Tax Court of Canada Judgments

Date: 20000405

Docket: 98-2254-GST-G

BETWEEN:

DONALD REDMOND,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Margeson, J.T.C.C.

[1] This is an appeal from the assessment of the Minister of National Revenue (the “Minister”), Notice of Assessment No. 01CB R122752215-02, dated February 17, 1997, in the amount of $47,360.47 in respect of GST unremitted by G.M. Piercey Enterprises Limited (the “Company”) and interest and penalties assessed thereon.

Evidence

[2] Jennifer Ann Holleman was an administrative assistant in real estate who had lived all of her life in Kings County, Nova Scotia. She had Grade 12 education and had taken an advanced course in accounting at the Community College which lasted for one year. She was employed by G.M. Piercey Enterprises Limited and started working there in the fall of 1992. She worked there until a receivership took place on February 24, 1993.

[3] At the beginning, her duties included accounts payable, accounts receivable, payroll and general office duties and then her duties were extended to include more detailed bookkeeping work which had earlier been performed by one Kim Dunbar. Between November 1992 and February 1993 there was no one above her in accounting although she did receive advice from Chris Maynard who was a chartered accountant who completed the year-end statements and also gave accounting advice throughout the year.

[4] She said that Gary Piercey was the owner-manager and Donald Redmond was the body repairman and owner of Redmond’s Auto Body Shop. She was unaware that Mr. Redmond was a partner. She did not see him often and received no instructions from him. She did the bank deposits and prepared the cheques for Gary Piercey’s signature.

[5] She inspected the invoices and made up cheques which she gave to Mr. Piercey and when they came back signed she sent them out. With respect to GST remittances she said that she had a calendar setting out what payments were to be made and when. Four to five days before they were due she made up the forms and the cheques. She gave the cheques to Gary Piercey, for signature. They came back promptly at first and then Mr. Piercey began holding on to them and sometimes he sent them out himself.

[6] The tax people were calling all of the time but Mr. Piercey would not talk to them. She surmised that such large amounts were not paid because they would have affected the financial position of the Company. They had an overdraft available at the Bank of Montreal but the position was such that each vehicle from inventory had to be paid off as soon as it was sold.

[7] The financial statements were completed once per month on a computer linked up to Honda Canada with respect to sales. She also had another system, in-house which printed out the trial balance and balance sheets. The Honda financial sheet was also available. She gave all of these documents to Mr. Piercey. Mr. Piercey often altered them and had her change the bottom lines at times. Thus the statements were not accurate. She was uncomfortable with this action at first but she did not believe she was in a position to question it. She knew that something was going to happen. Two or three weeks before the bankruptcy there was shop talk and Mr. Piercey said nothing until a few days before the bankruptcy occurred on February 24, 1993.

[8] Towards the end of the operation Chris Maynard was there more frequently. There were meetings between Mr. Piercey and Mr. Maynard. Mr. Redmond was not there very much but once she saw him in a state of shock. Mr. Redmond did not have signing authority.

[9] She said that the GST remittances during the last months were not up-to-date. For the last amount owing she said that Mr. Piercey intended to divide the amount up into four but the account was never paid up. She did not deliver or send any payments to GST in the last few months. During February of 1993 she did not have much involvement.

[10] In cross-examination she said that there were 10 to 13 people on staff. The Appellant was not an employee. He did the bodywork. Once in a while he would go in to talk to Gary Piercey. During the last five to six months creditors were calling the business. The accounts went from 30 days, to three to four months overdue. Revenue Canada did call regarding the payroll remittances and GST remittances. The payments were never on time. She did not recall the amounts owing but she said they were large, being in the tens of thousands of dollars. She knew that these payments had to be made quarterly. She made them up and gave them to Mr. Piercey and it was up to him to give them back or send them out himself. Often times when she checked, the government cheques had not been sent and sometimes they were not even signed. She left them in Mr. Piercey’s office.

[11] According to this witness, Chris Maynard, the accountant was aware of the situation. She spoke to him and expressed her concern about being able to do her job. Mr. Maynard knew about what was going on but she did not tell him that. If someone looked at the statements they could tell that a bill had not been paid. There was a cheque disbursement journal. It would show as being written. If it was cashed it was ticked off and if it was not cashed it was left alone. All books that she used regularly were kept in her office across the hall from Mr. Piercey’s office.

[12] Mr. Redmond, the Appellant, never came in to look at any books, financial statements, cash disbursement journals, deposit books, monthly trial balances or sales records. He did not ask about the financial position of the Company at any time.

[13] The input tax credits were looked after by Mr. Piercey himself. This witness merely took the numbers from the computer and put them on to the remittance slips.

[14] The witness could not say whether a return was filed for the period ending January 31, 1993. She did not know what a transitional tax credit was. She did the payroll deductions and the remittances were made first but then delayed in the same way as the GST remittances were delayed. There was no separate bank account for GST or payroll deductions. She was aware that Mr. Piercey held on to cheques quite often during the whole period that she was there. She believed that the Honda statement also contained the GST information but she could not remember for sure. Mr. Piercey asked her to make changes to the manual statement and the purpose was to alter the bottom line. He did not make any changes to sales or inventory and he did not make any changes to the amounts of GST collected.

[15] This witness was unaware that Donald Redmond was a director of the Company. She knew that the entries were not correct but she did not feel that she could tell Mr. Piercey to change. Her last day of work was her last day of operation for the business. She did not go to the new dealership. She saw Mr. Redmond at the premises more often during the final period of operation.

[16] In answer to the Court’s question she said that all of her records were available to anyone who was entitled to see them. The records would show that the cheques were not cashed. She was not asked to show the amount of GST deductions, that the amounts were paid or when they were paid.

[17] Peter Muttart was a lawyer since 1968. A book of exhibits was introduced as Exhibit A-1 subject to weight and proof. He believed that he had incorporated the Company and did the legal work for it. Gary Piercey was the original contact person and he also met with Mr. Redmond, the Appellant. This witness identified the document at Tab 1 which was a letter from the Company accountants, Whynot, Maynard & Bent, more particularly, Chris Maynard, which gave instructions to Mr. Muttart regarding the share structure of the corporation. Gary Piercey was to have 75 shares and Donald Redmond was to have 25 shares. The officers were to be G.M. Piercey as President and D.W. Redmond as Secretary Treasurer. It also provided that the shareholders would be the directors of the Company. Mr. Piercey was to invest $50,000 into the Company and Mr. Redmond was investing $100,000. These would be set up as shareholders’ loans and would be non-interest bearing without any definite terms of repayment.

[18] The witness also said that Mr. Piercey told him that Mr. Redmond would be involved in the Company. There would be business exchanges between Mr. Redmond’s repair business and the car business. The witness said that he would have made them both directors.

[19] He did not deal specifically with duties of directors but he did say that as a matter of practice there would have been one or more meetings with Mr. Piercey and Mr. Redmond and he would have recommended a shareholder’s agreement. He identified the shareholder’s agreement at Tab 2 and said that he had witnessed it. This agreement showed a share structure of 70 common shares for Mr. Piercey and 30 common shares for Mr. Redmond which was a change from the original instructions that he had received from the accountant. He did not know why this change took place. He was unaware whether or not Mr. Redmond had received any independent legal advice. Mr. Piercey was restricted by the agreement to spending no more than $10,000 on any capital item without the knowledge and consent of Mr. Redmond. The lawyers involvement thereafter would have been on an annual basis with respect to the minutes and any dividends that might be declared.

[20] This witness was aware of an offer from a Mr. Munro to purchase the business at one time but this fell through. Another one followed with a Mr. Meisner as seen in the agreement of purchase and sale found at Tab 13 which Mr. Muttart witnessed. This witness was not involved in the negotiations. He could not recall any instructions from Mr. Redmond but he said that they would have met. He received no instructions from Mr. Piercey with respect to Mr. Redmond.

[21] He was aware that there was a concern by the parties of the ability of the Company to pay its liabilities out of the proceeds of sale. He had no discussions regarding the personal liability of Mr. Piercey because all debts were to be paid back from the proceeds of the sale.

[22] The witness was aware that the Bank of Montreal had a security and this was discussed with them (presumably Mr. Redmond and Mr. Piercey). It was a special account with the Bank of Montreal and this made it more urgent that the sale take place. A problem developed with the landlord who was selling the property and not honouring his duties under the agreement to his clients. Consequently, the purchaser was backing off and wished to change the purchase price. This would have left a shortfall of $18,000 (nothing to do with taxes) but it would be impossible to satisfy the Bulk Sales Act. The bank was not cooperative either and appeared to be agreeing with the sale going through with the $18,000 reduction. As far as this witness was concerned Mr. Piercey had no choice in the matter as the bank had indicated that it was going to call the security. There was a receivership followed by a proposal in bankruptcy. The sale took place for much less than it should have.

