[OFFICIAL ENGLISH TRANSLATION]
2000-3958(GST)I
BETWEEN:
GILLES B. THIBAULT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on March 5, 2002, at Montréal, Quebec, by
the Honourable Judge Lucie Lamarre
Appearances
For the Appellant: The Appellant himself
Counsel for the Respondent: Benoît Denis
JUDGMENT
The appeal from the assessment made under Part IX of the Excise Tax Act for the period from June 1, 1992, to June 30, 1995, the notice of which is dated June 10, 1998, and numbered PM-98-0115, is allowed with costs and the said assessment is vacated.
Signed at Ottawa, Canada, this 19th day of March 2002.
|
"Lucie Lamarre" |
J.T.C.C.
Translation certified true
on this 22nd day of May 2003.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020319
Docket: 2000-3958(GST)I
BETWEEN:
GILLES B. THIBAULT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre, J.T.C.C.
[1] The respondent assessed the appellant as a director of 2863-1984 Québec Inc., which went bankrupt on June 25, 1996 ("bankrupt corporation") and which, under the Excise Tax Act ("Act"), owed the respondent a net tax, interest and penalty amount of $65,231.08 for the period from June 1, 1992, to June 30, 1995.
[2] The respondent relied on section 323 of the Act in attributing that tax liability to the appellant, since he was a director of the bankrupt corporation at the time it was required to remit the amount of net tax during that period.
[3] The appellant, a lawyer by training, argued in his defence that, during the period in question, he had exercised the degree of care, diligence and skill to prevent the bankrupt corporation's failure that a reasonably prudent person would have exercised in comparable circumstances.
[4] He explained that he had started up his law firm in 1991. At the same time, a corporation of which he was the sole shareholder and director, 2863-1380 Québec Inc., purchased an immovable property to sublet it to the bankrupt corporation, which was acting as a management company for the appellant's law firm. The bankrupt corporation in turn sublet the property to the law firm. That approach was recommended to the appellant by the accounting firm of Moquin, Ménard. I understand from the appellant's testimony that the said property was occupied solely by his law firm.
[5] The appellant explained that the corporation that owned the property carried on no commercial activity other than owning the property. The rent payments corresponded to the exact amount of the mortgage. At first, these payments were made by the law firm to the bankrupt corporation, which transferred them to the corporation that owned the property, which in turn made the mortgage payments to the credit union. According to the appellant's testimony, that approach led to delays in making the mortgage payments, and the credit union therefore agreed that the law firm could make the payments directly to it. The credit union even closed the bank account of the corporation that owned the property.
[6] The bankrupt corporation registered for the goods and services tax ("GST") in 1991. The appellant initially dealt with the accounting firm of Moquin, Ménard for his bookkeeping. He later hired his own controller to work for his firm. He paid the controller an annual salary of between $30,000 and $60,000 over the years. The firm also equipped itself with a computerized accounting system recommended by the Barreau du Québec.
[7] The appellant testified that over the years his law firm has always filed GST returns and financial statements for its legal practice. With regard to the collection of GST on the rental income, he explained that his accountant had recommended to him that an election be made under the Act whereby the bankrupt corporation would waive the input tax credits with respect to the rent and thus be exempted from collecting the GST.
[8] In 1995, when an audit was conducted by the Quebec Department of Revenue ("Revenu Québec"), the appellant was apparently told that such an election could not be made and that the bankrupt corporation should have collected GST amounts on the rental income. The appellant thereupon met with a representative of Revenu Québec to attempt to agree on the terms for paying the GST on the rental income. The appellant's accountant and his controller were present at that meeting.
[9] The appellant suggested that the amounts owed by the bankrupt corporation, for which he is now being held liable, are those GST amounts not collected on the rent. He argued that, since he had received professional advice from his accountants indicating that the bankrupt corporation did not have to collect the GST if an election was made, he cannot now be accused of failing to exercise diligence to prevent the failure.
[10] Counsel for the respondent filed a power of attorney signed by the appellant in September 1995 and authorizing his accountant to sign the GST returns for the period from April 1992 to April 1995. The respondent also filed a copy of some of those returns completed on the bankrupt corporation's behalf as well as a computer printout of the GST returns allegedly provided by the accountant at the time. The appellant argued that those returns were for the GST amounts that the bankrupt corporation had to collect on the rent and stated that they were filed in September 1995 after it was learned that the election made was not valid. According to him, this is confirmed by the fixed income amounts shown on the GST returns, since rental income generally consists of fixed monthly amounts, whereas a law firm's income is variable.
[11] Mr. Malo, a collection agent at Revenu Québec's tax collection centre who testified for the respondent, was unable to trace the assessments made against the bankrupt corporation. He said that he assessed the appellant as a director on the basis of the GST returns that had been signed by the appellant and sent through his accountant without the amounts owed being remitted. Mr. Malo could not say whether the amounts assessed against the bankrupt corporation for which the appellant is being held liable derived from the GST amounts not collected on the rental income or on the law firm's income.
[12] The respondent filed an Amended Reply to the Notice of Appeal the day before the hearing. In that Amended Reply, the respondent made the new allegation that the bankrupt corporation had filed its quarterly returns for the periods from July 1, 1991, to June 30, 1995, with the Minister of National Revenue ("Minister") in September 1995, that is, after the prescribed time limit. The appellant did not accept that claim and submitted that returns had been filed in the past and that the GST returns filed in September 1995 were those dealing with the rental income. Since that new allegation in the Amended Reply was contested, and since the Amended Reply was filed after the close of pleadings, I allowed the Amended Reply to be filed but imposed on the respondent the burden of proving the new allegation. However, Mr. Malo was unable to trace anything in his file. He could not trace any of the assessments made against the bankrupt corporation or any of the bankrupt corporation's previous GST returns.
[13] The file auditor who made the assessments against the bankrupt corporation was not at the hearing. No explanation was given for his absence. In view of the appellant's assertion that returns were filed in the past, it was up to the respondent to prove that this was not the case. In my opinion, the respondent has not succeeded in doing so. Although Mr. Malo did not trace any such returns in his file, nor did he trace the assessments made against the bankrupt corporation. Obviously, he did not have the bankrupt corporation's file in his possession. In my view, the respondent has not succeeded, through her evidence, in impeaching the credibility of the appellant's testimony. The appellant maintained that he had employed a controller throughout the years 1991 to 1995 and that he had had no reason to doubt that the controller was remitting the GST on the law firm's income. Moreover, he explained that GST remittances were not made on the rent because of the professional advice given by his accountant. I agree with the appellant that it is difficult to argue that he failed to exercise diligence to prevent the failure when his professional adviser had maintained, rightly or wrongly, that no tax was payable on the rent by virtue of an election made under the Act.
[14] As I see it, this is a case in which the director of the bankrupt corporation may have been misled (if in fact a mistake was made as regards the possibility of an election under the Act, which I do not have to decide here) by his professional adviser, which is something for which the appellant cannot be held liable. As stated by Robertson J.A. in Soper v. The Queen, [1998] 1 F.C. 124, [1997] F.C.J. 881, at paragraph 53, the positive duty to act arises where a director obtains information, or becomes aware of facts, which might lead one to conclude that there is a problem with remittances. Although that comment was made in discussing the liability of an outside director, I think that it also applies where an inside director could not reasonably be expected to have doubted the possibly mistaken advice given by his or her professional adviser.
[15] Moreover, while it is possible that the assessments made against the bankrupt corporation did not relate solely to the rent, the evidence in the record does not enable me to determine whether such was actually the case.
[16] In the circumstances, I would accept the due diligence defence made by the appellant under subsection 323(4) of the Act and allow the appeal with costs.
Signed at Ottawa, Canada, this 19th day of March 2002.
|
"Lucie Lamarre" |
J.T.C.C.
Translation certified true
on this 22nd day of May 2003.
Erich Klein, Revisor