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Docket: 98-526(IT)G |
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BETWEEN: |
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GAVIN PITCHFORD, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on April 9, 10 and 11, 2003, at Toronto, Ontario,
by the Honourable Judge M.A. Mogan |
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Appearances: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Marilyn Vardy |
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JUDGMENT
The appeal from the assessment of tax made subsection 227.1(1) of the Income Tax Act, notice of which is dated August 16, 1989 and bears number 1249 is dismissed, with costs.
Signed at Ottawa, Canada, this 6th day of May, 2003.
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"M.A. Mogan" |
J.T.C.C.
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Citation: 2003TCC296 |
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Date: 20030506 |
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Docket: 98-526(IT)G |
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BETWEEN: |
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GAVIN PITCHFORD, |
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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
Mogan J.
[1] The Appellant was assessed under section 227.1 of the Income Tax Act as a director of Technology Equity Corporation ("TEC") with respect to the alleged failure of TEC to remit amounts deducted at source from the salary and wages of certain employees. The Notice of Assessment under appeal is dated August 16, 1989 (Exhibit R-2, Tab 1) and is based on failure to remit for three specific periods: (i) January to April 1987; (ii) October to December 1987; and (iii) all of 1988. The aggregate amount assessed is $83,622.31 comprising federal tax of $30,867.54, provincial tax of $11,703.31, Canada Pension Plan ("CPP") premiums of $8,563.34, Unemployment Insurance ("UI") premiums of $13,258.38 plus other amounts for penalty and interest.
[2] The Appellant's principal attack on the assessment is based on his claim that TEC had no employees of its own and that, if there were source deductions not remitted, such source deductions were in respect of persons who were employed by some other corporation. The Appellant also claims that he meets the due diligence test in subsection 227.1(3) of the Act.
[3] The Appellant finished high school in Toronto in the late 1970s and attended University of Western Ontario where he enrolled in courses with an emphasis on computer science. He did not complete his degree but returned to Toronto where he started to work in October 1979 for a company which was successful in securing and training potential employees for its clients. The Appellant described his work as primarily a "head hunter". Within two years, he became one of the top producers for that company. In 1982, at the age of 23, he left the company where he had trained as a head hunter and went out on his own. His intention was to recruit and place people in the information technology marketplace.
[4] He brought into his new business as a partner a woman (Lynda) who had experience in administration. Lynda later became his wife. In 1983, IBM brought out its first personal computer ("p.c."). The Appellant and his wife became experts in small computer systems. They formed a new business called "High Tech Software" in which they owned 45%, a law firm owned 45%, and the remaining 10% was owned by a silent partner. Almost all of the Appellant's time was spent developing a software package for law firms called "Lexicalc". They started selling Lexicalc in 1984 and, by 1985, they had a large number of "installed base" clients. In the period 1983 to 1985, he spent 60% of his time working on the product by creating programs, and 40% of his time marketing the product with demonstrations and training customers.
[5] In 1985, the Canadian Bar Association embarked on a survey of computer programs for law firms. In early 1985, High Tech Software had sales to law firms in the range of $60,000 to $70,000 per month. When the Canadian Bar Association survey was released in the summer of 1985, the Lexicalc software product received a low rating and sales within the Appellant's business plunged. The business of High Tech Software collapsed. The Appellant and Lynda were forced to regroup and start afresh.
[6] After obtaining legal advice, the Appellant and Lynda caused the incorporation of five new companies in the period December 1985 to March 1986:
Technology Equity Corporation ("TEC")
LAN Technologies Inc. ("LAN")
Technology Solutions Inc. ("TSI")
Lexicalc Inc. ("Lexi")
High Tech Solutions Inc. ("HTSI")
TEC was the parent company owning all of the issued shared of LAN, TSI, Lexi and HTSI. The Appellant and Lynda were the only shareholders of TEC and the Appellant was a director of each corporation. According to the Appellant, each of the five corporations had a specific business purpose. TEC owned certain assets like computers and furniture which it leased to the other companies but TEC was not expected to have any employees of its own. LAN was expected to be the only employer within the corporate group; providing personnel to the other companies and cross-charging them for the employment overhead. LAN was also expected to purchase all supplies and product for resale. TSI would sell any "hard" product to customers after purchasing such product from LAN. Lexi created computer programs for sale and applied for research grants and tax credits.
