BETWEEN:
and
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
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Appeal heard on August 30, 2005, at Baie-Comeau, Quebec
Before: The Honourable Justice Alain Tardif
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JUDGMENT
The appeal from the assessment of goods and services tax under Part IX of the Excise Tax Act, notice of which is dated November 19, 2002, and bears No. PQ-2002-6799, is dismissed, in accordance with the attached reasons for judgment.
Signed at Ottawa, Canada, this 17th day of October 2005.
Certified true translation
on this 14th day of March, 2006.
Julie Poirier, Translator
BETWEEN:
CLÉMENT JONCAS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
[1] This is an appeal from an assessment of goods and services tax ("GST"), No. PQ-2002-6799, dated November 19, 2002, made under the Excise Tax Act (the "Act").
[2] The issues are as follows:
· Is the Appellant, in his capacity as a director of the company, jointly and severally liable, with the company, for payment of the net tax owing and of interest and penalties?
· Did the Appellant, as a director of the company, act with the care, diligence and skill to prevent the company's failure to pay the net tax owing that a reasonably prudent person would exercise in comparable circumstances?
[3] The Minister of National Revenue (the "Minister") relied on the following assumptions of fact, inter alia, in making the assessment:
(a) during 2000 and 2001, the Appellant was a director of La compagnie Industrielle de Hauterive ltée (the "company") (admitted)
(b) during the above-mentioned years, the company was a GST registrant. (admitted)
(c) when the company was audited, it was determined that it had collected GST but failed to remit it to the Respondent during the period from July 1, 2000, to November 19, 2001. (admitted)
(d) on March 19, 2002, the company made an assignment under the Bankruptcy and Insolvency Act; (admitted)
(e) although the Respondent filed a proof of claim on August 29, 2002, within six months from the date of the company's bankruptcy, the Respondent's claim has never been paid in full; (admitted)
(f) the Appellant was a director of the company during the periods when the company was required to pay the net tax to the Respondent; (admitted)
(g) the Appellant handled the day-to-day management of the company during the period in issue;(admitted)
(h) more specifically, the Appellant signed the company's tax return for the fiscal year ending on December 31, 1999, on February 23, 2000; (admitted)
(i) as well, the Appellant signed various cheques during 2001, as a director of the company, for the administration of the company and for remissions of its taxes. (admitted)
(j) as a director of the company, the Appellant signed the company's bankruptcy balance sheet on March 29, 2002. (no knowledge)
(k) the Appellant failed to act with the degree of care, diligence and still to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances; (denied)
(l) in particular, the Appellant failed to take any concrete and positive action to prevent the company's failures; (denied)
[4] The Appellant was represented by his accountant, Jean-Louis Martel. Mr. Martel admitted paragraphs (a) to (i) inclusive, stated that he had no knowledge of the content of paragraph (j), and denied the content of paragraphs (k) and (l).
[5] The Appellant and his accountant explained that the company in question was established in the 1980s.
[6] At one time, the company's sales volume was nearly $2,000,000 and it was flourishing; it provided employment for a number of people, and had as many as 30 employees on its payroll.
[7] At the end of the 1990s, the region was hit by an economic slowdown and the firm's annual sales fell off radically, dropping to about $600,000.
[8] The work force was reduced to a minimum. Just before the firm closed, it was operating with only four employees. Because of the numerous financial problems, the Appellant, who was managing the company, stopped buying from suppliers and renewing inventory, given that the bank no longer wanted to grant the loans that were needed. At one point, the bank also demanded repayment of loans charged to the line of credit and stopped accepting cheques issued by the company.
[9] In order to comply with an agreement made with the Minister regarding the amounts owing, the company opened a new account at the Caisse populaire de Hauterive. Four cheques for $1,500, numbers 419, 420, 421 and 422, were drawn on that account, all to pay the accumulated debts.
[10] However, the company still continued to be late in filing its returns and paying the amounts associated with those returns.
[11] Because of the difficulties it was experiencing, the company started the process for submitting a proposal to its creditors. The liquid assets on which its proposal was based was to come from the sale of the property and business to what then seemed to be an interested entity.
[12] Because of delays in finalizing that sale, the company requested and was granted several extensions of time for filing a proposal to its creditors; without a purchaser for the business, the company ultimately never submitted a proposal. Consequently, the case ended up in the hands of the trustee for an assignment. The Appellant and his accountant said that everything possible had been done to pay the amounts set out in the assessments under appeal.
[13] The Appellant submitted evidence that was consistent with what was stated in the notice of appeal dated January 21, 1994, in which he stated:
[TRANSLATION] I managed my company for a number of years without ever failing to remit all taxes owing to the government on time. In recent years, because the economic situation in our region has deteriorated rapidly, I have had financial difficulties, which became so serious that ultimately I had to resign myself to my company going bankrupt. I did everything in my power to remedy the situation, but I was unsuccessful. However, I do not believe that I was negligent in the performance of my duties, and that is why I refuse to admit that I am personally responsible for a loss suffered by the company when it closed down permanently.
[14] In the Appellant's view, the fact that the account at the Caisse populaire was opened proved that he did everything possible to pay the amount owing. However, he also said that payment of the employees' wages had come before payment of the amounts owing to the Minister.
[15] The Respondent called Jacques Dumais, who is in charge of the collections case. Mr. Dumais, referring to his file, described the numerous efforts made by representatives of the Minister, in writing and by telephone, beginning in November 2000, to collect the amounts owing.
[16] Subsections 323(1), (2) and (3) of the Act read as follows:
323(1) Liability of directors - Where a corporation fails to remit an amount of net tax as required under subsection 228(2), 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) Limitations A director of a corporation is not liable under subsection (1) unless
(a) a certificate for the amount of the corporation's liability referred to in that subsection has been registered in the Federal Court under section 316 and execution for that amount has been returned unsatisfied in whole or in part;
(b) the corporation has commenced liquidation or dissolution proceedings or has been dissolved and a claim for the amount of the corporation's liability referred to in subsection (1) has been proved within six months after the earlier of the date of commencement of the proceedings and the date of dissolution; or
(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) Diligence - 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.
[17] There is no doubt that the company the Appellant managed intended to pay the various amounts owing. Is that, in itself, sufficient for a finding that the director was diligent? Did the Appellant act with care, diligence and skill in relation to the payment of the net tax he had collected?
[18] The amounts that are the subject of the assessments were money collected and administered by the company as agent for the Respondent.
[19] In other words, they were money that belonged to someone else. They were not uncollected amounts of money. They were money collected, but used for other purposes, and in particular to pay wages or certain debts that were deemed by the Appellant to be more urgent, at the expense of the debt owing to the Minister.
[20] Intending to pay a tax debt is one thing, but taking concrete and tangible action to make payment of the debt is an entirely different thing.
[21] Mere intent is not sufficient to bring someone within the exception set out in subsection 323(3) of the Act. In order to be relieved of any liability, a director must have acted with the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. Reasonable prudence goes beyond mere intention. It implies that concrete action be taken and consistently followed up, particularly if the director in question has full authority over the management of the firm.
[22] In this case, the money that should have been paid to the Minister was used to keep the company alive artificially. Doing everything in one's power to keep a business afloat is a courageous decision deserving of recognition; on the other hand, if that decision requires that money belonging to someone else be used, it is totally unacceptable and is not an act of reasonable diligence.
[23] What the Appellant did, in his capacity as director, was to make decisions on a daily basis. One of the things he decided to do was to write cheques to certain creditors. Although the choice he made may have seemed legitimate to him, having regard to the circumstances, that does not justify using the taxes collected for other purposes.
[24] Every business that collects taxes on behalf of the government has a duty to pay those taxes within the time provided, and is subject to severe penalties if it fails to do so. Using that money to operate a business that is experiencing financial difficulties is totally unacceptable and flatly improper.
[25] The Appellant was the prime mover in the business, and in his capacity as agent he should have deposited the money collected in a special account so that he would be able to pay it to the proper party.
[26] Using that money for the company's day-to-day business is in itself a serious mistake, and cannot be used as evidence of reasonable diligence. Because the Appellant has failed to prove that he acted with care and diligence to prevent the company's failure to pay the net tax owing, his appeal must be dismissed.
Signed at Ottawa, Canada, this 17th day of October 2005.
"Alain Tardif"
Tardif J.
Certified true translation
on this 14th day of March, 2006.
Julie Poirier, Translator
STYLE OF CAUSE: Clément Joncas and Her Majesty the Queen
PLACE OF HEARING: Baie-Comeau, Quebec
DATE OF HEARING: August 3, 2005
REASONS FOR JUDGMENT BY: The Honourable Justice Alain Tardif
DATE OF JUDGMENT: October 17, 2005
APPEARANCES:
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Agent for the Appellant: |
Jean-Louis Martel
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Counsel for the Respondent: |
Philippe Morin |
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada