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Docket:2003-3198(GST)I |
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BETWEEN: |
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MICHEL TAILLEFER, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeal heard on January 30, 2004 at Sudbury, Ontario.
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Before: The Honourable Justice Brent Paris |
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Appearances: |
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Agent for the Appellant: |
Robert D. Topp |
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Counsel for the Respondent: |
Justine Malone |
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JUDGMENT
The appeal from the Assessment made under the Excise Tax Act, notice of which is dated July 16, 2002 and bears number 60784 is dismissed.
Signed at Ottawa, Canada, on the 19th day of February 2004.
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"Brent Paris" |
Paris, J.
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Citation: 2004TCC148 |
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Date: 20040219 |
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Docket: 2003-3198(GST)I |
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BETWEEN: |
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MICHEL TAILLEFER, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Paris, J.
[1] Mr. Taillefer is appealing an assessment against him under section 323(1) of the Excise Tax Act in respect of his liability as a director of The Trailer Centre Inc. (the "company") for the failure of that company to remit the GST for the periods ending September 30, 1998 through December 31, 1999 and for penalties and interest relating thereto. The total amount assessed against Mr. Taillefer is $20,126.10.
[2] The only issue before the Court is whether Mr. Taillefer, as a director of the company, exercised the degree of care, diligence and skill to prevent the company's failure to remit the GST that a reasonably prudent person would have exercised in comparable circumstances, in which case he would not be liable for the amounts owed by the company.
[3] Mr. Taillefer was the sole shareholder and director of the company, which he incorporated in about 1993. The company started off selling utility trailers, aluminum boat docks and lifts, and parts from its first location south of Sudbury. It expanded to a second location in Estaire after a few years and began to sell recreational vehicles such as tent trailers, truck campers, travel trailers and fifth-wheel trailers. The company purchased premises in Estaire for its operation for approximately $139,000, which it financed through the Business Development Bank.
[4] The company acquired its inventory from suppliers on credit that was extended by certain financing agencies. Mr. Taillefer said that the type of financing used by the company was called "floor planning", which meant that the party supplying the financing had a lien against the merchandise and that when a customer of the Trailer Centre purchased a trailer or other item, the financing against it had to be paid off by the company in order to have the lien released. For this reason, a large part of the purchase price received by the company from a customer for the purchase of merchandise had to be used immediately to pay the financing company. Mr. Taillefer estimated that the normal profit margin the company earned over its cost was 40-60% on parts, 30% on trailers and lifts and 25% on trailers and fifth-wheels. I understood this to mean that this was the profit made on the sale of the item, over its cost but before payment of the company's operating expenses, which included interest on the floor plan financing.
[5] Mr. Taillefer was active in the day-to-day operations of the company and made all the major financial decisions in the business. The company bookkeeper prepared monthly financial statements that were reviewed by Mr. Taillefer, and these statements included information concerning the payment of source deductions and the GST and PST. He said that he could tell from these statements whether any accounts were not being paid on time and, according to him, the company was never in arrears of the GST prior to the fall of 1998.
[6] In late 1998, because of the state of the local economy, Mr. Taillefer decided to close the company's business. There were a number of competitors that had opened in the area and he felt that the company's prospects were not good. He planned to have the company sell of its remaining inventory in an orderly fashion, which would enable it to pay off all of its creditors. He felt that there would be sufficient profit from the sale of the inventory to permit everyone to be paid off in full. According to Mr. Taillefer, the company was not in financial difficulty at that time, but that he foresaw difficult times ahead. He also said that the company's equity in the Estaire property would be available to pay off any shortfall.
[7] However, the liquidation of the company's merchandise did not go as smoothly as Mr. Taillefer had hoped. The company was required to reduce its prices to make sales because customers knew it was going out of business. The profit margins on the inventory dropped and the company did not have enough money to pay all of its creditors. Mr. Taillefer said that there was some money left from the sales after the payment of the floor plan financing, and that he decided how those funds were used. He chose what accounts the company paid and when those payments were made. He admitted that the GST was collected on all sales and that these funds were put in the company's bank account. The funds in the account were then used to pay the company's day-to-day operating expenses. This enabled the company to keep its doors open and to continue selling off its stock.
[8] By keeping the company operating, he felt that the company would be able to realize the greatest return on remaining inventory. He said that the inventory would have been sold at a loss if he had simply shut down the company and that he would have been left owing the difference to the creditors. He was aware that the GST remittances were not being made on time but felt that any shortfall could be made up at a later date out of the money the company obtained from the sale of the Estaire property. It was his view that the company had built up some equity in the property but, as it turned out, the property was repossessed by the Business Development Bank and sold for $65,000 and nothing was left over to pay other creditors.
[9] Mr. Taillefer also said that in mid-1999 one of its creditors seized some inventory over which it had liens, and sold those goods at auction. The price obtained was very low and this created further financial difficulties for the company although how this affected its operations was not made clear. From the evidence it appears that the creditor repossessed about four or five recreational vehicles.
[10] The company first fell into arrears in with its GST remittances in September 1998, and although it made many payments on its account, it was in arrears until it ceased business in December 1999. All of its returns were late filed during this period, and the amounts owing according to those returns were not remitted with the returns. Material filed by the Respondent showed that for the reporting periods ending September 1998 through December 31, 1999 the company was required to remit the GST of approximately $70,000 and for those same periods remitted approximately $50,000.
[11] The Appellant's representative argued that Mr. Taillefer exercised due diligence to prevent the failure by the company to remit the GST and that he should not personally be held liable for the unremitted amounts. He argued that it was reasonable for the Appellant to do whatever he could to keep the company operating in order to minimize its losses from the liquidation of its inventory. He said that the Appellant's plan was to sell off the inventory in an orderly fashion and pay all creditors with the proceeds. It was only because less was realized on the sales that the company was not able to make the GST remittances. In these circumstances, he submitted, it would not have been reasonable to simply shut down his business.