[7] Although the Appellant was clear in his mind about the specific business purpose of each corporation, the documents entered into evidence indicate that business operations within the corporate group were not always carried on in watertight compartments. The Appellant relies on a two-page agreement dated May 5, 1986 between LAN and TEC (Exhibit A-1) which he drafted himself. Exhibit A-1 provides, inter alia, that LAN will hire such employees as are required to fulfil the personnel needs of TEC and other companies within the corporate group; and that LAN will cross-charge the other companies for providing such personnel plus an administrative fee not to exceed 15%.
[8] Exhibit A-1 is important to the Appellant's attack upon the section 227.1 assessment because that exhibit clearly indicates that any individuals employed within the TEC/LAN corporate group would be employees of LAN and not TEC. The section 227.1 assessment was issued to the Appellant in his capacity as a director of TEC. The Notice of Assessment (Exhibit R-2, Tab 1) contains the following notation:
NOTICE OF ASSESSMENT IN RESPECT OF the liability under Subsection 227.1(1) of the Income Tax Act and Section 36a of the Income Tax Act - Ontario, and Section 22.1 of the Canada Pension Plan and Subsection 54.1 of the Unemployment Insurance Act in the amount of $83,622.31 being the amount of unpaid deductions, interest and penalties payable by Technology Equity Corp. in respect of a Notice of Assessment dated February 28, 1989 issued against Technology Equity Corp. (Underlining added)
[9] The Appellant stated that an agreement similar to Exhibit A-1 was entered into between TEC and each of the other three subsidiaries but such other agreements were not entered in evidence. Also, I have some difficulty imagining such other agreements because, in concept, only LAN was to be the employer. The five companies were all incorporated in the period December 1985 to March 1986. There is some evidence that the payroll for the corporate group in the latter part of 1986 was operated through LAN. Exhibit A-5 is a group of three cheques dated July 16, 1986; August 16, 1986 and September 1, 1986; all payable to individuals (probably employees) and all payable by "LAN Technologies Payroll" through its account no. 233-0 at the Royal Bank of Canada, 131 Bloor Street West, Toronto.
[10] The Appellant had at first banked with the Canadian Imperial Bank of Commerce ("CIBC") but in 1986, after it had called a loan, he transferred his business to the Royal Bank of Canada ("RBC"). Exhibit A-6 is a draft credit/loan agreement with RBC dated November 26, 1986. Exhibit R-2, Tab 19 is the credit/loan agreement dated December 1, 1986 between RBC and TEC signed by the Appellant and Lynda. The Appellant thinks that it is important how the "Security" provisions changed from the draft agreement to the final signed agreement. I regard those changes as part of the negotiation process, and am concerned only with the terms of the final signed agreement (Exhibit R-2, Tab 19).
[11] The Appellant thought that the former banking arrangements (employees paid by LAN from its account 233-0 at RBC) would continue but RBC regarded TEC as its only banking customer. When LAN issued payroll cheques in early January 1987, they were shown as payable out of LAN account no. 233-0 at RBC, 131 Bloor Street West but I doubt whether any payroll cheques were actually paid out of that account. RBC refused to advance any funds to the LAN account and insisted that all payroll cheques be paid out of the new TEC account no. 123-1257 at 48 St. Clair Avenue West, Toronto.
[12] Exhibit A-2 is a group of about 25 cheques all payable to individuals (apparently employees of the Appellant's corporate group) and issued from January 2, 1987 to February 2, 1987. All 25 cheques have the words "LAN Technologies Payroll" printed in the upper left corner, indicating LAN as the payor; and the RBC branch at 131 Bloor Street West is also printed on the cheque along with the LAN account no. 233-0. All of the cheques dated January 2, 1987 must have been returned NSF because they bear the stamp "Pursuant to clearing rules this item may not be cleared again unless certified". On all cheques issued after January 15, 1987, some person has crossed out the printed name of the payor "LAN Technologies Payroll" and has written by hand "Technology Equity Corp"; and that person has also crossed out the RBC branch address "131 Bloor Street West" and has written by hand "48 St. Clair Ave. West". The new credit/loan agreement (Exhibit R-2, Tab 19) is on letterhead for the RBC branch at 48 St. Clair Avenue West; and the only corporate client of RBC named in the agreement is Technology Equity Corp.
