Date: 19990129
Docket: 97-2306-GST-I; 97-2307-GST-I; 97-2309-GST-I
BETWEEN:
LAWRENCE RAYMOND BOYD, BARBARA BOUDREAU, JOSEPH BOUDREAU,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Hamlyn, J.T.C.C.
[1] The three Appellants filed a common Notice of Appeal. The appeals were heard by way of common evidence.
[2] The appeals are in respect of failure to remit Goods and Services Tax ("GST") by a corporation and subsequent notices of assessment sent to the three appellants in their capacity as directors of the corporation pursuant to subsection 323(1) of the Excise Tax Act (the "Act").
FACTS
[3] A Partial Agreed Statement of Facts was filed. It reads:
1. Joseph Boudreau, Barbara Boudreau and Lawrence Raymond Boyd (the "Appellants") were directors of B & B Trailer Supplies Ltd. ("B & B") at all material times; and the Appellants did not resign as directors of B & B at any time.
2. B & B was registered for GST effective January 1, 1991 and was required to report and remit GST on a monthly basis. Until default in September 1992, its GST payments were made in a timely manner.
3. On January 6, 1993, B & B filed a Notice of Intention to Make a Proposal under the Bankruptcy and Insolvency Act. On February 3, 1993 a Proposal was filed by B & B pursuant to the Bankruptcy and Insolvency Act.
4. On April 15, 1993 the Proposal, dated February 3, 1993, was annulled and B & B was deemed to have made an assignment in bankruptcy as at April 15, 1993.
5. By Notice of Assessment No. SWOL040 dated May 27, 1993 the Minister of National Revenue (the "Minister") assessed B & B for unremitted GST in the amount of $215,761.88 consisting of net GST in the amount of $209,998.15, penalty of $2,705.08, and interest of $3,058.65 for the period of September 1, 1992 to April 14, 1993.
6. A Proof of Claim, dated May 27, 1993, for the amount of B & B's liability to the Minister proved within six months after the date of B & B's assignment in bankruptcy under the Bankruptcy and Insolvency Act.
7. By Notices of Assessment Nos. 08BP-100430057-01, 08BP-100430057-02, and 08BP-100430057-03, dated January 26, 1996, the Minister assessed Joseph Boudreau's, Lawrence Boyd's and Barbara Boudreau's, respectively, tax liability in the amount of $147,570.10 consisting of net GST in the amount of $141,806.37, penalty of $2,705.08, and interest of $3,058.65 for the period of September 1, 1992 to February 29, 1993 in respect of B & B's failure to remit GST, interest and penalties.
8. By Notices of Decision dated December 6, 1996 the Minister confirmed the Notices of Assessment, referred to in paragraph 7 above, with respect to the Appellants' liability pursuant to subsection 323(1) of the Excise Tax Act ("Act").
THE VIVA VOCE EVIDENCE
[4] B & B Trailer Supplies Ltd. ("B & B") was in the business of selling trailer supplies to retailers. The company originally had its head office in Montreal. For the period in question the company was based in London, Ontario. The Appellant Joseph Boudreau was the President and the Appellant Lawrence Boyd was the Vice President. Both of these Appellants were directors of B & B and managed and ran the day-to-day activities of B & B. Mr. Boyd was the General Manager and in charge of operations and Mr. Boudreau was in charge of sales. The Appellant Barbara Boudreau is the wife of Joseph Boudreau and also was a director of B & B. In 1992 and 1993 she was not involved with the operations and management of the company. In l988 she left her active role as a bookkeeper with B & B; she and her husband stated her only role after that date was a means to allow her to receive income that normally would be destined for Mr. Boudreau.
[5] Mr. Boudreau held 75% of the shares of B & B and Mr. Boyd held the remaining 25% of the shares.
[6] The company in the eighties was expanding in terms of market share and facilities. Its physical premises grew and it acquired an existing western Canadian corporation. The National Bank of Canada ("Bank") advanced funds for these projects and sustained a line of credit to B & B.
[7] Each year the financing arrangements continued with variations and modifications as to terms.
[8] In the nineties, the trailer parts business, being part of a recreational based industry, declined with the recession bound economy.
[9] In l990, the Bank became concerned about the status and viability of B & B's borrowing and thereafter, over time, changed its relationship with the company. The Bank advised the company to seek other equity capital and reduced the Bank's risk in relation to the line of credit. The Bank imposed consultants on the company to be paid for by the company and placed daily controls on operating credit margins including the issuing of cheques.
[10] These arrangements continued until August 1992. Throughout this period the GST remittances were made and treated by the Bank and the company as 'prior claims'. However, at the end of August l992, the Bank's representative, according to Mr. Lawrence Boyd, told him not to pay GST. Mr. Boyd immediately passed this information on to Mr. Boudreau and informed the bookkeeper of the Bank's directive. Each day a list of proposed cheques, along with the daily report, were sent to the Bank, and B & B, after consultation with the Bank, would act on the cheques as the Bank instructed.
[11] During the months of September, October, November and December l992, the Bank imposed tightening credit controls and developed an exit strategy that removed the Bank's funds from B & B at an accelerated rate.
[12] In December l992 the directors Joseph Boudreau and Lawrence Boyd sought other means to solve B & B's problems. In January l993 they developed a proposal under the insolvency laws that would have seen the GST claim paid in six months. From February to mid-April this proposal in bankruptcy proceeded until it became apparent it was doomed to fail. What followed was bankruptcy.
[13] After consultations with professionals on April 14, l993, B & B prepared a cheque to the Receiver General for a large amount of the outstanding GST funds. The directors were advised the cheque would not be honoured.
[14] Even with bankruptcy the directors Joseph Boudreau and Lawrence Boyd were confident that GST claims would be paid as there were sufficient accounts receivables and inventory in their belief to cover the indebtedness. In the fullness of time however, this did not happen.
[15] Throughout the process, while their ability to use corporate funds was subject to Bank approval, the directors attempted to save the company and save the jobs of the employees.
[16] The documentary evidence filed supported much of the viva voce evidence.
[17] From 1987 onward, letters from the Bank to B & B set out the terms and conditions for credit.
[18] Later, the documents set forth the Bank's demand for the imposition of a consultant and the imposition of bank centred administrative services. Other filed documents speak about the Bank's priority in relation to the continuing debt and the Bank's concern about the on-going viability of B & B.
[19] Correspondence from B & B to the Bank shows the company's total dependency on the Bank and the desire to be amenable in the face of the looming alternatives.
[20] Examples of the daily filings to the Bank and the list of cheques sought to be issued support the evidence the Bank was in control of the cash flow.
[21] One point of evidence that was not supported by documents was the Bank's directive after August l992 that GST was not to be paid.
[22] The evidence from Mr. Boyd was clear, he unequivocally received this non-remittance directive. The evidence from the Bank official involved was that he did not recall saying that but it was possible that it could have been said.
[23] The focus of that same Bank official was to get the Bank's money back and indeed the last statement return of the Bank to him was complimentary and at the bottom was endorsed "the centre is to be commended for the successful wind-down of this loan".
[24] The evidence from another Bank employee involved prior to August l992 was to the effect that from time to time he told the company to put certain cheques 'in a drawer'; that is, the direction was clear — do not issue those cheques. Again, this evidence clearly supports the conclusion the Bank was in control over who should be paid.
[25] The veracity and credibility of the evidence of Mr. Boyd was unassailed. I accept that the Bank told him not to pay GST after August l992. Therefore, under the circumstances and given B & B's economic dependency on the Bank, the directors had no power to do otherwise.
[26] The other point of evidence in contention was the degree of knowledge and involvement of Barbara Boudreau. She advised when she left the company in l988 she was 'tired out', that she had taught her stepdaughter the necessary skills of bookkeeping and then left active involvement in the company. For the critical period of late l992 and the early period of l993 she was in Florida and was not present in London, Ontario. Mr. Joseph Boudreau stated he kept all the critical and damaging information about B & B from his wife. She was not told what was going on and that she only found out when Mr. Boudreau went to Florida in January l993 to tell her the Florida condominium had to be sold as things were not going well.
ANALYSIS
[27] The legislation sets forth director's liability of a corporation, where the corporation collects the GST and does not remit the tax to the Receiver General in accordance with the statutory regimen.
[28] Where a corporation fails to remit an amount of net tax pursuant to the Act, 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 the amount, any interest thereon and penalties relating thereto.
[29] Where a director can establish that he or she has exercised under subsection 323(3) of the Act the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances he or she will not be held liable pursuant to subsection 323(1) for the unremitted amount.
