Date: 20020118
Dockets: 2000-3119-IT-G,
2000-3561-GST-G
BETWEEN:
PETER WOO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor Judgment
Rowe, D.J.T.C.C.
[1] By Notice of Assessment No. 32950 dated June 23, 1999, the Minister of National Revenue (the "Minister") assessed the appellant for net goods and services tax (GST) collected but not remitted by JPT Enterprises Ltd. (JPT) in the amount of $80,907.00 together with penalties and interest relating thereto. The Minister issued the assessment on the basis the appellant was a director of JPT at all material times and was therefore liable for the unpaid tax pursuant to the provisions of subsection 323(1) of the Excise Act (the "Act").
[2] On June 23, 1999, the Minister assessed the appellant for federal income tax deducted at source but not remitted by JPT in the amount of $4,936.10 together with penalties and interest relating thereto. The Minister issued the assessment on the basis the appellant was a director of JPT at all material times and was therefore liable for the unpaid tax pursuant to the provisions of subsection 227.1(1) of the Income Tax Act (ITA).
[3] Counsel for the parties agreed the two appeals would be heard on common evidence.
[4] Peter Woo testified he resides in Victoria, British Columbia and has been employed by the British Columbia Ferry Corporation for the past 32 years. He began working as a galley helper but is now a Chief Officer, in charge of crew for loading and unloading and conduct of the ship. He left school after Grade 10 but later went to Camosun College in 1986 and again in 1992 when he obtained his Coastal Navigation ticket. In 1997, he qualified for a Master Local Voyage Certificate. At one point in his career, he was Master of the Thetis Island ferry but currently serves as second-in-command on the Spirit of Vancouver Island, one of the modern Superferries (not to be confused with the so-called fast ferries). The appellant stated that the corporation - JPT - purchased and operated a restaurant called Coffee Mac's on Gorge Road in Esquimalt. His mother had worked in that business for 22 years and his brother - Jerry - had been employed there for 15 years. When the café came up for sale, his mother and brother approached him with the proposition that he participate in the purchase of the business with the idea it would continue to be operated by the Woo family. The appellant agreed to join the venture and arranged for a mortgage - up to a maximum of $175,000 - on his principal residence in order to finance the purchase and Jerry Woo made arrangements with a lawyer practicing in Sooke, B.C. to handle the legal details. JPT was incorporated and the appellant held 49% of the issued shares and Jerry Woo held the balance. The name - JPT - was based on Jerry and Peter's initials and Theresa, Jerry's wife. The appellant stated he was aware that Jerry - holding 51% of the shares - was in a position to have "the final say". As a consequence of either winning - or losing - a coin toss held in the office of their solicitor, the appellant stated he became Secretary of the corporation and Jerry assumed the position of President. At that point, Peter Woo stated he was not aware he had also become a director of JPT as there had been no discussion on that subject or explanation of the role, duties or responsibility of serving as a director of the corporation and he first learned he was a director of JPT only two months before the company ceased operations at the end of October, 1996. In carrying out the purchase of the business, Peter Woo stated he became aware of a problem relating to obtaining title to the land upon which the building and business was situate but understood JPT - somehow - was purchasing the business separately. The appellant stated his work schedule at BC Ferries was based on certain shifts and - depending on the time - he could drive his mother to work and then spend two hours in the restaurant working - as a cook - before going to his job. He stated he did not participate in the hiring or firing of any staff and did not prepare payroll or other cheques but was required to sign them since he and his brother had signing authority on the bank account and both signatures were required. At some point, Jerry Woo's wife - Theresa - was added as a signing authority. The restaurant was staffed by Jerry Woo and his mother, and they were assisted by two kitchen helpers, one head waitress and 7 servers. The bookkeeping was done by Theresa Woo and a person named Brent Wilson. The appellant explained that Coffee Mac's Restaurant was a well-established, well-known, 24-hour business, extremely popular with residents of Greater Victoria. He stated that in the early stages of his participation in the business as a shareholder of JPT, he would drive his mother to work and then attend at the JPT office - within the restaurant premises - in an attempt to access the computer in order to gain information concerning financial affairs of the business. In addition, he inquired of his brother and Brent Wilson as to the state of affairs relating to the operation of the restaurant. He also spoke to Theresa and requested a print-out of daily sales and expenses. That demand and other inquiries led Theresa to respond - angrily - by telling him his presence in the JPT office was "invading her space". She instructed him not to attempt to open files in the computer and further informed him that she had recently been diagnosed with Multiple Sclerosis and his constant quest for financial information was aggravating her serious medical condition. In an attempt to resolve this problem, the appellant and his brother went to see the corporate solicitor but no progress was made in that regard. The appellant stated there was one occasion upon which a supplier demanded cash prior to delivering a particular product. As a result, the appellant spoke to his brother who explained that although JPT had missed a payment, the matter had since been cleared up and there was no real problem. The appellant stated that he trusted his brother and accepted his word at that time as he had done throughout their business relationship. He stated he had not considered resigning from the company since he had never been aware of any problem concerning GST or any other financial matter. When he had re-arranged his work schedule in order to devote more time to the business - as a cook - he was met with increased hostility from his sister-in-law. At one point, Jerry Woo arranged a meeting with the former owner in an effort to determine whether the business could merely be transferred back on the basis the food and supplies remaining in inventory could be left on the premises and applied to extinguish the one-month arrears in rent. The total purchase price had been in the sum of $250,000 and one half - $125,000 - was still outstanding when operations ceased. Jerry Woo moved to Alberta and the appellant stated he later heard his brother had filed for bankruptcy and received a discharge. When the appellant spoke to his brother about a month prior to the hearing of this appeal - with a view to having him testify - Jerry Woo responded by stating he was busy driving truck in Alberta and would not be attending at Victoria for that purpose. After October 31, 1996, the appellant stated he received a telephone call from an official at the provincial Employment Standards Branch concerning unpaid wages for employees. At that point, he was informed that, in his capacity as a Director of JPT, he was personally responsible for that debt. As a consequence, he arranged to satisfy the outstanding amount owed on wages by making payments according to a schedule worked out with the official. The appellant stated he undertook that course of action - apart from any legal responsibility - because he felt it was a moral obligation to ensure the workers were paid in full. Turning to the assumptions of fact contained in the Amended Reply to the Notice of Appeal (2000-3561(GST)G) - at paragraph 6 - the appellant stated he did not work at the business premises on a regular basis - as stated at paragraph 6(f) - because he worked a maximum of two hours a day only if his particular shift at BC Ferries permitted. He pointed out the first mortgage on his residence was a floating charge in the sum of $140,000. In addition, he had obtained a loan - in the sum of $50,000 - secured by a second mortgage and also owed $15,000 on a personal line of credit, all pertaining to his participation in JPT. The appellant denied the assumption - at paragraph 6(i) that he was aware - at all material times - the corporation was in financial difficulty. In fact, he emphasized he had never been aware of any financial problems until just before the end of operations on October 31, 1996. He accepts the assumptions of fact as stated in paragraphs 6(k) to 6(o), as follows:
(k) the Corporation's liability for the Amount results from its failure to file GST returns or remit GST for the period from July 1, 1995 to October 31, 1996;
(l) on December 23, 1997, the Corporation was assessed with respect to its liability for net GST due and payable on October 31, 1995, January 31, 1996, April 30, 1996, July 31, 1996, October 31, 1996, and December 2, 1996, penalties and interest;
(m) a certificate in the amount of $98,202.64 representing the Corporation's liability for net GST, penalties and interest, was registered in the Federal Court of Canada on May 28, 1998 under section 316 of the Excise Tax Act, R.S.C. E-13, s. 1, as amended (the "Act");
(n) a writ of execution corresponding to the certificate was issued on August 14, 1998, and was returned wholly unsatisfied on August 19, 1998;
(o) from December 23, 1997 to June 23, 1999, interest had accrued on the Corporation's unpaid GST liability; and
[5] The appellant does not agree with the so-called assumption of fact - at paragraph 6(p) (that seems to be fairly obvious as otherwise he would not be appealing the assessments). The irrelevant "assumption" purporting to transform a finding - in law - into a statement of fact, prior to any finding by the Court at the conclusion of all the evidence, is as follows:
(p) the Appellant did not exercise the degree of care, diligence and skill to prevent the failure by the Corporation to remit the Amount that a reasonably prudent person would have exercised in comparable circumstances.
[6] In cross-examination, the appellant stated the corporation was to be named JP Enterprises Ltd. but his brother wanted to add T - for his wife Theresa - to the official name. Marv Halgren, practicing in Sooke, British Columbia, was the solicitor chosen to carry out the necessary legal work. The appellant reiterated he had not been aware that he was a Director of JPT, although he knew he held 49% of the issued shares in an arrangement whereby the corporation was used to carry on business - with his brother - in a form of partnership. He understood that there were two officers of the company, a President and a Secretary. He stated he signed various documents in the appropriate places but was not aware of his duties as Secretary. He also signed other documents placed in front of him but cannot recall their nature. Only he and his brother were present during the meeting with their solicitor. Later, when they were operating the restaurant - through JPT - he was assigned his work shifts at BC Ferries sufficiently in advance so he could work mornings in the business for two hours a day amounting to between 10 and 15 hours per week. Other times, his duty assignments at BC Ferries were such that he was unable to work at the restaurant during a particular rotation. The appellant stated he was paid an hourly wage for his work at the restaurant but never received a share of any profits. Although Theresa Woo was never a director or shareholder in JPT, she did the bookkeeping, handled the shift changes and vacation assignments for servers and - in effect - ran the front end of the restaurant while her husband - Jerry Woo - was in charge of the kitchen. In order to operate 24 hours a day, 7 days a week, a total staff of 15 was required. While Theresa merely made entries of daily sales and deposits, Brent Wilson was the company bookkeeper and performed the necessary accounting work by utilizing a computer. The appellant stated he had "crashed" the computer while attempting to retrieve some financial information concerning the affairs of the business and had requested that Theresa provide him with details of daily sales. His concern was to be aware of money in - and money out - in order to know how the business was doing on an ongoing basis. The appellant explained that when he inquired of Jerry and Theresa Woo about the state of the business, they refused to speak to him about his concerns. As a result, he went to Brent Wilson and asked about the financial health of the restaurant and received the response that "everything is fine". Peter Woo stated he was not a businessman and wanted to receive assurance that JPT was functioning profitably because he was not able to understand the information contained in various statements or computer print-outs. He never saw any financial statements or corporate tax returns relating to JPT although he was aware these documents were prepared by an outside accountant - named Brian - whom he had never met. At one point, the appellant stated a meeting was arranged by Theresa whereby discussions concerning the operation of the business would be held at the office of their solicitor in Sooke. In his opinion, Theresa Woo was not pulling her weight within the business and, even though he did not want to participate in managing the business on a day-to-day basis, he wanted to have some input into the ongoing operation of the restaurant. He was concerned that there were too many persons involved in the process of keeping the books and records of JPT. Peter Woo related an incident when Theresa had decided to order new tablecloths, napkin holders and wall decorations for the restaurant. He did not agree with this expenditure and expressed his opinion to Theresa which caused a total breakdown in communications between them. In addition, Jerry Woo and Theresa had decided to install a juke box and a new pizza oven without consulting him. Later, they explained to him that the juke box was placed in their premises on the basis of a profit-sharing arrangement with the owner and that it was "good for business". In view of this atmosphere among family members, the appellant contacted the former owner who held a mortgage on the business - in order to secure the unpaid balance - but was unable to obtain a release from liability. To make things worse, Jerry Woo and Theresa Woo did not have any funds with which to buy out his interest in the business. Throughout the relevant period, the appellant explained his participation in the day-to-day operation of the restaurant extended only to the requirement that he sign payroll cheques but he undertook no calculations in that regard and did not understand the method by which it was done except he was aware a software program called Simply Accounting was used for that purpose. With regard to GST, the appellant stated he did not know how JPT dealt with that issue and had absolutely no sense - at all - of the workings of the GST system as it applied to the business or otherwise. However, he knew that his brother had worked there for 13 years and was well experienced in all aspects of the business. The appellant agreed he had also signed cheques payable to suppliers but stated he had never met with any agents or representatives except on one occasion and even then Theresa had commented to the effect that his presence was interfering with the meeting she was in the process of holding with a supplier. The appellant recalled having to take cash out of the till in order to pay for an order of Coca-Cola because he had been informed by the delivery person that the account was in arrears. After this incident, Jerry Woo explained away the matter by admitting that a couple of payments had been missed while assuring the appellant the cash flow had since improved. On one occasion, the appellant knew Jerry Woo had borrowed money from the bank - on a personal line of credit - in order to pay some trade accounts. The appellant stated that when he was able to see the reports on daily sales - during Theresa's absence in the office - the amounts seemed to be consistent throughout the entire period of operation.