[13] The Appellant introduced the group of 25 cheques (Exhibit A-2) to show how he had tried to maintain his original plan of LAN as the only employer and payor of the employees; and how the RBC had forced him to change and cause TEC to be the corporation which actually issued the payroll cheques. I do not doubt that the Appellant tried to maintain his original plan but, on the question of source deductions and failures to remit, the important fact is the identity of the person who actually paid the salary and wages.
[14] Exhibit R-2, Tab 29 contains copies of 18 payroll cheques issued in the period from May 1987 to September 1988. Not one of those cheques was issued by any corporation other than TEC. All 18 cheques were drawn on the RBC branch at 48 St. Clair Avenue West. Ten of those cheques were paid out of account no. 123-130-7 with the payor identified as "Technology Equity Corp. Payroll". The eight remaining cheques were paid out of account no. 202-113-7 with the payor identified as "Technology Equity Corp. o/a LAN Technology Payroll". Even these eight remaining cheques were actually issued by TEC but with an indication that it was operating as LAN or as agent for LAN. Exhibit R-2, Tab 30 contains monthly statements from RBC for the "Technology Equity Corp. Payroll Account" no. 123-130-7 for the period May 25, 1987 to February 25, 1988. The later monthly statements from March 25 to September 30, 1988 from RBC for account 202-113-7 are simply in the name of "Technology Equity Corp". Notwithstanding the Appellant's original business plan, I am satisfied that, from and after January 2, 1987, all payments of salary or wages to employees of the Appellant's corporate group were made by TEC alone and not by LAN or any other company within the group.
[15] In February 1988, an auditor from Revenue Canada (Ms. Pattischeri) came to the business premises of TEC Group and spent about eight hours reviewing the payroll records. The auditor determined that there were significant deficiencies in the remittance of source deductions. On March 16, 1988, Revenue Canada seized the TEC bank account because of the deficient remittances. The Appellant and his wife Lynda personally raised $25,000 and paid that amount to Revenue Canada to get the TEC bank account released. In the midst of these negotiations, Revenue Canada wrote a letter to LAN on April 8, 1988 stating that the source deduction arrears were about $96,000. The Appellant relies heavily on this letter and so I shall set it out in full. The letter (Exhibits A-3 and R-2, Tab 44) is addressed to LAN to the attention of the Appellant and states:
Re: Account # VGF 35239 7 Lan Technologies Inc. and
Account # VHX 14194 6 High Tech Software Ltd.
Pursuant to our telephone conversation of March 24, 1988, please be advised that the outstanding source deductions arrears with interest computed to March 31, 1988, are as follows:
1) High Tech Software Ltd. - $18,983.60
2) Lan Technologies Inc. - $77,100.97
Total Outstanding $96,084.57
As per our discussion and the available information there appear to be no source deductions arrears for the other three related companies, namely Technology Equity Corp., Technology Solutions Inc. and Lexicalc Inc.
We understand that the company is seeking a bank loan, and payment of $96,084.57 plus interest accrued to the date of payment will be paid in full upon receipt of this money.
You have been cautioned that failure to comply with the agreed-upon arrangement may result in assessing the directors, personally, under Section 227.1 of the Income Tax Act.
[16] The Appellant relies in particular on the statement in the second paragraph "... there appear to be no source deduction arrears for the other three related companies" TEC, TSI and Lexi. The Appellant regards that statement as something like an estoppel which should have prevented Revenue Canada from issuing the assessment to him (as a director of TEC) which is the subject of this appeal. That statement, of course, is not an estoppel. It is a very much qualified statement: "as per our discussion and the available information there appear to be". If the Revenue Canada auditor had reviewed only payroll records in February 1988, and had not examined the cheques issued to pay salaries and wages, she may have concluded that only LAN had employees and that TEC had no employees even though TEC had been paying all salaries and wages since January 2, 1987.
