees, continued paying other current accounts and earlier had made an interest free loan to one of its officers.
[131] It is true that the Appellant referred to himself as a director whose principal job was to promote liaison between the minority and majority shareholders but under the appropriate legislation a director is not there for a limited purpose only and the Appellant cannot escape liability by merely saying, "I was involved in liaison only and was not responsible as a director for any other actions of the Company."
[132] Under the circumstances it is clear to this Court that the Appellant must be classified as an inside director during the appropriate period of time and a higher degree of care is imposed upon him as an inside director when considering whether or not he acted reasonably taking into account all of the circumstances.
[133] It was the Appellant's position that he took positive steps as a director to prevent the loss. These positive steps were: proposing the resolution that the debts be paid; asking Revenue Canada to do an audit; trying to work out a payment schedule with Revenue Canada; seeking advice from a tax consultant to help them prepare an application to assist the Company in applying for a research and development tax credit; communicating with Revenue Canada in an attempt to have an audit completed as soon as possible to ensure the receipt of the SRED grant and suggesting to Revenue Canada that they hold the outstanding unremitted employee deductions from the cheque before it was issued. He also arranged to have a GST audit done after October 25, 1995 before the SRED grant cheque was issued
[134] He said that he was told by Mr. Looey in early 1996 that he had made arrangements to have the amount deducted from the refund before the cheque was issued and that he assured him that there were no outstanding amounts at that time.
[135] These were the steps that the Appellant took which he believed satisfied his duties as a director of the Company. But it can be seen from the evidence that none of these actions resulted in any of the outstanding amounts being paid to Revenue Canada and of course the latter action took place well after the assessment period which was for the period from November 1, 1993 to October 31, 1995. The Court does not consider that these actions were positive actions taken by the Appellant to prevent the failure as contemplated by Robertson, J. A. in Soper v. R. (supra).
[136] Some of the positive steps that he might have taken which might have made some difference after he moved the resolution to have the accounts paid would be by asking for regular reports from the Company's financial officers as to what amounts were paid, when they were paid and what the balances were. He could have obtained confirmation at regular intervals that withholding of the remittances had taken place as required by the Act. He might have had himself appointed as a signing authority on the bank account or he might have insisted on monitoring the cheques issued to see that they were going to Revenue Canada and not only to the employees and to the payments of other ongoing accounts while the business continued to operate. Such more positive acts surely were required of the Appellant since he had the knowledge that he did have about the dire financial position of the Company, its prospects and the fact that it had experienced considerable difficulties in making remittances, in keeping promises made to make remittances and in keeping up to date not only with regular payments but in satisfying the arrears which had already occurred.
[137] The Court is satisfied that the Appellant had access to all of the records of the Company, which, together with the information he already possessed about the difficulties of the Company, should have made it clear to him that the remittances to Revenue Canada were behind, that there were monies owing and that something more had to be done to ensure that these remittances were made to Revenue Canada.
[138] The actions that he took were not working, the remittances were not being made and he was not entitled to merely sit back and presume that the steps he had taken were sufficient given his responsibilities under the statute. The actions that he took did not have the effect of ensuring that Revenue Canada received any of the monies in question here.
[139] The Appellant was not entitled to rely upon the audits of Revenue Canada to determine what amounts were owed by the Company. He was not entitled to rely upon the presumption that Revenue Canada would withhold sufficient amounts from the grant money to pay off the arrears. The evidence given in Court made it clear that Revenue Canada was unable to do so. He was not entitled to rely upon the audits of Revenue Canada to determine the status of the remittance accounts to Revenue Canada and he should have been able to determine that status from the Company records to which he had access.
[140] There was no evidence whatsoever that the Appellant as much as asked the accountant or anybody else as to when the Company made any payments, what payments it made, when the next payment would be made and what the outstanding balances were. He was content merely to presume that everything was in order when he should well have known that it was not.
[141] It is true that there was not a necessity for him to institute a separate account for the Company's remittances but under the circumstances that existed here it certainly would have been wise for him to do so. It was not necessary that he become a co-signer on the remittance cheques but again under the circumstances and in light of his involvement with the Company it would have been wise to do so. It is true that it was important for employees and creditors of the Company to be paid but in light of the fact that such payments were going on during the period in issue it would have been wise for the Appellant as a reasonable director to take some steps to ensure that Revenue Canada was also paid and he did not.
[142] The Court is satisfied that the actions taken by the Appellant did nothing to prevent the failure. All indications were that the Company was in severe financial difficulties. In his position as a director he had a duty to take substantial actions to ensure that these accounts were paid.
[143] It was insufficient for the Appellant to rely upon the first audit and for him to be satisfied that the accounts were up to date when there was no reasonable basis for so concluding. The argument of counsel for the Respondent that the Appellant should have had notice that the records of the Company might not be accurate or complete at the time of the first audit and that therefore he should not be content to rely upon the first audit, is well taken. It was well known that the records were not well kept. The bookkeeper was no longer employed by the Company, one of the officers of the Company had been loaned a large amount of money without interest, bankruptcy was pending and one of the officers of the Company was threatening to call a large loan.
[144] The Appellant relied to a considerable extent upon the case of Fancy v. M.N.R., (supra). The Court is satisfied that the facts in that case are significantly different from the facts in the case at bar and the result offers no consolation to the Appellant here.
[145] The appeal is dismissed and the Minister’s assessment is confirmed.
Signed at Ottawa, Canada, this 9th day of February 2000.
"T.E. Margeson"
J.T.C.C.