Date: 20020109
Docket: 1999-533-IT-G
BETWEEN:
VICTOR ELIAS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Bowman, A.C.J.
[1] This appeal is from an assessment in the amount of $735,735.50 made under section 227.1 of the Income Tax Act on the basis that the appellant was liable as a director for the unremitted source deductions that it is alleged that A.J. Perron Gold Corporation ("Gold Corp.") should have remitted to the Receiver General.
[2] The appellant's position is that he is not liable for the source deductions for two reasons:
1. The employer and the payor of the remuneration was not Gold Corp. but rather a subsidiary G.S.R. Mining Corporation ("GSR") and therefore Gold Corp. had no obligation to make the remittances.
2. In any event the appellant exercised the degree of due diligence necessary to relieve him of responsibility under subsection 227.1(3).
[3] The facts are that the appellant is a lawyer although he has not practised for a number of years. Prior to ceasing practice to embark on other commercial activities he specialized in corporate and securities law.
[4] The following basic facts from the notice of appeal are either admitted or have been established in evidence.
1 Victor Elias, (hereinafter "Elias"), served as a member of the Board of Directors of Deak Resources Ltd. (now A.J. Perron Gold Corp. after a name change approved by the shareholders on August 10, 1994), from April 21, 1994 until tendering his resignation on October 31, 1996.
2 A.J. Perron Gold Corp. was a public company, trading on the Toronto Stock Exchange with sophisticated management including a full time Secretary-Treasurer and a comptroller and other financial staff in its subsidiary corporations.
3 Elias did not at any time own any stock or options in A.J. Perron Gold Corp. or any related company, but served as an outside director.
4 A.J. Perron Gold Corp. was a holding company with several subsidiaries including wholly owned GSR Acquisition Corporation which in turn owned 77% of GSR Mining Corporation, which in turn owned 99% of Kerr Jex Corporation. In addition A.J. Perron Gold Corp. was involved in a joint venture in which both A.J. Perron Gold Corp. and GSR Mining Corporation held a 50% interest.
5 GSR Mining Corporation is a federally incorporated Canadian corporation and was the operating entity for A.J. Perron Gold Corp.'s gold mining activities at Larder Lake and Virginiatown in the Province of Ontario.
6 GSR Mining Corporation employed a unionized workforce pursuant to a Collective Bargaining Agreement with the United Steelworkers of America, Local 9283.
7 GSR Mining Corporation maintained appropriate accounts relating to its employees with Revenue Canada, the Ontario Workers' Compensation Board, the Ontario Ministry of Finance Employer Health Tax Branch, and the Labour Division, Survey of Employment, Payrolls and Hours of Statistics Canada.
[5] The appellant was never a director of GSR. That company operated the Kerr gold mine in Northern Ontario. Gold Corp. apart from key management staff had no employees.
[6] It is clear from the evidence and in particular tab 24 of Volume 1 of the Joint Book of Documents (Exhibit AR-1) as well as the viva voce evidence of Mr. David Ansara, the Comptroller of GSR, Gold Corp. would transfer funds every two weeks from its bank accounts to the bank account number 512286 of GSR at the Canada Trust Company sufficient to cover the amount owing for salary and wages to the staff and to workers paid on an hourly basis. GSR would issue cheques on its bank account to its employees and would provide them with T4 slips. At the end of each year GSR would prepare and file with Revenue Canada T4 summaries. GSR's account number with Revenue Canada was AXC 56920 3.
[7] Amounts were withheld for federal and provincial income tax, Canada Pension Plan, Unemployment Insurance and Employment Insurance and remitted to Revenue Canada under the above account number by or on behalf of GSR.
[8] All of the necessary remittances were made for 1995 (except for a nominal shortfall of $200). In 1996 a cash flow shortage developed and the two Perron brothers, Alex and John (who controlled Gold Corp. and indirectly GSR, of which they were directors) instructed Mr. Ansara to make the necessary payments of salary and wages to the employees, but not to remit the payroll deductions to Revenue Canada. The reasoning — and it is a familiar refrain in directors' liability cases — was that if the employees and other creditors were not paid the business would go under and the 160 or so employees would lose their jobs. It was expected that if the business could be kept afloat things would turn around and the obligations to Revenue Canada would be satisfied. It was a business decision that for the purposes of this case I need neither condemn nor condone. I state it merely as a fact. It was a decision made by the directors of GSR.
[9] Revenue Canada assessed GSR for the unremitted amounts using the account number AXC 56920 3. These assessments of GSR continued until June 28, 1996. Then, starting on July 24, 1996, Revenue Canada started assessing Gold Corp., but using the same (GSR's) account number AXC 56920 3. These assessments continued until September 6, 1996, when they started to use another account number 89684 3430 RP. Concurrently with these assessments they started issuing assessments against Gold Corp. on April 30, 1996 using the new account number. These assessments continued until February 18, 1997.
[10] On February 27, 1998 they assessed the appellant under section 227.1 of the Income Tax Act for $735,735.50. The notice of assessment contains the following explanation:
THE LIABILITY UNDER SECITON 227.1 OF THE INCOME TAX ACT, SECTION 38 OF THE INCOME TAX ACT - ONTARIO, SECTION 21.1 OF THE CANADA PENSION PLAN, SECTION 54 OF THE UNEMPLOYMENT INSURANCE ACT, SUBSECTION 83(1) OF THE EMPLOYMENT INSURANCE ACT IN THE AMOUNT OF $735,735.50 BEING THE AMOUNT OF UNPAID DEDUCTIONS, INSTEREST AND PENALTIES PAYABLE BY A J PERRON GOLD CORPORATION, IN RESPECT OF NOTICES OF ASSESSMENT DATED APRIL 30, 1996, JUNE 17, 1996, JUNE 24, 1996, JUNE 27, 1996, JULY 23, 1996, JULY 25, 1996, AUGUST 7, 1996, AUGUST 13, 1996, AUGUST 20, 1996, AUGUST 27, 1996, SEPTEMBER 5, 1996 AND FEBRUARY 18, 1997.
[11] It is of course open to the appellant to challenge the assessments of Gold Corp., in light of Gaucher v. R., [2001] 1 C.T.C. 125, and that is what he has done.
[12] The assessments against Gold Corp. and hence the derivative assessment against the appellant are premised on the assumption that Gold Corp. was paying salary, wages or remuneration to the employees of GSR within the meaning of section 153 of the Income Tax Act. That assumption is wrong. Gold Corp. advanced funds to GSR who paid GSR's employees. No principle of interpretation permits or requires that I extend the meaning of the words of subsection 153(1)
Every person paying at any time in a taxation year
(a) salary, wages or other remuneration
...
to a person who advances funds to the true payor. The evidence is clear that the person paying the salary wages or remuneration to GSR employees was GSR not Gold Corp. even though it received the funds from Gold Corp.
[13] Some point was made of the fact that Gold Corp. when the remittances were made to Revenue Canada paid them directly. I do not think this makes Gold Corp. the person who pays the salary, wages or remuneration. It was merely satisfying, on behalf of GSR, GSR's obligation to Revenue Canada. GSR was a viable operating company. It was not a sham, nor was it an agent of Gold Corp. nor was Gold Corp. an agent of GSR. They were separate corporate entities, with separate legal existences.
[14] I conclude therefore that Gold Corp. never had an obligation to pay the remittances to Revenue Canada under subsection 153(1). Accordingly subsections 227(9), (9.1), (9.2), (9.4) and (10.1) referred to by counsel for the respondent have no application to Gold Corp.
[15] It follows therefore that the assessments against Gold Corp. are wrong and must fall insofar as they form the basis of the assessment against the appellant. The appellant's assessment must as a consequence fall as well. As between Gold Corp. and the Minister of National Revenue, Gold Corp.'s assessments may well be conclusive if it has not objected. I make no finding on this point. Gold Corp. is not a party to this action. There was no failure on the part of Gold Corp. as envisaged by subsection 227.1(1) and so the foundation of the appellant's liability under that subsection disappears.
[16] This conclusion is sufficient to dispose of the appeal. However, I shall deal briefly with the appellant's alternative argument. Even if I am wrong in concluding that Gold Corp. was not the person paying the salary, wages and remuneration and therefore was not liable to make the remittances to Revenue Canada, I think that the due diligence required of the appellant has been amply satisfied. He was an outside director. He had no obligation to enquire into the financial position of an operating subsidiary of which he was not a director — at least not as a director for the purposes of section 227.1, whatever may have been his duties as a member of the audit committee.
[17] There have been a number of Federal Court of Appeal decisions on directors' liability. They have invariably propounded a less rigid or stringent test than that which has been applied by some of the judges of this court. I agree with that approach. The cases are Soper v. R., [1997] 3 C.T.C. 242; Smith v. R., [2001] 2 C.T.C.192; Worrell v. R., [2000] G.S.T.C. 91; Wheeliker v. R., [1999] 2 C.T.C. 395; and Cameron v. R., [2001] 3 C.T.C. 200.
[18] In Cameron v. R., Linden J.A. said at page 202:
In our respectful view, the Tax Court Judge did not correctly apply the jurisprudence of this Court as outlined in Soper v. R. (1997), [1998] 1 F.C. 124 (Fed. C.A.); Smith v. R., [2001] F.C.J. No. 448 (Fed. C.A.); Worrell v. R., [2000] F.C.J. No. 1730 (Fed. C.A.), and Wheeliker v. R., [1999] 3 F.C. 173 (Fed. C.A.). First, he appears to have held the appellant to a stricter standard of care than the statute and jurisprudence require. He stated that the appellant had a "duty to prevent defalcation (default, according to the brief of the Crown) under the circumstance." That is not the law; his duty was only to use reasonable care to prevent defalcation (or default). As Justice Sharlow explained in Smith, supra;
A director is required only to act reasonably in the circumstance. The fact that his efforts are unsuccessful does not establish that he has failed to act reasonably.
She concluded that the standard is reasonableness, "not perfection." Moreover, the Tax Court Judge held that the appellant took "no positive action to set up or place into existence controls to account for remittances and the ongoing use of any controls." Although the appellant made "some efforts to protect Revenue Canada's arrears" he said, these were "immaterial." Here too, however, he erred, because, although positive steps are required of directors, they need only be reasonable, positive steps, not foolproof ones.
According to these principles and based on largely uncontested facts, the appellant, in our view, complied with this legal obligation under sub section 227.1(3), that is, the objective-subjective standard to act as a reasonably prudent person would have in the circumstance of this case.
[19] Nothing in the financial statements would have given the appellant any idea that the remittances of source deductions in 1996 were not being made. Moreover, there was nothing he could have done to prevent the failure. The two Perron brothers were, to use Mr. Ansara's words, calling the shots. The appellant could not have prevented the failure even if he had known about it.
[20] The appeal is allowed with costs and the assessment is vacated.
Signed at Toronto, Canada, this 9th day of January 2002.
"D.G.H. Bowman"
A.C.J.
COURT FILE NO.: 1999-533(IT)G
STYLE OF CAUSE: Between Victor Elias and
Her Majesty The Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: December 12 and 13, 2001
REASONS FOR JUDGMENT BY: The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF JUDGMENT: January 9, 2002
APPEARANCES:
For the Appellant: The Appellant himself
Counsel for the Respondent: Judith Sheppard
COUNSEL OF RECORD:
For the Appellant:
Name: --
Firm: --
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-533(IT)G
BETWEEN:
VICTOR ELIAS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on December 12 and 13, 2001, at Vancouver, British Columbia, by
The Honourable D.G.H. Bowman
Associate Chief Judge
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Judith Sheppard
JUDGMENT
It is ordered that the appeal from the assessment made under section 227.1 of the Income Tax Act, notice of which is dated February 27, 1998 and bears number 12780 be allowed with costs and the assessment be vacated.
Signed at Toronto, Canada, this 9th day of January 2002.
|
"D.G.H. Bowman" |
A.C.J.