[17] A subsequent audit by Revenue Canada must have revealed the fact that salaries and wages were paid by TEC after January 2, 1987 because, on February 28, 1989, Revenue Canada issued four Notices of Assessment to TEC (Exhibit R-2, Tab 5) in the aggregate amount of $82,500.40 for failure to remit as required for 1987, 1988 and 1989. These are the underlying assessment against TEC which, in turn, triggered the assessment against the Appellant under section 227.1 which is the subject of this appeal. TEC objected to the four assessments but they were confirmed (Exhibit R-2, Tab 9).
[18] The books and records of TEC are not in evidence. Neither are the books and records of LAN or any of the other three companies. I cannot determine if there was careful separate bookkeeping for each corporation or if the bookkeeping was somewhat merged. I have an impression, however, that the bookkeeping of the companies was mingled or merged because of what the Appellant had to say about the T2 corporate tax return of TEC for the fiscal year ending April 30, 1987 (Exhibit R-2, Tab 17). The Appellant, under cross-examination, confirmed his answer to Discover Question 337 that the TEC T2 tax return for fiscal 30/4/87 was the only income tax return ever filed by any of the five corporations in his group!
[19] The financial statements attached to that T2 return show revenue of $621,489. The Appellant confirmed that that amount ($621,489) was the total revenue of his corporate group for the 12 months ending April 30, 1987. The financial statements show $152,519 as the cost of wages. The Appellant confirmed that that amount ($152,519) was the total cost of all wages paid within his corporate group for the 12 months ending April 30, 1987. And so on! In effect, the T2 return filed by TEC for the 12 months ending April 30, 1987 was a consolidation of all commercial activity within the Appellant's corporate group for that 12-month period.
[20] The remarkable fact about the 1987 T2 return filed by TEC (Exhibit R-2, Tab 17) is that it contains a claim for investment tax credit and a claim for Scientific Research and Experimental Development Expenditures ("SR & ED"). The SR & ED activity was supposed to be carried on by some other corporation within the Appellant's corporate group. The notes to the financial statement indicate that TEC was carrying on an active business in the 1987 fiscal year even though, according to the Appellant's original plan, TEC was not intended to carry on any business at all. The Appellant explained that he was content to file the one T2 corporate return for 1987 in the name of TEC in order to expedite the SR & ED tax credit or classification. In so doing, he seems to have merged all or most of the commercial activity under one corporation, TEC.
Analysis
[21] The relevant legislation is contained in two sections of the Income Tax Act:
153(1) Every person paying at any time in a taxation year
(a) salary or wages or other remuneration,
(b) a superannuation or pension benefit
(c) a retiring allowance,
(d) ...
shall deduct or withhold therefrom such amount as may be determined in accordance with prescribed rules and shall, at such time as may be prescribed, remit that amount to the Receiver General on account of the payee's tax for the year under this Part or Part XI.3, as the case may be.
227.1(1) Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or section 153 or 215, has failed to remit such an amount or has failed to pay an amount of tax for a taxation year as required under Part VII or VIII, the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest or penalties relating thereto.
227.1(2) ...
227.1(3) A director is not liable for a failure under subsection (1) where he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.
[22] At the commencement of the hearing, the Appellant requested permission to amend his Notice of Appeal by adding three new paragraphs 14A, 14B and 14C. Counsel for the Respondent did not oppose the request. Accordingly, the Appellant's request was granted and the Notice of Appeal is amended by adding immediately after paragraph 14, the following three paragraphs:
14A The Appellant states that in the alternative, if TEC was in law liable for withholding and remitting certain amounts of source deductions, the reasons claimed by Revenue Canada for making such assessment did not come into being until the payroll of February 15, 1987, and consequently it was not TEC that was liable for withholding or remitting monies in January 1987 or prior to February 15, 1987 and that the assessment against TEC (and therefore the bare assessment raised against Appellant) is therefore wrong by a corresponding amount of approximately $6,650.56 for January 1987, and an undetermined amount for February (approximately half), plus associated penalties and interest.