[12] In my view it has not been shown that Mr. Taillefer exercised the care, diligence and skill required to bring himself within the provisions of subsection 323(3) of the Excise Tax Act. In deciding whether Mr. Taillefer exercised due diligence within the meaning of that provision, it is necessary to consider his level of relevant experience and knowledge. He was heavily involved in the financial operations of the company and he was relatively experienced in business, having operated the business for five or six years prior to the fall of 1998. The standard of care expected of him is therefore higher than for someone without this involvement and knowledge.
[13] The evidence shows that the company collected the GST on its sales and that the Appellant, as director of the company, made a conscious decision that the company would not remit the GST to the Receiver General in order to use those funds to pay other creditors in order to keep the company operating. There is no evidence that steps were taken to prevent the failures to remit.
[14] The due diligence defence in subsection 323(3) is directed at steps taken to prevent any failure by a corporation to remit the GST. This aspect of the due diligence defence was noted by the Federal Court of Appeal in the case of Canada v. McKinnon, [2001] 2 F.C. 203. At pages 220-221 and 232-233, Evans, J.A. said:
[30] ... "due diligence" normally requires that, when a director becomes aware, or ought to have become aware, that the company is falling behind with its remittances, he or she should take some positive steps to prevent the default, such as an attempt to increase the company's operating line of credit with its bank or to come to an arrangement with the bank that would enable it to make remittances. ...
...
[70] In my opinion, it is essential to keep in mind the relevant question in this appeal: did the directors exercise due diligence to prevent the company's failure to remit? This is not necessarily the same as asking whether it was reasonable from a business point of view for the directors to continue to operate the business. In order to avail themselves of the defence provided by subsection 227.1(3) directors must normally have taken positive steps which, if successful, could have prevented the company's failure to remit from occurring. The question then is whether what the directors did to prevent the failure meets the standard of the care, diligence and skill that would have been exercised by a reasonably prudent person in comparable circumstances.
[71] It will normally not be sufficient for the directors simply to have carried on the business, knowing that a failure to remit was likely but hoping that the company's fortunes would revive with an upturn in the economy or in their market position. In such circumstances directors will generally be held to have assumed the risk that the company will subsequently be able to make its remittances. Taxpayers are not required involuntarily to underwrite this risk, no matter how reasonable it may have been from a business perspective for the directors to have continued the business without doing anything to prevent future failures to remit.
[15] Here Mr. Taillefer said that he believed initially that, by continuing the business and liquidating the assets in an orderly fashion, the company would earn enough money to pay the GST. The evidence shows, however, that by September 30, 1998 the GST arrears were beginning to accumulate, and that by the end of that year the arrears had risen to approximately $15,000. Under cross-examination, he said that he did not seek out any additional sources of financing for the company to enable it to pay the GST it owed, nor did he take any other steps to lessen the likelihood of future failures to remit. It appears that he was mainly relying on the eventual sale of the Estaire property to provide funds to pay off the outstanding GST.
[16] The course of action chosen by the Appellant for the company was at least in part influenced by the fact that he would be liable personally for the shortfall between what the company was able to earn from the sale of the inventory and the amount of its debts. It was in his interest to keep the company going, even if it meant that the GST would not be remitted as required. His plan to pay off the GST liability at some later point does not meet the test for due diligence set out in subsection 323(3) of the Excise Tax Act.
[17] The Appellant's representative referred me to the case of McKinnon v. The Queen, 2003 TCC 884 in which Bowman, A.C.J., found that the Appellant had exercised due diligence to prevent the failure to remit the GST. In that case there were two failures to remit, one in March 1997 and another within two months in May 1997. It was held that the failures were due to unforeseen events, which severely affected the company's cash flow, and primarily because a contractor to whom the company subcontracted arbitrarily and unjustly refused to pay significant amounts that it owed the company. The amount withheld by the contractor was approximately $58,000 while the unremitted amounts totaled less than $12,000. The Court there found that the taxpayer did all that he could to prevent the failure to remit but that the economic circumstances in which the company found itself made this impossible.
[18] The McKinnon case is distinguishable on the basis that the unforeseen loss of revenue from the contractor made it impossible for the company there to meet its obligations. It was not a situation where remittances were in arrears for a significant period of time, during which the director chose to keep the business operating in the hope of eventually being able to catch up on its GST obligations.
[19] The duty of a director is to prevent the default rather than simply to make up the deficiency at a later point. In this case the evidence did not show that it was impossible for the company to make the remittances in question. Rather, Mr. Taillefer made certain choices of how the company's funds would be spent, and he chose not to remit the GST that had been collected in the hope that the amounts owing could be worked out in the end. I am therefore not satisfied that he has demonstrated that he exercised the care, diligence and skill that a reasonably prudent businessperson in comparable circumstances would have exercised to prevent the failures to remit.
[20] The appeal is therefore dismissed.
Signed at Ottawa, Canada, on this 19th day of February 2004.
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"Brent Paris" |
Paris, J.
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CITATION: |
2004TCC148 |
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COURT FILE NO.: |
2003-3198(GST)I |
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STYLE OF CAUSE: |
Michel Taillefer v. The Queen |
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PLACE OF HEARING: |
Sudbury, Ontario |
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DATE OF HEARING: |
January 30, 2004 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice Brent Paris |
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DATE OF JUDGMENT: |
February 19, 2004 |
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APPEARANCES: |
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Agent for the Appellant: |
Robert D. Topp |
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Counsel for the Respondent: |
Justine Malone |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
Robert D. Topp, C.A. |
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Firm: |
Arthur Rogers & Topp |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |