Tax Court of Canada Judgments

Date: 20010629

Docket: 98-2653-IT-G,

98-2816-IT-G

BETWEEN:

HENRI SIMON,

GILDA SIMON,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Archambault, J.T.C.C.

[1]            Gilda Simon and her husband, Henri Simon, are challenging assessments made by the Minister of National Revenue (Minister) on September 4, 1997, under section 227.1 of the Income Tax Act (Act). The Minister, applying that section, is holding the Simons liable to pay the source deductions that Aviron Limitée (Aviron) allegedly failed to withhold for the tax payable by its employees on the wages it paid to them. The assessments also concern premiums owed by Aviron and its employees under the Employment Insurance Act (EIA). Aviron's failure in relation to all those amounts (SDs) that it ought to have withheld and remitted to the Minister allegedly occurred for the period from May 1, 1993 to June 30, 1994 (relevant period). The following is a breakdown of the SDs that Aviron allegedly failed to withhold and remit to the Minister as well as the penalty and interest amounts claimed from Aviron in the assessments made against it:

Date	Assessment breakdown	Federal tax	Unemploy-ment insurance	Penalty	Interest	Total
27/04/94	SDs from May to December 1993	$39,253.34	$2,266.20	$3,751.95	$1,837	$47,108.49
27/04/94	SDs from January to March 1994	$11,082.50	$484.59	$1,006.70	$66	$12,639.79
25/01/95	SDs from April to June 1994	$15,396.00		$1,539.60	$759	$17,694.60
21/02/96	Difference 1994 T4s	$5,381.34		$488.13	$654	$6,523.47
Minus: 15/05/94	Payment applied					($4,000.00)
19/09/94	Payment applied					($3,832.74)
Plus: 04/09/97	Accrued interest					$24,829.39
	Legal fees					$100.69
Balance due:						$101,063.69

[2]            The only grounds that the Simons put forward at the hearing to challenge the assessments are as follows: (i) they were not directors of Aviron during the relevant period; (ii) in the alternative, if they were directors, they had ceased to be directors by September 4, 1995, and, since the assessments were made on September 4, 1997, they are statute-barred; (iii) the amount of the SDs that Aviron allegedly failed to withhold and remit for 1994 has not been established satisfactorily. The appellants do not dispute the amount for 1993. The Minister, for his part, admits that the legal fees of $100.69 must be subtracted from the amount of the assessment made under section 227.1 of the Act.

The facts

[3]            Aviron was incorporated on December 9, 1940, under Part I of the Québec Companies Act.[1] It operated a trade school (school) from that time on. Mr. and Mrs. Simon, along with a Kamal Chehab, purchased all of Aviron's shares in May or June 1990 either directly or through a corporation. Mr. Chehab is a childhood acquaintance of Mr. Simon's and one of his former clients. Their mothers were friends in Egypt. It was Mr. Chehab who encouraged the Simons to join him in purchasing all of Aviron's shares. At the time of the purchase, Aviron was having financial difficulties. It had about $800,000 in debts, which would explain why the purchase price for its shares was a very low $1.

[4]            The allotment of the shares among the new shareholders was not clearly established at the hearing. Unfortunately, the evidence is contradictory. Mrs. Simon testified that she was a shareholder in Aviron from the start. Mr. Chehab said that he and Mr. Simon owned 45 shares each and that Mrs. Simon owned 10 shares.[2] According to Mr. Simon, only he and Mr. Chehab were shareholders in Aviron, and they had 45 shares each. However, he did not explain why there were 100 common shares on May 6, 1994: according to the annual report, Mr. Chehab held 45 shares and a numbered company, 2744-6020 Québec Inc. (GSI), held 55 shares. It is possible that the shares owned by Mrs. Simon and Mr. Chehab were purchased by GSI in the fall of 1990, but this was not established convincingly.

[5]            Mr. Chehab became the school's executive director and, according to Mr. Simon, he was Aviron's only director. However, Mrs. Simon testified that she had been a director of Aviron from the outset. Mr. Chehab had to devote all his energies to making the operation of the school by that corporation profitable.

[6]            In the fall of 1990, Mrs. Simon starting taking part in the day-to-day management of Aviron. She said that she initially did secretarial work. A few months after her arrival at the school, she noted that there were personality clashes between Mr. Chehab and the teaching staff. She also found that Mr. Chehab had used one of Aviron's credit cards to make personal purchases for one of his close relatives. According to the Simons, all of this led to Mr. Chehab's departure around October 1990.[3] He was apparently replaced as a director by a Sandy Lapenna. Mr. Lapenna left Aviron after a few months to start his own business and, according to Mr. Simon, he was replaced in 1991 by Mrs. Simon, who then became the school's executive director as well as a director of Aviron.

[7]            Mr. Simon said that he was not very involved in the day-to-day management of the school and that he was never a director of Aviron until August 1992. He stated that he limited his role to that of legal advisor. As such, he negotiated the corporation's refinancing with the bank and also negotiated with its other creditors. However, he signed the share certificate as Aviron's president. Mr. Simon has been a lawyer since 1975: he practises business law, especially in the area of business financing. He said that at first he met with Mr. Chehab only on Fridays after work. As well, he himself taught a security course from 1992 to 1994. It was a basic course given in four-hour blocks. He said that he taught it 10 or so times, particularly on Mondays.

[8]            Ms. Malo gave a different version of the facts. She said that initially she saw Mr. Simon at the school almost every day. Subsequently, in 1993 and 1994, he was in his office at the school every Monday for the entire day. He was also there occasionally the other days of the week. The accountant, Mr. Lafond, also said that Mr. Simon was at the school every Monday between 1991 and 1994.

[9]            In August 1992, Aviron obtained $750,000 in new financing from the National Bank, for which Mr. Simon had to personally give security. The financing was made up of a $500,000 term loan and a $250,000 line of credit. In addition to providing security, Mr. Simon apparently had to agree to participate more in Aviron's management and, at the National Bank's request, to become one of that corporation's directors. On August 13, 1992, Mr. and Mrs. Simon gave the National Bank written confirmation that they were both directors of Aviron[4] and that Mr. Simon was its president and Mrs. Simon its vice-president.

[10]          According to Mrs. Simon, the school had about 35 employees at that time. Mr. Simon said that the start of the new school year in the fall of 1992 was disastrous. The school had only about 120 to 150 students. The economic situation at the time strongly contributed to the drop of about 200 in student enrolment. According to Mr. Simon, there were no longer enough students for the school to be run profitably. He therefore recommended to his spouse that it be closed, but she thought that she could improve the situation. She worked very long hours, from 9:00 a.m. until 10:00 or 11:00 p.m. Unfortunately, the number of enrolments for the 1993 winter session was just as disastrous as for the 1992 fall session. The situation encouraged Mr. Simon to find a new purchaser or, failing that, to close the school.

[11]          According to Mr. Simon, Mr. Chehab came knocking at his door again in May 1993. He knew that there had been a considerable drop in enrolment and that Aviron's business was not doing well. Mr. Simon said that Mr. Chehab [translation] "was dead set on taking over the school". Mr. Simon therefore offered to sell him all of Aviron's shares for the nominal sum of $1. Mr. Simon said that, since he had given the bank security for $750,000, it was in his interest to sell his shares that way because the new owner would see to it that the payments of the amounts owed to the National Bank were made.

