Date: 20021125
Docket: 2000-1594-GST-G
BETWEEN:
AGATHA KIT CHUN LAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Docket: 2000-1596(GST)G
BETWEEN:
PATRICK WING CHU LAU,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1] These appeals are from assessments under subsection 323(1) of the Excise Tax Act of the appellants as directors of Nikiko Restaurant Inc. ("Nikiko") for unremitted goods and services tax ("GST") for the period October 1, 1992 to June 30, 1996. The appellants are husband and wife.
[2] The position of Agatha Lau ("Agatha") is that she was not a director of Nikiko and in any event she exercised the due diligence contemplated by subsection 323(3) of the Excise Tax Act. Patrick Lau ("Patrick") admits that he was a director but says that he was an outside director as that expression was used in Soper v. The Queen, 97 DTC 5407 (F.C.A.), and that in any event he exercised the due diligence contemplated by subsection 323(3). He raises a further argument about the validity of an assessment issued after a corporation has filed for bankruptcy and also argued that a substantial portion of the services were zero-rated.
[3] For the reasons that follow I am satisfied that the appellants are entitled to succeed.
[4] Patrick has practised as a commercial photographer for the past 26 years. In 1990 or 1991 he was approached by two friends who were successful businessmen (the investors) in Macao and who wanted to open a Japanese restaurant in Canada. They asked Patrick to oversee the restaurant and he agreed to do so as a favour to these people although his understanding was that he would not be involved in the day-to-day operations.
[5] On March 25, 1991 Patrick caused 935376 Ontario Inc. to be incorporated under the Ontario Business Corporations Act.
[6] In April it changed its name to Nikiko Restaurant Inc. The articles of incorporation showed Patrick as the sole director. All of the issued and outstanding common shares of Nikiko (100 common shares) were owned by Patrick.
[7] Two offshore trusts, one for each of the families of the two investors, each owned 100 Class A shares. These shares were non-voting but were convertible into an equal number of common shares.
[8] Patrick hired a manager to run the restaurant. He did not have the time to do the bookkeeping and as he needed someone for this purpose he asked his wife Agatha to do so and she agreed. Neither Patrick nor Agatha ever received any remuneration. She had no formal training in bookkeeping and at Patrick's suggestion she consulted with Ricky Wong, a manager for KMPG Peat Marwick Thorne ("KPMG"), a national accounting firm. He set up the accounting system for her including a computer system relating to the payroll, the expenses and the receipts. Mr. Wong also discussed with her the GST filings. Agatha did the quarterly GST filings and would calculate the GST payable and the input tax credits on the computer using the ACCPAC and Excalibur systems. If she had a problem she would call KPMG. She would prepare the cheques to the government for the GST payable.
[9] She sent to KMPG the GST forms that she had filed, as well as the corporate forms, books and bank statements and assumed that if she did not hear from them she was doing nothing wrong.
[10] Nikiko carried on the restaurant business from March 25, 1991 until January 1997. On January 11, 1997 Nikiko ceased operations and on January 17, 1997 it filed an assignment in bankruptcy. On January 20, 1997 the CCRA issued a notice of assessment to Nikiko for the GST that is the subject of the derivative assessments against the appellants.
[11] The claim by the CCRA for unremitted GST appears to arise partially from what have been described as management or consulting fees of $183,230, $352,743 and $306,454 received by Nikiko mostly from the investors in the years 1993, 1994 and 1995. No GST was paid on these fees.
[12] I shall deal first with the assessment against Agatha. The central question is whether she was a director of Nikiko. Mr. Henry Hui was the first witness called on behalf of the appellant. Mr. Hui is a barrister and solicitor who has practised law in Ontario since 1975. He was the lawyer who acted on the incorporation of Nikiko on March 25, 1991 and has kept the minute book of the company in his office. The entire minute book was entered as an exhibit. It shows Patrick as the incorporator. Agatha's name as a director appears in By-law No. 1 but neither she nor Patrick signed it. There is a certificate and consent to act as director dated May 2, 1991 with Agatha's name on it. She did not sign that either.
[13] A resolution of the shareholders of Nikiko appears in the book purporting to elect Patrick and Agatha as directors. It is not signed. Other resolutions of directors appear in the book but they are not signed.
[14] In the directors' register Patrick and Agatha's names appear but like everything else in the minute book it is not signed.
[15] Tab 8 of Exhibit A/R-1 is Form 1 under the Corporations Information Act. It shows Patrick and Agatha as directors. It is signed by Ms. P. Sun, Mr. Hui's former secretary. Mr. Hui stated that in light of Agatha's failure to sign the consent to act as director her name in the form signed by Ms. Sun was an error. I agree. Mr. Hui's office had no authority to show Agatha as a director. She never consented to act as director, she was never elected director by the sole voting shareholder and she never held herself out as a director.