[23] Mr. Piercey was advised that he might have an action against several parties including the landlord but he had no financial means to pursue these actions. His own legal account was settled with the receiver.

[24] The witness was shown his statement of account which indicated consultation with Mr. Piercey and his partner on the 28^th day of December 1992 and an indication that a call was made to Mr. Cooper regarding the agreement.

[25] Mr. Redmond and Mr. Piercey received assessments from Revenue Canada and his firm filed notices of appeal for both. Mr. Piercey received a further assessment for PST and consequently he went into personal bankruptcy.

[26] The witness was shown several documents pertaining to various assessments of Donald Redmond and these were objected to by counsel for the Respondent. These were allowed subject to weight and relevance.

[27] The witness was shown the document at Tab 8 which was a letter to Revenue Canada by himself which referred to Mr. Redmond as a former director. The witness said that Mr. Redmond had nothing to do with the Company after the bankruptcy.

[28] In cross-examination the witness was referred to a letter from Revenue Canada to himself requesting additional written representations on behalf of Mr. Redmond and his notice of objection. The witness indicated that he did not recall making any further representations on Mr. Redmond’s behalf.

[29] The witness said that Mr. Redmond did not resign as a director up to February of 1993 when he ceased to have anything to do with the Company. He did not know whether he resigned after February of 1993 or if at all.

[30] When directed to the date of December 28^th, 1992 shown at Tab 39 he said that he could not recall what it was about but that it referred to the Munro proposed sale which was the first proposal. He would not necessarily have reviewed the financial position of the Company at that time. During the course of the purchase he would have reviewed what was incoming and outgoing and whether there was enough money to pay expenses including taxes. He said that he would have been provided with the documents by them but he did not recall having any discussions with Mr. Redmond regarding the sale to Mr. Meisner but that does not mean that he did not have such discussions.

[31] He took instructions from Mr. Piercey but Mr. Redmond would have been seen when his signature was needed for these documents. The witness believed that Mr. Piercey had ostensible authority from Mr. Redmond to sign the agreement of purchase and sale. He would have discussed the purchase and sale agreement signed by Mr. Piercey and Mr. Redmond with them. Again he said that he would not necessarily have advised Mr. Redmond as to his duties as a director, but he would have discussed with them generally that the directors have the effective control of the operation of the Company and that they must meet once a year. He also would have discussed the limited liability with him. Mr. Redmond did not ask him what his responsibilities were as a director. They did not discuss liability for unremitted taxes.

[32] According to this witness, there was a director’s meeting and a shareholder’s meeting once a year and otherwise, if needed. This witness would not be there. He was familiar with the Minutes of the annual meetings and said that only directors approved the financial statements annually. The annual minutes would have been completed by his office up to the time that the books were removed by the receivership. His office sent out the minutes and told them to have the meetings, sign the minutes and return them to his office. There may have been further calls or meetings with Mr. Redmond about the Company between 1990 and 1993 but he did not have specific documents to show that. There were no inquiries from Mr. Redmond with respect to liabilities for the Company’s debts.

[33] He understood that there was an outstanding tax liability of about $60,000 and this would have been paid out of the proceeds of sale. This information might have been received from both Mr. Piercey and Mr. Redmond but he was not sure. He went through the numbers with Mr. Piercey in December or January of 1992 with respect to the Munro transaction.

[34] In response to a question put by the Court he said that Mr. Redmond was aware through Mr. Piercey of the outstanding accounts and Mr. Muttart’s discussions with Mr. Piercey. Following the Court’s question and in response to a question by Mr. Tompkins, the witness said that Mr. Redmond was aware of the fact that all taxes would be paid and part of that was based upon the lawyer’s discussions with Mr. Piercey. He was aware that Mr. Redmond and Mr. Piercey talked regularly and he assumed that Mr. Redmond knew of the obligations and that they would be looked after.

[35] In response to a question from counsel for the Respondent the witness said that at the meeting with both Mr. Redmond and Mr. Piercey they discussed the Munro transaction and Mr. Redmond knew about it and its terms. Mr. Piercey signed the agreement and had the authority to do so. Clearly, the Company was having financial problems. He did not know when but it was shortly after the Bank of Montreal made the account a special account.

[36] James Christopher Maynard had been a chartered accountant since 1971. In 1971 he was practising in Nova Scotia. He did work for the Company and was recommended to Mr. Piercey by the former owner. He did not give advice for the initial sale. Most of the negotiation was done between Mr. Sampson and Mr. Piercey themselves. Mr. Piercey had worked for Mr. Sampson for about two years before the transaction took place.

[37] He said that in 1990, initially, he did not deal with Mr. Redmond. In June of 1992 Mr. Redmond called to find out if there would be sufficient amounts to pay the bills out of the proceeds of sale.

[38] He had not met Mr. Redmond before March 30^th, 1990 when he wrote the letter of instruction to Mr. Muttart. He took the information from Mr. Piercey. He did not know if Mr. Redmond had legal or accounting advice. Money was invested into the Company as set out in that letter. This witness was asked to assist the internal bookkeeper on an ongoing basis. The Company had three to four internal bookkeepers being Betty Whynott, Kim Dunbar, Jennifer Holleman and Elaine Foot. This witness recommended a shareholder’s agreement between Mr. Redmond and Mr. Piercey but could not explain why the changes took place in the shareholdings.

[39] By June of 1992 financial difficulties became known. He knew that there were ongoing problems with the Bank of Montreal as of the spring of 1992. He had discussions with Mr. Redmond regarding the financial problems. Mr. Redmond called him to see if there would be a shortfall if there was a sale. Mr. Redmond was told that he would have to talk to Mr. Piercey about the assets and liabilities.

[40] The last time he did financial statements was for the period ending April 30, 1992. He met with Mr. Piercey on June 6, 1992 and was given the best case scenario. The best case scenario was that there would be $96,000 in excess funds and in the worse case scenario there would be $6,000 of excess funds. Before paying out the shareholders’ accounts he called Mr. Redmond and gave him these figures and told him that they came from Mr. Piercey and that he was not confirming their accuracy. He was referred to Tab 12 which contained a financial statement for the year ending April 30, 1992. This was completed on October 9, 1992. These statements showed difficulties in the accounting practices. He and Mr. Piercey met with the Bank of Montreal in Halifax and they were not pleased. Stability was a problem. Mr. Redmond was not there and Mr. Redmond was not made aware of the situation.

[41] During the last of December of 1992 or the first of January of 1993 Mr. Redmond called him and asked him to meet him at the office with Mr. Piercey regarding the sale and the payout of liabilities. The witness used Mr. Piercey’s information and he indicated that the shareholders would not be paid in full but the liabilities would be paid. He was not involved in the sale with Mr. Meisner.

[42] This witness met with Mr. Piercey monthly or bi-monthly and with the staff. Mr. Redmond had no dealings with him. There were no discussions about any particular liability such as government remittances. For the year-end April 30, 1992 he got involved in the amounts owing to Revenue Canada. When asked why the business was not successful he said that the expenses remained constant after there was a substantial drop in gross profit and in sales. This drop-off was reflective of the economy at the time. He only had street knowledge of the bankruptcy itself.

[43] The following year Mr. Redmond came in to retain him regarding the large write-off as a result of the business loss. He identified the letter at Tab 3 that he wrote to Revenue Canada. As a result of that letter his 1993 credit was released and Mr. Redmond received a nil balance assessment for the unremitted payroll deductions. He also received a letter saying that the two year limitation on collections would result in a no assessment against him. He said that he did not discuss with Mr. Piercey the changes that were made to the internal bookkeeping documents but his concern was reflected in his review engagement.

[44] In cross-examination he was referred to Tab 12, the financial documents of the Company and he said that many of the bookkeepers did not have experience in handling entries. There were posting errors and many activities were recorded in the wrong accounts. It was difficult to conclude the amount of sales, the cost of sales and the business expenses. The bookkeeping problem existed since the incorporation and got worse towards the year 1992 as the Company encountered financial difficulties. This witness mentioned the bookkeeping problems to Mr. Piercey. He never mentioned them to Mr. Redmond who he viewed as a silent partner and he left that up to Mr. Piercey to deal with him. He knew that Mr. Redmond was a director, a shareholder and an investor but advised Mr. Piercey only. He also did the April 30^th, 1991 statements. He gave his opinion based upon figures provided by Mr. Piercey.

[45] Mr. Redmond did not ask to see any documents. Further, this witness did not see any documents in June to verify the figures given by Mr. Piercey. He completed the financial statements based upon a review of the records and after making many adjustments. June of 1992 was the first time that Mr. Redmond came to see him about the problems.

