Docket: 2001-4516(GST)G

BETWEEN:

ANGELIKA WEYAND,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on June 25, 2003, at Victoria, British Columbia,

By: The Honourable Justice M.A. Mogan
Appearances:
Counsel for the Appellant:	Joseph Arvay and Matt Pollard
Counsel for the Respondent:	Kristy Foreman Gear

____________________________________________________________________

JUDGMENT

          The appeal from the assessment of goods and services tax made under the Excise Tax Act, notice of which is dated February 9, 2001, and bears number 32087 is dismissed, with costs.

Signed at Ottawa, Canada, this 10th day of May, 2004.

"M.A. Mogan"

Mogan J.

Citation: 2004TCC355

Date: 20040510

Docket: 2001-4516(GST)G

BETWEEN:

ANGELIKA WEYAND,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Mogan J.

[1]      The issue in this appeal is the possible liability of a director of a corporation under the goods and services tax ("GST") legislation which is part of the Excise Tax Act (the "Act"). The Minister of National Revenue assessed the Appellant under subsection 323(1) of the Act on the basis that she was a director of Value Developments Blackberry Road Inc. ("Blackberry"), a British Columbia corporation, when on or about May 31, 2000, Blackberry failed to remit net tax as required under subsection 228(2) of the Act. The most relevant provisions of the Act concerning the liability of a director are:

323(1) 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(2) ...

323(3) 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.

The above statutory provisions are almost the same as comparable provisions in section 227.1 of the Income Tax Act.

The Facts

[2]      The Appellant and her husband, Jurgen Weyand, were born and raised in Germany. They were married in 1976 and have three children born in 1978, 1979 and 1987, respectively. In 1994, they decided to move their family from Germany to Canada and to reside in Victoria, British Columbia. They became permanent residents of Canada in February 1995. Mr. Weyand had been a real estate developer in Germany and so he decided to do the same thing in Victoria. In 1995, he incorporated ACT Active Capital Transactions Inc. (hereafter "ACT"), a British Columbia corporation, to deal with investments and finances while he looked for a parcel of land to develop.

[3]      In 1997, Mr. Weyand found some land in the suburb of Saanich, about 10 kilometres from downtown Victoria. The land was located near the intersection of McKenzie Avenue and the Patricia Bay Highway. He incorporated Blackberry to acquire title to the land and do the first project. Blackberry was incorporated in February 1998. It acquired the land near McKenzie Avenue; had it subdivided into three lots (two larger and one smaller) and planned to build on one of the larger lots. The total cost of the land was approximately $1,800,000. Blackberry obtained the plans for a residential condominium building with 39 units. The project was marketed under the name "the Rainbow at Christmas Hill" because of its proximity to a local landmark in Saanich. Exhibit A-2 is a copy of a brochure used to sell the 39 condominium units.

[4]      Construction began in early 1999 and was substantially completed by December 1, 1999. The campaign to sell the condominium units began in March or April 1999 while the building was still under construction. A professional real estate firm was retained to sell the units and an aggressive sales campaign was carried on through the last eight months of 1999. It is a fact, however, that only one of the 39 condominium units was sold around August 1999. Mr. Weyand said that they had good success in getting prospective buyers in to view the model suites; there was a grand opening of "the Rainbow"; there were many favourable comments about the qualify of the product; but only one purchaser.

[5]      There was buyer fear because of what Mr. Weyand called the "leaking condo crisis", mainly in Vancouver. The newspapers were full of stories about condominiums leaking whenever it rained; owners being assessed $50,000 or $60,000 by their condominium corporations to cover the cost of substantial building repairs; and sad stories about elderly people who lost their life savings if they could not pay the assessed amounts. A few other condominium projects in Victoria which came on the market at the same time as the Rainbow in late 1999 and early 2000 suffered the same fate of no sales. People were afraid to purchase condominium units because of the bad publicity throughout the media in Vancouver and Victoria.

[6]      The purchase of the land and the construction of the 39-unit condominium building was financed by ACT lending money to Blackberry. Exhibit A-1 is a copy of the mortgage granted by Blackberry to ACT on January 25, 1999 in the amount of $6,500,000. Mr. Weyand said the mortgage amount was not paid at one time but advanced in stages to pay for the cost of the land and to pay construction costs as they arose. Exhibit A-6 is a printed statement showing a cumulative balance of the amounts owing by Blackberry to ACT on the mortgage at any time from December 31, 1997 to May 26, 2000. Exhibit A-6 also shows the many amounts advanced by ACT to Blackberry and the relatively few amounts repaid by Blackberry to ACT. Mr. Weyand was able to identify in Exhibit A-6 the $50,000 down payment on the land in December 1997; the payment of $1,530,000 in July 1998 to close the purchase of the land; and the significant construction costs which started to accumulate from and after January 1999. From January 1 to December 31, 1999, the amount owed by Blackberry on the mortgage increased by approximately $3,400,000 from $1,951,000 to $5,346,000 representing mainly the cost of the building.

[7]      After the building was completed in early December 1999, there was a risk of theft or vandalism if a high quality residential building like the Rainbow remained unoccupied over a lengthy period of time. The couple who had purchased the one unit in August 1999 moved their furniture in on December 1 when the Rainbow was ready for occupancy, but then left for Arizona for the winter intending to return in April 2000. At first, Mr. Weyand would go over to the Rainbow in the evenings to turn certain lights on and off just to give the appearance that people were living there. In January 2000, he found a policeman and his wife who would move in, rent-free, and in return would make one or two rounds of the building every evening making sure that the real estate agents (still showing the suites) had closed and locked all doors and windows, and turning on selective lights to give an appearance of occupancy.

[8]      Having sold only one condominium unit, Blackberry was in financial trouble in January 2000. There were operating costs to maintain the building and holding costs to service the big mortgage to ACT. In desperation, Mr. Weyand considered three alternatives. The first was to discount the price of the units in the hope that lower prices would lead to more sales. This did not work. The second was to sell the whole building for social housing to a non-profit social agency in Victoria. Two agencies looked at it seriously but lost interest because the location was too far from shopping. The third alternative was to bring over from Vancouver a marketing company which had previously been successful in selling similar units in Victoria. The Vancouver marketing company advised that there was simply no market for Blackberry's units at that particular time (January/February 2000).

[9]      The building needed tenants for maintenance reasons because it was full of moisture from the construction materials. It needed the ventilation which comes from opening and closing windows and doors and from the movement of people. Blackberry needed tenants for financial reasons because it had no revenues. In these circumstances, Mr. Weyand decided that his only option was to rent the 38 unsold units. He made the decision to rent in February 2000. Management of the rental operation of the Rainbow was assigned to Devon Properties Ltd. ("Devon") of Victoria. All of the 38 units were rented in a three-week period. Exhibit R-1 is a letter from Devon dated April 6, 2000 reporting for the month of March and enclosing a cheque for $16,500. Exhibit R-2 is a second letter from Devon dated May 5, 2000 reporting for April and enclosing a cheque for $26,700. Both of the letters from Devon were addressed to Mr. Weyand.

[10]     Mr. Weyand had retained a professional accounting firm to provide bookkeeping and accounting services to ACT and Blackberry. When Blackberry started to submit bookkeeping material which showed that rents were coming in, the accountants advised Mr. Weyand that GST was payable on what they called a "self supply". The accountants were referring to subsection 191(1) of the GST legislation which applies to a person who constructs a building and then rents all or part of it as a place of residence. Omitting many words which I regard as irrelevant for the purpose of this appeal, subsection 191(1) states:

191(1) For the purposes of this Part, where

(a)         the construction ... of a residential complex that is a single unit residential complex or a residential condominium unit is substantially completed,

(b)         the builder of the complex

(i)          gives possession of the complex to a particular person under a lease, licence or similar arrangement ... entered into for the purpose of its occupancy by an individual as a place of residence,

(ii)         ...

(iii)        ... and

(c)         the builder, the particular person or an individual who is a tenant or licensee of the particular person is the first individual to occupy the complex as a place of residence after substantial completion of the construction ... ,

the builder shall be deemed

(d)         to have made and received, at the later of the time the construction ... is substantially completed and the time possession of the complex is so given to the particular person ... , a taxable supply by way of sale of the complex, and

(e)         to have paid as a recipient and to have collected as a supplier, at the later of those times, tax in respect of the supply calculated on the fair market value of the complex at the later of those times.

[11]     The effect of subsection 191(1) is significant. If a person constructs a building with the intention of selling it and then, for whatever reason, grants possession of the building to a tenant under a lease as a place of residence, that person is deemed to have sold the building at the time when the tenant took possession and to have collected GST on the fair market value of the building at that time. Subsection 191(1) applied to Blackberry in March and April 2000 when the new tenants took possession of the 38 unsold units. Mr. Weyand had no knowledge of subsection 191(1) or its consequences until late April 2000 when the accountants advised him of Blackberry's deemed sale and deemed collection of GST based on the fair market value of the building.

[12]     Mr. Weyand immediately retained Palmer Appraisals Ltd. to advise with respect to the fair market value of the Rainbow at 799 Blackberry Road. Exhibit A-3 is the report of Palmer Appraisals Ltd. dated May 5, 2000 expressing the opinion that the fair market value of the Rainbow as at March 1, 2000 was $2,900,000. Mr. Weyand was shocked by the relatively low value determined by Palmer because the cost of the building alone (disregarding the cost of land) was approximately $3,400,000. The Palmer Report referred to the "Leaky Condo" syndrome and the prior sale of unit 401 at $190,000. Notwithstanding the sale price of that one unit, the Palmer Report fixed the value of one unit at $85,000.