[12]          In support of his allegation that he and his wife sold their entire interest in Aviron to Mr. Chehab on May 3, 1993, and that they were replaced as directors of that corporation at that time, Mr. Simon, during his testimony, filed a copy of the share certificate on the back of which it is stated that he transferred the certificate to Mr. Chehab on May 3, 1993.[5] Mr. Simon said that the certificate was endorsed on May 3, 1993. Mrs. Simon may have transferred her shares in GSI to Mr. Chehab a few days later.

[13]          Mr. Simon also filed a copy of a resolution passed by Aviron's shareholders (resolution of May 3, 1993) in lieu of an annual meeting. The resolution was passed at a meeting allegedly held on May 3, 1993, at 10:30 a.m. at 3975 Rue de Courtrai in Montréal, which was the school's address. Mr. Simon said that he drafted the document on Mr. Chehab's instructions and witnessed the signature of the document. It is a resolution through which Mr. Chehab and GSI, as shareholders, elected three directors: Kamal Chehab, Robledo David and Vasilios Alefantis (three designates). In addition to that resolution, Mr. Simon filed the annual report in which it is stated that the three designates were Aviron's directors. That report, which Mr. Simon prepared, is signed by Mr. Chehab.

[14]          In his testimony, Mr. Chehab said that he did not sign the resolution of May 3, 1993, until around June 20, 1994, and that that document was therefore backdated. He stated that he was merely acting as a nominee for the Simons when he acquired Aviron's shares in June 1994.[6] He added that he never received the share certificate that Mr. Simon allegedly endorsed over to him. Mr. Simon was, moreover, the one who filed it as Exhibit A-1 and who described it as a [translation] "photocopy of the share certificate". Mr. Chehab also said that he never received Aviron's minute book or registers of shareholders and directors. He said that he did not know Mr. David and Mr. Alefantis. According to him, Mr. Simon took those names out of the telephone book. Mr. Simon also admitted that he did not know those two persons.

[15]          Mr. Simon said that the person responsible for Aviron's account (loan officer) at the National Bank insisted that Mrs. Simon remain the signing officer for Aviron's cheques after the shares were sold to Mr. Chehab and that there be no change in the corporation's directors. That loan officer did not testify to corroborate what Mr. Simon said. Until July 1994, Mrs. Simon was the only signing officer for Aviron's current account at the bank.[7]

[16]          Although they had, they claim, sold their entire interest in Aviron to Mr. Chehab in May 1993, the Simons agreed to take out a $100,000 mortgage on their home on July 30, 1993, in order to guarantee Aviron's line of credit. Moreover, Mrs. Simon remained in charge of managing the school at least until the end of 1993. She explained that Mr. Chehab's presence would have caused a revolt at the school. A visit by Mr. Chehab in May 1993 allegedly worried the staff very much. She described the period between May 1993 and June 1994 as [translation] "a weaning period" intended to enable Mr. Chehab to make a gradual return. She described the situation as follows:

[TRANSLATION]

. . . So obviously I was interested, I wanted to leave. I had three children at the time, and it was no longer any kind of life for me anyway. So when he came back, quietly, no one knew about it, of course. We didn't say anything. It would have been . . . I think the employees would have gone on strike, there would have been an incredible revolt, and when there are problems with the employees, the students . . . and when their course isn't good or isn't taught properly or there are also students complaining . . . and students, you know. So one problem on top of another, so there had to be a kind of, there had to be a kind of weaning by me to bring Mr. Chehab in. Does that answer the question?

                                HENRI SIMON:

                92             Q.             And that weaning you refer to, can you explain it?

A.             Well, I continued to be a sort of figurehead for him while quietly waiting. I came all the time, all the time, all the time, and at one point I quietly withdrew and then I was coming three days a week. And I even continued to sign cheques for a little while first . . . for the bank and first for Mr. Chehab. Mr. Chehab couldn't sign. It was as if he didn't exist at that point. Does that answer the question?

                                                                                                                                                [Emphasis added.]

[17]          Mrs. Simon said that she was pregnant with her fourth child. Starting in October 1993, she cut back her presence at the school to two or three days a week, and they were not full days. She said that she left the school in January 1994 to give birth and did not come back after that except on rare occasions. She described the situation as follows:

[TRANSLATION]

                94             Q.             . . . you cut back and then what happened, until when did you cut back?

                                A.             I cut back . . . I was pregnant; I gave birth in January 94. That means I left completely I'd say two or three months earlier, in October maybe, around then, October 93, because I gave birth in January 94.

                                HIS HONOUR:

. . .

                96             Q.             Excuse me, what happened in October 93?

                                A.             I went home in October 93. I was going to give birth before long.

                97             Q.             And were you a hundred percent gone then?

                                A.             Well, but I still came in from time to time.

                98             Q.             OK.

                                A.             Never a hundred percent. I'd been going in from time to time for a little while.

                99             Q.             So from October 93 to January 94, when you stopped completely, how many days a week did you go in?

                                A.             Maybe two days.

100           Q.             OK.

                                A.             It could vary from week to week, two days, sometimes three days, and not even full time the entire day like before.

                                                                                                                                                [Emphasis added.]

[18]          On cross-examination, she provided the following additional explanations:

[TRANSLATION]

312           Q.             And Mr. Chehab, was he there every week, every day?

                                A.             I don't know how often. Mr. Chehab was being very discreet for a while. It was in his interest to be very discreet.

313           Q.             So who made the decisions?

                                A.             I don't know, he tried to . . . But things always went on as usual at the school, the school went on and all the employees were on the job and were doing their work, their jobs. Classes were still being given, the teachers were there. That was the main thing.

                                HIS HONOUR:

314           Q.             Who ran the school when you left?

                                A.             But even though there were . . . running things.

315           Q.             Yes.

                                A.             Mr. Chehab.

                                VALÉRIE TARDIF:

316           Q.             But you're saying that he wasn't there?

                                A.             He wasn't there all the time, probably because he was doing . . . he was doing things discreetly, but after that . . .

317           Q.             But what do you mean by he was doing things discreetly? Where was he? Was he at home? Was he at his store?

                                A.             I don't know where he was. Before he was present completely and constantly—and I don't know when that was, so don't ask me—he did not appear constantly right away, because obviously, if the employees knew he was going to be their boss, that would have created a problem.

                                                                                                                                                [Emphasis added.]

[19]          Since Mrs. Simon was still the only signing officer for Aviron's cheques while she was on maternity leave, Mr. Lafond had the cheques prepared and sent them by messenger, often the school's janitor, to Mrs. Simon's home for her to sign. He kept in touch with Mrs. Simon by telephone. Mr. Chehab never called Mrs. Simon [translation] "for the cheques"; rather, it was she who called him. When she was not available, the accountant dealt with Mr. Simon.

[20]          Ms. Malo and Mr. Lafond[8] both testified that they had not noticed Mr. Chehab's presence at the school at all between 1991 and June 1994. Ms. Malo said that Mr. Chehab reappeared [translation] "only at the time the school was sold" by Aviron to 2853-2968 Québec Inc. (RTI). According to the contract of sale, the transaction took place on June 28, 1994, the price being $480,000, which was the secured amount owed to the National Bank. The contract states that Mr. Chehab was Aviron's director and vice-president[9] and that one Reza Tehrani was RTI's president. Mr. Simon declared that he did not know who owned RTI. On June 28, 1994, Mr. Chehab and RTI also entered into a 10-year employment contract. Mr. Chehab became RTI's chief executive officer at an annual salary of $50,000.

[21]          According to the version given by Mr. Tehrani, it was Mr. Chehab who introduced Mr. Simon to him. Mr. Tehrani said that he met Mr. Chehab for the first time at his computer store in Lasalle in February 1994, which was when he learned that Mr. Chehab owned a school, just as he did.

[22]          According to Mr. Chehab's version, it was Mr. Simon who introduced Mr. Tehrani to him in June 1994. Mr. Simon told him that he had found a new buyer for Aviron and that there was a possibility that Mr. Chehab could have employment for 10 years running the school since, according to Mr. Simon, Mr. Tehrani had no experience in school management.[10] However, Mr. Chehab said that to obtain the new job he had to become a shareholder and director of Aviron. Mr. Chehab also said that he did not become a shareholder and director until one week before the sale to RTI, that is, around June 21, 1994.

[23]          In his testimony, Mr. Simon explained that a transfer of a business was subject to fairly strict conditions under the new Civil Code of Québec and that the negotiations between Aviron and RTI lasted from March to June 1994. Mr. Tehrani's lawyer apparently noticed that Aviron had not submitted an annual report to the Inspector General of Financial Institutions. Mr. Simon therefore prepared the annual report for 1992 and 1993. The address of the [translation] "transfer office for the company's shares", like the address indicated for correspondence, is the same as that given by Mr. Simon as his address[11] on his Notice of Appeal dated October 5, 1998.

[24]          According to Mr. Tehrani, Mr. Chehab left his employment at RTI in April 1995 following an investigation into the theft of $4,000 at the school. The three main suspects underwent a polygraph test, which only Mr. Chehab failed. Furthermore, on cross-examination by Mr. Simon, Mr. Chehab admitted that he had been sentenced to pay $10,000 for unlawfully copying software. Mr. Simon testified that Mr. Chehab had also misappropriated funds belonging to a business he had run with his cousins before joining Mr. Simon in purchasing Aviron. Mr. Simon said that he learned of this from Mr. Chehab's cousins after Mr. Chehab left Aviron in 1990.

[25]          On cross-examination, Mr. Chehab admitted that he had discussed the possibility of not testifying for the Minister if he was paid money for not doing so. According to Mr. Chehab, while he was in the Court's waiting room, Mr. Tehrani invited him to go down and get a cup of coffee. During that meeting, Mr. Tehrani said that he had an attractive offer to make him and that he would call him the next day. The next day, Mr. Tehrani offered to pay him $35,000. Mr. Chehab said that he never seriously considered accepting the offer, as shown by the fact that he instead demanded $1,000,000 even though the amount at issue in the case is well under $1,000,000.

[26]          Mr. Tehrani testified subsequently and told the Court that he had recorded his telephone conversation with Mr. Chehab. The suggestion that he do this had been made to him by Mr. Simon, who had learned from Mr. Tehrani the day before that Mr. Chehab was prepared to accept $35,000.[12] According to Mr. Tehrani—who used Mr. Simon's professional services several times after purchasing the school—Mr. Chehab was the one who asked him to go to the restaurant and who offered not to appear as a witness if he was given $50,000. Mr. Tehrani then asked him whether he could be more reasonable, and Mr. Chehab answered that the least he could accept was $35,000. During the telephone conversation as recorded by Mr. Tehrani, Mr. Tehrani told Mr. Chehab that the price had to be reduced to $30,000. Mr. Chehab then insisted on the $35,000 they had talked about. The recording shows that at no time during the conversation was there any reference to $1,000,000, contrary to what Mr. Chehab had claimed.

[27]          After hearing the recording, Mr. Chehab first denied that it was actually his voice. After pausing for a few minutes, he then apologized to the Court for lying. He said that he felt ashamed. Although he admitted that he had been prepared to accept $35,000, he continued to maintain that it was Mr. Tehrani who had offered him money for not testifying, and he stood by his testimony that he had not become a director until June 1994.

[28]          The respondent called two collection officers, Martin Girard and Richard Dvaranauskas, and an SD auditor, Céline Couture, to testify about the making of the assessments against Mr. and Mrs. Simon. Mr. Girard said that he did some of the preliminary work with regard to the assessments under section 227.1 of the Act. It was Mr. Dvaranauskas who actually made the assessments on September 4, 1997. In their preliminary work, Mr. Girard and Mr. Dvaranauskas merely looked up in the Department's computerized data the amounts that had been determined in the assessments made by three SD auditors, Jacques Daï, Christopher Prokop and Ms. Couture, and that were being claimed from Aviron.

[29]          Mr. Daï apparently made his assessments against Aviron on April 27, 1994. Those assessments concerned unremitted SDs for the period of May to December 1993 as well as for January to March 1994. As for Mr. Prokop, he apparently made an arbitrary assessment[13] in January 1995 for unremitted SDs for May and June 1994. It seems that Aviron remitted the required SD amounts for April 1994. Neither Mr. Daï nor Mr. Prokop testified in order to explain their audit work by, inter alia, describing the books of account they were able to consult and indicating which individuals they were able to meet.

[30]          Ms. Couture described the circumstances that led her to reassess Aviron on February 21, 1996. She had been asked to audit the insurable earnings of one Fouad Sarrouf for the purposes of the EIA. She went to the facility occupied by Aviron until June 1994. Since RTI had moved the school to new premises, Ms. Couture went to the school's new address. It was then that she learned of its new owner. In making checks concerning Mr. Sarrouf, she found that 29 T4 information slips for 1994 had mistakenly been treated as being part of RTI's file rather than being included in Aviron's file. She therefore made corrections to the Minister's files. The SD adjustment amounted to $29,866.46. Since some remittances had been made to the Minister and the amounts claimed by way of assessment totalled $24,485.12, the SDs not paid by Aviron, according to Ms. Couture's assessment, amounted to $5,381.34.

[31]          Given that Ms. Couture had to respond to an urgent request concerning Mr. Sarrouf's insurability, she does not seem to have spent much time auditing Aviron's SDs for the first six months of 1994. According to her report, her audit at RTI lasted just half an hour and she took only three and a half hours to finish her work concerning Mr. Sarrouf and make the corrections to Aviron's SDs. When she testified, Ms. Couture was unable to provide much information on her audit work with respect to Aviron's SDs. In particular, she was unable to clearly explain how she had been able to conclude that the 29 T4s had mistakenly been treated as being part of RTI's file. It is highly likely that she made her assessment solely on the basis of the T4s. This is clearly illustrated by the following excerpt from the cross-examination conducted by Mr. Simon:

[TRANSLATION]

                1288         Q.             So when you made your assessment, if I understand correctly, you had nothing other than the employer's T4s. Is that your testimony?

                                A.             It is.

                1289         Q.             That's what you said earlier?

                                A.             With respect to the figures I relied on, I had nothing other than the T4s . . .

                1290         Q.             Exactly, we're talking about figures?

                                A.             Yes.

                1291         Q.             OK. So, for the figures, you had nothing but the employers' T4s?

                                A.             Nothing but the amount from the T4s, that's right.

                1292         Q.             Did you look at whether, specifically for those employees during that period, there was a payroll journal that corresponded to the T4s?

                                A.             I can't tell you, maybe yes, maybe no . . .

                                                                                                                                                [Emphasis added.]

[32]          Moreover, when she began her testimony, she was not even certain whether she had looked at the T4s. She did not conclude that she had until noting that she had written in her audit report that copies of the T4s were in RTI's file. Ms. Couture was unable to give the employer's name appearing on the T4s. Unfortunately, she had not brought RTI's SD file with her, so she was not able to file the 29 T4s.

[33]          Based on his reading of Ms. Couture's audit report, Mr. Simon noted not only that Ms. Couture had found a mistake in the way the 29 T4s had been dealt with but also that RTI had paid SDs, also by mistake. Ms. Couture admitted that, in theory, RTI would have been reimbursed or would have been given a credit for those amounts.

Analysis

[34]          For the purposes of these appeals, the relevant subsections of section 227.1 of the Act are as follows:

227.1       Liability of directors for failure to deduct.

(1) Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or section 153 or 215, has failed to remit such an amount or has failed to pay an amount of tax for a taxation year as required under Part VII or VIII, the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest or penalties relating thereto.

(2) Limitations on liability. A director is not liable under subsection (1), unless

(a) a certificate for the amount of the corporation's liability referred to in that subsection has been registered in the Federal Court under section 223 and execution for that amount has been returned unsatisfied in whole or in part;

(b) the corporation has commenced liquidation or dissolution proceedings or has been dissolved and a claim for the amount of the corporation's liability referred to in that subsection has been proved within six months after the earlier of the date of commencement of the proceedings and the date of dissolution; or

(c) the corporation has made an assignment or a receiving order has been made against it under the Bankruptcy and Insolvency Act and a claim for the amount of the corporation's liability referred to in that subsection has been proved within six months after the date of the assignment or receiving order.

(4) Limitation period. No action or proceedings to recover any amount payable by a director of a corporation under subsection (1) shall be commenced more than two years after the director last ceased to be a director of that corporation.

                                                                                    [Emphasis added.]

Were the Simons replaced as directors on May 3, 1993?

[35]          When the Minister assessed the Simons on September 4, 1997, he assumed that they were directors of Aviron at all relevant times. The burden is on the Simons to demolish that assumption. Their first argument is that they were replaced by three new directors on Monday, May 3, 1993, and that they cannot be held liable for the failure to fulfil the obligation to remit SDs for the relevant period, which, it will be recalled, is from May 1, 1993, to June 30, 1994. Have they been able to prove on a balance of probabilities that they were replaced?

[36]          In support of their position, the Simons stated that they sold their shares in Aviron to Mr. Chehab on May 3, 1993, and perhaps the shares in GSI a few days later. They also filed a copy of an Aviron share certificate endorsed over to Mr. Chehab and the resolution of May 3, 1993, whereby Mr. Chehab and GSI elected Mr. Chehab, Mr. David and Mr. Alefantis as directors. The respondent called Mr. Chehab as a witness, and he stated that the resolution was not signed until June 1994, or near the end of the relevant period. We therefore have contradictory testimony: the Simons' version on the one hand and Mr. Chehab's on the other. Which one should be accepted?

[37]          It is important to deal first with Mr. Chehab's credibility. As we have seen, he perjured himself while being cross-examined by Mr. Simon: he is therefore a tainted witness. It is thus imperative that one be cautious as to the probative force to be given to his testimony. However, it must be acknowledged that, although Mr. Chehab lied about the attempt to bribe him, this does not mean that he necessarily lied when he said that Mr. Tehrani initiated the bribe attempt. Nor did he necessarily lie when he said that the resolution of May 3, 1993, was not signed until June 1994 and that Mr. Simon got the names of Mr. David and Mr. Alefantis out of a telephone book. Moreover, the fact that Mr. Chehab is a tainted witness does not necessarily mean that the Simons[14] and Mr. Tehrani[15] necessarily told the truth in their testimony.

[38]          One aspect of the Simons' testimony that gives rise to serious doubt is their assertion that Mr. Chehab became Aviron's sole shareholder (directly, or indirectly through GSI) on May 3, 1993, and that he gradually got involved in running the school. First of all, it strikes me as very surprising that the Simons would have agreed to sell Mr. Chehab their entire interest in Aviron when they knew for a fact that he was unscrupulous and they believed that he had acted dishonestly on at least two occasions. According to their own version of the facts, they had dismissed him in October 1990 for fraudulently using the school's credit card. He had apparently also misappropriated funds belonging to a business owned by his own cousins. How could the Simons trust Mr. Chehab to make repayment to the National Bank of Aviron's loans totalling about $750,000, for which Mr. Simon had personally stood surety?[16] Did not Mr. Chehab have a reputation for appropriating property belonging to the companies for which he worked, to the detriment of those companies and their shareholders? Even more surprising, how could they have agreed, following the alleged sale to Mr. Chehab in May 1993, to give the bank a mortgage on their own home to guarantee existing loans of Aviron's?

[39]          Moreover, how could they hope that the school would function properly and make enough money to pay back its loans if the owner was going to cause [translation] "a revolt and a strike" at the school? I also consider it totally implausible that Mr. Chehab purchased all of Aviron's shares in May 1993 while continuing to hide so as not to cause a revolt at the school he had just bought even though he [translation] "was dead set on taking over the school". Why would Mr. Chehab have [translation] "gradually" worked towards managing the school between May 1993 and June 1994 without being paid for his services? Mr. Lafond, who was responsible for issuing Aviron's cheques (including those to pay the lease fee on the car used by Mr. Chehab 12 months after he left the school in 1990), would certainly have known of any salary paid to Mr. Chehab. If Mr. Lafond had paid him a salary, he would have mentioned it.

[40]          During the period from May 1993 to June 1994, Aviron had serious cash flow problems and failed to remit substantial amounts of SDs to the Minister. Why did the accountant obtain his instructions only from the Simons and not from Mr. Chehab, the alleged new owner and one of the alleged new directors as of May 3, 1993? Mrs. Simon claimed that she called Mr. Chehab to decide which cheques would be postdated. Now, why did someone like Mr. Lafond—who Mr. Simon admitted was very discreet and with whom Mr. Chehab had had no personality conflicts (Mr. Lafond having been hired after Mr. Chehab's departure in 1990)—not "discreetly" consult Mr. Chehab directly? Yet the Simons said that Mr. Chehab gradually became involved in managing the school. On cross-examination, Mrs. Simon gave counsel for the respondent the following answer indicating that Mr. Chehab got involved in managing the school in 1993:

[TRANSLATION]

375           Q.             Did Mr. Chehab have some degree of presence at the company in 1993 and 1994?

                HIS HONOUR:    Pardon me, for what period?

                VALÉRIE TARDIF:    1993 and 1994.

                A.             I suppose so, yes. He came and went, that's for sure.[17]

                                                                                                                                [Emphasis added.]

[41]          To this must be added the fact that Mrs. Simon allegedly cut back her time at the school in October 1993 and left at the end of 1993 to go on maternity leave. If there was a time when one would have expected Mr. Chehab to be more present at the school, it would certainly have been between October 1993 and June 1994, as Mr. Simon admitted in argument. However, such was not the case. Ms. Malo[18] and Mr. Lafond did not see Mr. Chehab before June or July 1994.

[42]          Moreover, neither Ms. Malo nor Mr. Lafond confirmed that Mr. Chehab had come to the school in May 1993 and that this had greatly worried the school's staff. As well, no one other than the Simons stated that there were serious problems with the interpersonal relations between Mr. Chehab and the school's employees.

[43]          Mr. Simon did try to impugn Mr. Lafond's credibility by saying that he had a financial stake in the Simons' being recognized as directors because he had brought proceedings against Aviron before the Commission des normes du travail. Mr. Lafond's answer was that he had not brought proceedings against Mr. Simon and that he had not taken account of Mr. Simon's credit standing. I consider Mr. Lafond's answer honest. Moreover, Ms. Malo corroborated his testimony concerning Mr. Chehab's absence prior to the sale of the school in June 1994. Mr. Simon attempted to impugn Ms. Malo's credibility by saying that she had been Mr. Chehab's [translation] "private secretary" and that she had expressed her displeasure at testifying in court. However, I found Ms. Malo's testimony credible. She did her best to answer candidly the questions she was asked. As well, it should be added that Mr. Simon admitted that there is no evidence that Ms. Malo brought proceedings against Aviron or the Simons before the Commission des normes du travail.

[44]          Given the circumstances already described and the testimony of Ms. Malo and Mr. Lafond, the Simons' version of the facts strikes me as highly implausible and even improbable. To this it must be added that Mrs. Simon's testimony was often evasive and contradictory. For example, she said that Mr. Chehab gradually took part in managing the school right on the school premises, but she did not know how often he was there. [translation] "He wasn't there all the time . . . because . . . he was doing things discreetly." She [translation] "suppose[d]" that he had "some degree of presence" at the company and at the same time she was sure that he came and went. Mr. Chehab was running the school, but she did not know who made the decisions (question 313)!

[45]          Furthermore, in my view, the Simons' contention that the loan officer strongly suggested that they keep Mrs. Simon as signing officer for the cheques after May 1993 and that they not officially inform the bank of the change in directors has not been established convincingly. The Simons' testimony on this point is hearsay to which I give no probative value here. The loan officer should have been called to testify and I draw an unfavourable conclusion from his absence at the hearing. I will point out here what Sopinka and Lederman say in The Law of Evidence in Civil Cases, as cited by Judge Sarchuk of this Court in Enns v. M.N.R., 87 DTC 208, at page 210:

In The Law of Evidence in Civil Cases, by Sopinka and Lederman, the authors comment on the effect of failure to call a witness and I quote:

In Blatch v. Archer , (1774), 1 Cowp. 63, at p. 65, Lord Mansfield stated:

"It is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted."

The application of this maxim has led to a well-recognized rule that the failure of a party or a witness to give evidence, which it was in the power of the party or witness to give and by which the facts might have been elucidated, justifies the court in drawing the inference that the evidence of the party or witness would have been unfavourable to the party to whom the failure was attributed.

[46]          There are also other indications that, when added to the facts already mentioned, cast doubt on the Simons' version.[19] Mrs. Simon said that she saw Mr. Chehab's signature on the contract dated June 28, 1994, through which Aviron sold the school to RTI.[20] If she had sold all her shares in May 1993, why would she have been shown that contract (on which her signature does not even appear) when she said she was not involved in the negotiations[21] and merely signed some documents?[22] Moreover, if Mr. Chehab owned Aviron when the school was sold to RTI in June 1994, why was he only Aviron's vice-president, as stated in the conveyance? And who was its president?

[47]          There is Ms. Malo's testimony, which contradicts that given by Mr. Simon, regarding his much more important role in running the school. It should be remembered that Mr. Simon was Aviron's president from the very beginning in 1990. Moreover, how can Mr. Simon claim that Mr. Chehab was the sole director of a corporation governed by Part I of the Companies Act (QCA) (R.S.Q., c. C-38) given that section 83 of that statute requires that there be not less than three directors? It must be borne in mind that Mr. Simon has been a lawyer specializing in business law, particularly financing law, since 1975. How could he have been unaware of that legal rule? Besides, Mr. Simon seems to have been aware of it, since he drafted the resolution of May 3, 1993, stating that Aviron's shareholders had elected "three" directors.

[48]          For all these reasons,[23] I find unconvincing the testimony of Mr. and Mrs. Simon that they sold their interest in Aviron to Mr. Chehab in May 1993 and that Mr. Chehab became a director and shareholder of Aviron at that time. Accordingly, I am prepared to accept that Mr. Chehab was telling the truth when he said that he did not become a shareholder in Aviron again until June 1994, and that he was likewise being truthful in stating that the names of Mr. David and Mr. Alefantis were taken out of the telephone book and that he did not know them. The Simons' two alternative arguments must therefore be considered.

Were the Simons directors of Aviron on September 4, 1995?

[49]          Before looking at the facts relevant to answering this question, it is helpful to refer to certain rules laid down by the QCA concerning companies governed by Part I of that statute. According to subsection 4(1), Part I of the QCA applies to every "company incorporated under Part I of The Québec Companies Act". As stated above, section 83 QCA provides that the affairs of the company are to be managed by a board of not less than three directors. Section 87 QCA states that the number of directors may be increased or decreased. However, there must always be at least three directors. According to subsection 86(1) QCA, no person is to be elected or appointed a director of a company unless the person, or any other company of which the person is an officer or director, is a shareholder therein.

[50]          According to subsection 71(1) QCA, no transfer of shares is valid for any purpose until entry thereof is duly made in the register of transfers, except for the purpose of exhibiting the rights of the parties thereto towards each other and of rendering the transferee liable in the meantime, solidarily with the transferor, to the company and its creditors. In Leduc v. Leduc, [1959] B.R. 779, at page 784, Taschereau J. of the Court of Queen's Bench (in appeal) stated that delivery of an endorsed share certificate does not transfer ownership of the shares of a company governed by the QCA.

[51]          Finally, section 85 QCA provides that failure to elect new directors means that the former directors continue in office:

85. If, at any time, an election of directors is not made or does not take effect at the proper time, the company shall not be held to be thereby dissolved, but such election may take place at any subsequent general meeting of the company called for that purpose, and the retiring directors shall continue in office until their successors are elected.

                                                                                                                                                [Emphasis added.]

[52]          It seems to be recognized in the common law that, for a person to be lawfully elected a director of a corporation, the person must have accepted the office of director. In DeWitt v. M.N.R., 90 DTC 1027, Judge Kempo of this Court adopted that interpretation, in support of which she referred to West Leechburg Steel Co. v. Smitton, 280 Mich. 180, 273 NW 439 (Mich. S.C.). At page 440 of that decision, the Michigan Supreme Court cited the following passage:

To make one an officer of a corporation, his consent, as well as an appointment or election is necessary. A person who is elected without his knowledge, and who does not accept the office, or act as an officer, is not an officer, although he may have received stock after his election period.

[53]          Let us now consider the relevant facts of this appeal. The first thing to be decided is whether the Simons have discharged their burden of proving that they were no longer directors of Aviron by September 4, 1995, at the latest. That date is relevant because subsection 227.1(4) of the Act provides that no action to recover any amount payable under subsection 227.1(1) may be commenced more than two years after a director last ceased to be a director of a corporation.

[54]          In my opinion, the Simons have not discharged their burden. To begin with, regardless of whether or not Aviron was incorporated—as I believe it was—under Part I of the Québec Companies Act, it is Part I of the QCA that applies to that corporation. Moreover, the Simons admitted that they never prepared a document recording their resignation as directors of Aviron. They claimed that they ceased to be directors when they were replaced by three new directors as a result of the resolution of May 3, 1993. That resolution raises many problems, however. First of all, one may question whether it is a valid document. Mr. Chehab testified that he did not become a shareholder in Aviron until June 1994, that he did so as a nominee and that the resolution of May 3, 1993, does not reflect the real situation: this means that no meeting was held at 3975 Rue de Courtrai on that date. The document is therefore a forgery and a sham. If the resolution of May 3, 1993, does not reflect the real situation on that date, might it reflect the situation in June 1994, when it was actually drafted?

[55]          It must first be pointed out that section 88 QCA provides that directors of a company are to be elected by the shareholders in such manner as the constituting act or, as the case may be, the by-laws of the company prescribe. However, the corporation's letters patent, although public documents,[24] were not filed in evidence. The corporation's by-laws were not filed either. It therefore cannot be determined whether the directors were elected in accordance with Aviron's constituting act or by-laws.

[56]          It can however be determined whether the election was consistent with the provisions of the QCA. The first question that arises is whether the three designates were elected as directors by duly registered shareholders of Aviron. In the first place, there is only Mr. Simon's testimony that the transfer records for the shares in Aviron and GSI were completed. No such records from Aviron showing that Mr. Chehab and GSI validly became shareholders in Aviron was filed to corroborate that testimony. Moreover, there is no evidence of who GSI's officers, directors and shareholders were. Thus, even if one could consider the resolution of May 3, 1993, to have been passed in June 1994, it is far from certain that Mr. Chehab and GSI were registered shareholders of Aviron in June 1994. The words of Taschereau J. must be recalled: delivery of an endorsed share certificate does not transfer ownership of the shares of a company governed by Part I of the QCA. Given the lack of convincing evidence that all the legal requirements for the transfer of the shares in Aviron to Mr. Chehab and GSI were met, it cannot be determined whether Mr. Chehab and GSI were registered shareholders of Aviron, whether they had the legal capacity to elect the three designates and whether those three persons were lawfully elected directors.

[57]          Furthermore, if the three designates were not shareholders in Aviron, they did not have the essential qualifications needed to become directors of Aviron as set out in subsection 86(1) QCA, unless they were officers or directors of GSI and that company validly became a shareholder in Aviron. However, not only is there no convincing evidence that GSI lawfully became a shareholder in Aviron, but there is also no such evidence that the three designates were officers or directors of GSI.

[58]          Even if I accepted Mr. Simon's testimony as probative and concluded that GSI and Mr. Chehab lawfully became shareholders in Aviron in June 1994, Mr. Chehab would merely be the only one of the three designates elected by the shareholders' resolution of May 3, 1993. First of all, only Mr. Chehab agreed to become a director. Not only is there no evidence that the other two alleged directors, Mr. David and Mr. Alefantis, agreed to become directors of Aviron, but it has been shown on a balance of probabilities that they never knew they had been elected directors. Mr. Chehab said that their names were taken out of the telephone book. In my opinion, the resolution of May 3, 1993, is a sham not only as regards the date on which the shareholders' meeting was held but also as regards the election of the two strangers in question. Moreover, the interpretation adopted in West Leechburg Steel Co., supra, seems to me to be entirely in keeping with the spirit of the QCA. How can people be elected to manage a corporation's affairs if they have no knowledge of their so-called election? How can duties be imposed on such persons if they have not accepted the office of director?

[59]          Since a corporation governed by Part I of the QCA must have not less than three directors and only Mr. Chehab accepted the office of director, the other two director's positions held by Mr. and Mrs. Simon were not filled. According to section 85 QCA, "the retiring directors shall continue in office until their successors are elected". It has been established that the Simons were directors of Aviron from at least August 1992 on. Since no evidence was adduced showing that they were lawfully replaced[25]—Mr. Chehab holding the third director's position required by the QCA—I have no basis for concluding that they were not directors of Aviron on September 4, 1995. Accordingly, the limitation period set out in subsection 227.1(4) cannot be a valid defence for the Simons in the circumstances.

[60]          A brief comment must be made about the position taken by counsel for the respondent concerning the Simons' status as directors in September 1995. She argued that the Simons' sale of their shares in Aviron to Mr. Chehab in June 1994 should be considered as having no effect because it was a sham. In my view, that position is unfounded. Mr. Chehab admitted that he became a shareholder as a nominee for the Simons. Legally, nothing prevented him from doing so. If the transfer was recorded in the share transfer records, Mr. Chehab became a shareholder in Aviron from a corporate law standpoint. Under subsection 86(1) QCA, Mr. Chehab did not have to own shares of the corporation "absolutely in his own right" unless Aviron's by-laws so provided. There is no evidence that Aviron's by-laws contain such a condition. Therefore, the mere fact that Mr. Chehab did not become the beneficial owner of the shares is not as such a valid reason for concluding that the Simons were not replaced by other directors.

Is there sufficient evidence as to the amount of the SDs that Aviron allegedly failed to remit to the Minister for 1994?

[61]          As a third ground for challenging the Minister's assessments, the Simons argued that the Minister has not satisfactorily established the amount of the SDs not remitted to him. As shown by the facts set out above, the evidence is indeed deficient on this question. The respondent did not call as witnesses the auditors who made the assessments holding Aviron liable for the SDs not remitted to the Minister. The respondent merely called the collection officers, who said that they had determined those SDs by relying basically on the Department's computerized data.

[62]          The only exception is Ms. Couture, who made one of the four SD assessments against Aviron. However, she did not really conduct an audit concerning Aviron: she merely found a mistake in the treatment of 29 T4s and made a correction accordingly. Not only was she not able to file the 29 T4s in question, but she was also unable to say which documents she had been able to consult to reach her conclusion and make her assessment of February 1996. After hesitating a moment, she admitted that the only documents she had been able to consult were the T4s.

[63]          The auditors, who could have enlightened the Court about Aviron's failure to fulfil its obligation to remit SDs to the Minister, were not called to testify by the Simons either. The question to be decided is who had the burden of proving the amount of SDs not remitted to the Minister. Was it enough for the respondent to state, in her Reply to the Notice of Appeal, the amounts determined by the Minister in the assessments against Aviron and to call as witnesses the collection officers who made the assessments against the Simons on the basis of the amounts claimed in the assessments against Aviron?

