[1] This is an appeal from a decision of Bonner J. of the Tax Court (2004 TCC 311). The issue is directors' liability under section 323 of the Excise Tax Act, R.S. 1985, c. E-15, as amended (the "Act"). Bonner J. dismissed the appellant's appeal.

FACTS

[2] The appellant was the sole director of Jetcom Communications Inc. ("Jetcom"). From January 1997 to December 1998, the company experienced financial difficulty and went into bankruptcy on December 4, 1998.

[3] The appellant was assessed the total sum of $276,277.94 under subsection 323(1) of the Act based on the failure of Jetcom to make GST remittances, as required by subsection 228(2) of the Act.

ISSUES

[4] The same three issues argued before Bonner J. were argued on appeal to this Court:

1. whether the individual who issued the assessment was authorized to do so;

2. whether the appellant was entitled to invoke the due diligence defence under subsection 323(3); and

3. whether the Minister of National Revenue satisfied the requirement in paragraph 323(2)(c) that he prove his claim with the trustee in bankruptcy within six months of the date of the corporation's bankruptcy.

ANALYSIS

1. Delegation

[5] The appellant argues that by a delegation instrument, the Minister's powers were delegated to persons in specific positions. The individual who performed the assessment in this case was not one of those persons. Therefore, according to the appellant, the assessment was invalid.

[6] Bonner J. thoroughly dealt with the delegation issue in his reasons. His conclusion was that the issuance of an assessment did not fall outside the scope of the functions which the assessor in this case was hired to perform. He was of the view that the matter was governed by subsections 275(2) and (3) of the Act. Subsections 275(2) and (3) provide:

2) Such officers, agents and employees as are necessary to administer and enforce this Part shall be appointed or employed in the manner authorized by law.

(3) The Minister may authorize a designated officer or agent or a class of officers or agents to exercise powers or perform duties of the Minister under this Part.

(2) Sont nommés ou employés de la manière autorisée par la loi les fonctionnaires, mandataires et préposés nécessaires à l'application et à l'exécution de la présente partie.

(3) Le ministre peut autoriser un fonctionnaire ou un mandataire désigné ou une catégorie de fonctionnaires ou de mandataires à exercer ses pouvoirs et à remplir ses fonctions prévus par la présente partie.

[7] Bonner J. found that although the Minister had signed the delegation instrument, that "does not support the inference that 'officers, agents and employees' employed under subsection 275(2), as Mr. Ball (the assessing officer) was, require an express grant of specific ministerial authority to perform routine administrative acts." In support of this conclusion, he relied on R. v. Harrison, [1977] 1 S.C.R. 238 at 245-246.

[8] I am in agreement with Bonner J.'s opinion and his succinct analysis. No useful purpose would be served by recasting them here in different words.

2. Due Diligence

[9] Bonner J. found that the appellant's due diligence defence failed. He noted that returns were filed late and that the appellant "admitted that he had made no inquiry of his senior management because at the time he 'knew we were in trouble'" (paragraph 34). He concluded that although there was a sincere effort to pay arrears, the failure to verify on a monthly basis that payments were remitted on time fell below the statutory standard of care.

[10] Section 323 provides in relevant part:

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.

(2) A director of a corporation is not liable under subsection (1) unless

...

(c) the corporation has made an assignment or a receiving order has been made against it under the Bankruptcy and Insolvency Act and a claim for the amount of the corporation's liability referred to in subsection (1) has been proved within six months after the date of the assignment or receiving order.

(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.

323. (1) Les administrateurs de la personne morale au moment où elle était tenue de verser une taxe nette comme l'exigent les paragraphes 228(2) ou (2.3), sont, en cas de défaut par la personne morale, solidairement tenus, avec cette dernière, de payer cette taxe ainsi que les intérêts et pénalités y afférents.

(2) L'administrateur n'encourt de responsabilité selon le paragraphe (1) que si_:

...

c) la personne morale a fait une cession, ou une ordonnance de séquestre a été rendue contre elle en application de la Loi sur la faillite et l'insolvabilité, et une réclamation de la somme pour laquelle elle est responsable a été établie dans les six mois suivant la cession ou l'ordonnance.

(3) L'administrateur n'encourt pas de responsabilité s'il a agi avec autant de soin, de diligence et de compétence pour prévenir le manquement visé au paragraphe (1) que ne l'aurait fait une personne raisonnablement prudente dans les mêmes circonstances.

[11] This is a very sympathetic case. From the time the appellant became aware of Jetcom's remittance problems from his senior management in August 1997, to the bankruptcy in December 1998, the appellant ensured that Jetcom paid over $378,000 in current and arrears remittances. Bonner J. characterized the appellant's actions as a "serious effort" to pay arrears, but not of "an attempt to prevent the failures to remit which did occur during the period" (paragraph 35).

[12] Save for one exception, I cannot say that Bonner J. made palpable or overriding errors in arriving at this conclusion.

[13] The one exception pertains to the remittances due December 31, 1997 and January 31, 1998. At paragraph 21 of his reasons, Bonner J. found that:

In December of 1997 the bank appointed a consultant to prepare a report on the performance and operations of Jetcom. The terms of the appointment, to which the Appellant reluctantly agreed, stripped him of all management responsibility and control over business operations.

The bank retained control from December 1997 until February 1998 when Jetcom was refinanced and the appellant regained control and made arrangements with Revenue Canada to pay current remittances and additional amounts to retire arrears.

[14] In some circumstances, when a director loses de facto control of a company, the director may be entitled to invoke the due diligence defence. See, for example, Canada (Attorney General) v. McKinnon (C.A.), [2001] 2 F.C. 203 at paragraphs 39 and 79. Each case will be decided on its own facts.

[15] Here, until at most, a few weeks prior to the bank taking over control, payments of current amounts due and some arrears were being made. On December 23, 1997, the bank called its loan. The remittances due December 31, 1997, and January 31, 1998, when the bank had control of Jetcom, were not made.

[16] In these circumstances, I do not see how it can be said that the appellant failed to be duly diligent when he had no management responsibility and no control over business operations.

[17] Bonner J. does say that there was no suggestion that the appellant asked the monitor to comply with the requirements to file returns and remit excise tax. However, once the appellant had lost control, that such a request was not made is not a failure of due diligence.

[18] Once the bank called its loan, the appellant had been given an ultimatum. The bank wanted its money. Apparently, the bank ultimately accepted about forty cents on the dollar in satisfaction of its outstanding loan to Jetcom. In these circumstances, it is obvious that a request to the representative of the bank to make GST remittances would have fallen on deaf ears.

[19] It will always be possible to find that a director did not take some step to prevent a failure of a corporation to remit tax. However, the test of due diligence under subsection 323(3) is not whether every conceivable step has been taken, but rather what steps to prevent failure "a reasonably prudent person would have exercised in comparable circumstances."

[20] A reasonably prudent person, I think, would be guided by a sense of business reality. Where the bank has called its loan, a simple request to make GST remittances by the appellant, when he had no power or leverage to influence the bank's monitor, is not realistic. It is not what a reasonably prudent person would do in comparable circumstances. I am of the respectful view that Bonner J. did not apply the reasonably prudent person test under subsection 323(3) in respect of the remittances that were due on December 31, 1997, and January 31, 1998, and that he erred in not finding that the due diligence defence applied to these two payments.

[21] In all other respects, I would not interfere with his due diligence findings.

3. Late Filing of Proof of Loss

[22] The appellant says that there was noncompliance by the Minister with paragraph 323(2)(c) with respect to the remittances that were due on November 30, 1998, and December 31, 1998. The company went into bankruptcy on December 4, 1998. Indeed, the amounts for November and December 1998 were not submitted to the trustee when the original proof of loss was filed. They were only submitted on January 11, 2000, over a year after the bankruptcy took place.

[23] The appellant says that the requirement to prove loss within six months is mandatory and that failure by the Minister to meet that deadline means that the appellant is not liable for the amounts due on November 30 and December 31, 1998.

[24] Subsection 299(5) of the Act provides:

(5) An appeal from an assessment shall not be allowed by reasons only of an irregularity, informality, omission or error on the part of any person in the observation of any directory provision of this Part.

(5) L'appel d'une cotisation ne peut être accueilli pour cause seulement d'irrégularité, de vice de forme, d'omission ou d'erreur de la part d'une personne dans le respect d'une disposition directrice de la présente partie.

[25] Bonner J. rejected the appellant's arguments, relying on the decision of this Court in Kyte v. The Queen (1997), 97 D.T.C. 5022. In Kyte, a certificate registered against the corporation was challenged on the basis that it was not in the correct amount. The argument was rejected on the grounds that the provision was directory and not mandatory. Paragraph 227.1(2)(a) is virtually identical to subsection 299(5).

[26] Bonner J. was of the view that the reasoning in Kyte was applicable to paragraph 323(2)(c) and to this case and that the late filing of an amended proof of loss was not fatal. I am in agreement with his analysis and his conclusion.

CONCLUSION

[27] The appeal should be allowed in respect of the remittances due December 31, 1997, and January 31, 1998, and in all other respects it should be dismissed. The Minister should reassess

in accordance with these reasons. As success was divided, there should be no order as to costs here and in the Tax Court.

"Marshall Rothstein"

J.A.

"I agree

A.M. Linden J.A."

"I agree

Marc Noël J.A."

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET: A-555-04

STYLE OF CAUSE: ROBERT ALAN MORIYAMA v.

HER MAJESTY THE QUEEN

PLACE OF HEARING: TORONTO, ONTARIO

DATE OF HEARING: MAY 26, 2005

REASONS FOR JUDGMENT

BY: ROTHSTEIN J.A.

CONCURRED IN BY: LINDEN J.A.

NOËL J.A.

DATED: JUNE 1, 2005

APPEARANCES:

Mr. David Douglas Robertson FOR THE APPELLANT

Ms. Marie-Thérèse Boris

Ms. Andrea Jackett FOR THE RESPONDENT

SOLICITORS OF RECORD:

Mr. David Douglas Robertson

Toronto, Ontario FOR THE APPELLANT

John H. Sims, Q.C.

Deputy Attorney General of

of Canada FOR THE RESPONDENT

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