14B In addition, the Appellant states that in the alternative, if TEC was in law liable for withholding and remitting certain amounts of source deductions, the Appellant states that the Minister of National Revenue also assessed certain subsidiaries of TEC, including Technology Solutions Inc. ("TSI"), Lexicalc Inc. High Tech Solutions Inc. and High Tech Management Resources Inc. for the same amounts, and issued garnishees to the clients of these subsidiary and related companies, and admits to collecting over $9,000 as a result, and then vacated the assessments against each and every one of these companies except TEC for the period in question, but did not properly either return the money to the subsidiaries nor to TEC, nor apply it against the indebtedness of TEC and consequently the assessment made against TEC and hence against the Appellant is too high as a result, by a corresponding amount.
14C In addition, the Appellant states that in the alternative, if TEC was in law the payor of wages in July and August 1987 and hence liable for withholding and remitting certain amounts of source deductions, then the same entity, TEC, made payments to Revenue Canada on each of July 13, 1987 for $1,500 and on August 17, 1987 for $2,500. Both of these payments were partial payments for the current months remittances for the payroll expenses which occurred during the prior month, but were then improperly credited to another company: (LAN) and should properly have been credited to TEC, and consequently the assessment made against TEC and hence against the Appellant is too high as a result by a corresponding amount.
[23] As stated in paragraph 2 above, the Appellant's first attack on the assessment is his claim that TEC had no employees. The Notice of Assessment (Exhibit R-2, Tab 1) is addressed to the Appellant in respect of his liability under subsection 227.1(1) of the Income Tax Act (and other statutes) in the amount of $83,622.31 "being the amount of unpaid deductions, interest and penalties payable by Technology Equity Corp". The Appellant's claim is quite simple: if TEC had no employees, then it would not have any "unpaid deductions". In my view, it is not a question of whether TEC had any employees. The critical question is whether TEC paid any salary or wages to its own employees or to employees of some other corporation.
[24] Under subsection 153(1) of the Act (see paragraph 21 above), every person who pays salary or wages is required to deduct or withhold prescribed amounts. The person who pays salary or wages may not be the employer of the payees but that person is the one who must deduct or withhold. In paragraphs 12, 13 and 14 above, I described 25 cheques issued in the first five weeks of 1987 and 18 cheques issued from May 1987 to September 1988; and I concluded that from and after January 2, 1987, TEC was the only corporation which paid salary or wages to employees of the Appellant's corporate group.
[25] MollenhauerLtd. v. The Queen, [1992] 2 C.T.C. 121 is a decision of the Federal Court Trial Division strongly against the Appellant herein. Mollenhauer as general contractor was constructing a hotel and awarded a drywall subcontract to "Aprok". When the subcontract was about 85% complete, Aprok was unable to meet its payroll. At that time, Mollenhauer owed Aprok approximately $155,000 on the subcontract. In order to keep the project moving, Mollenhauer agreed to pay the amounts owing by Aprok to Aprok employees, and then set off such amounts against the $155,000 owing by Mollenhauer to Aprok. Mollenhauer issued cheques to Aprok's employees but no source deductions were withheld or remitted. When Aprok was unable to remit, an assessment was issued to Mollenhauer under section 153 for failure to withhold and remit the usual source deductions. When dismissing Mollenhauer's appeal, Teitelbaum J. stated at page 126:
It is very clear that subsection 153(1) of the Act does not speak of whether persons doing the paying are employers or not. I am satisfied that if a person or company is paying "salary or wages or other remuneration" it must deduct or withhold the required amount pursuant to the Income Tax Act.
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I adopt, for the purposes of the case at bar, the words of Mr. Justice Berger in the case of In re Bankruptcy of G. & G. Equipment Co. Ltd. (supra) where at page 6408 he states:
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The question then is whether G. & G. was a "person paying ... wages ... to an ... employee". If G. &
G. falls within Section 153, the Department is entitled to be treated as a preferred creditor under Section 107 of the Bankruptcy Act. |
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I think the Department must succeed. Section 153 says that every person paying wages to an employee must withhold tax, it doesn't say that only employers must. The language must be taken to have been deliberately chosen, and to have been intended to encompass the kind of situation that exists in the case at bar. The law recognizes that these two companies are separate legal entities. At the same time the law ought to recognize that one business undertaking may be carried on through a group of related companies. The law ought to take into account the realities of modern business arrangements.
