Date: 19990920
Docket: 98-291-GST-I
BETWEEN:
RONALD JEFFREY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the Informal Procedure was heard at Toronto, Ontario on September 9, 1999 on common evidence with the appeal of the Appellant's son, Warden Jeffrey. Ronald and Warden testified. The Respondent called Frank Ruggles. At issue is the assessment of the Appellant for GST which was not remitted by Franklyn Sprinkler & Fire Service Ltd. ("Franklyn") for the period May 15, 1989 to February 15, 1995.
[2] Ronald Jeffrey ("Ron") was a director and secretary of Franklyn at all material times. The issue is whether and when he failed to exercise the degree of care, diligence and skill to prevent Franklyn's failure to remit that a reasonably prudent person would have in comparable circumstances.
[3] Ronald Jeffrey appears to be about 60 years old. He is a graduate of the University of Western Ontario with a B.A. in Social Work. Before the time in evidence and throughout that time he has been a construction superintendent and project manager building shopping centres in southern Ontario.
[4] In May, 1989 Ron met Frank Ruggles ("Frank"). After they had agreed, he formed 838836 Ontario Inc. ("838836") in May, 1989 and, because Frank could not attend, had his adult son, Warden ("Ward") sign as a co-director. Ron signed and filed a Notice of Change of Directors (Exhibit R-2) which made Frank a third director. Both signed a consent to act as directors dated May 17, 1989 (Exhibit R-1). 838836 changed its name to Franklyn.
[5] On June 28, 1989 Ron and Frank signed an agreement (Exhibit A-1) whereby Frank became the General Manager at a salary and profit share and received 5 shares in Franklyn. Ron got 75 shares and agreed to loan Franklyn approximately $50,000, which he did. Ron was Secretary and Ward President. After his first signatures, Ward never again took any part in or had anything to do with Franklyn. Frank and Ron became alternate signatories for Franklyn at the Royal Bank of Canada. Frank's shareholdings were to increase at 5 per year until they became 25. Ron and Frank both expected that Frank would become the majority shareholder of Franklyn with the passage of time.
[6] Ron registered Franklyn for Workers Compensation purposes and signed the necessary bank forms for Franklyn at the Royal Bank of Canada in Grimsby, where Frank was. Ron transferred his loan to Franklyn into the Grimsby account. He also dealt with Franklyn's lawyer in Toronto until Franklyn changed lawyers to a firm outside of Toronto.
[7] There is no evidence that any other corporate records were ever signed.
[8] Frank ran the day to day operations of Franklyn. His wife, Pat, was the unpaid bookkeeper. Franklyn's office was in their home. They did Franklyn's paper work. When GST came in they filed GST forms, but they did not pay the GST.
[9] Once the corporation was set up Ron was working in Toronto. He was not involved in the management of Franklyn. He saw the annual statements of Franklyn and met with Frank occasionally, both for business and social purposes. Ron and Frank also met with the bank on a cursory basis once a year, but until 1995 there was no discussion of GST with the bank. Ron never knew that GST was not being paid. Ron knew it had to be paid, but the financial statements were quite ordinary and they just showed payables due. They did not specify GST and Ron did not ask Frank about GST.
[10] In 1993 a GST collector contacted Frank. Frank testified that he told Ron about this and that GST had not been paid. Ron denies this and testified that the first time he knew that GST had not been paid was in 1995.
[11] Both men were sincere and honest in their testimony and any discrepancy on either part is due either to a faulty memory or a confusion between 1993 and 1995. The Court finds that Ron is telling the truth because in 1995 he took an active part in dealing with the failure to pay GST when he discovered it. By contrast, Frank simply persisted in not paying GST when the GST staff failed to press him for payment. As a result, the Court finds that the Appellant never knew that GST was not being remitted regularly until 1995.