[7] Counsel for the appellant submitted the standard test for due diligence combined both subjective and objective elements and suggested the evidence had clearly demonstrated the appellant was an individual - inexperienced in business - who had never before functioned as an entrepreneur. Instead, the appellant had agreed to assist his brother and sister-in-law to purchase a business familiar to them and one which had employed his brother - for 15 years - and his mother for 22 years. Counsel submitted that even though the appellant was present at the restaurant on a regular basis when his work schedule permitted, he still only functioned - part time - as a cook and his participation in financial matters was limited to signing payroll cheques prepared by others. Although Peter Woo was naive, counsel pointed out the evidence had established he had not merely ignored the situation but was either rebuffed or assured that all was well each time he sought financial information. Counsel referred to the appellant's evidence that when JPT was incorporated, there had been no explanation provided concerning any responsibilities or duties of a director and he had not been aware - until troubles had developed - that he was a director of JPT although he had known he held the office of Secretary. Counsel submitted the evidence had shown the assumption of the Minister - at paragraph 6(i) of the Amended Reply - to have been incorrect because the appellant was never aware of any financial difficulty of the corporation except as it related to the one incident concerning the Coca-Cola supplier. Having regard to the particular facts of the within appeals, counsel requested the assessments issued pursuant to the Excise Tax Act and the Income Tax Act be vacated.
[8] Counsel for the respondent referred to the jurisprudence in this area as being extremely fact-specific and conceded the cases often involve individuals who have been caught in a difficult position as a consequence of an unfortunate lack of care. Counsel referred to the evidence of the appellant and categorized it as insufficient in order to permit the conclusion to be drawn that he had made the proper inquiries to ensure the mechanism for remittances of GST and income tax were in place and were being adhered to by those persons hired for that purpose. Overall, counsel submitted the appellant had ample reason to be suspicious and, as an individual who was an inside director, should have taken certain precautions to protect his own self-interest in a manner consistent with what a reasonably prudent person would have done under those circumstances. Counsel submitted the facts in the within appeals did not support the view the appellant had a reasonable basis for confidence in the ability of Jerry Woo - his brother and fellow director - to manage financial affairs of JPT and that it was not sufficient to assume someone else in charge of preparing payroll cheques was otherwise properly meeting the requirements concerning source deductions and GST especially when the appellant became aware he was being kept away from the particular information sought by him on a regular basis.
[9] Although these two appeals are heard on the basis of common evidence, I will deal primarily with the appeal concerning the GST assessment at this point.
[10] The relevant provisions of the Excise Tax Act are as follows:
323(1) Liability of directors - Where a corporation fails to remit an amount of net tax as required under subsection 228(2) or (2.3), the directors of the corporation at the time the corporation was required to remit the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest thereon or penalties relating thereto.
323(3) Diligence - A director of a corporation is not liable for a failure under subsection (1) where the director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.
[11] The decision of the Federal Court of Appeal in Soper v. The Queen, 97 DTC 5407, dealt extensively with the matter of directors' personal liability for a corporation's unremitted source deductions for income tax. The wording of that provision of the ITA under consideration - subsection 227.1(3) - is identical to that of subsection 323(3) of the Act relevant to the within appeals. In the course of his judgment, Roberston J.A. reviewed the legislative history and framework of the provisions concerning personal liability of directors together with the standard of care as illustrated by the jurisprudence in this field. At page 5416 and following, Robertson J.A. stated:
This is a convenient place to summarize my findings in respect of subsection 227.1(3) of the Income Tax Act. The standard of care laid down in subsection 227.1(3) of the Act is inherently flexible. Rather than treating directors as a homogeneous group of professionals whose conduct is governed by a single, unchanging standard, that provision embraces a subjective element which takes into account the personal knowledge and background of the director, as well as his or her corporate circumstances in the form of, inter alia, the company's organization, resources, customs and conduct. Thus, for example, more is expected of individuals with superior qualifications (e.g. experienced business-persons).
The standard of care set out in subsection 227.1(3) of the Act is, therefore, not purely objective. Nor is it purely subjective. It is not enough for a director to say he or she did his or her best, for that is an invocation of the purely subjective standard. Equally clear is that honesty is not enough. However, the standard is not a professional one. Nor is it the negligence law standard that governs these cases. Rather, the Act contains both objective elements - embodied in the reasonable person language - and subjective elements - inherent in individual considerations like "skill" and the idea of "comparable circumstances". Accordingly, the standard can be properly described as "objective subjective".
V. ANALYSIS
There are far too many cases dealing with section 227.1 of the Act. One way to appreciate the breadth of the extant law is to categorize the relevant cases. That task has, in fact, already been accomplished in large part by some of the commentators: see e.g. Moskowitz, supra at 556-66; see also R.L. Campbell, "Directors' Liability for Unremitted Employee Deductions" (1933) 14 Advocates' Q. 453.