[46] At the time he did not believe that there was any liability for an outside director. He never advised Mr. Redmond that he was an outside director and he was never asked by Mr. Redmond about liability. The Company had problems in 1992 with a net loss of $155,351 and in 1991 a net loss of $29,082.

[47] The witness reviewed the 1991 financial statements with Mr. Piercey only. As of April 30^th, 1992 there were arrears for one quarter only with respect to remittances. The Company also owed GST for 1991. The financial statements showed Goods and Services Tax payable $23,459 in 1992. The Company had cash flow problems from April 30^th, 1991 to April 30^th, 1992. The year-end statements for 1991 were completed in August of 1991.

[48] The GST filings for November of 1991 to January of 1992 had not been filed as of April 30th, 1992 although they may have been completed. The reports for February, March and April of 1992 had not been completed. Input tax credits were calculated by the internal bookkeeper. April 30^th, 1992 was the last tax return that he did for the Company.

[49] In re-direct he said that he was not involved in 1993 and that with respect to new money they put in the Company in 1992 it was close to the shareholder ratio. In response to questions by counsel for the Respondent the witness said that by looking at the statements alone, even a more sophisticated person would not know that GST and income tax remittances were in arrears by more than one quarter, if at all.

[50] Mark Stephen Rosen was a trustee in bankruptcy and he was familiar with the Company. He became involved near the end of 1993. He received a global figure from Gary Piercey which showed PST owing of $70,000 and GST at $30,000. He was told that Mr. Redmond was a director. It was important to have a bankruptcy in order to enable the bank to receive back as much money as possible after the resale. As a result of the sale to Mr. Meisner almost all of the money went to the Bank of Montreal. They had some information with respect to government claims but they asked Revenue Canada to file the proofs of claim. He received Company statements about arrears owing to Revenue Canada, he received the Company’s books and records and after completion he gave them back to Gary Piercey about two years later. He did not deal with Mr. Redmond although he may have signed some documents. He did not remember.

[51] This witness dealt basically with Mr. Piercey on a regular basis. He reviewed various documents with respect to the bankruptcy and receivership. He told Revenue Canada to file a claim under the bankruptcy, no Court action was taken and there were no further demands made. Revenue Canada made a third party demand as set out at Tab 36 but he did not know what amount, if any, they had collected on it. There was no response from Revenue Canada to his letter of May 21^st, 1993 with respect to outstanding accounts receivable of the Company.

[52] With respect to the document at Tab 45 showing an outstanding balance of $37,641.05, the witness said that he had discussions with Mr. Piercey about it and may have had discussions with Mr. Redmond. Some accounts were left with Revenue Canada to collect and he had not heard about them. He referred to the amended claim of Revenue Canada shown at Exhibit A-1 at Tab 4 for the amount in issue and the Proof of Claim – “Amended”, at Tab 5 together with the Request for Cancellation of Registration of a GST number shown at Tab 7.

[53] Gary Michael Piercey testified that he was involved in the automotive field since the early 1980s. He was involved with the previous owner David Sampson as general manager. In the spring of 1990 they acquired the Company. The Appellant Donald Redmond had a body shop. The share split changed from 75% - 25% to 70% - 30% for the closing. This witness believed that Mr. Redmond had a separate lawyer and obtained advice from him. He changed to 70% - 30% on the advice of his lawyer who had some concern about Mr. Piercey being able to sell without any notice being given to Mr. Redmond. The matters referred to in the letter at Exhibit A-1, Tab 1 were discussed with Mr. Redmond although they did not have any discussions about the risk of being a director.

[54] The witness said that he and Donald Redmond saw an opportunity. Mr. Redmond was aware of why Mr. Piercey had come there. They just started talking about the business and he asked Donald Redmond if he was interested in coming in and he was.

[55] The witness was asked about the involvement of Donald Redmond and he said that he had none as such. Day to day business was conducted by Mr. Piercey as well as the banking. He believed that Mr. Redmond’s lawyer was a Mr. Force. He suggested an employment contract for Mr. Redmond. Mr. Redmond had no signing authority.

[56] As far as Mr. Piercey was concerned, the deal with Mr. Sampson was a take it or leave it proposition. The purchaser received the inventory, it bought the equipment for which it had to pay an extra $100,000, the vendor kept the receivables and the used cars and the purchaser agreed to sell them and to split the profits. They opened up a line of credit with the Bank of Commerce for $100,000. For the $100,000 they received the equipment and furnishings, signs, telephone systems, tools, hoists and machinery. He described how the Company dealt with the Bank of Commerce until they called their loan in the spring of 1992. At that time they switched to the Bank of Montreal.

[57] The Company had current financial information which was unaudited. He did not know much about a balance sheet nor did he know much about shares. He did not share the financial information with Mr. Redmond although he never held anything back from him either. Mr. Redmond was involved in the repair business. He received no salary from the Company, he received no dividends, he received no money back on his loan and he had nothing to do with hiring employees.

[58] With respect to the deductions and remittances to Revenue Canada, he reviewed the month-end statements. He relied on the accountant and other staff but he did know that there were dates by which remittances had to be made. The creditors were paid during 1990 but between 1991 and 1992 things were turning down. He knew it.

[59] In 1991 Mr. Redmond still had no role in the business. Everyone knew sales were down. Mr. Redmond was in the office and could see that the showroom was empty. There were always monthly statements. He did not review them with Mr. Redmond. He did not recall reviewing the status of accounts with Mr. Redmond either. He knew about problems after the financial statements were prepared. Between March 1992 and January 1993 he was in to all of his savings and RRSPs to obtain money to keep the Company going. He said “I am sure that Donny knew that we were in difficulty because we were putting money in constantly.” When money was required both himself and Mr. Redmond put it in in the proportions to the shareholdings. If $10,000 was required he put in $7,000 and Mr. Redmond put in $3,000. He reiterated that the priority of both in selling the business was to pay the bills. Mr. Redmond was aware that he was trying to sell the Company.

[60] He referred to an error in the 1991 financial statement and he said that the incorrect statement was in his hands for about a year and it had an error of about $50,000. He spoke to Mr. Maynard about the problems in October 1992. He had no money left to put into the Company. He seemed to suggest that Mr. Maynard had interviewed the bookkeeping staff and recommended them but this appeared to be contrary to the evidence of Mr. Maynard. He did not review the financial statements with Mr. Redmond because he said he did not have them. The statements were not obtained until October 9, 1992. The Company was held to its operating line of credit. It missed only one source deduction and an audit was performed by the Provincial Sales Tax Department in 1992. The one payment that was missed according to this witness were source deductions on the December remittance which was due in January 1992. According to him no GST and source deductions were late but then he said that one was late in the summer of 1992. He received no calls about it and he did not know that the staff had received calls. The remittances had to be made every quarter and according to him they had an input tax credit.

[61] GST was calculated by Kim Dunbar in 1992 until December and then by Jennifer Holleman. The only amount that he was aware of was a cheque to Revenue Canada for $4,400.00 which the Bank of Montreal had authorized to be paid. On February 25, the bank told him to make sure that the GST was paid. It was the first time that he was told that he would be responsible as a director. He did not recall viewing the document from the Bank of Montreal dated February 26, 1993 which in essence called the loan. He could not confirm the amounts alleged to be owing from documents submitted by Revenue Canada as at Tab 45 in Exbibit A-1 for the amount of $37,641.05. He was aware of it but he could not say if it was correct. He was assessed for outstanding amounts and then he filed for personal bankruptcy and he ceased the defence of the Revenue Canada claim.

[62] Mr. Redmond was part of the meetings with respect to the bankruptcy. Mr. Redmond was aware that they had paid the GST cheque in the amount of $4,400. The topic came up several times and Donald was told that he would not be liable. He advised Mr. Redmond that it had been paid. They could not find out what the account of Revenue Canada was about.

[63] At no time did he advise Mr. Redmond to get legal advice. If they had received the full purchase price for the business, they would not have owed anyone. Mr. Redmond was involved with the discussions in November with respect to the sale to Mr. Munro. Mr. Redmond was aware of the deal with Mr. Meisner. This witness said that he advised him of that. He received a computer print-out each month from Jennifer Holleman and he admitted that he had changed the statements by adding inventory but those are the only changes that he made.

[64] In cross-examination he identified his signature on the Goods and Services Tax Registration Form as found in Exhibit R-1 at Tab 2. He said that the shareholders’ loans to the Company were about $200,000 for himself and $120,000 to $130,000 for the Appellant. He never expended anymore than $10,000 on a capital item in accordance with the agreement. Mr. Redmond did not put in any of the extra $25,000 needed to close the transaction with Mr. Sampson. Mr. Redmond’s lawyer suggested that he receive 30% of the shares instead of 25% according to this witness. The witness was in charge of the day-to-day operations. This was decided before the agreement was signed. Mr. Piercey was the general manager.