[30] The recent decision of the Federal Court of Appeal in Soper v. The Queen, 97 DTC 5407[1] is now the leading case on director's tax liability for both the Income Tax Act and the Excise Tax Act.[2] The Court in Soper reviews principles governing the conduct of directors when applying the due diligence test. These principles include the following:
· the standard of care is flexible, the analysis must look at the circumstances;
· the standard of care for director's tax liability is partly objective and partly subjective;
· once a director is aware or should be aware that there are problems with remittances, he or she has a positive duty to act; and
· an inside director will be held to a higher standard of care than an outside director.
[31] Otherjurisprudence indicates that directors should not be held liable for remittances in cases where they do not have control over the financial affairs of the corporation.
[32] In Fancy v. M.N.R., 88 DTC 1641 (T.C.C.), per Couture C.J.T.C., the bank of the company in question had begun monitoring all cheques issued by it and only authorizing certain payments. The bank refused to approve remittance payments to Revenue Canada and the Appellant-directors informed the latter of this fact. It was held that the directors were victims of circumstance over which they had no effective control and therefore they were exempt from liability under the due diligence provisions.
[33] In Robitaille v. The Queen, 90 DTC 6059 (F.C.T.D.), per Addy J., the bank had appointed a controller and no cheques were issued without his authorization, including those containing remittances to Revenue Canada. The Court held that a director is not liable for a failure to remit if he or she did not have control of the company at the time the remittance obligation arose. Addy J. wrote, at pages 6062-6063:
Furthermore, where the effective control of the corporation has been taken over by a bank such as in the case under appeal, without the bank being requested or invited to do so by the directors, and where the decisions as to what cheques will or will not be issued without consultation with the Board of Directors, are exclusively those of the bank, then from that time the actions of the corporation regarding the payment or withholding of monies are essentially those of the bank and I would be prepared to hold that, even without considering subsection 227.1(3), there would be no liability on the directors under subsection 227.1(1) because the latter obviously contemplates that the corporation is freely acting through its Board of Directors. The exercise of freedom of choice on the part of the director is essential in order to establish personal liability.
[34] Similarly, in Champeval et al. v. M.N.R., 90 DTC 1285 (T.C.C.), per Couture C.J.T.C. and Worrell et al. v. The Queen, 98 DTC 1783 (T.C.C.), per McArthur J.T.C.C. the Court held that in cases where the bank, and not the directors, had the ultimate authority to decide which cheques to pay, the Appellants had no freedom of choice in the matter and could not be held liable for the company's failure to remit.
CONCLUSION
[35] The Appellants Lawrence Boyd and Joseph Boudreau did not have the freedom of choice to remit the GST to the Receiver General from B & B as B & B's funds were under the strict control by the Bank.
[36] The Appellants Lawrence Boyd and Joseph Boudreau tried to resolve the GST difficulty after the Bank refused to allow B & B to issue cheques by working through a proposal in bankruptcy during the period of January to April 1993. They also, at the end, tried to issue a cheque in April 1993 to satisfy the liability. Lastly, they believed when bankruptcy did happen that that proceeding would result in satisfaction of the GST claim. I therefore conclude directors Lawrence Boyd and Joseph Boudreau, to the degree they could, beyond the strictures of the Bank's control, did exercise due diligence.
[37] The Appellant Barbara Boudreau the wife of Joseph Boudreau was an outside passive director, was not aware of the problem. Her function as director in terms of Joseph Boudreau was solely to receive income that would in effect be a means to reduce his income. She was purposely removed from the problems of B & B and was mislead by omission as to the financial status of B & B. When she did find out about the inability to meet the financial obligations (January 1993) there was no protective action she could take. At that point B & B was in a proposal under the insolvency laws.
DECISION
[38] The appeals are allowed and the assessments are vacated.
Signed at Ottawa, Canada, this 29th day of January 1999.
"D. Hamlyn"
J.T.C.C.
[1] In Soper, Linden J.A. concurred with the reasons of Robertson J.A. Marceau J.A. wrote a separate concurring judgment.
[2] In Drover v. The Queen, 98 DTC 6378 (F.C.A.) at page 6379, per Robertson J.A., the Court said of Soper that "[t]herein the relevant principles concerning director's liability and the due diligence defence are set out".