[13]     In the hope that the Palmer Report (Exhibit A-3) was wrong, Mr. Weyand right away wanted a second opinion. He retained Top Ten Appraisals of Victoria to provide that second opinion. Exhibit A-4 is the report of Top Ten Appraisals dated May 29, 2000 expressing the opinion that the fair market value of the Rainbow as at May 26, 2000 was $3,118,000. The Top Ten Report estimated the value by sale price per unit at $79,300 which is only 6.7% less than the value ($85,000) determined by Palmer. Upon receiving the Top Ten Report, Mr. Weyand was resigned to the fact that the fair market value of the Rainbow (approximately $3,000,000) was significantly less than the amount owing ($5,265,000) by Blackberry to ACT on May 26, 2000. See Exhibit A-6.

[14]     The Palmer Report (Exhibit A-3) set a value of $2,900,000 as at March 1, 2000. The Top Ten Report (Exhibit A-4) set a value of $3,118,000 as at May 26, 2000. The 38 units were all rented in a three-week period in February and March according to page six of the Palmer Report. If I assume that the fair market value of the Rainbow was constant at $3,000,000 throughout the period when the tenants took possession of the 38 units, then Blackberry had a GST liability of $210,000 (7% of $3,000,000) as a consequence of subsection 191(1) of the Act. Mr. Weyand would have known of this liability around May 5 when he received the Palmer Report. In fact, he would have expected the GST liability to be greater because he thought that the value of the Rainbow was substantially higher than the amount ($2.9 million) appraised by Palmer. He stated that he was "shocked" at the low value of the Palmer appraisal.

[15]     Around May 22 or 23, 2000, Mr. Botten of Top Ten called Mr. Weyand to say that his (Botten's) second valuation was going to be a bit higher than the Palmer appraisal but in the same ballpark. By May 23, Mr. Weyand knew from two independent appraisals that the fair market value of the Rainbow was approximately $3,000,000 when Blackberry's debt to ACT was about $5,200,000. Mr. Weyand resigned as a director of Blackberry on May 24, 2000 and told his wife (the Appellant) that he was resigning. She knew that she was the only remaining director. When Mr. Weyand was asked in chief by Appellant's counsel what he had told the Appellant, he answered:

A.         I had a discussion with my lawyer. I told him that we got a problem here, that we had loaned all these funds by ACT and it looks like that we are having a big loss here, and that I have two independent appraisals which show that there is going to be a huge loss, and I asked his advice and his advice was that I should cut my losses and just try to get out of it and make sure that the damage to ACT is not getting any bigger as it already is.

            We discussed this, and the first idea was to foreclose on the property, and I said that I want to resign and have - because I thought it's going to look very funny if I am foreclosing as the same person on myself, and he said this would be no problem, it would be perfectly legal, but I didn't like the appearance of it. So I told him I'm going to resign, and also we are still, I mean, family and related, but then my wife can go and act and can act for the company and I can act only for one company, because I thought that there was a bit of a conflict of interest which, in the appearance, I certainly didn't appreciate that.

Q.         Now, what you've just stated in that answer, is that what you told your wife, or you're telling us what the conversation was you had with the lawyer?

A.         Well, this was my conversation with the lawyer, and then I told my wife that I'm resigning, and that we would have to close down Value Developments, Blackberry Road, and she said, "Well, what do you want me to do? What do I have to do?", and I told her, "Well, the lawyers are going to take care of everything. I mean, there's nothing that you have to do on your own. The lawyers will prepare everything and then we can go from there."

Q.         Now, on that date, May 24th, 2000, when you resigned, what did you understand the assets of Blackberry to be?

A.         I understand the assets of Blackberry were basically the condominiums. Everything else I understood, and I knew was neglectable (sic), so was basically non-existing. There were a few dollars in the bank, but the truth is, okay, the company was broke. The liabilities of the company exceeded by a huge amount, by a huge amount, the value of the assets.

                                                                                    (Transcript pages 42 and 43)

[16]     The Appellant's evidence is consistent with that of her husband when she testified in chief as follows:

Q.         Now, we heard from your husband that on May 24th he resigned. Were you aware of that at that time?

A.         I was told by him that he will resign, yeah.

Q.         Okay. I'm sorry, we were both speaking at the same time. What did you say, again?

A.         I was told by him that he is going to resign.

Q.         And can you tell me what you did when he told you that he was going to resign?

A.         I had asked him if I am now an only director, what my - what do I have to do and what my - what I should - what I should do now, and I was told by my husband, and I actually talked to the lawyer, as well, and the lawyer told me that he would prepare the necessary paperwork for me, and that was for me enough to hear because he, as the lawyer, would know what to do in this situation.

Q.         And when you say you spoke to both your husband and the lawyer, did you speak - is this on or around May 24th?