[65] Mr. Redmond did not express any concern about Mr. Piercey being in charge of the day-to-day operations. It was not part of the deal to have Mr. Redmond continue to do the repairs although he did so. The vice-president had no duties and the president did everything. At first he said that he thought that both himself and Mr. Redmond signed the security for the Bank of Montreal for the $100,000 loan but then he said he could not say. He signed one guarantee for the Bank of Commerce and the debenture for the Bank of Montreal. He believed that Mr. Redmond signed the same documents.

[66] In March 1992 he had to put in 70% of $32,000 and Mr. Redmond put in 30% of it. Then he said that he did not know. Ninety nine percent of the time he borrowed all of the money himself. He never reviewed the month-end statements with the Appellant. However, he said that he was sure that he was aware of the statements. He never asked to see them. Then he said that he and Mr. Redmond sat down and went over the 1991 year-end statements in the fall of 1991. They never went over the 1992 year-end statements but Mr. Maynard and himself took the information into the Bank of Montreal in October. He knew they were in trouble. They had a ball park figure. He did not recall whether or not Mr. Redmond received a copy of the 1992 statement. He brought the $56,000 mistake to the attention of Mr. Redmond in the fall of 1992. This was a mistake in inventory account.

[67] The accountant was working at the place of business frequently and he had to be paid every week. Mr. Redmond was aware of the decrease in sales and the slowdown of his work for the Company. He came to the garage quite frequently. This witness saw him there two times a week. He did not ask to see the books. Mr. Redmond knew that they were having financial difficulties and that the witness was receiving an extension of time from the bank to complete the deal. He had to put so much money in. Sometimes he did not tell Mr. Redmond and he just went down and borrowed the money himself. Mr. Redmond could have checked this out in the shareholders’ loans account. The books were in the office or at Coopers and Lybrand office. Mr. Redmond never asked to see them and this witness never prevented him from seeing them. He did not think that Mr. Redmond put in any of the $10,000 that the Bank of Montreal required on Christmas Eve.

[68] During December 1991 and January and February 1992, the bank was coming in regularly to audit the business and himself and Mr. Redmond knew what they were doing there. The bank had someone there all of the time.

[69] In January 1992 the bank would not allow a cheque to be cashed for source deductions. The first one. With respect to GST, in April 1992, someone from the GST department said that they had not remitted the form from the last quarter for $10,000 and they wrote a cheque for it. During the next quarter according to him there was a credit and during the following quarter the credit offset the amount owing. He had no reason to believe that the calculations were not correct. They did not use the GST collections to operate the business because he said that they paid Revenue Canada.

[70] The last cheque was for $4,400 to $4,600 that he wrote for GST remittances. It was approved by the bank. The bank told him that he would be responsible if the remittances were not made. Mr. Redmond was there as well.

[71] He was shown Exhibit A-1 at Tab 13 which was the agreement with Mr. Meisner for the sale of the business. They had no option but to sign it. Mr. Redmond did not instruct him not to sign it. Mr. Sampson had sold the building.

[72] They did not hold regular shareholders’ meetings but just at the years’ end. Mr. Muttart was advised. No shareholders’ meetings were attended with Mr. Redmond. Then he said after the first year he sat down and discussed the financial statements. From time to time he called Mr. Redmond and advised him about the bank wanting money. There were no annual directors’ meetings. He was not aware that he had to have a director’s meeting. They had directors’ meetings about various financial things such as the change of banks. Mr. Redmond was aware that GST was paid by the cheque through the Bank of Montreal in February of 1993. Prior to that time he did not recall Mr. Redmond asking if the GST was paid.

[73] In re-direct he said that those changes in the cash position as set out in Exhibit A-1 at Tab 12 were year-end only and not on a monthly basis.

[74] Donald Redmond was an auto body repairman. He had been in business for 30 years. He is a proprietor. He has no employees. At one time he had one employee. He was familiar with the Company. He was approached by Garry Piercey to purchase it from Dave Sampson. He had seen him at the dealership when he repaired cars for Dave Sampson. He had no knowledge about it. This was in December of 1989 or January of 1990. He invested $100,000 in the Company which he borrowed through the credit union.

[75] The previous owner, Dave Sampson, had done very well according to the Appellant and the Appellant had received 90% of his work from that business. According to him he had nothing to do with the incorporation. He had no discussion about the 75% – 25% split. He did not discuss any factors with anyone. He did not know what an officer/director was. He heard about it through Revenue Canada. He had nothing to do with the day-to-day operations of the Company. In 1990 he did not know what Mr. Piercey was putting into the Company. He received no legal or accounting advice in 1990. Both he and Mr. Piercey met with Mr. Muttart about setting up the business.

[76] He was shown Exhibit A-1 Tab 2 which was the agreement between himself, Mr. Piercey and G.M. Piercey Enterprises Limited. He said that he signed it. There was no particular reason why he decided that he should have 30% of the shares. He received no legal advice. He did not stipulate the provisions of paragraph 4.01 with respect to the officers and directors. He was into the place of business almost every day.

[77] He had never been a shareholder, officer or director of a Company before. He did not know what that entailed. He did not ask Mr. Piercey. He had no discussions with Mr. Piercey about the business. He did not know when he expected to get his money back. He had nothing to do with banking nor the hiring of employees. He did remember going to the Bank of Commerce but he did not remember what he signed. He thought that it was a guarantee. When they switched to the Bank of Montreal he said that he had nothing to do with it. He was told by Mr. Piercey. He had a personal guarantee with the Bank of Montreal for $60,000.

[78] During the years 1991 and 1992 he asked no questions about the financial situation. He did not recall contacting Mr. Maynard till late in 1992 or early in 1993. He called Mr. Maynard to meet him at the dealership and to ensure that all the local people would be paid from the proceeds of the sale. He found out about it through Gary Piercey. He did not know who was going to purchase it. He received no financial details in 1992.

[79] In December of 1992 or early of 1993 he contacted Mr. Maynard because the Bank of Montreal wanted him to sign a collateral mortgage on his property. Mr. Maynard told him that either he sign it to allow the Company to continue until the sale or he would lose everything, so he signed it. He had no other dealings with Mr. Maynard.

[80] He was not familiar with the financial statements as set out in Exhibit A-1 at Tab 12 and he said that the first time he saw them was at his lawyer’s office in preparation for this trial. He made no inquiries about the financial statements. He does not know how to interpret the financial statements. Chris Maynard does his income tax returns. He was familiar with GST and income tax deductions. He took them off for the employee that he had at one time and sent them in to Revenue Canada.

[81] He did not discuss sales or expenses particularly with Mr. Piercey. Mr. Piercey told him that things were going fine. In late 1992 they had to put in some money. In 1990 he put in $100,000, in 1992 he put in $13,500 when they changed banks. No arrangements were made to get the money back. In January 1993 he signed the collateral mortgage but did not put any money in. It was drawn up by a lawyer and he signed it. Possibly this was Mr. Muttart. According to him he did not know that there was a problem about GST and income tax deductions and remittances. A few days before the bankruptcy Mr. Piercey talked to Gary Maynard about it. He received the cheque and took it to the bank and it was refused. Then it had to be sent by courier to Revenue Canada. He understood that it was the full amount of the GST that was still owing.

[82] With respect to the Meisner agreement he said that he did not see it until he viewed it at his lawyer’s office in preparation for this trial a few days ago. He knew about the agreement in 1993 through Gary Piercey. He was not familiar with the amounts set out therein and he never signed it. He had no responsibilities as a director. He had some discussions with Mr. Maynard in 1993 about the problem of everyone being paid and that he might end up owing the bank money. He did not see any need to resign as an officer or director since the business was being sold. (This would appear to be inconsistent with his earlier position that he did not know he was a director).

[83] He was referred to Exhibit A-1 at Tab 55, which was a letter from Mr. Muttart to Mark Rosen inquiring as to the date Donald Redmond became a director. The witness said that he had no discussions with Mr. Muttart about that subject. Yet, the letter indicates that Mr. Redmond advised Mr. Muttart that he became a director somewhere around April 27 of 1990.

[84] He was referred to the letter from Mr. Maynard to Revenue Canada in Exhibit A-1 at Tab 3 and he said that he discussed that letter with Mr. Maynard. This letter points out that Mr. Redmond was indeed a director and also discusses the fact that Mr. Redmond was informed on several occasions that the Company was experiencing cash flow problems but at no time was he informed that the Company was in arrears with regards to Goods and Services Tax or payroll deductions. He could not remember receiving a notice of assessment and said that nothing was ever mentioned like this. He had no idea whether the amount was correct or not. He did not inquire as to whether the amount was correct.

[85] The books were at Coopers and Lybrand. They made contact with Revenue Canada as to where the amounts came from. He talked to a number of people from Halifax to Ottawa about it but received no satisfaction. He did not remember meeting with Mr. Piercey and Mr. Muttart on the 28^th day of December 1992 about the agreement. He did not know about the possible sale until mid-December of 1992. He was not aware of Mr. Piercey changing financial statements or holding back cheques.

[86] When referred to the Reply, he said, “I guess I was a director and a shareholder at all times. I did not work at the business. I did not resign. There was no reason that I was disqualified. I did everything that I could reasonably do. I started finding out in December of 1992 about the problems.” The bank came after him for the indebtedness and he paid money to the province for the provincial sales tax.

[87] In cross-examination he said that he read the shareholders’ agreement before he signed it and that this agreement set out that he had 30 shares. Mr. Muttart was there. He did not advise him as to any specific duties as a director. If he did he did not remember it. He had no duties as a vice-president. He never expected to have any role in the Company. Mr. Piercey had the expertise to run it.

[88] He knew that his consent was required for an expenditure over $10,000. Just before signing the agreement he had some problem with it. He received no independent legal advice except with respect to his divorce. He never asked anyone about what an officer, director or shareholder was.

[89] He admitted that he had one employee in the late 1980s. He knew that employee deductions had to be made and remitted. In the 1990s he knew that GST had to be paid and employee deductions had to be made. He knew that he would be responsible.

[90] With respect to the Company in question he knew that the Company had employees, had to make deductions and that GST had to be paid. The Company had a bookkeeper and an accountant. He never reviewed the books but he knew that Jennifer Holleman was there doing books and he hoped that the remittances were made. He said, “I would hope that Mr. Maynard would tell me if the remittances were not made.” He never requested to see the financial statements of the Company. He did not make any inquiries as to the business from David Sampson. He knew that Mr. Sampson was making money and therefore he did not ask for any information. He would have hoped that Mr. Piercey was doing his job as he was paid $50,000 a year in salary. He knew that the Company had 10 to 13 employees.

[91] With respect to the monies he advanced to the Company, he believed that he would get them back at some time. He did not receive back any money. In spite of the fact that he put in $13,000 in the spring of 1992 and signed a guarantee for $60,000 with the Bank of Montreal, he still did not inquire as to when he would get his own money back. If they had directors and shareholders meetings he did not know what they were. He did not know that they had to have an annual shareholders meeting.

[92] He did not remember contacting Mr. Maynard in June 1992 about a sale. He heard about the sale to Mr. Munro in December of 1992, he was not positive as to the date. They decided that the best thing to do was to sell the business. By November or December of 1992 there was some suggestion that the Company was losing money. In January 1993 he signed a colateral mortgage for $25,000. Then he contacted Chris Maynard. He did not request to review the books. He knew that they were at the office. He did not know about the monthly Honda statements. Insofar as a checkmark in the cheque disbursement voucher was concerned it would mean nothing to him. He did have financial statements prepared by Mr. Maynard for Redmond Auto Body for income tax purposes but he did not check them for accuracy.

[93] He did not see the financial statements and he did not ask Mr. Maynard whether or not GST was owing. He did not know about the error in the financial statements. He denied that Mr. Piercey told him about it. Again he said that he never resigned as a director, he never was removed as a director and he never gave notice of his intention to resign as a director. He never asked Mr. Muttart to explain the bankruptcy or receivership proceedings. Again he said he did not tell Mr. Muttart as to when he became a shareholder as was indicated in Exhibit A-1 at Tab 55. He said, “I presumed that he knew that I was a director. I did not have to tell him that.”

[94] There were questions about various allegations contained in the Reply but he was unable to offer any evidence about them. He had no documents to show whether or not the amounts claimed were correct or incorrect or whether or not the allegations contained in the Reply were correct or incorrect. Just before the receivership a cheque was sent to Revenue Canada for remittances. He did not know the amount. That was the first time that he knew that the account was in arrears.

[95] With respect to the letter to Mr. Muttart from Revenue Canada requesting additional written representations as to why the amount was not owing by Mr. Redmond he said that he presumed that if there was something to be done that Mr. Muttart would look after it. Again he said that Mr. Muttart was wrong when he said that he attended a meeting with him and Mr. Piercey on December 28, 1992.

[96] In late December of 1992 or early January 1993 he knew about the problems but did not take any steps to see if the GST was being remitted. He presumed that it was. He admitted that no one prevented him from seeing or reviewing the Company books. He lived five miles away from the Company’s offices. Between 1991 and 1993 he was not prevented from exercising his powers as a director.

[97] He said that he had no input with respect to the direction of the Company but he could have voiced his opinion. He had only heard about one deal. He knew that they were talking about a sale. He had an input into the decision to sell. It was a major business decision.

[98] He made no inquiries as to the capabilities of the staff. He had no idea about the GST money going into the Company’s general account. Between 1991 and 1993 from time to time he talked to Gary Piercey on the telephone and in person but he never had any conversations regarding how the business was doing or about the bank account. Mr. Piercey never contacted him about putting money into the bank and about the Company being “offside” with the bank.

[99] In re-direct he said that he had a grade 8 education and two years of auto body repair instruction in a vocational school. His business was registered now.

[100] The Respondent called Kevin Nelson who was a chartered accountant. He was a field auditor with GST and as part of the compliance audit he compared the books and records of the Company to the returns filed. He reviewed the detailed general ledger which he received from Mark Rosen who was the Bank of Montreal receiver. He reviewed the amount of GST collected and the input tax credits claimed during the period in issue. In the hardcopy of the computer print-out, there were no discrepancies found. He confirmed the presumption set out in the Reply at paragraph 9.g). He confirmed the outstanding figure of $37,641.05 as outstanding GST as found in Exhibit R-1 at Tab 9 but he did not know what the other figures were for which made up the total assessed amount of $47,360.47. The document in Exbibit R-1 at Tab 3 was generated by his work. He confirmed that the period ending January 31, 1993 showed the largest single amount for returns not filed. Due to the state of the books and records he did not do a full audit.

Argument on behalf of the Appellant

[101] In argument, counsel for the Appellant said that an important factor in this case is the amount of bank control over the Company after October 1992. He admitted that there was some discrepancy in the evidence as to when meetings were held but after October 1992 the bank got very involved in the day-to-day operation of the business. He also stressed the significance of the mistake that was made in the financial statements and opined that if the original figures were correct the matter might not have proceeded to this stage.

[102] Mr. Redmond adopted a hands-off position in the operation of the Company and basically placed blind faith in Mr. Piercey. There was some difficulty by Mr. Redmond in understanding if he was a director or not and what were his responsibilities if he were a director.

[103] In any event, Mr. Redmond did not become aware of the problems until late December of 1992 or in January 1993. He had little education and one has to ask what he did know and understand about what he found out to be complex issues such as corporate law, minute books and resolutions. He relied upon qualified and experienced people such as the accountants, bookkeepers and the general manager. He received information from them as well as from the bank.

[104] In late 1992 or early 1993 he was told that he was only an outside director. He contacted Mr. Maynard about the payment of creditors after he found out about the problems. Whether or not he was an inside or outside director is only one part of the issue in this case but the Court should find him to have been an outside director.

[105] When one looks at the financial statements and considers the evidence in Court, his failure to review them should not be found to have been a significant factor. If he had seen them he might not have been any more aware of what was going on or anymore able to do anything about the situation in any event. There was some diverse evidence presented as to the accuracy of the financial statements.

[106] With respect to the law on the subject, counsel referred to the case of Ferguson v. R., 1999 CarswellNat 612 particularly at pages 7, 9 and 10 where the Appellants indicated that they were not directors and that they did not exercise power or control over the actions of the corporation, therefore they should not be held liable for the failure of the corporation to remit GST. A subjective standard was referred to in that case and was confirmed in Soper v. R., 97 DTC 5407. In Ferguson, supra, the Court found that the Appellants involvement in the corporation was not great and not much was expected of them. They also had limited financial involvement as shareholders and investors and little business management sophistication. They placed the management of the business in the hands of experienced persons and trained professionals who they thought were looking after the affairs of the business. On that basis, the Court found them to be outside directors and that they were not wilfully blind as to their role, obligations or duties. Further he found that they were not aware that any problem existed with the remittances. The learned judge was satisfied that the management of the corporation concealed the financial difficulties of the business and was satisfied that the Appellants were completely unaware that the business was in trouble until one of them noticed that the parking lot was empty and a notice was posted on the door.

[107] Counsel also relied upon the case of Bains (A.S.) v. Canada, 1999 CarswellNat 2106 particularly at page 5 where the Court referred to:

. . . . .

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.

as indicated in Soper, supra.

[108] In that particular case the Court found that the directors were responsible for remitting on behalf of the corporation for part of the period and not for another part of the period. Likewise, counsel found some consolation in the case of Boyd v. R., 99 G.T.C. 3074 where the directors in question were confident that GST claims would be paid as there were sufficient accounts receivables in inventory and they believed that there was enough to cover the indebtedness even though this was not the end result. After a consideration of a number of cases the Court found that the directors tried to resolve the GST difficulty after the bank refused to allow the Company to issue cheques. They also tried to issue a cheque to cover the liability. They also believed that when the bankruptcy did occur that the GST account would be paid. The Court was satisfied that the directors, to the degree that they could, beyond the restrictions of the bank control, did exercise due diligence.

[109] In the case of Hevenor v. R., 1999 CarswellNat 111, counsel argued that the learned trial judge considered the educational background of the director. In that case the father had set up the business for his son but had little more to do with it. The facts in that case were in some ways similar to those in the case at bar in that even if the taxpayer had been presented with periodic financial statements he would not have understood them to the extent that he would have realised that the Company had no hope of success. The learned trial judge went on to find that the taxpayer merely financed his son’s business and if he had been experienced in the business, expected his exposure as a director or director’s duties and responsibilities and had he not been blinded by devotion to his son then he may have paid more attention to the operations of the Company. But even then his degree of care would have been limited by his lack of skill. These were the subjective traits that the taxpayer was endowed with. The Court found that the director was not liable.

[110] In Whitehouse v. R., 1999 CarswellNat 2345, Judge Rip found that the director in question was an outside director who knew very little of the business and did not believe it was necessary to make enquiries. She gave him full reign to operate the corporation. She placed her full confidence in him and yet she knew that source deductions and GST had to be paid regularly. She never inquired if these payments were being made as required and she was satisfied with the reply that all was well when she would make a general inquiry. Even under such circumstances the director was found not to be liable. The actions of the director were of an entirely passive nature and yet the Court found that the director was entitled to rely upon the day-to-day corporate managers to be responsible for payment of the debt until such time as he or she suspected or ought to have known that something was amiss when they would then be required to take positive steps to try to remedy the situation.

[111] Further, in Merson v. M.N.R., 89 DTC 22 where there was a system in existence for the times of remittance of source deductions, where there was no problem until the bank intervened, the Court found that the director was not liable.

[112] Counsel argued that this may be a situation where there is partial liability for the payments and not liability for all of the payments. He argued that for the periods of November 1, 1992 to January 31, 1993 this amount was not due to be paid until February 28, 1993 and by that time the banks had taken over and the Appellant should not be held liable for that period.

[113] Counsel argued that the appeal should be allowed, with costs.

Argument on behalf of the Respondent

[114]Counsel for the Respondent argued that the whole issue is whether or not the Appellant was liable under section 323 of the Excise Tax Act (the “Act”) for failure by the Company to remit GST in accordance with section 228(2) of the Act. He said that the Minister was right in making the claim against the Appellant under section 323 and the factual situation as set out in the Reply. The Appellant did not exercise the degree of care and skill to prevent the failure that a reasonable person would have exercised under similar circumstances.

[115]Counsel relied upon Soper, supra, and MacDonald v. R., [1998] 4 C.T.C. 2067, in support of his contention that the Appellant was properly assessed. The Appellant was aware that GST returns had to be filed and remittances had to be made on certain dates as he was familiar from his own business experience that this had to be done. He was familiar with financial statements having had them produced for Redmond’s Auto Body and knew that financial statements were prepared by Mr. Maynard for the Company. Around the month of October 1992 Mr. Piercey told the Appellant that a mistake of $56,000 had been made in the financial statements. He was aware of the problems that existed in September and October of 1992. He had a positive duty to act. There was a loss by the Company and that is why there were discussions to sell the business. He did nothing at that time.

[116] He did not go to Mr. Piercey, Mr. Maynard, the bookkeeper or the bank. Surely the last straw occurred in October but he had a duty before that. He did not look at any documents. He may have thought that the Company was making a profit but he did not look at the books even with respect to the previous owner’s success in the business. He put his hands up and said that he relied upon others because he thought that there was a profit and that was enough for him and he need not act further. According to the shareholders’ agreement he was the vice-president and a director. Yet he said in evidence that he did not know. It is hard to believe that he would not ask any questions given the position that he held in the Company.

[117]This case is not similar to the case of Shermeta v. M.N.R., [1991] 1 C.T.C. 2593. Even if Mr. Redmond was unsophisticated he is still liable. He had access to all documents of the Company. He was not prevented from looking at the records at any time. He had some input into the Munro negotiations, he was not pushed away from exercising his rights as a director and was not prevented from acting. Yet he did nothing. Mr. Redmond was no different than the director in MacDonald, supra, and he should be found liable.

[118]Even in the best case scenario the Appellant should not be permitted to take a passive approach unless he had some reason to believe that everything was being done correctly. There was no reason for him believing that in this case because he did not inquire. He never checked the accounts, he never checked to see if any schemes were in place for making remittances.

[119]The evidence showed that the books were not maintained correctly. Income tax credits were improperly calculated. Mr. Maynard, the accountant, said that all people who lacked experience were working at the business. Everyone was “passing the buck”.

[120] In the case at bar the bank did not control the Company prior to February 1993. Therefore the bank did not prevent the Appellant as a director from acting and taking positive steps to ensure that the remittances were being made. The case at bar is different from the other cases referred to by counsel for the Appellant. The factual situation here is different from that in Drover v. Canada, 1998 CarswellNat 726, where the director was unable to act because of the intervention of the bank or some other party. The Court held:

The obligation imposed on directors is not limited to that of exercising the requisite standard of care in ensuring that GST as calculated was remitted. There is also an obligation to exercise the same standard with respect to ensuring that GST is properly calculated.

. . . . .

The obligation to properly calculate GST flows from ss. 228(1) of the Excise Tax Act.

[121] Further, as in Wheeliker v. R., [1999] 2 C.T.C. 395, there is no different standard between an inside director and an outside director. In that case the Court said as follows:

All directors of all companies are liable for their failure if they do not meet the single standard of care provided for in subsection 227.1(3) of the Act. The flexibility is in the application of the standard since the qualifications, skills and attributes of a director will vary from case to case. So will the circumstances leading to and surrounding the failure to hold and remit the sums due.

In my respectful view it was an error for the Tax Court judge to conclude that the standard of care was different and less rigorous in not-for-profit corporations. As a result, he misinterpreted and misapplied the evidence that was before him.

[122] There was no evidence given to rebut the presumptions contained in the Reply. Any other arguments raised in the appeal, at least by way of defence to the assessment, are not supported in any way by the evidence.

[123] The appeal should be dismissed and the Minister’s assessment confirmed, with costs.

Rebuttal

[124] In rebuttal counsel submitted that the decision in Wheeliker, supra, if accepted, would be tantamount to finding that the provisions of subsection 323(2) of the Act create a situation of absolute liability.

[125] Counsel submitted that the Appellant was not advised about the financial position in October of 1992 but if he was this was not an indication that tax had not been paid.

Analysis and Decision

[126] In the Notice of Appeal counsel for the Appellant set forth various issues which he considered to be of consequence in this appeal, such as:

Whether the Appellant was ever legally a director of the Company.

Whether the Appellant was a de facto director of the Company at any relevant time.

Whether any persons were legal directors of the Company at any relevant time.

Whether Section 323 of the Act creates liability for a person who is merely a de facto director.

Whether the Appellant was liable at all pursuant to Subsection 323(1) of the Act, because of his lack of control and involvement in the business of the Company.

Whether the Appellant is not liable pursuant to Subsection 323(2) of the Act, because the Respondent did not assert any priority for payment of the amounts in issue over other creditors, or otherwise.

Whether the Appellant is not liable pursuant to Subsection 323(3) of the Act, because he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

Whether the Appellant last ceased to be a director of the Company by February 16, 1995 at the latest, and whether he may rely on the limitation period provided by Subsection 323(5) of the Act.

Whether the Appellant is entitled to contribution from other directors of the Company, pursuant to Subsection 323(8) of the Act.

Whether, if the Appellant is liable for any amount pursuant to Subsection 323(1) of the Act, the amount is the amount assessed by the Respondent, or some lesser amount.

[127] After hearing the evidence and considering the argument on these points this Court is satisfied that the only outstanding issue is whether or not the Appellant showed that he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances so that he is not liable for the assessment made against him pursuant to subsection 323(1) of the Act relating to the failure to remit net taxes required under subsection 228(2) of the Act, by the Company.

