TAX COURT OF CANADA
RE: EXCISE TAX ACT
2009-223(GST)I
BETWEEN: LOUIS-ROCK LANGLOIS
Appellant
-and-
HER MAJESTY THE QUEEN
Respondent
[OFFICIAL ENGLISH TRANSLATION]
Held before the Honourable Justice PIERRE ARCHAMBAULT, Tax Court of Canada, Trois-Rivières, Quebec, on June 30, 2009.
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REASONS FOR JUDGMENT
APPEARANCES:
LOUIS-ROCK LANGLOIS
for himself.
Philippe Morin
Counsel for the respondent.
Registrar/Tenchnician: Nicole Champagne
RIOPEL, GAGNON, LAROSE & ASSOCIÉS
215 Saint-Jacques St.
Suite 328
Montréal, Quebec
H2Y 1M6
GST-5287 per: JEAN LAROSE
START OF REASONS FOR JUDGMENT: 11:55 a.m.
HIS HONOUR: Listen, I have listened to you attentively. Unfortunately, the situation seems very clear to me, and I am even ready to render my decision. Mr. Langlois, your story is sad; it is similar to the stories of many taxpayers who have appeared before me and who acted in good faith, who weren't, in your case, it is not everyone's case, but in your case it's clear that you did not profit at all from participating in the activities of what we called the operating company and of the limited partnership, but the day that you accepted to become director for that partnership, there are responsibilities attached to that position, and directors are there to manage the company. They are a type of trustee. They have to ensure that the company is managed soundly, and unless the directors... unless the directors are stripped of their power, and it's transferred to the shareholders, the directors are the ones who control the company's operations, and, as such, the tax legislation prescribes that the directors, as the people in a position of control, take the measures necessary for the money received from a sale or from providing a service, that the money, which... paid by customers is remitted, as an agent, by the company in question, which provided the service, and that that money is remitted to its actual owner, the tax authorities.
And the goal of the section of the Act that renders directors liable is to make sure that directors don't favour one supplier over another. In other words, what happened was that the operating company in fact borrowed money from the government to finance its operations. And certainly, if a new purchaser had been found, the money would have been reimbursed, and no one would have complained. Interest and penalties would have been due because the payments would have been late, but once the government has been paid once, it doesn't run after the directors to get paid. It's when the company goes bankrupt and the government can't recover the money it's owed, at that moment, the government turns to the directors. And that's not an administrative issue; it's a legal issue. The law sets out a clear provision - it's in the Income Tax Act - regarding employee salaries, among other things, and those are sums that do not belong to the companies that have to collect, those are sums that are due, that belong from the very start to the government, to tax authorities.
So, I repeat, this is a very sad story as far as... And you, you are somewhat the victim in this situation, but unfortunately, the role of the Court is to apply the letter of the law, and in my opinion, all the conditions were present to justify the assessment that was issued concerning the two periods, effectively for the reasons stated by counsel for the respondent.
There was a failure. What the Act says is that you cannot be found liable if you had taken the measures necessary to prevent the failure. If you had given instructions to the Executive Director; if you had given instructions to Ms. Jacob: “I’m giving you clear instructions: you must take the money that you have collected as GST and ensure that that money is put aside and that it will be remitted at the right time, on April 30, 2006, and on... the 31st, that's June, it’s July 31...”
PHILIPPE MORIN: Actually, it's June 30, Your Honour.
HIS HONOUR: June 30.
LOUIS-ROCK LANGLOIS: No, no, the tax was due on July 31.
PHILIPPE MORIN: Okay, sorry, sorry, I'm sorry, yes.
HIS HONOUR: July 31. If you had said: “Here, these are your instructions,” but the staff didn't follow your instructions, in a case like that, it's clear that you would not be held liable. You had put in place... You would have established a mechanism; you would have given instructions to ensure that the tax is paid. Saying to the shareholders: "Listen, the taxes are due," then, in one of the e-mails, you say: "My director's liability is at stake; please send me the money." To me, that's not enough because you had accepted, admittedly, in good faith, and you are not penalized in any other way than being held liable, which is already a huge penalty, but you are not penalized for defrauding the government. We're not in that kind of situation: not only did you not profit, but you also did not do it with the intent to defraud the government. That's clear. You did it for the good cause of keeping a business going, of possibly keeping the jobs of those... Well, it wasn't proven. I note that the number of employees was not put in evidence, but that...
LOUIS-ROCK LANGLOIS: No.
HIS HONOUR: ...But that, just for future reference, that's the kind of fact that should have been accepted; counsel should have maybe put in evidence that the money had not been paid, but those are technicalities. What I mean to say is that it's certain that, and you acted in good faith and with the best of intentions, but money was borrowed that belonged to the government, then you let that money be used for other needs that were more urgent, and that's the case in almost all or at least 90% of the cases I have heard where that was what happened. The people acted in good faith, but in a case like this, the consequence is that the directors are liable.
So, basically, these are the reasons, in my opinion, these are the reasons referred to by... So there was a failure to establish the mechanisms, and what I have concluded concerning the second period is that, actually, the trustee was not in control of operations, that happened only after the court order for the interim receiver, it was at that time that they took effective control, and taking into account that at July 31, that's before August 2006, at that time, you were still the director and had to establish the mechanisms necessary to prevent the failure to remit the money when it was due.
So for the two periods, I find that, unfortunately, the evidence before me does not allow me to grant you the exemption that you could have had if you had acted with due diligence.
For the record, I will still mention that you had appealed from the assessment issued... From the Minister's second assessment dated...
PHILIPPE MORIN: If I may, Your Honour, it's tab 2.
HIS HONOUR: Tab 2. Yes, that's right.
PHILIPPE MORIN: Yes.
HIS HONOUR: So dated October 16, 2008, which reduced the taxes on the ground that the period after June 30, 2006, was excluded from that assessment, because at that time, at the time of the payment for the subsequent period, you would not have been a director since you had stepped down.
And at the beginning of the hearing you admitted all the facts that the Minister relied on, except paragraph (c), 21(c), for the period following March 2006. As for (f) (g) and (h), as far as I'm concerned, you were a director for all the periods in question: you were informed about operations; you were involved in the process of filing tax returns, and you knew your legal duty with respect to directors' liability.
So unfortunately, as far as this appeal goes, I have no doubt in finding that the conditions of the Act were all present for all the reasons I already stated.
Therefore, your appeal is unfortunately, and I am not happy about it in the circumstances, is dismissed. I hope that your brother will have the decency to reimburse you for the taxes that weren't yours, more his than yours in any case. Evidently, it's just wishful thinking on my part, since I obviously have absolutely no power over this, but....
END OF REASONS FOR JUDGMENT
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Translation certified true
on this 30th day of September 2009
Margarita Gorbounova, Translator