A.         Yeah.

Q.         And did you speak to the lawyer in person or by telephone, do you remember?

A.         I cannot recall that.

Q.         And at that time, around May 24th, did your husband or the lawyer tell you anything about your or the company, Blackberry's, responsibilities to remit GST?

A.         No.

                                                                                 (Transcript pages 172 and 173)

[17]     Returning to Mr. Weyand's testimony, he described the discussions on May 24 concerning his decision to resign as a director of Blackberry:

Q.         So what happened next, after May 24th, 2000? You've told us you resigned. You've told us what the appraisal showed the value of the properties were, and now you've told us what the amount owing to ACT was. What happened next?

A.         Well, we basically followed piece by piece, both my wife and I, the instructions of the lawyers. This was way beyond our expertise now. The lawyer recommended that we should not foreclose on the property, that the facts would be so clear that it would be just a waste of money to go through foreclosure proceedings, and that he would have to go through certain steps with calling the loan in and asking for payment, and instead of foreclosing we could basically agree on a transfer of the assets to the financing company.

   (Transcript page 48)

The lawyer advised that of course ACT could foreclose, but with the corporation of the company in debt, this could be avoided, and he said that the discrepancy between the money owed and advanced and the assets transferred would be so big that they would be beyond any criticism that there might be some assets being transferred which had a hidden value, or something. He said, of course you can foreclose, but if the company in debt agrees to that, then we can do this without a foreclosure proceeding and save you some legal costs. And then he said, in any event, okay, he has to make a demand for payment and give a notice of intent to execute the security, and he prepared these documents and he talked to me on this day, and he talked to my wife on the day on the phone, and then later on in the following days we met with him several times, signing the documents that he prepared.

   (Transcript page 49)

Q.         I want to be very specific, or I want you to listen to the specific question, Mr. Weyand. You've described a number of things that the lawyer told you.. Are you aware of the details of the conversation that the lawyer had with Mrs. Weyand or were you not present for that conversation?

A.         I was --- I was present whenever there was documents to be signed by both of us, and even when the lawyer, of course, is talking to my wife and talking to me, we both hear what he's saying.

Q.         Mm-hmm. And you've discussed a number of documents which we'll go through in a moment, but on the 24th, May 24th, were all those items discussed with your wife?

A.         No, not in - not at - on May the 24th I just resigned, and I still have the idea that we would foreclose on the company, and he said there are other options and he will prepare some documents, and in any event, the initial steps would be all the same. And then he talked to my wife, and on May the 24th my wife was not with me when I saw the lawyer, but I understand that they talked on the phone later.

Q.         Later on the 24th or -

A.         Yeah.

Q.         -- was that a later day?

A.         Later on the 24th, I understand.

                                                                                    (Transcript pages 50 and 51)

[18]     The lawyer who was advising Mr. Weyand on behalf of ACT and the Appellant (Mrs. Weyand) on behalf of Blackberry prepared the following three documents which were signed by both Mr. Weyand and the Appellant:

Exhibit A-7 is a Demand for Payment signed by Mr. Weyand on behalf of ACT demanding payment of $5,873,351 from Blackberry with interest at the rate of $1,609 per day from and after May 27, 2000.

                   Although the Demand stated that "Payment must be made within 15 days", the Appellant signed an acknowledgement on behalf of Blackberry in the following terms:

Value Developments Blackberry Road Inc. hereby acknowledges receipt of the within demand for payment, and hereby agrees that the said sum, together with interest thereon as aforesaid, shall be paid forthwith, and hereby waives any right to be given any time, or any notice period, or any period of grace, within which to make payment.

Exhibit A-7 was signed by Mr. Weyand and the Appellant on May 26, 2000.

Exhibit A-9 is a Notice of Intent to Enforce a Security signed by Mr. Weyand on behalf of ACT and consented to by the Appellant on behalf of Blackberry. Exhibit A-9 was signed by Mr. Weyand and the Appellant on May 27, 2000.

Exhibit A-10 is a Deed of Composition signed by the Appellant on behalf of Blackberry and by Mr. Weyand on behalf of ACT. Although Exhibit A-10 speaks for itself, it appears to be a conveyance of Lot A, Lot C and all of the Rainbow (condominium land and building, excluding the unit sold in August 1999). In effect, Blackberry conveyed to ACT in Exhibit A-10 all of its real property interests in satisfaction of its debt to ACT. Exhibit A-10 was signed by the Appellant and Mr. Weyand on May 31, 2000.

[19]     Exhibit A-5 is a monthly statement from the Toronto-Dominion Bank for the period April 28 to May 31, 2000 for the Blackberry account showing a balance of $17,456.51 as at May 23. On May 26, there was a transfer of $17,000 out of the Blackberry account to account number 0304899. Mr. Weyand stated that he effected the transfer on May 26 to an ACT account, and that he did not tell the Appellant (his wife) anything about the transfer even though he had resigned as a director of Blackberry on May 24 and she was the sole director on May 26. See pages 54 and 55 of the transcript. There were two Blackberry cheques for $200 and $155.04, respectively, which he had signed and sent on May 20 but were not cashed until May 26 and 31. Mr. Weyand did not tell his wife (the Appellant) that those cheques were outstanding when he resigned as a director of Blackberry on May 24. The transfer of $17,000 and the two small cheques had the effect of reducing the Blackberry account at the Toronto-Dominion Bank from $17,456.51 to $101.47.

[20]     Exhibit A-11 is a photocopy of a group of ten GST returns filed by Blackberry for various periods in 1998, 1999 and 2000. Three were signed by Mr. Weyand; three were signed by a person named Lee who Mr. Weyand said worked in the accountant's office; two were not signed, one was signed by the Appellant; and the tenth was signed in a name which cannot be identified. The GST return signed by the Appellant was for the period February 1 to April 30, 2000. She signed it on June 5, 2000 showing GST owing in the amount of $200,871.07 but no payment enclosed. Mr. Weyand explained the circumstances in which the Appellant signed that one GST return:

A.         I gave it to my wife and I said, "This still has to be signed. It's from the accountant," and she kind of like went, "Oh, another one?" So she - "Another form to sign?", but she signed it and we just mailed it.

                                                                        (Transcript page 64)

[21]     By Notice of Assessment dated February 9, 2001, the Appellant was assessed as a director of Blackberry in the amount of $217,703.04. The Appellant has come to this Court appealing from that assessment.

Analysis

[22]     There is no dispute concerning the fact that the Appellant was a director of Blackberry at all relevant times. The primary issue is whether she satisfied the due diligence test in subsection 323(3) of the Act. There is a secondary issue concerning the extent of her liability as a director, if she is liable at all, but I will leave aside for now the secondary issue. Section 323 of the Act is, for all practical purposes, the same as section 227.1 of the Income Tax Act. There has been much more litigation under section 227.1 of the ITA than under section 323 of the ETA. Therefore, I will use cases concerning section 227.1 in order to interpret and apply section 323 to the facts of this appeal.

[23]     One of the leading cases concerning liability of a director is the decision of the Federal Court of Appeal in Soper v. The Queen, 97 DTC 5407. In Soper, Robertson J.A. described the standard of care in subsection 227.1(3) of the ITA as objective and subjective. See paragraphs 29 and 30 at page 5415.

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".

Later in his reasons, Robertson J.A. distinguished between inside and outside directors. See paragraph 33 at page 5417.

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.

[24]     In argument, counsel for the Respondent conceded that the Appellant was an outside director of Blackberry prior to May 24, 2000. That was a reasonable concession because the evidence clearly established that the Appellant's husband, the only other director, managed the day-to-day business of Blackberry. He was solely responsible for financing the construction of the Rainbow (cash advances from ACT to Blackberry); he chose the real estate agent to sell the condominium units; he decided to change from a sales program to a rental program; he chose the agency to find tenants; and he obtained the two appraisals with respect to the fair market value of the Rainbow. The Appellant was passive through these endeavours.

[25]     When the Appellant first became a director of Blackberry in March 1998, soon after the company was incorporated, she was told by the lawyer and by her husband that it was just a formality. Transcript page 165. Circumstances changed on May 24, 2000. Mr. Weyand resigned as a director of Blackberry and told the Appellant that he had resigned. She knew at that time that she was the only director. In paragraph 16 above, there is a passage from the Appellant's testimony in which she stated:

A.         I had asked him if I am now an only director, what my - what do I have to do and what my - what I should - what I should do now, and I was told by my husband, and I actually talked to the lawyer, as well, and the lawyer told me that he would prepare the necessary paperwork for me, and that was for me enough to hear because he, as the lawyer, would know what to do in this situation.                                                    (Transcript page 172)

When answering a question put to her by her own counsel, the Appellant used the word "now" twice and ended her answer with the phrase "in this situation". I infer from her use of those words that she knew that her role as a director was no longer a formality. She indicated from her questions to the lawyer and to her husband that she realized something more was expected of her as "an only director".

[26]     As of May 24, 2000, the Appellant probably needed independent legal advice but there is no evidence that she obtained it. Indeed, the evidence is that she, as the sole director of Blackberry after May 24, followed the advice of her husband's lawyer and the directions of her husband without any questions, and that she signed the documents which were put before her without even reading them. Was the Appellant an outside or inside director after May 24, 2000 ?

