Date: 19990504
Docket: 97-2666-GST-G
BETWEEN:
STEPHEN GOODMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the General Procedure was heard at Toronto, Ontario on April 27, 1999. The Appellant testified and his counsel called Joan Carmichael, C.A.; Karen Marcotte, C.M.A.; Morris Feldman, C.A. and John Wiseman, C.A. There were no other witnesses.
[2] The Appellant appealed a Notice of Assessment issued on April 11, 1995 assessing him as a director of Liptons International Limited ("Liptons") for unpaid GST, interest and penalties by Liptons of $278,955.62 as of April 11, 1995.
[3] At all material times Liptons was controlled by Barstev Holdings Inc. ("Barstev") which was controlled by Stephen's parents, Marvin and Evelyn Goodman. They were also the directors of Liptons until March 31, 1990. As of March 31, 1990 Stephen became the sole director of Liptons and remained its sole director and its secretary and treasurer until it was put into bankruptcy by Barstev on June 23, 1993.
[4] Stephen Goodman is a competent, intelligent man who appears to be in his middle 40's. After high school, he studied fine arts for two years at York University, he also studied photography for a year at London Independent Centre for Art and subsequently took courses in photography at Ryerson. In 1977 he was employed by Liptons, a clothing retailer, as a shipping-receiving clerk for one year. He then became its warehouse manager, responsible for receiving and provisioning. Thereupon he became an assistant buyer and then divisional manager of the clothing division. In 1983 he became Liptons' vice-president in charge of marketing which included sales, hiring, store staff and merchandising. His father, Marvin, was president and his mother, Evelyn, later became president until March 31, 1992. In 1989 Stephen was elected as a director of Liptons and retained that position throughout the events in question. In 1992 Stephen's sister, Barbara Benollio, became Liptons' president and chief executive officer.
[5] In August, 1990, Stephen quit his job with Liptons. He went into the sports clothing import and wholesale business through "Tourida Sport" which failed. He then became a music promoter and he is now a leasing broker. After quitting Liptons, he remained an advisor on Liptons' Advisory Board which met to advise about one day every three months where he participated in discussions of Liptons' sales, marketing, store operations and new employee hirings. It also discussed Liptons' sales targets and ability to meet them and Liptons' financial status to meet those targets. Stephen was not a signing officer of Liptons.
[6] Karen Marcotte joined Liptons in 1989 as Assistant Controller and remained with Liptons until July, 1993. In 1990 Liptons had 67 retail stores across Canada. Joan Carmichael testified that by November, 1992 it had 39 retail stores and that most had closed in a short time in 1992. Karen Marcotte headed the accounting department and reported to Joan Carmichael. Karen had 25 employees under her in 1989 or 1990. Karen's testimony is accepted in its entirety. She testified that Marvin Goodman ran Liptons' day to day operations. Second to Marvin were his daughter, Barbara Benollio, Liptons' chief operating officer and Kristine Kulesza, its chief financial officer. They met with Marvin Goodman. No reasons were given as to why none of these three or Evelyn Goodman did not testify. Joan Carmichael reported to Kristine Kulesza.
[7] Karen Marcotte testified that in 1990-1991 Liptons instituted a wage freeze and withheld some rents it owed, which, contrary to Stephen's assertions, it planned to pay later. All other creditors were paid. In 1991, Liptons did away with its credit card and by the end of 1991 Liptons' bank took a stricter view of its line of credit since it no longer had credit card receivables. Karen testified that, by late 1992, every cheque to pay GST had to be approved by Joan Carmichael or Karen Kulesza before it was issued.
[8] Joan Carmichael joined Liptons in 1990 as Controller. She testified that day to day operations then were managed by Marvin and Evelyn Goodman, their daughter Barbara and Kristine Kulesza. Cheques at all material times were signed by any two of Marvin Goodman, Evelyn Goodman, Barbara Benollio, Kristine Kulesza, Joan Carmichael, Karen Marcotte and Mary MacKinnon. All major financing matters were dealt with by Marvin Goodman, minor financing was attended to by Kristine Kulesza. During Joan's employment Liptons went through a major renegotiation of its line of credit, and when Joan was hired in 1990 Liptons was going through a systems conversion which was also organized to handle GST.
[9] The accounting system had an automatic dating system to issue cheques on dates when accounts and other debts were payable. It would issue a cheque requisition which was then authorized for the cheque itself by Joan Carmichael. If there were no funds to pay that cheque, it was "deselected" and not issued. Before the fall of 1992 cash flow became "very tight" in Joan's words. Joan did six week and three month cash flow forecasts and reviewed them with Kristine Kulesza. When cash requirements could not be met Kristine met with Marvin Goodman and Barstev advanced the money to meet the cash requirements. Liptons had seasonal cash problems after 1990. By the fall of 1992 Liptons had reduced its store numbers from 67 to 39 and its accounting staff from 23 to 11 and it was evident to Joan Carmichael that Liptons was in the midst of a major recession. Liptons had had kept up its GST remittances until December of 1992. In Joan Carmichael's words it "always found a way to juggle" that payment. But in January, 1993, it did not have the funds to pay its December, 1992 GST instalment of $188,728.50. Amounts of $1,000 and then $25,000 were paid on this instalment in January and February, 1993 but it was never paid in full and there is no evidence that any later assessments of GST were ever paid by Liptons.