[16] As a matter of fact even if one could place any reliance on the form under tab 8, there is another form in the minute book apparently signed by the same Ms. Sun showing that Agatha was elected a director on May 2, 1991 and that she ceased to be a director on the same day.
[17] In a special notice filed with the Ontario Government (tab 37 of Exhibit A/R-1) there is a document that purports to be signed by Agatha Lau. She denies ever having seen it and I accept what she says. Even if she had signed it this would not make her a director. In any event attached to it as Schedule A is information on officers and directors, Agatha is shown as having been elected a director and secretary on March 1, 1990, which as it happens, is about 14 months before the company came into existence.
[18] To hold Agatha liable as a director when she was not one, in law or in fact, based on the slapdash work of the law firm, would be unconscionable. Agatha was not at any time a director. Her appeal is allowed and the assessment against her is vacated.
[19] I come now to Patrick. He does not have the defence available to him that his wife has. He admits that he was a director. Like his wife he received no compensation from the company. His principal defence is due diligence. Has it been made out? I believe it has. He ensured that his wife was given instructions in keeping the books and records. He relied upon her to check with KPMG and she did so if she encountered a problem. She submitted the returns to KPMG as well as other information and if they did not get in touch with her she assumed there was no problem.
[20] I do not think that one can realistically separate Patrick's defence of due diligence from his reliance upon his wife's competence. He was satisfied that she was capable of understanding and carrying out KPMG's instructions with respect to accounting for the GST. She carried out those instructions to the satisfaction of KPMG and her mastery of the ACCPAC accounting system appears to have been satisfactory. She had no reason to believe that she was doing anything wrong and neither did Patrick. All revenues were fully disclosed to KPMG, including the so-called consulting fees. They were disclosed in the financial statements prepared by KPMG.
[21] In fact, Patrick testified that the amounts were recorded as consulting fees based on the advice of Connie Mak of KPMG. The consulting fees, which totalled about $842,000 over the three years 1993, 1994 and 1995, were put into Nikiko's operating account and recorded by KPMG as consulting and management fees. This is the only evidence that I have with respect to the nature of these amounts and so I have to accept the evidence at its face value although over $800,000 does seem like a lot of money for two residents of Macao to be paying to a Japanese restaurant as consulting fees.
[22] In light of Patrick's expectation that KPMG were monitoring his wife's work with respect to the reporting and paying of GST I think he was acting reasonably with respect to Nikiko's GST obligations.
[23] There have been a number of cases in this court and in the Federal Court of Appeal involving directors' liabilities for unremitted tax under the Income Tax Act and the Excise Tax Act. I set them out in Fremlin v. R., [2002] G.S.T.C. 65 at paragraph 32 and they need not be repeated here. They demonstrate an evolution in the law with respect to the derivative liabilities of directors for unremitted tax. Some of the earlier cases in this court imposed in my view an unduly stringent obligation on directors. Section 323 of the Excise Tax Act and section 227.1 of the Income Tax Act do not demand the impossible. They do not require perfection. Directors are not insurers for the fisc. All that is needed is that the director "exercise the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances."
[24] One might ask the question "What did the director fail to do that ought reasonably to have been done?" The answer is, in this case, nothing. Once Patrick was satisfied that Agatha's mastery of the system was adequate and that she could rely on KPMG for any assistance she needed with respect to the GST filing and remittances I think it would be unreasonable to require him to go further and check her work, particularly when neither he nor Agatha were given any indication that anything was wrong.
[25] This conclusion is sufficient to dispose of the appeals. However a number of other arguments were advanced and out of respect to counsel I shall mention them briefly.
[26] Counsel for the appellants argued that the director's liability under section 323 of the Excise Tax Act is dependent upon a number of conditions being met, one of which is contained in paragraph 323(2)(c), that the Crown's claim be proved in the bankruptcy of the corporation within six months of the assignment in bankruptcy. Counsel contends that the Crown has failed to prove that this condition has been met. I agree that the onus of proving this is on the Crown and the proof of claim did not find its way into the evidence. Nonetheless the notices of appeal state that the CCRA filed a proof of claim on February 7, 1997 and the replies admit the allegation except for the date. Moreover it is pleaded in both replies as an "assumption", so-called, that the Minister of National Revenue filed a proof of claim in the bankrupt estate of Nikiko on February 10, 1997. That assumption is unrebutted and the practice in this court, subject to certain exceptions, is that unrebutted assumptions pleaded in the reply must be taken as true.
[27] This point seems not to have been argued in Wollitzer v. Canada, [1995] T.C.J. No. 259, to which counsel referred.
[28] I am reluctant to push the concept of "assumption" stated in M.N.R. v. Pillsbury Holdings Ltd., 64 DTC 5184, any further than it has already been pushed. It gives the Crown a powerful advantage and is potentially capable of abuse. In light of my finding that Agatha was not a director and Patrick exercised due diligence and in light of the admitted statements in the notices of appeal I think it is preferable that I leave to another day the question whether the mere pleading of an assumption of a fact that is peculiarly within the respondent's knowledge and in respect of which the respondent has the onus of proof is sufficient to cast the onus on the appellant of disproving the assumption. I do not find the proposition particularly attractive. While it may be that the persons who criticise the rule on the basis that it means that a taxpayer in a civil tax appeal is "guilty until proved innocent" might themselves be criticized for employing in their zeal a touch of hyperbole, nonetheless it must be remembered that the rationale for the rule that the taxpayer bears the onus of proof is found not only in M.N.R. v. Johnston, [1948] S.C.R. 186 but also in Anderson Logging Co. v. The King, 52 DTC 1209, where Duff J. said at p. 1211:
First, as to the contention on the point of onus. If, on an appeal to the judge of the Court of Revision, it appears that, on the true facts, the application of the pertinent enactment is doubtful, it would, on principle, seem that the Crown must fail. That seems to be necessarily involved in the principle according to which statutes imposing a burden upon the subject have, by inveterate practice, been interpreted and administered. But, as concerns the inquiry into the facts, the appellant is in the same position as any other appellant. He must shew that the impeached assessment is an assessment which ought not to have been made; that is to say, he must establish facts upon which it can be affirmatively asserted that the assessment was not authorized by the taxing statute, or which bring the matter into such a state of doubt that, on the principles alluded to, the liability of the appellant must be negatived. The true facts may be established, of course, by direct evidence or by probable inference. The appellant may adduce facts constituting a prima facie case which remains unanswered; but in considering whether this has been done it is important not to forget, if it be so, that the facts are, in a special degree if not exclusively, within the appellant's cognizance; although this last is a consideration which, for obvious reasons, must not be pressed too far.
[29] I do not read that passage as permitting the Crown to plead anything it likes as an assumption, whether or not it is uniquely within the Crown's knowledge, and expect the taxpayer to disprove it. The cards are already sufficiently stacked in favour of the Crown. A similar reservation was expressed by L'Heureux-Dubé J. in Hickman Motors Limited v. The Queen, 97 DTC 5363 at p. 5370. See also Mungovan v. The Queen, 2001 DTC 691 at paragraphs 10-13. I need not decide this point here, however.
[30] The next argument is that the notice of reassessment against Nikiko was issued on January 20, 1997, three days after Nikiko filed its assignment in bankruptcy and that in light of subsection 69.3(1) of the Bankruptcy and Insolvency Act the notice of reassessment is invalid. Subsection 69.3(1) reads:
Subject to subsection (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor's property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy, until the trustee has been discharged.
[31] Section 4.1 makes the Bankruptcy and Insolvency Act binding on the Crown. Counsel for the appellants argued that the derivative assessments against the appellants are based upon an invalid act, the notice of assessment against Nikiko.
[32] I do not agree. The notice of assessment is simply a statement of the Minister's calculation of the taxpayer's liability. As Thorson P. said in Pure Spring Co. Ltd. v. Minister of National Revenue, 2 DTC 844, at p. 857:
The assessment is different from the notice of assessment; the one is an operation, the other a piece of paper. The nature of the assessment operation was clearly stated by the Chief Justice of Australia, Isaacs, A.C.J., in Federal Commissioner of Taxation v. Clarke(1927) 40 C.L.R. 246 at 277):
An assessment is only the ascertainment and fixation of liability.
a definition which he had previously elaborated in The King v. Deputy Federal Commissioner of Taxation (S.A.); ex parte Hooper ((1926) 37 C.L.R. 368 at 373):
An "assessment" is not a piece of paper: it is an official act or operation; it is the Commissioner's ascertainment, on consideration of all relevant circumstances, including sometimes his own opinion, of the amount of tax chargeable to a given taxpayer. When he has completed his ascertainment of the amount he sends by post a notification thereof called "a notice of assessment" ... But neither the paper sent nor the notification it gives is the "assessment". That is and remains the act of operation of the Commissioner.
It is the opinion as formed, and not the material on which it was based, that is one of the circumstances relevant to the assessment. The assessment, as I see it, is the summation of all the factors representing tax liability, ascertained in a variety of ways, and the fixation of the total after all the necessary computations have been made.
[33] Obviously the notice of assessment serves a function. It is evidence that an assessment has been made and that the Minister has determined how much he thinks the taxpayer's liability is. It starts time limits running. Indeed, it is conceptually somewhat difficult to believe that an "assessment" can exist in the Minister's mind in some metaphysical and incorporeal state, without any notice being given to the taxpayer. Unquestionably a notice of assessment is required before the assessment has any practical effect. I do not think an assessment is complete until notice has been given to the taxpayer. This is clear from the decision of Thurlow J. (as he then was) in Scott v. M.N.R., 60 DTC 1273.
[34] Nonetheless I do not think that subsection 69.3(2) of the Bankruptcy and Insolvency Act has the effect of preventing a notice of assessment from being issued against the company after the assignment in bankruptcy. Undoubtedly it would prevent the Minister from taking the proceedings contemplated by section 316 of the Excise Tax Act such as filing a certificate in the Federal Court and obtaining a writ under subsection 316(4). I do not however regard a notice of assessment as being an "action, execution, or other proceedings ..." within the meaning of subsection 69.3(1) of the Bankruptcy and Insolvency Act.
[35] Even if the notice of assessment were in some way invalidated by the fact it was issued after the assignment in bankruptcy this does not in my view prevent the Minister from pursuing his remedies against the directors. The liability for tax exists independently of the existence of any assessment (subsection 299(2) of the Excise Tax Act).
[36] Counsel for the respondent argued that it was not open to the appellants to attack the assessment against the company. In light of Gaucher v. The Queen, 2000 DTC 6678, this argument is not sustainable.
[37] I turn now to the management and consulting fees. Some of them were paid in cash to Nikiko. Some were from two domestic companies Tri/Novo and Greatwill. The amounts were initially recorded as shareholders' loans, but on the advice of Connie Mak of KPMG they were later designated as consulting fees. Mr. Ho, the auditor for the CCRA, agreed that if these amounts were shareholder advances or loans or if they were zero-rated they were not taxable.
[38] Counsel for the appellants argued that I should find that the amounts were shareholder advances, notwithstanding their treatment in Nikiko's books as consulting and management fees. Given their magnitude, the irregular way in which they were paid and the fact that on many occasions they were paid in cash by the wives of the two Macao shareholders there might be grounds to suspect that they really were not consulting or management fees. However such a conclusion would be based on conjecture, not evidence. The only conclusion that the evidence safely permits is, notwithstanding the doubts I may have, that the payments were consulting and management fees.
[39] Counsel argued then that under Schedule VI, Part V of the Excise Tax Act the consulting fees are zero-rated under section 23 which reads
A supply of an advisory, professional or consulting service made to a non-resident person, but not including a supply of
...
(b) a service in respect of real property situated in Canada;
...
[40] They were said by Patrick to relate, in a vague sort of way, to "investments" - including the stock market or possible businesses. Counsel argued that this takes then out of the exception for real estate. That may well be, but if someone wants a supply to be zero-rated it is not a bad idea to nail down the grounds with some considerable specificity. I do not care to base a conclusion on such vague assertions.
[41] Counsel was also critical of the way in which the assessment against Nikiko was made. It was argued that it was based on insufficient information. Perhaps it was, but I have some sympathy for Mr. Ho, the assessor. He was having difficulty in getting information from Agatha, the restaurant closed and the company went bankrupt. He had to move fast and he did. I cannot criticize that.
[42] I have concluded that Agatha was not a director of Nikiko at any time and Patrick has demonstrated that he acted reasonably and met the due diligence test required by subsection 323(3) of the Excise Tax Act.
[43] The appeals are allowed and the assessments made under section 323 of the Excise Tax Act are vacated.
[44] Counsel for the appellants asked that before the formal judgment is issued he be given an opportunity to address the matter of costs. I would ask that counsel communicate with the registry to determine a suitable time for dealing with this question. If counsel agree it can be done by telephone conference or in writing.
Signed at Ottawa, Canada, this 25th day of November 2002.
|
"D.G.H. Bowman" |
A.C.J.COURT FILE NOS.: 2000-1594(GST)G and 2000-1596(GST)G
STYLE OF CAUSE: Between Agatha Kit Chun Lau and
Her Majesty The Queen
AND Between Patrick Wing Chu Lau and
Her Majesty The Queen
PLACE OF HEARING: Toronto, Ontario
DATES OF HEARING: September 4 and 5, 2002
REASONS FOR JUDGMENT BY: The Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF REASONS FOR JUDGMENT: November 25, 2002
APPEARANCES:
Counsel for the Appellants: Robert J. Morris, Esq.
Counsel for the Respondent: J. Michelle Farrell
COUNSEL OF RECORD:
For the Appellants:
Name: Robert J. Morris, Esq.
Firm: Lerner & Associates LLP
Toronto, Ontario
For the Respondent: Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada