Date: 19990504
Docket: 98-644-GST-I
BETWEEN:
RICHARD NORMAN JEFFS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Bowman, J.T.C.C.
[1] This appeal is from an assessment made under the Excise Tax Act against the appellant as a director of Essex Development Corp. as a result of the failure by Essex to pay GST arising from the sale of two houses which it had constructed.
[2] The appellant was the sole director and shareholder of Essex and was in both legal and effective control of its affairs.
[3] Essex built two houses in Nanaimo, British Columbia at 825 and 829 Brookfield Drive. The sale of 825 Brookfield gave rise to a GST liability of $5,788.67. The sale of 829 Brookfield gave rise to a GST liability of $6,161.72. These figures are not disputed.
[4] These amounts were not paid to the Receiver General and the Minister of National Revenue has assessed the appellant under section 323 of the Act which imposes upon directors of a corporation that has failed to remit the tax a joint and several liability for the unremitted tax as well as interest and penalties.
[5] Subsection 323(3) provides a due diligence defence. It reads:
(3) A director of a corporation is not liable for a failure under subsection (1) where the director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.
[6] The appellant accepts that he was in full control of Essex and that he was completely cognizant of the obligations of the company to remit GST. His contention is however that notwithstanding his dominant position in the company, he was simply not in effective control of the company's finances at the time of default.
[7] Briefly, the position is that most of the proceeds from the sale of the houses had to be paid to mortgagees or real estate agents and that the company could not have made the sales if it had not been able to give clear title, which required that the mortgages be paid off.
[8] The vendor's statement of adjustments with respect to 825 Brookfield shows a total sale price of $129,211.33, plus GST of $5,788.67 as a credit to the vendor, as well as $22.64 for property taxes. The debits are $6,978.97 for the real estate commission, $7,500 for the builder's lien holdback and the balance due to the vendor's solicitor of $120,513.35 on completion. Included in the total credits to the Vendor of $135,022.64 was the $5,788.67 GST. The $120,513.35 was disbursed as follows:
Lawyers' fees $360.55
First mortgage $60,659.63
Second mortgage
held by appellant's wife $59,457.74
Water account $35.73
Total $120,513.35
[9] The result was that nothing was paid to Essex, who sold the property at a loss. The appellant contends therefore that since no money ever came to Essex he, as director, could not have ensured that it pay the GST.
[10] This statement is not quite accurate. Only $4,657.15 was needed to pay the builder's lien holdback. The balance of the $7,500, $2,842.85 was paid by lawyers to Essex. Even if I accept the appellant's other arguments at least this amount could have been paid to the Receiver General as GST.
[11] A somewhat similar story emerges from the sale of 829 Brookfield. The total sale price was $137,538.28. A credit of $6,161.72 for GST was given to the Vendor, for a total of $143,700. On the debit side, $7,282.30 was in respect of the real estate fees and a $10,000 builder's lien holdback. Other minor adjustments brought the balance due to $125,804.78. The vendor's statement of adjustments contained the following statement:
VENDORS ARE AWARE THAT THEY ARE RESPONSIBLE FOR PAYMENT OF 7% GOODS AND SERVICES TAX LESS REBATE, IN THE AMOUNT OF $6,161.72, AND VENDORS WARRANT THAT THEY WILL SUBMIT THE AFOREMENTIONED AMOUNT TO REVENUE CANADA EXCISE.
[12] There were two vendor's Orders to Pay. The amended order showed legal fees of $296.20, mortgage payout to the appellant's wife of $66,662.75, a payout of the first mortgage of $60,875.45 and payment of builder's liens of $9,876.55. This resulted in a minus amount of $1,906.17 payable to Essex. It seems this was eliminated by the appellant's wife taking only $64,756.58.
[13] The appellant's position is that the liability for GST crystallizes when title passes (subsection 168(5)). Also, he says that the transactions could not have closed if the mortgages had not been removed from the title. Clear title had to be given. I agree with both of these propositions. The appellant's position is set out in the following written submission:
It is the Appellant's submission that Richard Norman Jeffs should not be held personally liable as director for either the GST liability owed by the Company or the real estate commissions which were paid on the property sales. There are three elements to this submission:
(1) The purchase funds were forwarded directly to the Company's solicitor in trust on undertakings to clear the titles of the properties in order to complete the transactions.
(2) The real estate commissions were one of the liabilities that had to be paid before title on the properties could be cleared for transfer.
(3) According to the act, the GST liability did not crystallize until title to the properties transferred to the purchasers.
The real estate commissions were paid out of the deposit placed in trust with the real estate agent. The Company never received any part of the purchase funds by the time that the GST liability crystallized because the purchase monies paid to the Company's solicitor on undertakings to clear the titles were not sufficient to pay the outstanding liabilities. As a result, some creditors were forced to accept less than the face value of their debts in order to complete the transactions. No money from the sale of the property was ever released to the Company, and the Company received no further revenue which the Appellant could submit to Revenue Canada to pay the outstanding GST. At no point did the Appellant have effective control over the purchase funds, nor did the Appellant have any power to direct how they should be paid. There was simply no money remaining after the transactions were completed and titles were cleared to remit to Revenue Canada. Copies of the vendor's statement of adjustments and orders to pay for both properties are attached to these submissions.
[14] I agree with the general proposition that the law does not compel a person to do that which is impossible — lex non cogit ad impossibilia.
[15] Nonetheless, the fact is that Essex through its lawyers collected the GST from the purchaser. Subsection 222(1) reads:
222.(1) — Subject to subsection (1.1), where a person collects an amount as or on account of tax under Division II, the person shall, for all purposes, be deemed to hold the amount in trust for Her Majesty until it is remitted to the Receiver General or withdrawn under subsection (2).
[16] The result was that the moment the purchase price was paid by the purchaser, the portion of the payment that represented GST was impressed with a trust in favour of Her Majesty. Here then is the dilemma. The purchase price would not have been paid and the transaction would not have closed and the GST would not have become payable had good title not been given and this necessitated paying off the mortgages and the builder's liens that encumbered the property.
[17] The real estate commissions were held by the real estate agent and had presumably been paid to the agent by the purchasers. The likelihood of persuading the real estate agents to give up their commissions so that GST could be paid is remote if not fanciful and unrealistic.
[18] We are therefore faced with a practical problem. What would a reasonable person in the position of the appellant have done at the time to ensure that the government was paid its tax?
[19] In Cloutier et al. v. M.N.R., 93 DTC 544, I put the approach which I follow in these cases as follows at pages 545 and 546:
The question therefore becomes one of fact and the court must to the extent possible attempt to determine what a reasonably prudent person ought to have done and could have done at the time in comparable circumstances. Attempts by courts to conjure up the hypothetical reasonable person have not always been an unqualified success. Tests have been developed, refined and repeated in order to give the process the appearance of rationality and objectivity but ultimately the judge deciding the matter must apply his own concepts of common sense and fairness.1 It is easy to be wise in retrospect and the court must endeavour to avoid asking the question "What would I have done, knowing what I know now?" It is not that sort of ex post facto judgement that is required here. Many judgement calls that turn out in retrospect to have been wrong would not have been made if the person making them had the benefit of hindsight at the time.
Section 227.1 is an example. That section imposes a standard of care on directors that requires reasonable prudence and skill in ensuring that the money raised through the SRTC program be in fact used for scientific research or else that the Part VIII tax be paid either out of the money so raised or otherwise. In determining whether that standard has been met one must ask whether, in light of the facts that existed at the time that were known or ought to have been known by the director, and in light of the alternatives that were open to that director, did he or she choose an alternative that a reasonably prudent person would, in circumstances, have chosen and which it was reasonable to expect would have resulted in the satisfaction of the tax liability. That the alternative chosen was the wrong one is not determinative. In cases of this sort the failure to satisfy the Part VIII liability usually results either from the making of a wrong choice in good faith, or from deliberate default or wilful blindness on the part of the director.
[20] One thing seems obvious. If the mortgagee and lien holders were to be paid off and clear title given to the properties (assuming that as a practical matter the real estate agents could not be induced to disgorge their commissions) the portion of the moneys paid by the purchasers representing GST had to be used to pay the encumbrances.
[21] What was to be done? Counsel for the respondent says the appellant was in a position to kill the deal and that is what he should have done. That is certainly a solution but it does not seem to accord with practical economic reality. Everyone, including the government would have lost.
[22] I think that if the appellant was that anxious to see the houses sold before real restate prices fell even more, there are a number of things that he might have done:
(a) he could have dug into his own pocket to make up the shortfall;
(b) he could have tried to persuade his wife to take less than the amount owed her under the mortgage. In fact in the case of 829 Brookfield she did reduce her claim by $1,906.17;
(c) he might have endeavoured to persuade the real estate agents to give up part of their commission on the basis that if they did not do so, the deal would fail.
[23] We are not dealing here with an isolated director who is powerless to do anything to change the course of events. We are dealing with the sole owner and sole director of a company whose solicitors, with the appellant's concurrence and on his instructions, use moneys held in trust for Her Majesty to pay off the mortgages held by the appellant's spouse. The GST collected from the purchasers, who paid it in good faith expecting that it would be paid to the government, formed no part of Essex's corporate assets. It belonged to Her Majesty. If the appellant, who was the directing mind and sole owner of Essex, wanted the deals to close, it was to his own assets or that of his wife that he should have looked, not the government's. I might say that I find the lawyers' use of the trust funds for purposes other than the payment of the tax rather surprising. In fact in the case of 825 Brookfield, they sent Essex $2,842.85 which was never paid to the government.
[24] The evidence does not establish that the appellant attempted to do anything to ensure that an amount equal to the funds held in trust for Her Majesty was paid to the government.
[25] I am well aware that this is 1999 and not 1899, that spouses' properties are held separately and that husbands cannot tell their wives what to do. Nonetheless, the idea that one may nonchalantly pay off one's wife out of funds held in trust for Her Majesty and cavalierly tell the government to go whistle for its money without exploring any alternative runs counter to my sense of commercial morality and does not fit into my idea of what constitutes the diligence and care required by subsection 323(3).
[26] The appeal is dismissed.
Signed at Ottawa, Canada, this 5th day of May 1999.
"D.G.H. Bowman"
J.T.C.C.