[10] Thus, Stephen Goodman's duty to prevent Liptons' failure to remit began on or before Liptons' December, 1992 instalment became due. As a director in Canada, he also had the statutory duty set out in business corporations statutes to manage or supervise the management of the business and affairs of Liptons which was a large, national retail corporation operating retail clothing stores across Canada.
[11] Stephen Goodman testified in his examination in chief that in his view Liptons had a very capable and efficient chief financial officer in Kristine Kulesza. He said that he did not see the financial statements and did not ask to see them. He was aware of some sales shortfalls but he was told nothing about Revenue Canada or GST remittances. He stated that he received sales information and information on employee reallocations but he thought that Liptons was viable and could continue at a reduced level. He did discuss the closings with his father, Marvin, but he stated that he had no reason to believe that the GST was not remitted. He also testified that he only learned of Liptons' bankruptcy after the public announcement and that after that he took no further role in Liptons. Finally, he testified in chief that he first learned of his liability for GST in the fall of 1993.
[12] In cross-examination Stephen admitted that he assumed his directorship of Liptons for succession purposes. He knew that Liptons failed to pay rent on certain leases but stated that it was because of disputes with landlords. Stephen admitted that in the fall of 1992 he knew that Liptons was in "significantly" increased financial difficulty. He also knew that Liptons had closed 16 or 17 stores in fiscal 1991 because they were losing money. He did not recall any discussions with Marvin Goodman about large loans to Liptons from Barstev or Liptons' failure to pay them. But he knew that Barstev was Liptons' largest creditor.
[13] Stephen was the only director of Liptons. Both counsel argued the question of inside or outside director as discussed in Neil Soper v The Queen (F.C.A.) 97 DTC 5407. In that case, Robertson, J.A. suggested that the least "difficulty" is that applying to the outside director. Describing an outside director's duty, Robertson, J.A., said at 5418:
Accordingly, an outside director cannot be required to go to the lengths outlined above. As an illustration, I would not expect an outside director, upon appointment to the board of one of Canada's leading companies, to go directly to the comptroller's office to inquire about withholdings and remittances. Obviously, if I would not expect such steps to be taken by the most sophisticated of business-persons, then I would certainly not expect such measures to be adopted by those with limited business acumen. This is not to suggest that a director can adopt an entirely passive approach but only that, unless there is reason for suspicion, it is permissible to rely on the day-to-day corporate managers to be responsible for the payment of debt obligations such as those owing to Her Majesty. This falls within the fourth proposition in the City Equitable case: see discussion supra at page 15. The question remains, however, as to when a positive duty to act arises.
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. For example, in Byrt v. M.N.R., 91 DTC 923 (T.C.C.), an outside director signed financial statements revealing a corporate deficit and thus he knew, or ought to have known, that the company was in financial trouble. ...
He went on to say at page 5419:
... In each case it will be for the Tax Court Judge to determine whether, based on the financial information or documentation available to the director, the latter ought to have known that there was a problem or potential problem with remittances. Whether the standard of care has been met, now that it has been defined, is thus predominantly a question of fact to be resolved in light of the personal knowledge and experience of the director at issue.
Applying the foregoing analysis of the law to the facts of this case, I find that the taxpayer was under a positive duty to act which arose, at the latest, in November of 1987 when he received the balance sheet of RBI revealing that the company was experiencing what the Tax Court Judge found, as a matter of fact, to be "extremely serious" financial problems (Appeal Book at 43). In light of that finding by the Tax Court Judge, and given the taxpayer's ample experience in the field of business, the balance sheet of November 1987 should have alerted the taxpayer to the existence of a possible problem with remittances. This is all the more true since there was no indication or evidence that RBI's financial troubles were merely temporary in nature. In the circumstances, however, the taxpayer made no inquiries in respect of remittance of employee withholdings.
[14] In this case Stephen Goodman was a man of considerable business experience by 1992. From 1977 until 1990 he had risen through Liptons' ranks until he was appointed a director of Liptons in 1989 with a view to succeeding his parents in the business. After 1990 he had a variety of business experience and he failed in business. Stephen knew that he was Liptons' only director. He knew about Liptons' rent withholding in 1990-1991 and he knew about its employee reallocations and store closings in fiscal 1991 and in 1992. He discussed the store closings with his father, Marvin. He admitted that in the fall of 1992 he knew that Liptons was in significant financial difficulty. But he did nothing. He did so little that Karen Marcotte, Liptons' assistant controller, never met him and testified that she did not know that Stephen Goodman had anything to do with GST. Joan Carmichael had met Stephen Goodman. Messrs. Feldman and Wiseman met with two of Liptons' senior staff, including Kristine Kulesza on May 12, 1993. They reported to Marvin Goodman. They never reported to Stephen Goodman. Nor did Stephen make any inquiries of them or of anyone else respecting Liptons' requirements to remit GST.
[15] In the fall of 1992 Stephen Goodman knew that Liptons was in significant financial difficulty. He had ample experience in Liptons' business. At that time he should have been aware of a potential problem with the GST remittances. Its financial troubles had begun long before then and it is clear that they were serious from the time that the rents were not paid in 1990 and the store closings began in fiscal 1991. But Stephen made no inquiries respecting GST remittances. Nor did he do anything to see that they were paid. In the words of subsection 323(3) of the Excise Tax Act, he failed to exercise the degree of care, diligence and skill to prevent Liptons' failure that a reasonably prudent person would have exercised in comparable circumstances.
[16] The appeal is dismissed.
[17] The Respondent is awarded party and party costs.
Signed at Ottawa, Canada this 4th day of May 1999.
"D.W. Beaubier"
J.T.C.C.