[128] The evidence of Jennifer Holleman made it clear that there were shortcomings in the bookkeeping aspects of this business almost from the time she started working there in the fall of 1992. From November of 1992 on until February of 1993 there was no one above her to offer her accounting advice except on occasion when she was able to speak to the accountant. She said that she had a calendar with respect to what payments had to be made for GST remittances and four to five days before that date she made up the forms and the cheques and gave them to Mr. Piercey. At first they came back promptly but then he began to hold on to them and sometimes he sent them out himself. Subsequently there were questions raised continually by the tax people about remittances that were due. This witness said that: “The tax people were calling all the time and Mr. Piercey would not talk to them.” When asked why the amounts were not paid, she said that such large amounts would affect the financial position of the Company. It was obvious from that point on that there were some difficulties being experienced by the Company with respect to making GST remittances.

[129] Further, it was clear that the Company was required by the Bank of Montreal to pay for every vehicle taken out of inventory immediately after it was sold. This witness said: “Mr. Piercey often altered the financial statements and had me change the bottom lines. The statements were not accurate.” This witness was uncomfortable with it but she did not believe that she should question it. She knew that something was going to happen.

[130] It is obvious that the situation heated up as the Company came closer to bankruptcy and receivership but the Court is satisfied that problems existed long before the bankruptcy and receivership took place and that signs were everywhere with respect to the growing difficulties of the Company.

[131] This witness said that the last month’s status was that the Company was not up-to-date. There was a lot of money owing. Mr. Piercey intended to divide the money into four portions but it was never paid up. She did not deliver or send any payments to GST in the last few months.

[132] In light of this evidence it is difficult to accept the evidence of Mr. Piercey that he believed at all times that the accounts were up-to-date and that he did not believe that even the amount claimed now by the Minister was indeed owing. His evidence in this regard was not really credible.

[133] This witness said that creditors started calling at least during the last five to six months and accounts went from 30 days outstanding to three or four months overdue. Revenue Canada did call regarding the payroll deductions and GST remittances. Payments were never on time. She did not recall the amounts but they were in the tens of thousands of dollars. She knew that they had to be made quarterly. She made them up and gave them to Mr. Piercey but when she reviewed the cheque ledger she found that the cheques had not been sent out and sometimes had not even been signed. This is not the situation that one would believe existed by listening to the evidence of Mr. Piercey.

[134] According to this witness even the Company accountant was aware of the situation. She spoke with him and expressed concern about not being able to do her job. She believed that he knew what was going on. According to this witness if someone looked at the statements they could tell that a bill had not been paid because there was a check mark beside the cheque if it had been cashed.

[135] This witness made it clear that all books were kept in her office which she used regularly and they would have been available to any persons entitled to see them. Mr. Redmond, the Appellant, never came in to look at any books, financial statements, cash disbursement journals, deposit books, monthly trial balances or sales records. He did not inquire of her about any records and did not ask about the financial position of the Company.

[136] This witness said that Mr. Piercey held on to cheques quite often during the whole period that she was there so that the problems that existed were manifest since the fall of 1992.

[137] The Court also has some problem in believing holus bolus the evidence of Mr. Redmond. Mr. Redmond took the position at one point in time that he did not even know whether or not he was a director or officer of the Company. However, the evidence of Peter Muttart, the lawyer, makes it clear that the Appellant must have known that he was a director and officer of the Company as well as a shareholder and financial contributor in light of the letter of instruction received by Mr. Muttart from the Company’s accountant and the ensuing execution of the agreement between Gary M. Piercey, Donald W. Redmond and G.M. Piercey Enterprises Ltd. dated April 27, 1990. As of needs be one could only conclude that the letter and the agreement must have been discussed with Mr. Redmond before it was executed on April 27, 1990. This agreement and the letter make it clear what the position of Mr. Redmond was supposed to have been in accordance with the instructions set out in the letter from the Company accountant as changed by the subsequent agreement. By that agreement the share structure was changed to give Mr. Piercey 70 common shares and Mr. Redmond 30 common shares. There was some evidence that this change might have been made due to Mr. Redmond’s concern about Mr. Piercey being able to act on important issues without considering the position of the minority shareholder although Mr. Redmond denied that he had received any advice in this regard. To that extent his evidence is conflicting with that of Mr. Piercey who believed that Mr. Redmond had indeed obtained separate legal advice in that regard and it was for that reason that some changes were made.

[138] In any event the Court must conclude that the Appellant was made familiar with the terms of the agreement, the letter of Mr. Whynot, what his financial position was to be in the Company, what his contribution was to be, and that he was a director and officer of the Company, in spite of what he said to the contrary. Under such circumstances, the Court could not reasonably conclude that Mr. Redmond was anything but an inside director, whatever the significance of that terminology may be.

[139] The Appellant indicated that he did not know what the duties of a director were. He took the position that he was only a body repairman and had very little knowledge of the Company. He was aware of the fact that the previous owner had done very well and that this situation presented an opportunity for both himself and Mr. Piercey to make a profit. However, he said that he had nothing to do with the incorporation. This would appear to be contradicted by the evidence which the Court has already referred to in other evidence.

[140] Mr. Redmond took the position that he only found out about a director or officer after Revenue Canada told him about it. This position, the Court cannot accept and this position flies in the face of the evidence of several witnesses.

[141] Mr. Redmond said that he received no legal or accounting advice in 1990 and yet he admitted that he met with Mr. Muttart about setting up the business. He signed the agreement.

[142] His evidence that there was no particular reason for the 70 - 30 split in shares does not seem reasonable.

[143] It is also difficult for the Court to believe that Mr. Redmond had no discussions with Mr. Piercey about the business as it operated. He said that he did not know when he expected to get his money back. However, he did admit that he went to the Bank of Commerce when the Company was changing banks but he said that he did not remember what he signed. He thought that he had signed a guarantee. In spite of the fact that he said that he had nothing to do with the switch to the Bank of Montreal he signed a personal guarantee to the Bank of Montreal for $60,000. He said that in 1990 and 1991 he asked no questions about the financial situation and he did not recall contacting Mr. Maynard until late 1992 or early 1993. At that time his only concern was that all local people would be paid. Further, he said that he did not even know who the purchaser was and he found that out through Gary Piercey. This also is difficult to accept.

[144] Even by his own admission in 1992 or early 1993 he was concerned enough to contact the Company accountant since the Bank of Montreal wanted him to sign a collateral mortgage on his property. Yet, he did nothing to inquire as to the financial position of the Company, the position of the remittances to Revenue Canada even though he said that he was concerned about the payment of all local people.

[145] Also, the Court finds some difficulty in accepting Mr. Redmond’s evidence that he was completely unfamiliar with the financial statements of the Company for the year ending 1991 and 1992 and that he had not seen them. The evidence of Mr. Muttart was to the effect that even though he may not have discussed specifically the duties of a director with Mr. Redmond he would have discussed the requirements of the Company to hold annual meetings, to have annual minutes, to have them signed, to produce financial statements and indeed Mr. Muttart said that the normal course of events was to send the minutes out to the parties, have them signed and returned. Mr. Redmond said that he never attended any such meetings although the Court could only conclude that the minutes must have been produced, signed and returned to the office of Mr. Muttart for insertion in the Company book. The Company book itself was not produced in evidence.

[146] The Court is satisfied that Mr. Redmond may very well not have understood the intricacies of the financial statements and at first blush a reading of them may not have put him on notice that the business was not going well. However, any reasonable director in his position having received those statements would certainly have questioned the accountant, Mr. Piercey or would have raised some questions at least with the office staff about the financial position of the Company and the state of the remittances which the Company was required to make.

[147] Mr. Redmond testified that he was familiar with the fact that remittances had to be made for GST and source deductions. He was a businessman himself. At one time he had an employee and he was required to make deductions and remittances. He knew that both himself and the Company had to file income tax returns and surely anyone who had invested that amount of money in this Company would have been more interested in the affairs of the Company than he was prepared to admit that he was when he testified.

[148] Mr. Redmond indicated that he never knew that there was a problem about GST and income tax deductions. A few days before the bankruptcy Mr. Piercey talked to him about obtaining a cheque for Revenue Canada and took it to the bank but it was refused. Then it had to be sent by a courier to Revenue Canada. He said that he believed that this was the full amount of the GST. One would have to ask how he would be satisfied that it were if he had not made further inquiries. By his own admission he had never made any inquiries up to that date.

[149] In his evidence Mr. Redmond said that he did everything that he could reasonably do as a director as soon as he started finding out about any problems in December 1992 but any action he took was not until that time and any action he took had nothing to do with ensuring that the remittances were made to Revenue Canada with the exception of taking part in the arrangements to have one cheque made out to Revenue Canada and remitted. There would be no basis for his stated belief that this represented the balance of all monies owing to Revenue Canada. He had not taken any steps whatsoever up to that time or after to determine what the real status of the account was with Revenue Canada.