[64]          To answer these questions, it is first necessary to recall the wording of subsection 227.1(1) of the Act, which states that the directors of a corporation are jointly and severally liable, together with the corporation, "[w]here a corporation has failed to deduct or withhold an amount as required by . . . section 153 or . . . to remit such an amount". Proof of failure to withhold or remit is a precondition for a director's financial liability. At first blush, one might expect that the respondent be the one to establish that juridical fact. In addition to taking account of the wording of section 227.1, the nature of an assessment made under that provision must also be considered. Such an assessment is not a standard assessment for income tax owed by a taxpayer, for the tax on capital owed by a taxpayer or for the goods and services tax payable on the purchase of a product or service. An assessment under section 227.1 is a tool the Minister is given by the Act to enable him to collect the tax owed by a third party. Here, Aviron had an obligation under section 153 of the Act to withhold, on account of tax, part of the wages paid to its employees.[26] Since Aviron did not remit some of the amounts withheld and the Minister was unable to recover the unremitted amounts because execution therefor was returned unsatisfied in whole or in part, the Minister exercised his remedy against Aviron's directors, whom he held jointly and severally liable, together with Aviron, to pay the SDs.

[65]          That recovery tool is very similar to the one found in subsection 160(1) of the Act. In Gaucher v. The Queen, 2000 DTC 6678, Rothstein J.A. of the Federal Court of Appeal described an assessment under that subsection as a "derivative assessment". He stated the following in paragraph 7 of his reasons:

When the Minister issues a derivative assessment under subsection 160(1), a special statutory provision is invoked entitling the Minister to seek payment from a second person for the tax assessed against the primary tax payer. That second person must have a full right of defence to challenge the assessment made against her, including an attack on the primary assessment on which the second person's assessment is based.

[66]          In the next paragraph, he commented on the approach taken by the trial judge: "It seems to me that this approach fails to appreciate that what is at issue are two separate assessments between the Minister and two different taxpayers." In Gaucher, the Federal Court of Appeal concluded that the transferee of property was entitled to challenge the primary assessment again even though that assessment had been confirmed by the Tax Court of Canada. Rothstein J.A. stated the following in paragraph 9:

. . . since the secondary taxpayer was not a party in the proceedings between the Minister and the primary taxpayer, she is not bound by the assessment against the primary taxpayer. The secondary taxpayer is entitled to raise any defence that the primary taxpayer could have raised against the primary assessment.

[67]          In Gestion Yvan Drouin Inc. v. The Queen, 2000 CarswellNat 3296, [2000] T.C.J. No. 872, a decision rendered shortly after Gaucher, I considered the question of who had the burden of proving the existence of the primary tax debtor's tax liability. I stated the following in paragraph 114:[27]

114. Since it is the Minister who takes measures against a third party to recover the tax owed to him by the tax debtor, it seems entirely reasonable to me that it should be incumbent on the Minister to provide prima facie evidence of the existence of the tax liability. To do this, the Minister usually has in his possession the tax debtor's tax return and, if he has carried out an audit, he may have copies of the source documents or other relevant documents supporting his assessment. He is therefore the one who is in the best position to establish the quantum of the tax liability. I thus conclude that the onus of providing prima facie evidence of the tax liability where an assessment has been made under subsection 160(1) of the Act generally falls on the Minister.

[68]          I added that it was not enough to produce the primary tax debtor's notice of assessment unless the amount established by the Minister in that assessment corresponded to that indicated by the tax debtor in his or her tax return.

[69]          A review of the case law on the application of section 227.1 of the Act shows that the courts have considered the question of where the burden of proof under that section lies. It must be noted that section 227.1 has applied since November 13, 1981; it is therefore a relatively recent statutory provision. In the past, taxpayers have tried to challenge the validity of assessments made under section 227.1 by raising the question of that section's constitutionality or by attempting to have the entire burden of proof as regards its application imposed on the Minister. Those efforts have been unsuccessful. See, inter alia, Byrt v. M.N.R., 91 DTC 923, [1991] 2 C.T.C. 2174; Tremblay v. M.N.R., [1990] 2 C.T.C. 2666; and Binavince v. M.N.R., [1991] 2 C.T.C. 2580, 91 DTC 1225. Those decisions clearly established that section 227.1 is constitutional and that it is reasonable for taxpayers to bear the burden of proving that they acted with due diligence in performing their duties as directors of a corporation, and specifically that they took all necessary steps to prevent the failure to fulfil the obligation to remit SDs to the Minister. This outcome strikes me as entirely appropriate, because the person who is in the best position to prove this is the director himself.

[70]          However, it seems to me that an entirely different problem arises in establishing the amount of SDs not remitted to the Minister by a corporation. It should be recalled that a corporation and a director are separate persons. The primary tax debtor in such a case is the corporation that pays the wages to its employees. The Minister cannot make an assessment against a director unless he has been unable to recover the SDs from that corporation. To determine the amount of SDs not remitted to the Minister by the corporation, an auditor must normally review the corporation's accounting records, including its payroll journal and cash disbursements journal, to determine the amounts paid by the corporation as wages to its employees and the amounts that had to be remitted to the Minister. By reviewing the Department's records, the auditor can then determine how much the Minister actually received and how much was not remitted. The accounting records of the corporation and of the Department do not belong to the director of the corporation. When a director comes to this Court to challenge assessments made under section 227.1 of the Act, it may be difficult if not impossible for the director to have access to those records. If the corporation, or even the Department, as occasionally occurs, has mislaid or destroyed its records or files, the director should not be adversely affected thereby unless it is shown that he or she participated in the destruction of the records or files.

[71]          In R. v. Leung, 1993 CarswellNat 958, [1994] 1 F.C. 482, Joyal J. of the Federal Court-Trial Division made some interesting comments on the burden of proof in an appeal raising the question of the application of section 227.1 of the Act. After looking at the oft-cited decisions on the burden of proof, he stated the following principle in paragraphs 91-93:

91 Again, in Hillsdale Shopping Centre Ltd v. Minister of National Revenue, [1981] C.T.C. 322, 81 D.T.C. 5261 (F.C.A.) at page 328 (D.T.C. 5266), the Federal Court of Appeal stated:

                If a taxpayer, after considering a reassessment made by the Minister, the Minister's reply to the taxpayer's objections and the Minister's pleadings in the appeal, has not been made aware of the basis upon which he is sought to be taxed, the onus of proving the taxpayer's liability in a proceeding similar to this one would lie upon the Minister.

92 In my view, the foregoing are instances where no matter the peremptory character of a notice of assessment, no matter what difficult issues it might raise in the eyes of the taxpayer, no matter the onus which as a general rule is imposed on him, courts have nonetheless recognized the need to maintain an even playing field. Courts have done so in recognition of the adversarial mode within which assessor and taxpayer must resolve an issue, on the basis of the normal rules of evidence respecting facts to the knowledge of one party or to the knowledge of the other, and generally on the basis of respect for equity and common sense.

93 This leads me to observe that while an assessment is deemed to be valid or declared to be so, this does not mean that it cannot be successfully challenged. As I noted when dealing with the shifting burden of proof, circumstances surrounding the making of an assessment may well impose on the Crown the burden of proving that its assessment is correct. This is especially so when an assessment is pursuant to section 227 of the statute.[28]

                                                                                                [Emphasis added.]

[72]          How should these principles be applied to the relevant facts of this appeal? First of all, it must be acknowledged that it is quite disturbing that the respondent did not see fit to call the auditors who made the assessments against Aviron to testify. Where the respondent is defending assessments being appealed by a taxpayer, she generally calls the auditor as a witness so that he can tell the Court about the audit work he did. In testifying, the auditor will state whom he met with for the purposes of the audit and describe the documents he consulted. This testimony will show that the facts on which the Minister relied in making his assessment are not something he imagined but are the facts found by the auditor following a review of the taxpayer's affairs that was as rigorous as it was complete. In my opinion, it is only in such circumstances that the burden of demolishing the facts gathered by an auditor and relied on by that auditor in making the assessment can be imposed on a taxpayer.

[73]          It would be totally unacceptable for the Minister to act capriciously and arbitrarily in making his assessment and for this to prejudice the taxpayer. It would go against "equity and common sense" to accept that the Minister can act in such a way and abuse the right that the courts recognize him as having and by virtue of which there is imposed on taxpayers an obligation to demolish the facts on which the Minister relied in making his assessment.

[74]          We are dealing here with a "derivative" assessment, as Rothstein J.A. put it in Gaucher, supra, and the approach adopted by the courts must take into account the fact that at issue are two separate assessments made by the Minister against two different taxpayers. Accordingly, where the SD amount in an assessment against a director is challenged, it is necessary to call as a witness the auditor who made the assessment against the corporation that failed to remit the SDs pursuant to section 153 of the Act, which assessment served as the basis for the assessment made against the director. It is not enough for a collection officer who assessed the director to state that he relied on the assessment made against the corporation by the SD auditor, just as it would not be enough merely to file that corporation's assessment. The Court cannot act on blind faith by assuming that all the audit work concerning the corporation was done in accordance with good practice and that the relevant documents were reviewed in making the assessment against the corporation.

[75]          It must be said that this requirement that the work done by the auditor of the corporation's SDs be verified is all the more imperative here because the Simons are alleging that they did not have access to Aviron's accounting records for the purpose of challenging their assessment and because the collection officers' testimony revealed that an arbitrary assessment was made at least for May and June 1994. Moreover, Ms. Couture's testimony is obviously insufficient to reassure the Court about the appropriateness of the corrections she made when doing her work verifying Mr. Sarrouf's insurability. Ms. Couture was unable to enlighten the Court about the documents she was able to consult that led her to conclude there had been a mistake.

[76]          What is even more disturbing here is the fact that Aviron seemed to have serious cash flow problems and that some employees were not paid. Mr. Lafond admitted that he had brought proceedings under the Act respecting labour standards for $7,000 in unpaid salary. It is not unthinkable that part of the wages owed by Aviron to its employees may have been paid by the new owner, RTI. If wages owed by Aviron to some of its employees were paid by RTI after those employees became its employees, it was RTI that had an obligation to withhold at source the tax owed by those employees.

[77]          It is not implausible that this occurred here, since Ms. Couture admitted that RTI may have been reimbursed—or at least given a credit—for the amounts related to the 29 T4s that, according to her, had been included in the wrong account. Since it was Ms. Couture who took the initiative of making such a correction following an audit concerning a completely different matter, and since the correction does not seem to have been the result of a request for a correction made by RTI, one wonders whether the amounts in question were not knowingly paid by RTI. Obviously, all of this is pure conjecture, because Ms. Couture was unable to produce the 29 T4s in question and no other relevant documents, such as Aviron's or RTI's payroll journal, were filed at the hearing. Moreover, Mr. Tehrani, RTI's president, was not examined on these matters.

[78]          If Mr. Daï and Mr. Prokop had testified, it is very likely that they would have provided prima facie evidence of the SD amounts not remitted to the Minister by Aviron. If their testimony had shown that it was impossible to check the relevant documents for a given period, inter alia because Aviron had not kept its payroll journal and cash disbursements journal as the Act requires, the respondent could then have argued that an arbitrary assessment method like the one described above could be a valid means of estimating the wages paid by Aviron in 1994.

[79]          However, all of this is mere conjecture, since those two auditors did not testify. The collection officers' testimony concerning the work done by Mr. Daï and Mr. Prokop is pure supposition or hearsay. In the circumstances, I cannot conclude that the SD amounts Aviron is alleged not to have remitted to the Minister actually correspond to the amounts not paid by it.

[80]          Given the Minister's failure[29] to show how he went about determining the SD amounts not paid by Aviron, the Court cannot confirm that the Simons' assessment for 1994 is correct. Since the Simons do not dispute the actual amount of the SDs for 1993, the Minister obviously did not have to adduce evidence concerning that taxation year.

[81]          For these reasons, the appeals of Mr. and Mrs. Simon are allowed, without costs as regards Mrs. Simon's appeal, and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that Mr. and Mrs. Simon are jointly and severally liable for the unremitted SDs for 1993 only. The legal fees of $100.69 must also be subtracted from the assessments. Given that the argument focused mainly on the question of the Simons' status as directors, and given that success is divided in these appeals, I award the respondent one third of the costs in Mr. Simon's appeal.

Signed at Ottawa, Canada, this 9th day of August 2001.

"Pierre Archambault"

J.T.C.C.

Translation certified true on this 31st day of January 2002.

[OFFICIAL ENGLISH TRANSLATION]

Erich Klein, Revisor

[OFFICIAL ENGLISH TRANSLATION]

98-2653(IT)G

BETWEEN:

HENRI SIMON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on common evidence with the appeal of Gilda Simon

(98-2816(IT)G) on August 23, 24 and 25, 2000, at Montréal, Quebec, by

the Honourable Judge Pierre Archambault

Appearances

For the Appellant:                                The Appellant himself

Counsel for the Respondent:                Valérie Tardif

JUDGMENT

          The appeal from the assessment bearing the number 2878, dated September 4, 1997 and made under subsection 227.1(1) of the Income Tax Act with respect to the period from May 1, 1993 to June 30, 1994 is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that Mr. and Mrs. Simon are jointly and severally liable for the unremitted source deductions for 1993 only. The legal fees of $100.69 must also be subtracted from the assessment.

The Respondent is entitled to one-third of the costs.

Signed at Ottawa, Canada, this 9th day of August 2001.

"Pierre Archambault"

J.T.C.C.

Translation certified true

on this 31st day of January 2002.

Erich Klein, Revisor

[OFFICIAL ENGLISH TRANSLATION]

98-2816(IT)G

BETWEEN:

GILDA SIMON,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on common evidence with the appeal of Henri Simon

(98-2653(IT)G) on August 23, 24 and 25, 2000, at Montréal, Quebec, by

the Honourable Judge Pierre Archambault

Appearances

Counsel for the Appellant:                    Henri Simon

Counsel for the Respondent:                Valérie Tardif

JUDGMENT

The appeal from the assessment bearing the number 2879, dated September 4, 1997 and made under subsection 227.1(1) of the Income Tax Act with respect to the period from May 1, 1993 to June 30, 1994 is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that Mr. and Mrs. Simon are jointly and severally liable for the unremitted source deductions for 1993 only. The legal fees of $100.69 must also be subtracted from the assessment.

Signed at Ottawa, Canada, this 9th day of August 2001.

"Pierre Archambault"

J.T.C.C.

Translation certified true

on this 31st day of January 2002.

Erich Klein, Revisor

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