Date: 20010130
Docket: 2000-1219-GST-I
BETWEEN:
RICHARD W. KENNY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUE:
[1] The issue is whether the Appellant, a 50 percent shareholder and director of 392643 Alberta Ltd., ("Company") is liable under section 323(1) of the Excise Tax Act ("Act"), Part IX (Goods and Services Tax ("GST") to pay the GST and interest and penalties relating thereto which the Company failed to remit to the Receiver General for Canada as required together with interest and penalties.
FACTS:
[2] The Appellant was, during GST reporting periods between July 1, 1990 and March 30, 1996, a 50 percent shareholder and director of the Company. His wife, Karen-Lee Giesbrecht ("Karen-Lee"), owned 50 percent of the shares of the Company and was a director thereof. She was the president of the Company and, according to the evidence, the active director. She, on behalf of the Company, performed accounting and bookkeeping services for the Company's clients.
[3] For the period in question the amount of net GST which should have been remitted by the Company was $33,651. The February 23, 1999 Notice of Assessment assessed the Appellant for this amount together with interest of $14,136.05 and penalty of $17,251.48 for a total amount owing of $65,038.53. Following a Notice of Objection, the Appellant was reassessed on January 5, 2000 for net GST of $17,974.59, interest of $8,167.88 and penalty of $9,675.40 for a total of $35,817.87.
[4] The Appellant testified that, after high school, he drove a truck and that his father did all accounting for that business. He later declared bankruptcy and then commenced working for a construction company as an employee. After marriage, he started working on his own in an epoxy stone business. He stated that he subcontracted to a stone company which required him to have a corporate name for invoices and he used the Company name for that purpose. Those invoices were never paid. In the spring of 1992 he incorporated a company known as Designed in Stone Ltd. ("Stone") to carry on his stone business.
[5] He also said that when his wife started the Company, they were told that the Company had to have two directors and that is why he became a director of the Company. He stated that Stone was not successful. It had, inter alia, undertaken a contract in the Middle East for which he was never paid. He testified that his absence from Canada was stressful on him and his family in that he was consumed by his problems. He said that he returned home to learn that his wife had had an affair and an abortion. She also was drinking heavily. He spoke of continuing fights, counselling, anti-depressants and very slow attempts at reconciliation.
[6] He said that he was communicating with his wife by telephone from the Middle East and he often asked her how things were and she told him that all things were fine and that the Company's bill were being paid and that he should not worry. He said that he had no indication that GST had not been paid until Revenue Canada conducted a search and seizure in 1995 or 1996. He testified that since that time he has, under extreme hardship, made payments of $800 per month to Revenue Canada totalling about $16,000 and in so doing, had "maxed out" his credit cards and was falling behind because of the accruing interest. He applied for Fairness Package Relief from interest and penalty in early May, 2000, received a written acknowledgement of that on July 4, 2000 and has heard nothing since that time.
[7] He commented on several assumptions made by the Minister in the Reply to the Notice of Appeal. With respect to the assumption that:
he did not inquire as to whether the Corporation had a system in place to ensure remittance of the net tax to the Minister;
he disagrees. He said that he had respect for his wife and what she did, that he was not an accountant and didn't understand computers. He said that he asked his wife many times if all the bills were paid and if the Company owed the government anything. She assured him that all was in order. He stated that he trusted his wife. He also said that he felt that she was quite superior in that she made more money than he, she was an accountant, she made household payments and prepared personal tax returns. He stated that he relied on her.
[8] In respect to the assumption that:
he did not inquire into the Corporation's affairs;
he said that he indeed did so. He said that he made inquiries, on average, once or twice a week.
[9] With respect to the assumption that:
he took no steps to ascertain the Corporation's position with respect to the GST and to prevent the failure to remit the tax collected and held in trust for her Majesty
he said that his wife often talked about GST and stated that she had done remittances and everything was fine.
[10] With respect to the assumption that:
the Appellant was aware of the day to day operations of the Company;
he said "not at all". He said he was an outside director, that he had signing authority on the bank account and that he may have signed four cheques in all those years. He stated, finally, that the amount owing was now approximately $75,000.
[11] On cross-examination, he said that his father prepared his income tax returns and that he did not review them, his father having taken bookkeeping courses at the Southern Alberta Institute of Technology. He said that the only document he remembers signing as a director was his resignation. He said that they never met as shareholders or directors but he just signed documents presented to him. He said he did not know where his wife got them. He stated further that he asked Karen-Lee what they were and she said something about meetings of directors.
[12] With respect to liability he said that his lawyer told him he'd be responsible for all debts and all taxes. He elaborated by saying that the lawyer told him that if the Company was sued for $10 million he would be liable. He then stated that his understanding was that if someone sued the Company for "lots of dollars" he would not be liable but he would be liable for day-to-day bills. He stated that with respect to Stone, he collected GST that was owing. He said that, substantially, Karen-Lee supported him and that he had no other income. He said that he did not request the financial statements of the Company and was not curious about them. He said that he did not review the books of account of the Company and did not know whether Karen-Lee kept those books at home or at work. He stated that his wife prepared the Company returns and that he did not review them. He said he assumed that GST had been paid and in response to a question as to whether he had given instructions about the ordering of bills, he told his wife that he did not want surprises.
[13] Finally, he said that he could ask his wife, who was present in the Courtroom, to give evidence in order to verify what he had said but that his wife had had a stroke and he preferred not to do so.
[14] An appeals officer from Canada Customs and Revenue Agency ("Agency") testified that Karen-Lee had been convicted of offences under the Income Tax Act and the GST portion of the Excise Tax Act. The officer identified a copy of a Prosecution Report which was introduced in evidence. It states that Karen-Lee had been in bankruptcy and was discharged on May 29, 1998. It stated also that the Company was in bankruptcy and was not discharged as of the day of the report.
APPELLANT'S SUBMISSIONS:
[15] The Appellant stated that he felt he had proven that he did ask how the Company was doing and that he was given misinformation. With respect to due diligence he said that a reasonable ability would require him to be a chartered accountant. He said that he would have to be as educated as Karen-Lee was. He reinforced this by stating that he had always driven trucks or laid stone and that had no indication of problems. He stated further that he had no money at home so he assumed that the Company's money went to pay bills and to pay taxes. He said that as an outside director, he didn't concern himself much with the Company and was busy putting out his own fires.
RESPONDENT'S SUBMISSIONS:
[16] Respondent's counsel referred to Soper v. Canada, 97 DTC 5407, in which Robertson, J.A. set forth certain propositions, namely:
(1) Directors are not to be equated with trustees.
(2) A director need not exhibit in the performance of duties a greater degree of skill and care than may reasonably be expected from a person of his or her knowledge and experience.
(3) A director is not obliged to give continuous attention to the affairs of a company nor is he or she bound to attend to all meetings of a board, but when it is reasonably possible to attend such meetings a director ought to do so. In this context he said:
... that the law today can scarcely be said to embrace the principle that the less a director does or knows or cares, the less likely it is that he or she will be held liable. Further to this point, the statutory standard of care will surely be interpreted and applied in a manner which encourages responsibility.
(4) In the absence of grounds for suspicion, it is not improper for a director to rely on company officials to perform honestly duties that have been properly delegated to them. The learned Justice continued:
... Further to this point, it is the exigencies of business and the company's articles of association that, together, will determine whether it is appropriate to delegate a duty. The larger the business, for instance, the greater will be the need to delegate.
[17] Counsel referred to Canada v. Corsano, 99 DTC 5658, in which the Federal Court of Appeal said:
... All directors of all companies are liable for their failure if they do not meet the single standard of care provided for in subsection 227.1(3) of the Act. The flexibility is in the application of the standard since the qualifications, skills and attributes of a director will vary from case to case. So will the circumstances leading to and surrounding the failure to withhold and remit the sums due.[1]
[18] In Cadrin v. Canada, 99 DTC 5079, the Federal Court of Appeal said:
... It is true that the standard of the reasonable person "adjusts to the circumstances and to the individual qualities of the actor" ... and that "more is expected of individuals with superior qualifications" ...but the fact remains that the law requires a minimum amount of care, however variable, and that a total lack of care does not meet the requirements of the law. If the appellant's only excuse were total passivity based on total ignorance, he would not escape liability under subsection 3 of section 227.1.
[19] In this case, Appellant's counsel argued that even if ignorance is no excuse, it is nonetheless not fatal. The Federal Court of Appeal agreed with that submission saying:
The outside director who gets involved to the extent of his role in the business and his abilities meets the standard of care in principle. If he ensures that the business is viable before investing money in it, if he surrounds himself with reliable and competent people who undertake the day-to-day management of the business, if he stays generally informed about what is happening, if nothing happens which should arouse suspicion about the payment of the corporation's liabilities, if he acts quickly when problems arise, he should not as a general rule be held liable.
[20] Appellant's counsel also referred to Starkman v. Canada, 97 DTC 220. In that case, this Court stated that it was evident from the whole testimony of the Appellant that she made no enquiries as to her duties or responsibilities as director toward the company or toward third parties, either of her husband or by asking their lawyer. She often attended at the place of business, particularly on week-ends. In short, the Court found that she did nothing. This Court said:
The mere fact that one becomes a director in the family context is not by itself sufficient to permit a director to turn her back on the affairs of the company, to ignore it for all practical purposes, to ignore her responsibilities and indeed to fail to ask even the most rudimentary and fundamental questions as to what those responsibilities are and thereby to escape liability under the provisions of the Income Tax Act.
ANALYSIS AND CONCLUSION:
[21] The Appellant was forthright in giving evidence and his manner of so doing persuaded me that he was telling the truth. I accept that evidence without reservation.
[22] It is clear to me that he was absorbed in his own business activity and probably lacked acumen so far as the financial aspects of that business were concerned. He left accounting and tax return functions to Karen-Lee and to his father. He became a director because he was told that two directors were required. He asked his wife often about whether company taxes were being paid and accepted her answer that they were. He respected her abilities as being superior to his own and, until the awareness of her extra-marital affair and drinking, trusted her entirely. After that discovery, he had to cope with his own mental state and emotional illness.
[23] The Soper proportions apply to the Appellant to the extent that
(1) he did not and, from his own testimony could not, exhibit a greater degree of skill and care than could reasonably be expected from a person of his knowledge and experience.
(2) there were no board meetings for him to attend.
(3) he had no grounds for suspicion and, accordingly, relied on Karen-Lee's assurances that taxes were paid.
[24] Subsection 323(3) of the Act provides:
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 period would have exercised in comparable circumstances.
[25] The Corsano decision, recognized, from similar subsections in the Income Tax Act that there is flexibility in the application of the standard of care since the qualifications, skills and attributes of a director will vary from case to case as will the circumstances leading to and surrounding the failure to withhold and remit tax.
[26] Cadrin states that more is expected of individuals with superior qualifications and also states that total passivity based on total ignorance would not excuse a director. The Appellant was not totally passive but inquired on a number of occasions about the payment of tax and was comfortable in accepting Karen-Lee's evidence that it had been paid. There was nothing to arouse suspicion.
[27] It is neither appropriate nor realistic to expect every director to seek legal advice concerning all director obligations. Where a person is assured, upon inquiry, that GST obligations are being met, the test under subsection 323(3) is met. This is underlined by the Appellant's lack of sophistication in business accounting affairs and his reliance on what he believed to be accurate information from a trusted spouse.
[28] Accordingly, I conclude that the Appellant did exercise the degree of care, diligence and skill to prevent the failure of the Company to pay GST on a timely basis that a reasonably prudent person would have exercised in comparable circumstances.
[29] The appeal will be allowed.
Signed at Ottawa, Canada, this 30th day of January 2001.
"R.D. Bell"
J.T.C.C.