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I understand that in the above case, the companies involved are related companies but I am satisfied that this in itself is immaterial. What is important is that in the case at bar the Plaintiff undertook the obligation of Aprok to pay the salary and wages of Aprok's employees in order for Plaintiff to complete its project without possible disruption from the employees or the union to which they belong.
[26] The decision in Mollenhauer has been followed by this Court in Zanet v. M.N.R., [1996] 2 C.T.C. 2373. A similar decision in the Federal Court of Appeal is Cana Construction Company Limited v. The Queen, 96 DTC 6370. The Appellant's argument about TEC not being the employer is an argument without merit. TEC is the corporation which paid the salaries and wages in 1987 and 1988. Accordingly, TEC was required to withhold and remit source deductions. The assessments against TEC (Exhibit R-2, Tab 5) were well founded.
[27] The letter from Revenue Canada to LAN dated April 8, 1988 is set out in paragraph 15 above. The Appellant relies on that letter but it does not help him. The author of that letter states: "there appear to be no source deductions arrears" for TEC. The statement is cautious and qualified. Even if it were a blunt statement that there were no source deduction arrears for TEC, it would not prevent the Minister from later assessing TEC and the Appellant (as a director of TEC) if the Minister received subsequent information that TEC had in fact paid salary and wages. In the appeals of Hawkes and Graham v. The Queen, 97 DTC 5060, the question of prior statements by the Minister and estoppel came before the Federal Court of Appeal. Strayer J.A. writing for the Court stated at page 5062:
Paragraph 10 asserts the undisputed fact that the Victoria office of Revenue Canada advised these appellants on April 22, 1993 that the respondent would allow the deductions in question, apparently on the basis that the Edmonton office had allowed such deductions in respect of Dr. Revell. This was obviously inconsistent with the reassessments actually issued on July 19, 1993. Again the authorities are clear that it is only the final assessment which can be attacked and that interim opinions, or even previous assessments, cannot be relied upon to establish the invalidity of the last assessment or reassessment provided the latter is made within the time allowed by the statute. ...
Paragraph 11 which alleges estoppel based, apparently, on the actions of the Minister alleged in paragraphs 9 and 10, similarly discloses no reasonable ground for appeal. It is trite law that estoppel cannot apply so as to prevent the Minister from performing the duties imposed on him by the Income Tax Act, namely the proper assessment of returns in accordance with the law. ...
[28] I have found that TEC paid the salaries and wages of all employees within the Appellant's corporate group from and after January 2, 1987. The Appellant was a director of TEC at all relevant times. Therefore, the Appellant may be liable for failure to remit source deductions under section 227.1 of the Act unless he can satisfy the due diligence test in subsection 227.1(3). In Soper v. The Queen, 97 DTC 5407, Robertson J.A. writing for the majority set out some useful guidelines with respect to due diligence. He stated at pages 5416 and 5417:
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".
... 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.
[29] The Appellant is clearly an inside director. He and his wife were the only shareholders and directors of TEC and they were actively engaged in the management of TEC and its related companies. The Appellant indicated in his evidence that his wife, Lynda, was more involved in administration while he was more involved in creating and selling software, but the correspondence with Revenue Canada and RBC shows that he was intimately involved in the financial affairs of the TEC group and knew of the cash problems. The letter of April 8, 1988 from Revenue Canada (Exhibit A-3) on which the Appellant relies offers very clear evidence that his corporate group had accumulated source deduction arrears of $96,000 by March 31, 1988. It is worth noting that the letter was directed to the Appellant's attention. The failure to remit had been a problem for some time prior to March 31, 1988 and the Appellant knew about that problem. Exhibit R-2, Tab 33 contains two Notices of Assessment dated November 13, 1986 addressed to High Tech Software Ltd. (one of the Appellant's corporations) showing a liability of $3,323.94 for failure to remit in 1984 and $14,140.48 for failure to remit in 1986.