[27]     In Soper, inside directors are referred to as "those involved in the day-to-day management of the company and who influence the conduct of its business affairs". By inverse reasoning, an outside director must be one who is not involved in day-to-day management and who does not influence the conduct of business. To put the matter in context, the Appellant acted as a sole director of Blackberry for a period of only 13 days from May 24 (when her husband resigned as the other director) until June 5 when she signed Blackberry's final GST return (Exhibit A-11). When considering the conduct of the Appellant as sole director of Blackberry over that 13-day period, we are not looking at a company engaged in heavy manufacturing or a company with a sales force of 500 persons. We are looking at a company divesting itself of its principal asset, a residential tenancy.

[28]     I will consider the Appellant first as an inside director and second as an outside director. When there are two or more directors of a corporation, a particular director may be characterized as "inside" or "outside" depending on the role which that particular director plays in the business affairs of the corporation. When there is only one director of a corporation, and when that person knows that he or she is the only director, that person in my opinion is implicitly an inside director because that person knows that he or she cannot rely on any other individual to bear the responsibilities of a director. Accordingly, I hold that the Appellant was an inside director of Blackberry from and after May 24, 2000. If a sole director (knowing that he or she is the only director) permits some third party to be responsible for corporate management, I would regard the third party as the agent of the sole director, and the conduct of the third party as the conduct of the sole director. To the extent that the Appellant permitted her husband to manage any of the affairs of Blackberry after May 24, I look upon him as her agent and upon his conduct as her conduct.

[29]     In Soper, the Federal Court of Appeal stated that an inside director would have the most difficulty in establishing the due diligence defence. I think that statement assumed that the inside director would have actual knowledge of the relevant corporate affairs. On May 24, 2000, the Appellant knew that Blackberry had been unable to sell the condominium units; she knew that the 38 remaining units had been rented; she knew that her husband owned both Blackberry and ACT; and she knew that she (as the only director of Blackberry) was being asked to sign important documents (Exhibits A-7, A-9 and A-10) on short notice. In all the circumstances of May 24, following her husband's resignation and realizing that she was the only director of Blackberry, I would expect the Appellant to ask only a few simple questions. Why is one family company (ACT) demanding payment from another family company (Blackberry)? See Exhibit A-7. If Blackberry cannot pay any money but will transfer property to ACT, why is that being done? See Exhibit A-10. Will any creditor of Blackberry be hurt by the transfer of property? What is the hurry? Why do these documents like Exhibit A-7 (May 26), Exhibit A-9 (May 27) and Exhibit A-10 (May 31) have to be signed so quickly? The Appellant did not ask any of these questions.

[30]     ACT was not a stranger, like an arm's length mortgagee, reaching out to seize the Blackberry property because its value had fallen below the principal amount owing on the mortgage. ACT was a family company; very much not at arm's length with Blackberry. There is no evidence that ACT was being pressed by any of its creditors to seize Blackberry's property in order to pay ACT's creditors. Quite the contrary. There is no evidence that ACT had any creditors at all. Under cross-examination, Mr. Weyand described how ACT acquired beneficial ownership of the 38 condominium units under the Deed of Composition (Exhibit A-10) but legal title to those units remained registered in the name of Blackberry in order to defer the payment of any land transfer tax.

[31]     Late in 2000, ACT sold the 38 units to the Appellant and her husband for $3,350,000 which was both cost to ACT and fair market value. Mr. Weyand said that Revenue Canada had reviewed the transaction and accepted the value and price as conferring no shareholder benefit on him and the Appellant. When the condominium market recovered in 2002 and the 38 remaining units were put up for sale, the vendors of beneficial title were the Appellant and her husband but the deeds of conveyance were signed by the Appellant, her husband and Blackberry because Blackberry was still on title. It was the ultimate sale to arm's length buyers in 2002 which finally triggered the payment of land transfer tax.

[32]     Having regard to the history of the 38 condominium units after May 24, 2000, there does not appear to have been any financial pressure from outside the Appellant's family requiring the transfer of those 38 units from Blackberry to ACT. Mr. Weyand described how shocked and concerned he was to learn from the Palmer appraisal (Exhibit A-3) and the Top Ten appraisal (Exhibit A-4) that the fair market value of the Rainbow building was only $3,000,000 when the amount owing by Blackberry to ACT was $5,200,000. He may have been shocked but, on the evidence, he had no reason to be concerned that some outside creditor would seize any family asset like the 38 unsold units in the Rainbow building. I conclude that the 38 condominium units were transferred from Blackberry to ACT in order to strip Blackberry of its assets and make it judgment proof against any creditor although this point was not, for obvious reasons, acknowledged by Mr. Weyand or the Appellant. My conclusion is reinforced by the fact that Mr. Weyand, on May 26, 2000, two days after he ceased being a director of Blackberry, transferred $17,000 from Blackberry's bank account to an ACT bank account; thereby reducing the Blackberry bank account to $101.47 (Exhibit A-5).

[33]     In paragraph 28 above, I held that the Appellant was an inside director of Blackberry from and after May 24, 2000 because she knew that she was the only director after that date. The state of her knowledge of Blackberry's business affairs did not change on May 24 just because she became an inside director but her standard of care changed under subsection 323(3). She knew from her testimony quoted in paragraph 25 that her being a director was no longer a formality. If she had asked some of the simple questions set out at the end of paragraph 29, she would have learned the purpose and consequences of transferring the 38 condominium units from Blackberry to ACT. She had a duty to ask at least some of those or similar questions. Her failure to inform herself about the transactions in Exhibits A-7, A-9 and A-10 (all of which she signed as a director of Blackberry) is a failure to meet the due diligence test in subsection 323(3) of the Act. As an inside director, she has a liability in the assessment under appeal.

[34]     If I am wrong in my opinion that a sole director of a corporation, knowing that he or she is the only director, is implicitly an inside director (see paragraph 28 above), then I have to consider the status of the Appellant as an outside director of Blackberry from and after May 24, 2000. In Soper, Robertson J.A. considered the question of when an outside director would have a positive duty to act. His statement is in paragraph 42 at page 5418.

In my view, the positive duty to act arises where a director obtains information, or becomes aware of facts, which might lead one to conclude that there is, or could reasonably be, a potential problem with remittances. Put differently, it is indeed incumbent upon an outside director to take positive steps if he or she knew, or ought to have known, that the corporation could be experiencing a remittance problem. The typical situation in which a director is, or ought to have been, apprised of the possibility of such a problem is where the company is having financial difficulties. ...

[35]     The Appellant certainly knew that Blackberry had financial difficulties. During her husband's examination-in-chief, the Appellant's counsel asked all the right questions to demonstrate how little Mr. Weyand told his wife (the Appellant) about the business affairs of Blackberry but Mr. Weyand did tell her that they could not sell the remaining 38 condominium units and that the units would have to be rented. I take cognisance of the fact that the two directors of Blackberry, prior to May 24, 2000, were not strangers. They were husband and wife. They both testified in this appeal. They live together in a domestic relationship and the Appellant impressed me as an intelligent woman. Considering that the Rainbow was Mr. Weyand's first project in Canada after becoming resident here in 1995, it is not conceivable that they would not discuss the project and, in particular, that she would not have known that he was shocked at the relatively low appraised value of the Rainbow.

[36]     Exhibit A-6 shows the many cash advances made by ACT to Blackberry in 1999 during construction of the Rainbow. Construction was completed by December 1999. I infer from Exhibit A-6 that all construction costs were paid on a current basis as they arose. There is no evidence of any liens on the project. A lien would, of course, be a deterrent to sales. The only significant liability arising after December 1999 was the $200,000 liability for GST which arose when Blackberry changed from a sales program to a rental program. The GST liability under subsection 191(1) was based on the fair market value of the property when the tenants took possession. Mr. Weyand learned of the GST liability from the accountants in late April 2000. It was this fresh knowledge which caused the flurry of activity: two outside appraisals to determine fair market value; Mr. Weyand's sudden decision to resign as a director; and the transfer of the project from Blackberry to ACT.

[37]     I will repeat one of the sentences from Soper quoted in paragraph 34 above:

... Put differently, it is indeed incumbent upon an outside director to take positive steps if he or she knew, or ought to have known, that the corporation could be experiencing a remittance problem. ...

In all the circumstances of this case, I find that the Appellant knew, or ought to have known, between May 24 and May 31, 2000, that Blackberry had a remittance problem in its obligation to pay about $200,000 in GST. Accordingly, the Appellant had, even as an outside director, a positive duty to act. Instead, she did nothing but sign, without questioning, the documents which were put before her. Marceau J.A. delivered a brief concurring judgment in Soper commenting on section 227.1 at paragraph 51:

... By these provisions, Parliament, I think, has imposed on a director of a corporation a completely new, separate and positive duty. Such duty is owed not to the corporation but to the Crown, and consists of an obligation to do what one reasonably can to prevent such failure from occurring. I simply cannot imagine that such a duty may ever be seen as having been fulfilled by a director who, as here, has never put his or her mind to the requirement and has remained completely uninterested and passive with respect to it.

[38]     In argument, Respondent's counsel referred to the Appellant's conduct between May 24 and May 31 as willful blindness. In my view, it is an appropriate description. As an outside director, the Appellant did not meet the standard of care in subsection 323(3); and she is liable in the assessment under appeal.

[39]     In Hanson v. The Queen, 97 DTC 796, Judge Sarchuk of this Court stated in paragraph 26 at page 799:

... The mere fact that one becomes a director in a family context is not sufficient to permit such director to turn his or her back on the affairs of the company; to ignore it for all practical purposes; to ignore her responsibilities; indeed, to fail to ask even the most rudimentary question as to what those responsibilities are, and thereby to escape liability under the provisions of the Income Tax Act.

Jane Hanson's appeal was allowed in part only to take into account the date of her resignation as a director. Otherwise, Judge Sarchuk's decision in Hanson was affirmed in the Federal Court of Appeal, 2000 DTC 6564, where Létourneau J.A., writing for the Court, stated in paragraph 5:

... In Cadrin, supra, this Court said, at p. 368, that total passivity based on total ignorance would not allow a taxpayer to escape liability under ss. 227.1(3). Implicit in this conclusion is a minimum duty to remedy one's ignorance.

[40]     Having decided that the Appellant is liable under section 323 of the Act, I am required to consider the secondary issue concerning the extent of her liability. The Appellant's counsel put forward an alternative argument that, if she had a liability as a director under section 323, her liability should be restricted to the amount of any funds or assets which were available to be directed to Revenue Canada after May 24 when she was the sole director of Blackberry. Specifically, Appellant's counsel argued that her liability should be restricted to $17,456.51 because (i) that was the amount of money on deposit in Blackberry's bank account on May 24, 2000 (see Exhibit A-5); (ii) the 38 condominium units were subject to a mortgage in favour of ACT when the amount owing on the mortgage exceeded the fair market value of the units; and (iii) Blackberry had no other assets.

[41]     The Respondent's counsel argued that if a person were a director of a corporation which failed to remit an amount of net tax within the meaning of subsection 323(1), that person was either liable for the full amount which the corporation failed to remit or not liable at all because of the due diligence test in subsection 323(3). In other words, the Respondent argues that if a director cannot meet the due diligence test in subsection 323(3), the liability of that director cannot be reduced to the amount of available cash in the corporation at the time of the failure.

[42]     I accept the basic premise of the Respondent's argument and will not reduce the Appellant's liability for three reasons. First, as a matter of law, I think the statute is clear. Subsection 323(1) employs the following words "fails to remit an amount" and "the directors ... are ... liable ... to pay that amount". Also, subsection 323(3) speaks of a director who exercised care, diligence and skill "to prevent the failure". When subsection 323(3) speaks of "the failure", it is referring to the corporation in subsection 323(1) which "fails to remit". In my opinion, it is the amount which the corporation "fails to remit" in subsection 323(1) which determines the amount of a director's liability.

[43]     Second, the Appellant has not disputed the amount of GST which Blackberry "failed to remit" in May/June 2000 with respect to its liability under the GST legislation. The Respondent's Reply in the pleadings sets that amount at $200,455.38. The amount assessed against the Appellant with interest and penalty is $217,703.04. These amounts have not been disputed.

[44]     And third, on the facts of this case, there is no reason to reduce the Appellant's liability to the balance in Blackberry's bank account on May 24, 2000. It is not possible to determine what might have happened if the Appellant, as sole director of Blackberry, had refused to sign any of the Exhibits A-7 (Demand for Payment), A-9 (Notice of Intent to Enforce a Security) or A-10 (Deed of Composition). On one scenario, the 38 condominium units may have remained in Blackberry where the rents, collected by Devon, could have been garnisheed. Exhibit R-2 is Devon's reporting letter dated May 5, 2000 enclosing a cheque to Blackberry for net rent of $26,700 for April. On another scenario, Mr. Weyand may have signed all three documents on behalf of Blackberry and ACT placing himself at risk as a de facto director of Blackberry.

[45]     The decision of Associate Chief Judge Bowman in Fremlin v. The Queen (May 24, 2002) seems to depend upon the particular facts of that case which can easily be distinguished from the facts herein.

[46]     I look upon the conduct of the Appellant and Mr. Weyand from May 24, 2000 (his resignation as a director of Blackberry) to June 5, 2000 (her signature on the last GST return of Blackberry showing a liability of $200,871.07 but no payment enclosed) as a cynical plan to strip Blackberry of assets so that the GST liability could not be collected. The GST liability arose under subsection 191(1) of the Act; it was the only significant liability in Blackberry after December 1999 (end of construction); it came to Mr. Weyand's attention in late April 2000; and it triggered all of the activity which occurred from the Palmer and Top Ten appraisals (Exhibits A-3 and A-4) to the Deed of Composition (Exhibit A-10).

[47]     The appeal is dismissed with costs.

Signed at Ottawa, Canada, this 10th day of May, 2004.

"M.A. Mogan"

Mogan J.

CITATION:

2004TCC355

COURT FILE NOS.:

2001-4516(GST)G

STYLE OF CAUSE:

Angelika Weyand and Her Majesty the Queen

PLACE OF HEARING:

Victoria, British Columbia

DATE OF HEARING:

June 25, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice M.A. Mogan

DATE OF JUDGMENT:

May 10, 2004

APPEARANCES:

Counsel for the Appellant:

Joseph Arvay and Matt Pollard

Counsel for the Respondent:

Kristy Foreman Gear

COUNSEL OF RECORD:

For the Appellant:

Name:

Joseph Arvay

Firm:

Arvay Finlay

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada