Date: 20000921
Docket: 1999-2937-GST-I
BETWEEN:
CHRISTOPHER ROBIN ISAAC,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
[1] The issue is whether the Appellant is liable pursuant to section 323(1) of the Excise Tax Act ("Act")[1] for Goods and Services Tax ("GST") in respect of the failure of Salmon Arm Jewellers Ltd. ("Company") to remit net GST on a timely basis to the Receiver General for Canada in respect of the periods ending on the following dates:
January 1, 1993, April 30, 1993, July 31, 1993, July 31, 1994, July 31, 1995, July 31, 1996, December 31, 1996
[2] The amount of net tax owing in respect of those periods is $19,094.62. The Minister also assessed penalties and interest under section 280(1) of the Act.
[3] The Appellant was the manager and active operating director of the Company. He testified that he was aware of the institution of GST, having discussed it with the Company's accountant. The Company operated a jewellery store whose business, according to his evidence, was adversely affected by the diminution in business activity in the area where the Company was operating due to the change of provincial government. He described the steps he had taken in order to improve the Company's business with the expectation that the Company would become current in its GST obligations, payments of same not having been made for the periods described above.
[4] The Appellant described how he had borrowed $20,000 for the purposes of paying GST. He said that he had in September, 1997, offered that sum to a Ms. Creiger, an employee of Revenue Canada, with the view of settling the entire obligation. He said that she refused to take this sum. He, therefore, as undertaken with the lender, returned the $20,000 to that lender.
[5] The Minister assessed the GST aforesaid. The Company ceased carrying on business in its large premises and opened a smaller store to continue the business, all to no avail.
ANALYSIS AND CONCLUSION
[6] By virtue of section of section 165, every recipient of a taxable supply shall pay GST calculated at the rate of seven percent on the value of the consideration for the supply. Section 221 requires every person making that supply to collect the tax payable by the recipient. Section 222 provides that the person collecting same shall be deemed to hold the amount in trust for Her Majesty until remitted to the Receiver General.
[7] Section 228 provides that net tax must be remitted to the Receiver General on or before the day on or before which the return for a given period is required to be filed.
[8] Section 280 provides that where a person fails to remit GST to the Receiver General when required, that person shall pay on the amount not remitted, a penalty of six percent per year and interest at a prescribed rate.
[9] Section 323 provides that where a corporation fails to remit an amount as required, the directors of the corporation at the time the corporation was required to remit the amount are jointly and severally liable with the corporation to pay that amount together with interest and penalties.
[10] Section 323(2) sets out three circumstances under which a director of a corporation is not so liable. The Appellant does not qualify under these exceptions.
[11] Section 323(3) provides that
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.
[12] As I said in Kingsbury v. H.M.Q., (not yet published in DTCs) in a Judgment dated June 30, 2000, I have sympathy with the Appellant's position. In the real world of business, a taxpayer, when in financial difficulty, is literally driven to pay employees and suppliers in order to remain in business. Nothing in the struggle to survive could be more understandable. However, section 323(1) imposes a strict test.
[13] In Neil Soper v. H.M.Q., [1997] 3 C.T.C. 242, Robertson, J.A. at 262, in discussing section 227.1(3) of the Income Tax Act[2] said:
Rather than treating directors as a homogeneous group of professionals whose conduct is governed by a single, unchanging standard, that provision embraces a subjective element which takes into account the personal knowledge and background of the director, as well as his or her corporate circumstances in the form of, inter alia, the company's organization, resources, customs and conduct. Thus, for example, more is expected of individuals with superior qualifications (e.g. experienced business-persons).
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 263 the learned Justice said:
... 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.
He then stated that
... 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.
[14] The Appellant, fully aware of the Company's GST obligation, in an earnest attempt to solve the Company's problem, borrowed $20,000 and offered it to Revenue Canada to conclude the matter. In these circumstances, it is astounding Revenue Canada was so insensitive to this earnest Appellant's plight that it did not conclude a settlement with him by waiving or cancelling interest and penalties payable under section 280 by virtue of its ability so to do described in section 280(1.1). The sum of $20,000 was in excess of the amount of GST owing.
[15] The Appellant is liable for the Company's GST obligation because he was a director at the time the corporation was required to remit the amount of tax. He attempted to keep the business alive but he did not exercise the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances in respect of the Company's failure in each period to remit the appropriate amount. Accordingly, the appeal is dismissed.
[16] As set out above, section 280(1.1) of the Act provides that the Minister may waive or cancel interest and penalties payable under section 280, the section under which penalty and interest were imposed in this case. This Court cannot direct the Minister so to do. However, in the circumstances, where the Appellant made an honest effort to conclude the liability by offering more money to Revenue Canada than was owing in tax, I cannot recommend more strongly that the Minister do so in this case.
Signed at Ottawa, Canada this 21st day of September, 2000.
"R.D. Bell"
J.T.C.C.