[150] The witness said that he never saw the financial statements and did not see the balance sheet which showed an outstanding amount with respect to GST and payroll deductions. He did not know about the error in the financial statements and said that Mr. Piercey did not tell him about that.

[151] The Appellant’s credibility was also strained when he denied that he gave any instructions to Mr. Muttart to write the letter of August 30, 1994 contained in Exhibit A-1 at Tab 55 to Revenue Canada. His position was that Mr. Muttart did it on his own. His credibility was also somewhat strained when he said that Mr. Muttart must have been wrong in indicating that he met with Mr. Piercey and himself on the 28^th of December 1992 even though this forms part of the statement of account from Mr. Muttart’s law firm to the Company after the receivership and bankruptcy.

[152] The Appellant himself testified that he was not prevented from exercising his powers as a director at any time. He said that he had no input with respect to the direction of the Company but he could have voiced an opinion. He did have an input into the decision to sell since that was a major business decision. He admitted that between 1991 and 1993, from time to time he talked to Gary Piercey on the telephone and in person but he took the position that he never talked to him about how business was doing and the state of the accounts. Under the circumstances this is difficult to accept.

[153] The Court cannot accept the argument of counsel for the Appellant that the bank exerted such control over the Company after October 1992 that the Appellant could not have acted to prevent the failure. It is true that the bank was keeping a close eye on the operations of the Company and indeed was monitoring very closely the sales and ensuring itself that the costs of inventory were paid out after a vehicle was sold. However, the Court cannot see this as having prevented the Appellant from having taken action to determine what the state of the Revenue Canada account was, whether it was up-to-date and what systems were in place to enable the Company to meet its commitments to collect and remit these amounts.

[154] He took no action to view the Company’s books or records nor did he make any inquiries of any knowledgeable persons with respect to these accounts at a time when he certainly should have been put on guard that something was drastically wrong. It is true that there was a mistake in the financial statement for the year ended April 30, 1991 and anyone reading them in their initial state certainly would have been mislead but the change in the financial position of the Company that the correction of the error would have brought about would have only served to make anyone looking at them even more concerned. That is not to say that they should not have been concerned before these financial statements were available, on the basis of the other facts which have been disclosed in the evidence.

[155] The balance sheets in both years showed goods and services taxes payable. It may very well have been that at some point in time the amounts outstanding might have been for one quarter only but that knowledge alone should have been sufficient to put any reasonable director on guard as to the pending disaster. In any event, the Appellant could hardly find any solace in the mistake showing a substantial change in the financial position of the Company as by his own admission he did not even look at the statements, nor did he attempt to do so, nor did he discuss them at any time with any knowledgeable parties. The Court cannot accept the argument that the Appellant only understood the problems in late December 1992 or early January 1993.

[156] The Court cannot accept as reasonable, Mr. Redmond’s position that any shortcomings were due to his lack of education and his lack of understanding of the format and of the complex issues relating to corporate matters. There was a minute book and resolutions available for him to peruse and he could have seen what was going on if he had any interest in doing so.

[157] The Appellant had qualified people available to answer his questions if he chose to ask them, to advise him as to how government remittances were being handled, if any system was in place to ensure government remittances and if it was working properly. However, he chose to do nothing and not even to ask. Even after late 1992 and early 1993 he did nothing to prevent the failure.

[158] Counsel for the Respondent relied heavily upon the cases of Soper, supra, and MacDonald, supra, in arguing that the Appellant was aware that GST had to be filed by certain dates and that payroll remittances had to be made by certain dates. He knew of the need for financial statements because he had them from his own business at Redmond’s Auto Body and he knew that Mr. Maynard prepared such statements for the Company. Counsel argued that Mr. Redmond knew by September and October 1992 of the problems because he was made aware of the mistake by Mr. Piercey and he had a positive duty to act at that time if not before. There was a loss in the Company, not a profit. Mr. Redmond must have known that that was one of the reasons why the Company was going to be sold. He waited until the last straw was drawn before he did anything and even then he did very little. He had a positive duty to act before that. He may have thought that the Company was making a profit but he had no reason for believing this unless he did not look at the books. He put his hands up and relied upon others without inquiring further. That is not enough. These arguments are persuasive.

[159] Counsel said that this case is unlike that of Shermeta, supra, and the Appellant is in a far different position here than was the Appellant in that case. The Appellant here is in the same position as the director in MacDonald, supra. Counsel argued that the price obtained on a possible sale was not relevant here. The Appellant could not take a passive approach to the payment of the GST account unless he had some reason to believe that everything was going properly and that the accounts were up-to-date. He could not have known this because he never checked. Further, the books were not maintained properly here. Input tax credits were improperly calculated. Mr. Maynard said that all people in the bookkeeping side of it lacked experience. Everyone was passing the buck. Again, these arguments are persuasive.

[160] The Court is satisfied that the case at bar is different from the facts set out in Shermeta, supra, and the facts are more similar to those in MacDonald, supra. The Appellant here took no action which the Court could consider reasonable under all the circumstances to prevent the failure that a reasonable director would.

[161] Counsel for the Appellant had some concern with respect to the decision in Wheeliker, supra, where the dissenting opinion would seem to suggest that there is no difference between the standard of care to be exhibited between an inside director or a passive director and presumably to directors whether they are inside or outside directors. The majority opinion in that case accepted the reasons of Létourneau, J.A. with respect to the standard of care and its application to the facts of that case.

[162] Counsel for the Appellant suggested that to interpret the duty of care so strictly might be tantamount to arguing that the duty imposed upon directors is absolute. However, this Court is satisfied that the section sets out a defence, that defence is the defence of reasonable care and it is set out in the section. However, this question cannot be answered by merely deciding whether or not the directors are active, passive, inside or outside directors. The Court can envisage a case where an outside director or a passive director could be held liable for the failure to remit because it is not every passive director or outside director who can meet the test of reasonable care. There could be many situations when such directors have full knowledge of the circumstances surrounding the failure, may have access to all Company books and records and they may not have been prevented in any way by the active directors or the inside directors from knowing of their failure to remit or knowing of existing problems which might lead to a failure to remit. They may not have been prevented in any way from taking some positive steps to prevent the failure by any other financial institution or bank or by the actions of any persons which prevented them from exercising their powers as a director. In these circumstances one would have to conclude that such a director could very well be held liable on the basis that he had not met the standard of care required of a reasonable director under all of the circumstances.

[163] The Court has also considered the case of Ferguson, supra, but this Court distinguishes that case from the facts in the present case. Unlike that case, the Court finds that the Appellant here did indeed have more involvement in the corporation than he was prepared to admit and certainly his involvement was something other than minuscule even though not much was expected of him in this case either. In any event, the Appellant’s financial involvement as a shareholder, investor, director and officer was much greater in the case at bar than in Ferguson, supra. Further, the Court endows the Appellant here with more business knowledge and experience than the directors in that case.

[164] Further, in that case the Judge was not satisfied that there was any evidence to suggest that the directors were wilfully blind as to their role, obligations or duties. Unfortunately for the Appellant here, the Court cannot so conclude. Further, in that case the manager of the corporation concealed the financial difficulties of the business. In the case at bar the Appellant had more than substantial opportunity to find out about the business and he chose not to do so.

[165] Counsel for the Appellant referred to the case of Whitehouse, supra, where the learned trial judge said as follows:

An entirely passive approach on the part of a director may not help that director’s defence of an assessment but, unless there is reason for suspicion, the director is permitted to rely on the day-to-day corporate managers to be responsible for payment of statutory debt obligations. An outside director who knows or suspects or ought to know something is amiss must take positive steps to try to remedy the situation.

However, surely that implies that there must be no reason for suspicion on the director’s part. There must be some basis for enabling the director to rely upon the day-to-day corporate managers as being responsible for payment of statutory debt obligations. In the case at bar the Appellant had no reason to rely upon the day-to-day managers as ensuring that remittances were being made because, according to his evidence, he knew nothing about the way in which payments were made, he never verified the method or extent of payment and he saw no reason to question any of the staff with respect to same. If one were to use the Whitehouse case, supra, to imply that an entirely passive director may avoid liability merely by ensuring that he knows nothing about what is going on and is therefore entitled to presume that the accounts are being looked after properly, then this Court could not accept that position.

[166] On the basis of all of the evidence, including the credibility that the Court attaches to the evidence of various witnesses, the Court concludes that the Appellant has failed to meet the burden of showing, on the balance of probabilities, that he acted as a reasonable director would under all of the circumstances. Consequently, the defence of due diligence is not available to him.

[167] The appeal is dismissed and the Minister’s assessment is confirmed. The Respondent will have its costs of this action to be taxed.

Signed at Ottawa, Canada, this 5^th day of April 2000.

"T.E. Margeson"

J.T.C.C.