BETWEEN:
and
____________________________________________________________________
Appeal heard on October 20, 2005, at Ottawa, Ontario
Before: The Honourable Justice C.H. McArthur
Appearances:
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under subsection 227.1(1) of the Income Tax Act, notice of which is dated April 26, 2004, and bears number 12608 is allowed, with costs of $500, and the assessment is vacated.
Signed at Ottawa, Canada, this 5th day of December 2005.
BETWEEN:
PHILIP BURTON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] This appeal is from an assessment dated April 26, 2004 in the amount of $7,137.71 under section 227.1 of the Income Tax Act on the basis that the Appellant was liable as a director for unremitted source deductions that it is alleged that Eastern Tilapia Inc. (Tilapia) should have remitted to the Receiver General.
[2] The Appellant's position is that he is not liable for the source deductions since he resigned as a director of Tilapia in December 2001, and the Minister of National Revenue took action or proceedings against him, more than two years after the Appellant ceased to be a director in contravention of subsection 227.1(4). In addition, he stated that Canada Revenue Agency is seeking to recover Canada Pension Plan contributions, Employment Insurance premiums, and penalties and interest from him in the amount of $7,137.71. However, after Tilapia filed for bankruptcy on October 17, 2003, CRA reviewed the books and records and collected $21,071.35 from the sale of the company assets. CRA also recovered an additional $18,777.50 from IROS International Services Inc., as agent for the Toronto-Dominion Bank. Accordingly, CRA has received funds in excess of the assessment to Tilapia. The Appellant abandoned this position during the hearing.
Facts
[3] After working for Bell Telephone for 15 years, the Appellant took a course in horticulture and then went to work for Tilapia. He is now working for a trucking company as a truck driver. The following basic facts from the Reply to the Notice of Appeal are admitted:
7(b) Eastern Tilapia Inc. (the "Corporation") was incorporated on February 2, 2000;
...
(d) the Corporation failed to remit to the Receiver General the deductions at source withheld from wages paid to its employees in the amount of $28,209.06;
(e) the Corporation filed an assignment for bankruptcy on October 14, 2003;
(f) the Minister filed a proof of claim in the amount of $24,604.94 on October 30, 2003;
(g) the proof of claim was revised to $28,209.06 on November 27, 2003;
(h) the Corporation's liability was broken down as follows:
Deemed trust (secured) $21,071.35
Unsecured liability $ 7,173.71
Total liability $28,209.06
(i) the Minister received the amount of $21,071.35 on December 19, 2003 upon the liquidation of the Corporation.
8. The Minister received an amount of $18,777.50 from IROS Institutional Services Inc. ("IROS") on September 22, 2004.
9. IROS was appointed by Toronto-Dominion Bank to act as receiver/manager of the Corporation.
10. The Minister as an unsecured creditor was not eligible to receive the amount of $18,777.50 from IROS.
[4] Tilapia was incorporated on February 2, 2000. Its objects included raising tilapia-fish on fish farm facilities in the Prescott area of Eastern Ontario. The originator and moving force was Kenneth Durand Jr. who gathered the support of his father Kenneth Durand Sr., and his uncle, Phillip Burton, the Appellant. All three were active in the company's formative months. Kenneth Durand Sr. is a chartered accountant who represented the Appellant, his brother-in-law in this appeal. He was not a director during the relevant period.
[5] Tilapia experienced many problems during its formative months, not the least of which was financial. The Appellant found the situation very stressful and could not cope with the day-to-day business problems, and in fact he feared a nervous breakdown. On December 5, 2001, he met with Kenneth Durand Sr. and Jr., explaining his situation and advising them he was resigning as a director. In January 2002, Kenneth Durand Sr. had his secretary, Deborah Hayes, prepared a resignation letter effective December 31, 2001 and had the Appellant sign it. Ms. Hayes testified that she did in fact prepare the resignation letter in early 2002, and saw the Appellant sign it as she was leaving the office. The resignation was not witnessed. The sole copy was mislaid in Kenneth Durand Sr.'s office, during a period when he was moving to a new office. Some years later, he and Ms. Hayes found it, and it was filed as Exhibit A-1. I accept this explanation. To find differently, I would have to question the credibility of Kenneth Durand Sr. and Ms. Hayes, both of whom saw him sign it, and of Kenneth Durand Jr., who verbally accepted the Appellant's resignation in December 2001, and was advised of the signed written resignation in early 2002. Also, Mr. Gordon Johnson, a long-time friend of the Appellant, testified that he was aware of the turmoil the Appellant was experiencing and the relief Mr. Burton experienced after he had resigned. A few months later, in May 2002, Mr. Burton left the employment of Tilapia when a replacement was found for him. About that time, Mr. Johnson assisted him in obtaining the truck driving job where he remains to this day.
[6] Tilapia was never in arrears of remittances to the Minister during the Appellant's active involvement with Tilapia.[1] The arrears which are the subject of this appeal, did not occur until 2002, almost a year after the Appellant resigned and ceased any contact with Tilapia, other than as a silent shareholder.
[7] The Appellant's resignation was never filed with the Ontario Corporations Branch. This is where the problem arises. An officer of CRA testified that he did not accept that the Appellant had signed a resignation in December 2001, believing it was signed probably after the Appellant was assessed in 2004. His scepticism is understandable. It was not sent to anyone and not placed in the Minute Book. At the time he recommended that the Appellant be assessed, he did not have the benefit of the four witnesses.
[8] Mr. Barry Laushway, barrister and solicitor, testified in a straightforward manner. He incorporated Tilapia and out of convenience, appointed himself the sole incorporating director, and not unlike the Appellant's situation, he resigned in favour of the active directors, yet neglected to advise the Ontario Corporations Branch. In 2003, the Minister sent him a letter holding him liable under section 227.1 as a director. Unlike the Appellant, Mr. Laushway was able to convince the Minister that he was not liable.
Conclusion
[9] The Appellant's written resignation as a director was received by the company no later than February 2002. At the time of the Appellant's resignation, there were no remittance arrears owing to CRA. The Minister assessed the Appellant more than two years later when statute barred - subsection 227.1(4).
[10] In December 2001, the Appellant was near emotional breakdown brought on by stress. He was not emotionally equipped to deal with the rigours of the struggling Tilapia. He verbally resigned at a meeting of December 5, 2001 and his resignation was accepted by both Kenneth Durand Jr. and Sr. He signed a written resignation about January 2002 which was subsequently given to the company's remaining director, Kenneth Durand Jr., about February 2002. He continued to work for Tilapia until May 2002 when a replacement was found. Tilapia was then in good standing with the Minister. He had nothing further to do with Tilapia other than only very occasional social contacts with his nephew, Kenneth Durand Jr.
[11] The appeal is allowed, with costs in the amount of $500 to the Appellant.
Signed at Ottawa, Canada, this 5th day of December 2005.
"C.H. McArthur"
McArthur J.
STYLE OF CAUSE: Philip Burton and Her Majesty The Queen
PLACE OF HEARING: Ottawa, Ontario
DATE OF HEARING: October 20, 2005
REASONS FOR JUDGEMENT BY: The Honourable Justice C.H. McArthur
DATE OF JUDGMENT: December 5, 2005
APPEARANCES:
|
Agent for the Appellant: |
Kenneth J. Durand |
|
Counsel for the Respondent: |
Marie-Eve Aubry |
COUNSEL OF RECORD:
Firm: N/A
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Ontario