For example, in some instances the relevant issue will be whether an individual was in fact or in law a director at the relevant time for purposes of imposing personal liability or whether that individual ceased to hold office by operation of a valid resignation. In other cases, such as those involving bankruptcy and receivership, the central issue will be de jure control. Yet another cluster of cases, including situations in which a dominant director is able to limit others' influence over corporate affairs, will deal with de facto control. I intend to focus on the category of cases respecting the distinction between inside and outside directors since that line of authority is the most pertinent to this appeal.
At the outset, I wish to emphasize that in adopting this analytical approach I am not suggesting that liability is dependent simply upon whether a person is classified as an inside as opposed to an outside director. Rather, that characterization is simply the starting point of my analysis. At the same time, however, it is difficult to deny that inside directors, meaning those involved in the day-to-day management of the company and who influence the conduct of its business affairs, will have the most difficulty in establishing the due diligence defence. For such individuals, it will be a challenge to argue convincingly that, despite their daily role in corporate management, they lacked business acumen to the extent that that factor should overtake the assumption that they did know, or ought to have known, of both remittance requirements and any problem in this regard. In short, inside directors will face a significant hurdle when arguing that the subjective element of the standard of care should predominate over its objective aspect.
In some instances, it is easy to see why inside directors have been held liable. Such is true in respect of Barnett, supra, the first case which dealt with the due diligence defence. In that case the taxpayer, as director and sole shareholder of the company, hired a comptroller. When the latter informed the taxpayer that the company was short of cash, the taxpayer instructed that the business' key suppliers should be paid first. In these circumstances, the Tax Court dismissed the taxpayer's appeal from the Minister's assessment which held the taxpayer personally liable for the source deductions withheld but not remitted. Equally understandable is the imposition of liability in the following cases involving inside directors: Quantz v. M.N.R., 88 DTC 1201 (T.C.C.); and Beutler v. M.N.R., 88 DTC 1286 (T.C.C.).
[12] In a recent judgment - Cassels v. Her Majesty the Queen, 1999-2627(GST)G), I dealt with the appeal of an experienced businessman who controlled various retail businesses and, as a consequence of having been a director of the relevant corporations, was assessed on the basis of personal liability. In that case, I found there were two different fact patterns within the relevant period, one concerning a period during which there had been a reasonable attempt to comply with new and complex GST legislation and another when the taxpayer had made a deliberate choice to divert GST monies towards payments of debts owed to suppliers. For the first portion of the assessment, I found he had discharged his duty as a director in a manner consistent with a reasonably prudent person in comparable circumstances since the Act did not demand perfection nor was a director required to serve as a guarantor to ensure that all deficiencies occurring within the conduct of a business would be rectified on the basis of personal responsibility.
[13] In Cassels, supra, I also commented as follows:
It is important to bear in mind the difference between directors' liability arising from a failure to remit source deductions for income tax, employment insurance premiums and Canada Pension Plan contributions and a breach of duty in remitting the required amount of GST together with the appropriate return for the reporting period. Even though the withholding of source deductions is a notional concept - as discussed by Robertson J.A. in Soper, supra - and employers do not actually set aside those funds every time a pay cheque is issued, the regulations made pursuant to the Income Tax Act require - as a minimum - that the funds withheld must be remitted by the 15th of the month following the end of the month in which the deductions were taken. As a result, it soon becomes apparent that the employer is in a serious financial position when those funds - belonging to the employees and subject to a trust in favour of Her Majesty in right of Canada - cannot be remitted to the Receiver General. Unless the failure is due to a temporary glitch in the financial machine of a business, capable of rectification within a reasonable period, then the ongoing ill health of the entity is going to be compounded and the arrears will accumulate. In that situation, the directors of a corporation will know - or certainly ought to know - relatively quickly that there is trouble - not looming on the horizon - but squarely in front of their faces. They know or ought to know that something will have to be done to prevent any further failure to remit the amount due by way of source deductions which - after all - is not the corporation's money and those funds must not be used to gamble in the course of efforts designed solely to maintain the life of the ailing business without concern for the debt owing for said deductions...
[14] The Federal Court of Appeal in Alexander Bruce Cameron v. Her Majesty The Queen, 2001 DTC 5405, dealt with an appeal concerning a lawyer who had been a director of a corporation. Linden, J.A. - writing for the Court - at paragraphs 6 and 7 of the judgment, described that appellant's role, as follows:
6. True, the appellant was a lawyer, but his role as a director of the corporation was primarily to help raise money for it through a public offering. He was not a hands-on person involved in the day-to-day operation of the company, but he was concerned mainly with general policy. He was not a signing officer and had only limited influence on management. He was, therefore, more an outside director than an inside one. While these facts certainly do not exempt him from his legal obligation, something he himself recognized, they are relevant matters in assessing whether he behaved in a reasonably prudent manner.
7. Let us look more closely at his conduct. Early in his tenure of office, and on many occasions thereafter, the appellant, because he was aware of some problems, frequently asked management about the status of the tax remittances and he was always assured that they were in order. He unwisely relied on these false assurances; in fact, the remittances were not in order as management professed.
[15] At paragraph 8 and following, Linden J.A. dealt with the specific circumstances surrounding the default in remittances and the steps taken to rectify the problem. He stated:
8. In September of 1994, documentary evidence emerged to demonstrate that management had not been truthful and that past remittance amounts were still owing and that current obligations were still not being met. Included in this documentation were an auditor's report, draft financial statements, and a letter from Revenue Canada dated September 19, 1994 to the effect that arrears of $205,000 were owing.
9. As a result of this, the appellant, Cameron, and his fellow directors decided to appoint Mr. McArthur, an accountant who had done a report about the corporation's financial status, as a director of the company and Chief Financial Officer to correct and oversee these matters. In addition, a certified management accountant, Mr. Solomon was appointed to be specifically responsible for remittance compliance. As a result of these efforts, it appeared as though matters were brought under control and that remittances were being made as required by law.
10. In addition, as part of this clean up operation, on September 28, 1994 an assignment agreement was entered into between the corporation and Revenue Canada, whereby the expected proceeds of a fire insurance claim with the Zurich Insurance Company were assigned to Revenue Canada up to an amount $215,000 in return for the assignee's agreement not to take steps to enforce the debt owing, that is a "standstill agreement".
11. A further step was later taken by the Board of Directors on March 23, 1995 to set aside monies as a second potential source for paying the overdue remittances. Out of the monies received from the public offering $213,000 was earmarked to repay the Alberta Opportunities Corporation and the arrears of source deductions. None of these funds were to be disbursed without the written authorization of one of the outside directors, which included Mr. Cameron.
12. At the meeting, however, it also became known that there were arrears of $25,000 in current source deductions. The Board directed that these arrears be paid immediately. The Board decided to meet again on April 12, 1995.
13. It was at the April 12, 1995 meeting that the appellant and the other board members learned that the $25,000 had not been paid as ordered. A cheque had been issued, but it was returned N.S.F. Another cheque covering the amount was later issued for $38,703.09 on May 4, 1995. Surprisingly, the April 12, 1995 board meeting was mistakenly told that the source deductions were current.
14. At this same April 12 meeting, the appellant learned that management had not complied with the board's direction to protect $213,000 from the proceeds of the public offering and that $113,000 of it had been spent without the consent of any outside director. This caused Mr. McArthur to resign from the Board. The appellant understandably became angry, decided to resign that evening and eventually did resign as of June 6, 1995.
15. These uncontested facts indicate that the appellant was not passive. He did as much as he could reasonably be expected to do in order to protect the interests of Revenue Canada. He may not have been as attentive, as skeptical and as assertive as he might have been, especially in allowing himself to be misled by management. But it is not easy to see what more he was required to do in the circumstances to comply with his director's duty to be reasonably prudent in the circumstances.
[16] In allowing the appeal and vacating the assessment on the basis the appellant had met the standard of due diligence required of him - under the circumstances - pursuant to subsection 227.1(3) of the ITA, it is apparent the Court found the appellant to have acted reasonably. As Linden, J.A. stated in paragraph 4 of his judgment, "although positive steps are required of directors, they need only be reasonable, positive steps, not foolproof ones".
[17] In the case of Whitehouse v. The Queen, 2000 DTC 1541, Judge Rip - Tax Court of Canada - heard the appeal of a woman who had assisted in incorporating a company, and in the process had become a director, in order to ensure the employment of her son. Prior to that, she had never been a director of any corporation and had no idea what the responsibilities of a director were under the Income Tax Act or the Excise Tax Act. However, she was aware a corporation had to withhold and remit source deductions and pay GST. Judge Rip - at paragraph 17 and following of his judgment - stated:
17. It is quite obvious that Ms. Whitehouse was an "outside director". The affairs of the Corporation were being run by Mr. Brodmann and I doubt he would have tolerated any interference by Ms. Whitehouse who had no experience in the business, notwithstanding that she was a Human Resource Manager responsible for employee benefits, among other things, for her employer's 350 employees.
18. Ms. Whitehouse knew very little of Mr. Brodmann's business and did not believe it was necessary to make any inquiries. She considered themselves friends and, rightly or wrongly, relied on his purported expertise and contacts to give him full rein to operate the Corporation. She placed her full confidence in Mr. Brodmann and she knew that source deductions and GST had to be paid regularly. She never inquired if these payments where [sic] being made as required. Ms. Whitehouse was satisfied with the reply that all was well when she would make a general inquiry.
19. Whether a standard of care by a director has been met for purposes of subsections 227.1(3) and 323(3) is predominantly a question of fact to be resolved in the light of the personal knowledge and experience of the director at issue. An entirely passive approach on the part of a director may not help that director's defence of an assessment but, unless there is reason for suspicion, the director is permitted to rely on the day-to-day corporate managers to be responsible for payment of statutory debt obligations. An outside director who knows or suspects or ought to know something is amiss must take positive steps to try to remedy the situation. A director of a company who never put his or her mind to exercise his or her duty to prevent the company from falling to remit source deductions and pay GST as required by section 227.1 of the ITA and section 323 of the ETA respectively and has remained completely uninterested and passive with respect to his or her duty is going to be vicariously liable for the payments required to be made by the company.
20. Both counsel also discussed the reasons in Hevenor v. Canada, [1999] T.C.J. No. 65 (Q.L.). In Hevenor an elderly taxpayer became the sole director of his son's corporation as a favour for his son. He did not fully understand his responsibilities and liabilities as a corporate director and was not involved in the decisions or operations of the company. Had he been shown financial statements, he would not understand them. His degree of care as a director was limited by his lack of skill and his appeal from an assessment pursuant to section 323 of the ETA was allowed.
21. In many ways Ms. Whitehouse finds herself in the same situation as Mr. Hevenor did: both were directors as a favour for their children, both assisted in financing the particular business, neither was involved in the day-to-day operations of the business, neither company appears to have had any meetings of shareholders or directors, neither parent knew of an impending financial crisis, neither parent was aware of the liabilities and responsibilities of a director. On the other hand Ms. Whitehouse knew that source deductions had to be paid on a regular basis and that GST was payable.
22. I cannot accept the respondent's submission that Ms. Whitehouse was "more comfortable in the business world" than Mr. Hevenor could be said to be and "possessed a capacity for greater understanding of business matters" than Mr. Hevenor. Ms. Whitehouse's so-called business experience was as an employee of a company. She was an administrator, not a business woman who made decisions. She simply executed the work assigned to her. My impression of her is that she was probably a valued employee for what she did but no more. Ms. Whitehouse was not a person who made decisions or developed her employer's policies.
23. Ms. Whitehouse's ignorance was not deliberate and did not result from wilful negligence. She was a mother who, like Mr. Hevenor, wanted the best for her son and relied on a person she respected to operate a business that would hopefully pay the debts assumed and benefit her son. She acted as most mothers would act in similar circumstances. There is no evidence that Ms. Whitehouse's lack of experience as a director and her ignorance of what the office of director entailed could have been remedied by her experience as an employee of her employer. I cannot find that her situation is so different from Mr. Hevenor.
24. The appeals are allowed and the assessments are vacated...
[18] Counsel for the appellant referred to a case - Steven Andreeff v. M.N.R. (89-2985(IT)) in which he had been counsel and I had been the presiding judge. The judgment was issued on October 19, 1990 and the appeal had concerned the issue of liability pursuant to subsection 227.1(3) of the ITA and concerned a young man who had been a director in a company controlled by his father. At page 5 - and following - I commented:
It is trite that a director is expected to live up to obligations imposed by the relevant statutes and the common law. However, the liability is not absolute unless so specified for the purposes of a particular statute and in subsection 227.1(3) the language permits escape under certain circumstances. I find it difficult that a director be required to do an undefined act, that is, something, when, in truth, such an act would have, in hindsight, been nothing more than an empty, albeit wise gesture that could be trotted out in the course of an appeal to justify exculpation. In order that the need arise to prevent a failure there must be some observable fact or circumstance from which an inference would be drawn by a reasonably prudent person that there was a difficulty in the operation of the corporation which could lead to its inability to remit employee source deductions. It might be the corporation was newly established, with limited financing and having embarked on a risky venture with limited cash flow in the early stages of operation. It could be the worsening of a specific or general economy that should cause a director to be concerned about the general ability of the corporation to meet liabilities including those to Revenue Canada. The particular director in question may, as a result of proximity to the business operation, be confronted with inescapable evidence that something is amiss and wilful blindness will not assist in escaping liability. Or, the director may be possessed of such skill and knowledge in business affairs that it is unthinkable for him or her not to have assimilated the facts and been put on guard. Often, the cases turn on findings of credibility and the protestations of the taxpayers as to their degree of passivity and ignorance of the affairs of the corporation are rejected. In my opinion, care must be taken to distinguish between that which was not proven in a particular case and that which is, in other circumstances, capable of being proven.
In the present appeal, at the time of the default of the Company, the appellant was a 22-year old common labourer, living apart from his father who had been in the logging business for over 20 years and was the operating mind of the corporation. The appellant was working in isolated areas, regularly receiving an ordinary pay cheque every two weeks and the timber being logged was being shipped and the operation in the middle of the forest was undisturbed by the frowns and grey visages of the bankers in Port Alberni. Nick Andreeff did not share his concerns with his son and the $4000,000.00 line of credit in place since 1982 would appear to the appellant as permitting the logging operations to continue and the Company to persevere as it had since its formation in 1964. The bookkeeper, Donald Keith, had been with the Company since 1974, and had obviously been capable of looking after the books and records and payables since that time. There was not, in my view, any reason for the alarm bells to ring, bearing in mind the historical physical separation of the appellant and the nature of his duties as a labourer (far removed from the office of the Company) the length of time the business had been in operation and 7 years of his association with it as an employee. When his pay cheque bounced and he later had to make a claim with the trustee in bankruptcy the alarm bells were loud and clear. The appellant is now 29 years old, married, with five children and is still engaged in logging through a limited company formed by him on the advice of his accountant. He is not the same person he was in 1983. In light of all the circumstances, what is it the appellant should have done in 1983 to prevent something which he did not know existed nor reasonably should have suspected and in any event, had he known, could have done nothing more to prevent other than to resign as director? The answer is nothing. On any reasonable assessment of the facts within the capacity of the appellant to perceive there was no palpable risk. As a result there was no need to respond.
These director's liability cases are like snowflakes, and although it would be most welcome, it is difficult to forecast the arrival of any dazzling pronouncement that will prevent specific fact-based findings from being the norm.
[19] The decision of the Federal Court of Appeal in Soper, supra, was one which provided additional insight into this difficult problem and set forth guidelines and relevant indicia to be observed when dealing with director's liability cases. In my view, the most significant aspect of the decision was the development of the concept of "outside" and "inside" director - as established in the judgment of Robertson J.A. - together with recognition of the practical business practice concerning the withholding of source deductions which - in the overwhelming majority of cases - is not done by means of a separate bank account but by a notional concept which is met when the deadline for remittance arises.
[20] In the case of Tremblay and McLeod - [1996] G.S.T.C. 28 - Tremblay and McLeod had each been assessed for the failure of certain corporations to remit income tax and GST on the basis they had been directors. Mr. Tremblay had become involved because he needed employment and possessed certain expertise in franchising which was to be put to use when approaching potential investors. He thought he had been a director only for the limited purpose of a corporate share reorganization. He never saw any share certificate evidencing his 25% ownership and had no control over the accounts of any of the three corporations. He was aware the corporations had been operating hair salons for some time and had been introduced to an individual who was fulfilling the role of controller and manager of the financial operations of the allied corporations. Tremblay's co-appellant - McLeod - had installed a computer system in the various stores and it had the capacity to record sales and calculate the appropriate tax. Unfortunately, the controller deliberately chose not to make remittances to Revenue Canada as they became due and elected to retain the money for his own purposes. In that case, I found in favour of Tremblay on the basis he had no reason to perceive that the GST was not being remitted and had the right to rely on the controller performing his duty in the context of a well-established business fully equipped with the proper accounting system for that specific purpose. However, he had no ability to assess - independently - the efficacy of the system. While there were other aspects of liability attaching to McLeod in regard to another corporation, he was also relieved of responsibility for the most part because he had installed a computer system that recorded sales on a point-of-sale basis in the various hair salons and he - like Tremblay - had no signing authority and had relied on misleading information provided by the controller. I noted in that case that it is very difficult for someone to prevent deliberate defalcation by someone in a corporation who has access to the bank account, particularly when that person is charged with the duty of making proper remittances, as required by relevant legislation.
[21] The recent jurisprudence has established the requirement to examine the particular circumstances as they relate to the specific director, bearing in the mind the standard of care is partly objective - by reference to the reasonable person - while retaining a subjective component based on an analysis of all the evidence as it concerns the intelligence, education, knowledge, business experience and worldliness of the individual in question. In the within appeals, the appellant is a highly-trained and competent individual with impressive credentials permitting him to operate as a Master - on a particular class of vessel - or as second-in-command on a Superferry capable of transporting more than 2,500 passengers and nearly 450 vehicles on each passage. He has been employed by BC Ferries for 32 years and rose through the ranks beginning as a galley helper with only a Grade 10 education. There are many reported cases which support the view that naiveté need not be a bar to exculpation in matters of director's liability. However, it seems to me if an individual is - overall - so guileless, unsuspicious, child-like and ingenuous and so lax in pursuing ordinary financial information concerning the corporation of which he is an integral part, then it is extremely difficult to find this person has discharged the appropriate duty of care. Peter Woo undertook the business venture in order to assist his family. It provided continuing employment for his brother and his mother and enabled him to participate in a well-established business with the knowledge his family members had been a part of that continuing success for 15 and 22 years, respectively. At the office of the solicitor during the meeting concerning the incorporation of JPT, the appellant admitted he did not understand the nature of the documents he was signing, except that he understood he was being named as Secretary. He testified he was unaware of having been a director of JPT until he received a call from an official at the Employment Standards Branch concerning unpaid wages to the employees of the restaurant. Earlier, he had attempted to obtain financial information on the financial state of affairs and tried to use the computer for that purpose but was unable to do so due to his lack of knowledge. When he demanded certain information from Theresa Woo - one of the individuals performing the role of bookkeeper - he was constantly rebuffed and when he inquired of Brent Wilson - the other bookkeeper - about the financial health of the business - in a generic sense - he received assurances that all was well. The appellant did gain access to certain print-outs on a regular basis but conceded he was not able to make much sense of them. He was aware - generally - of the amount of daily deposits and found them to be fairly consistent throughout so was not concerned with any sudden downturn in the total revenue generated. He became aware that his brother had needed to borrow money on a personal line of credit in order to inject additional funds into the business. At another point, he was confronted with the refusal of a delivery person to drop off a supply of Coca-Cola unless a previous account was paid in full. As a result, the appellant took cash from the till and satisfied the debt. Later, when questioned by the appellant about the matter, Jerry Woo assured him it had been a simple matter of reduced cash flow for a brief period and the situation would not be repeated. Throughout, the appellant was frustrated in his attempts to secure the sort of financial information he felt he needed to have since he was always aware he held a 49% interest in - and was an officer of - JPT, a corporation operating a business in which he had invested heavily by placing a large mortgage on his principal residence. The problem in gaining access to the relevant information was rooted in his inability to communicate with his brother and sister-in-law and his failure to confront them on a "push-come-to-shove" basis left him merely wishing everything was in order as it related to the financial operation of the business and hoping all debts were being paid as they became due. He admitted he had - to use his words - "no clue" about GST and the manner by which it was collected and remitted. He never saw any financial statements of JPT or any of the corporate tax returns prepared by an outside accountant, probably because he never demanded those documents and it is clear on the evidence his brother and sister-in-law were not about to volunteer that sort of information. He did not attempt to consult with the corporate accountant - whom he knew of only as a person named Brian - even though he knew where the office was located. A few moments spent by the appellant talking with either the bookkeeper - Brent Wilson - or the accountant in charge of preparing financial statements and corporate tax returns would have enabled him to determine the extent of liabilities, including those to the Receiver General for GST and/or withholding of source deductions. The amount of GST owing - from the failure of JPT to file GST returns or remit GST - is in the sum of $80,907.00 for the period from July 1, 1995 to October 31, 1996. It is obvious that this large accumulated debt must relate to total sales in excess of $1.1 million since the tax rate is 7%, bearing in mind, however, that without the proper return being filed there would be no capacity to claim appropriate Input Tax Credits. The Minister assessed on the basis of net GST due and payable on October 31, 1995, January 31, 1996, April 30, 1996. July 31, 1996, October 31, 1996 and December 31, 1996. JPT neglected to comply with reporting - and remitting - requirements for all of those periods.
[22] The appellant was on site between 10-15 hours a week as an employee. He had signing authority on the bank account together with his brother, although Theresa Woo was added later. It required two signatures on any JPT cheque. He was one of the incorporators of the company and held 49% of the shares, a holding which he readily understood was subject to the majority interest of his brother who held the balance. Yet, when it came to running the business, he remained totally passive - to the point of irresponsibility - concerning his own substantial investment and the attached risk which he later discovered had another layer to it, namely vicarious responsibility for certain corporate debts, including unpaid wages to employees. In Cameron, supra, Linden J.A. found the appellant to have been more of an outside director than an inside one. In the within appeals, the evidence supports the view that Peter Woo was more an inside director than an outside director. Since there is no middle ground, I find him to have been an inside director and do so with the clear understanding that liability is not dependent only on this classification. The appellant's brother - and fellow director - Jerry Woo acted in concert with Theresa Woo - the appellant's sister-in-law - so as to treat the appellant in accordance with the time-honoured tradition of mushroom growers, namely keeping him in the dark and - as required - feeding him that which is politely referred to as fertilizer of equine origin. Unlike the situation in Cameron, Peter Woo did have signing authority on the bank account and regularly signed what he referred to as "payroll cheques". Whether or not that included remittances to the Receiver General was not referred to specifically but for part of the relevant period, only he and Jerry Woo had signing authority on the bank account and later on when Theresa Woo was added as a signatory, it still required two of three persons to sign a cheque. It is reasonable to conclude that the appellant was signing cheques to the Receiver General in respect of income tax remittances since the total arrears in that category was less than $5,000 - excluding penalties and interest. It must be noted that JPT had operated the business - with a staff of approximately 15 persons - from November, 1993 until close of business on October 31, 1996 and any prolonged default would have amounted to a much larger sum. The appellant was also being paid - at an hourly rate - for his services as a cook and had reported these earnings on his income tax returns for the relevant years. I refer to this aspect of the matter in the context that while the appellant was aware of certain requirements pertaining to payment of wages to employees - including himself - he remained satisfied that an accounting software package - as utilized by Theresa and/or the other bookkeepers - was capable of handling all payroll requirements which would include source deductions. However, the appellant also knew he was being shut out of access to financial information concerning the operation of the restaurant, including payments to creditors. He would attempt to search the office when Theresa Woo was not on the premises. Regrettably, he did not really know what he was looking for and was not properly equipped to interpret the documents he had been provided with earlier, only after having made repeated demands for regular print-outs concerning revenue collected and funds paid out. In my view, he not only had ample grounds for suspicion but had harboured those suspicions to the point where there had been an attempt to mediate the problem by meeting at the office of the solicitor in Sooke. Had Peter Woo not been wearing the hat of brother and mother's son - attempting to assist family members who had worked at that restaurant for a total of 40 years - it is reasonable to conclude he would not have put up with such treatment and would have obtained legal and accounting advice in order to achieve his goal of determining the actual state of affairs pertaining to the operation of the business. However, he chose to keep peace within the family and went on hoping for the best. He accepted off-hand assurances in response to wistful inquiries, couched in the broadest terms. He truly wanted to believe everything was on the up-and-up. That, in my opinion, is not discharging the statutory duty imposed on a director pursuant to the identical wording of the legislation relevant to each of these appeals. It is one thing to demonstrate devotion to the best interests of one's family and I commend the appellant's commitment in that regard. It is another to be preternaturally artless in accepting assurances under circumstances where the root cause for the inquiry has never been properly addressed. Further, his continuous neglect of significant financial matters and failure to take any reasonable and meaningful steps to inform himself as to the ability of JPT to discharge its commitments in respect of the ordinary requirements of source deductions and GST - in order to prevent a failure by the corporation to remit amounts due - discloses a naiveté that is colossal - indeed - Brobdingnagian in proportion. The situation in the within appeals is unlike others in which the intervention of a third party - such as a receiver or a bank manager - has prevented a director from complying with the requirement to remit monies due to the Receiver General. In the within appeals, the evidence discloses the appellant to have been on the scene for a substantial period of time as an employee and as a shareholder of the corporation owned by himself and his brother. Unlike the facts in other cases referred to herein, the appellant had not been mislead as to whether payments had been made nor had other persons acted contrary to an agreed-upon course of conduct with respect to dealing with the issue of remittances in accordance with an established mechanism designed for that purpose. In addition to everything else that had gone on before, the appellant had been around the restaurant business long enough that when the Coca-Cola delivery person demanded cash in order to drop off the product, the alarm bells should have started ringing and proper inquiries by the appellant at that point may have been able to prevent the default in remitting source deductions during what I infer from the evidence as having occurred only during the last two or three months prior to the business ceasing operations on October 31, 1996.
[23] This is not a happy result for the appellant. He is a good, decent man caught up in a terrible situation. Because he is a local resident holding a secure, well-paid position and (for the moment) has deeper pockets, he is the person to whom the Minister looks for payment on the basis of joint and several liability imposed by the relevant legislation.
[24] Having regard to all the evidence and applying the relevant jurisprudence, I am not satisfied the appellant exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.
[25] As a consequence of the above finding, both appeals are hereby dismissed with one set of costs to the Respondent.
Signed at Sidney, British Columbia, this 18th day of January 2002.
"D.W. Rowe"
D.J.T.C.C.
COURT FILE NO.: 2000-3119(IT)G
STYLE OF CAUSE: Peter Woo and H.M.Q.
PLACE OF HEARING: Victoria, British Columbia
DATE OF HEARING: October 16, 2001
REASONS FOR JUDGMENT BY: the Honourable Deputy Judge D.W. Rowe
DATE OF JUDGMENT: January 18, 2002
APPEARANCES:
Counsel for the Appellant: George Jones
Counsel for the Respondent: Karen Truscott
COUNSEL OF RECORD:
For the Appellant:
Name: George Jones
Firm: Jones Emery Hargreaves Swan
Victoria, British Columbia
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
COURT FILE NO.: 2000-3561(GST)G
STYLE OF CAUSE: Peter Woo and H.M.Q.
PLACE OF HEARING: Victoria, British Columbia
DATE OF HEARING: October 16, 2001
REASONS FOR JUDGMENT BY: the Honourable Deputy Judge D.W. Rowe
DATE OF JUDGMENT: January 18, 2002
APPEARANCES:
Counsel for the Appellant: George Jones
Counsel for the Respondent: Karen Truscott
COUNSEL OF RECORD:
For the Appellant:
Name: George Jones
Firm: Jones Emery Hargreaves Swan
Victoria, British Columbia
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-3119(IT)G
BETWEEN:
PETER WOO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Peter Woo (2000-3561(GST)G) on October 16, 2001, at Victoria, British Columbia, by
the Honourable Deputy Judge D.W. Rowe
Appearances
Counsel for the Appellant: George Jones
Counsel for the Respondent: Karen Truscott
JUDGMENT
The appeal from the assessment made under the Income Tax Act, notice of which is dated June 23, 1999 and bears number 04404 is dismissed in accordance with the attached Reasons for Judgment.
One set of costs is awarded to the Respondent.
Signed at Sidney, British Columbia, this 18th day of January 2002.
|
"D.W. Rowe" |
D.J.T.C.C.
2000-3561(GST)G
BETWEEN:
PETER WOO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Peter Woo (2000-3119(IT)G) on October 16, 2001, at Victoria, British Columbia, by
the Honourable Deputy Judge D.W. Rowe
Appearances
Counsel for the Appellant: George Jones
Counsel for the Respondent: Karen Truscott
JUDGMENT
The appeal from the assessment made under the Excise Tax Act, notice of which is dated June 23, 1999 and bears number 32950 is dismissed in accordance with the attached Reasons for Judgment.
One set of costs is awarded to the Respondent.
Signed at Sidney, British Columbia, this 18th day of January 2002.
|
"D.W. Rowe" |
D.J.T.C.C.