[12] Franklyn was in the business of bidding on jobs and installing sprinkler systems. Its fiscal year end was September 30. The income and loss records from operations for the years for which records were submitted to the Court indicate:
1990 $18,163
1991 (30,036) loss
1992 1,580
1993 (12,935) loss
Gross income for these years was:
1990 $789,404
1991 955,162
1992 721,082
1993 477,926
Thus, gross income fell substantially in 1993 when, in Frank's words, things got pretty tough. But Franklyn reduced its expenses accordingly, including Frank's wage. "Accounts payable and accruals" which, unknown to Ron, included GST, were as follows:
1990 $158,958
1991 127,165
1992 141,884
1993 64,294
Thus, they too were in some relation to gross income.
[13] In Neil Soper v. The Queen, (F.C.A.) 97 DTC 5407, Robertson, J.A., for the Court stated:
The standard of care set out in subsection 227.1(3) of the Act is, therefore, not purely objective. Nor is it purely subjective. It is not enough for a director to say he or she did his or her best, for that is an invocation of the purely subjective standard. Equally clear is that honesty is not enough. However, the standard is not a professional one. Nor is it the negligence law standard that governs these cases. Rather, the Act contains both objective elements — embodied in the reasonable person language — and subjective elements — inherent in individual considerations like "skill" and the idea of "comparable circumstances". Accordingly, the standard can be properly described as "objective subjective".
...
At the outset, I wish to emphasize that in adopting this analytical approach I am not suggesting that liability is dependent simply upon whether a person is classified as an inside as opposed to an outside director. Rather, that characterization is simply the starting point of my analysis. At the same time, however, it is difficult to deny that inside directors, meaning those involved in the day-to-day management of the company and who influence the conduct of its business affairs, will have the most difficulty in establishing the due diligence defence. For such individuals, it will be a challenge to argue convincingly that, despite their daily role in corporate management, they lacked business acumen to the extent that that factor should overtake the assumption that they did know, or ought to have known, of both remittance requirements and any problem in this regard. In short, inside directors will face a significant hurdle when arguing that the subjective element of the standard of care should predominate over its objective aspect.
...
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. The same director also knew that the business integrity of one of his co-directors, who was the president of the corporation too, was questionable. In these circumstances, having made no efforts to ensure that remittances to the Crown were made, the outside director was held personally liable for amounts owing by the corporation to Revenue Canada. According to the Tax Court Judge the outside director had, in contravention of the statutory standard of care, failed to "heed what is transpiring within the corporation and his experience with the people who are responsible for the day-to-day affairs of the corporation" (supra at 930, per Rip, J.T.C.C.).
...
It is important to note that whether a company is in serious financial difficulty, such as to suggest a problem with remittances, cannot be determined simply by the fact that the monthly balance sheet bears a negative figure. For example, many firms operate on a line of credit to deal with fiscal fluctuations. 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] Based on the foregoing evidence, the Court finds the Appellant was an outside director. Therefore, the question is when, based on the financial or other information available, the Appellant knew or ought to have known that there was a problem or potential problem with remittances?
[15] Because the Court believes the Appellant, Ronald Jeffrey, it finds that he knew or ought to have known that there was a problem or a potential problem with GST and remittances by Franklyn when Revenue Canada first contacted him in February of 1995. He immediately telephoned Frank. They met the next day with Pat and Ron drafted a letter with a repayment schedule. That letter was sent to Revenue Canada and was never answered.
[16] The date in February when this occurred was never put into evidence. However, from the pleadings, and the evidence that thereafter some payments were made by Franklyn, it appears that Revenue Canada's letter was dated on the 15th of February 1995. At that point, the Appellant learned that there was a problem with remittances and he acted immediately. Based upon the Appellant's testimony, which the Court believes, the evidence that Frank was not paying GST and was not telling the Appellant of that fact, and because the GST payables were hidden in the financial statements, the Court finds that the Appellant did exercise the degree of care, diligence and skill to prevent the failure to remit the amount in issue by the corporation that a reasonably prudent person would have exercised in comparable circumstances.
[17] For these reasons the appeal is allowed. The Appellant is awarded party and party costs.
Signed at Toronto, Ontario this 20th day of September 1999.
"D.W. Beaubier"
J.T.C.C.