[30] The Appellant stated more than once his belief that the financial problems of his corporate group vis-à-vis Revenue Canada would be solved when the companies received either a substantial tax credit (SRTC?) or some tax benefit through SR & ED. He thought that the tax credit or benefit would offset any source deduction arrears. The due diligence test is aimed at what a director may have done "to prevent the failure" to withhold and remit. In The Queen v. Corsano et al, 99 DTC 5658, Noël J.A. writing for the Federal Court of Appeal stated in paragraph 35:
[35] Fourth, in assessing the respondent's due diligence, the Tax Court judge took in consideration the fact that the directors were satisfied that the asset values of the Corporation would be sufficient to meet the claims of all creditors, including Revenue Canada. With respect, this is an irrelevant consideration. The obligation on the directors is to prevent a failure, not to condone it systematically, as the respondents did, in the hope of eventually correcting it because there would be enough money in the end to pay all the creditors.
[31] Having regard to the defence of "due diligence", it is important for the Appellant, as director, to prove what he did or tried to do to prevent any corporate failure to withhold and remit source deductions. The Appellant knew that the TEC group of companies was accumulating significant source deduction arrears. It was his hope that the big expected tax credit would offset those arrears. That hope, however genuine, is not evidence of due diligence. The Appellant is liable for the source deduction arrears of TEC as assessed; and his appeal will be dismissed subject to any relief he may obtain from the amendments to his Notice of Appeal which were permitted at the commencement of the hearing.
[32] In paragraph 14A, the Appellant claims that TEC was not responsible for withholding or remitting prior to February 15, 1987. Therefore, the Appellant claims that the basic amount (before interest and penalties) assessed against him should be reduced by $6,650 for January 1987 and an undetermined amount (approximately one-half) for February. The Appellant's claim is not supported by the documents. The Appellant entered 25 original cheques as Exhibit A-2. They appear to be the same as the 25 photocopy cheques in Exhibit R-2, Tab 28. Those 25 cheques are payable to six or seven employees for dates January 2, January 16 and February 2, 1987. Although the cheques (as originally written) were drawn on LAN's account at RBC, 131 Bloor Street West, they were all paid out of TEC's account 123-1257 at RBC, 48 St. Clair Avenue West. I have concluded that after the new letter agreement with RBC dated December 1, 1986 (Exhibit R-2, Tab 19), the bank would not advance funds to any corporation in the Appellant's group of companies other than TEC.
[33] In paragraph 14B, the Appellant claims that the Minister assessed other subsidiaries of TEC; issued garnishees to clients of those subsidiaries; collected more than $9,000 from the garnishees; and later vacated the assessments without returning the money to the subsidiaries or to TEC. Exhibit R-2, Tab 51 shows that the Minister (Revenue Canada) collected $2,968.16 from its garnishee of RBC. Exhibit R-2, Tab 1 shows that the precise amount $2,968.16 was credited (as a payment on March 17, 1989) to the final amount assessed against the Appellant. The Appellant has offered no documents to support his claim that $9,000 was collected by garnishees and not credited prior to the last assessment.
[34] In paragraph 14C, the Appellant claims that TEC made payments to Revenue Canada of $1,500 in July 1987 and $2,500 in August 1987 as partial payments with respect to the current remittances, but that such payments were improperly credited to LAN when they should have been credited to TEC. There is no proof for this claim. The schedule attached to the Notice of Assessment (Exhibit R-2, Tab 1) indicates that the Appellant was given credit for all payments made prior to August 16, 1989, the date of the assessment. The appeal is dismissed, with costs.
Signed at Ottawa, Canada, this 6th day of May, 2003.
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"M.A. Mogan" |
J.T.C.C.
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CITATION: |
2003TCC296 |
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COURT FILE NO.: |
98-526(IT)G |
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STYLE OF CAUSE: |
Gavin Pitchford and Her Majesty the Queen |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATE OF HEARING: |
April 9, 10 and 11, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge M.A. Mogan |
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DATE OF JUDGMENT: |
May 6, 2003 |
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APPEARANCES: |
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For the Appellant: |
The Appellant himself |
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Counsel for the Respondent: |
Marilyn Vardy |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
N/A |
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Firm: |
N/A |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |