Date: 19990819
Docket: 97-3248-GST-I
BETWEEN:
ABTAR SINGH BAINS,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUE:
[1] The issue is whether the Appellant is liable, as a director of The Lantern House Restaurant Ltd. ("Company") under section 323 of the Excise Tax Act ("Act"), Part IX, respecting Goods and Services Tax, for tax which the company failed to remit to the Receiver General for the period from December 1, 1994 to August 31, 1996 and for penalties and interest relating thereto.
FACTS:
[2] The Appellant became a shareholder and director of the Company in 1984, having been contacted by a friend, Robert Heath ("Heath"), who introduced him to John Davies ("Davies"), a shareholder and director of the Company and manager of the restaurant operated by it. The Appellant described himself as a silent investor. He testified that the restaurant had been operating for five years when he entered the scene. He said that he had no knowledge of the restaurant business and that he was simply an investor like Heath who also had no knowledge of that business. He stated that Davies was the manager, had all responsibilities of running the business, including hiring, firing, purchase of supplies, payment of bills, et cetera and that he and Heath had nothing to do with the operation of the restaurant. He stated that Davies alone had authority to sign cheques and that he looked after all matters. Heath ceased to be a director in 1987, his shares having been purchased by Capital City Holdings Ltd. ("Capital City"), of which the Sundher brothers were shareholders and directors.
[3] The Appellant stated that a financial statement was prepared once a year and that Davies and the accountant prepared inventory work once a month. He said that he took no interest in the inventories. The Company continued in that form until its bankruptcy on October 3, 1996. He testified that he was not aware of any financial difficulty for 1990, 1991, 1992 or 1993. He then stated that it was the late part of 1994 when Davies approached him with respect to the Company's financial difficulties. The Appellant said that Davies advised him in 1995 that he needed $10,000 in order to "catch up on bills". The Appellant obtained this sum from the bank by using his Visa card and gave the money to Davies. He said that the discussion he had with Davies at that time involved Davies' statement that he needed it to pay bills and that GST was "behind". He said that he made further advances to Davies, namely, $3,500 on February 22, 1996 and $4,000 on November 22, 1996, bringing his total advances to $17,500. He stated that he believed all the money went into the restaurant account. He also said that the sums were intended to discharge GST obligations and that he did not inquire about where the money went because he had no reason to distrust Davies. He also stated, without furnishing a date, that Nirmal Sundher advanced $10,000 for the payment of GST. He added that Capital City advanced $20,000 in light of a threat from Davies that the Company would be shut down if the money was not made available for payment of GST.
[4] The Appellant then testified that H.S. Sangha of an entity called OK Industries advanced $16,000 to $18,000 to the Company for the payment of GST. The Appellant further testified that in late 1994 OK Industries injected the approximate sum of $150,000 into the Company, part of which was to be used for GST, and that sometime in 1996 the Company borrowed $100,000 from OK Industries, a portion of which was to be used to pay GST. The Appellant said that he and the four other individuals involved guaranteed the repayment of that loan as to $20,000 each.
[5] The Appellant stated also that a restaurant business known as "Foggs & Sudds", operating at the same time, needed renovations and that part of the aforesaid $150,000 went into that restaurant.
[6] He testified that neither he nor the other parties received an explanation or accounting as to where the money went. Davies declared bankruptcy after the Company became bankrupt.
[7] The Appellant then stated that he had been in the construction business and spent his time at that endeavour, that Davies, who had been in the restaurant business before Lantern House, had the expertise and that the conduct of its business was left to him.
[8] On cross-examination, the Appellant said that he was President of the Company and that he was a director and officer of Island Mortgage Corporation ("Island Mortgage") which he said owned the shares of the Company and also the premises in which the restaurant operation was conducted. One of the Sundhers was the President of Island Mortgage. The Appellant's construction company, A.S. Bains Development Ltd., owned shares of Island Mortgage. The Appellant testified that he had been in the building business since 1967 but stated that his company was not building homes since "GST came in".
[9] The Appellant further stated that he was a director of International Pay Telephone Corp., the business of which was unsuccessful. He said that Capital City, of which he and the two Sundhers were directors, had a transient trailer park but that business which had been operated from 1972 had been terminated in 1980 as an unsuccessful venture.
[10] The Appellant resigned as a director of the Company on September 19, 1996. He was quizzed by Respondent's counsel as to why he advanced the sum of $4,000 taken out on his Visa card on November 22, 1996 to pay GST when that date was about five weeks after the Company's bankruptcy commenced. He stated that that money went to Davies and then said that he did not know what was done with the money. He said that he assumed that Davies had paid the GST with the monies advanced to him. He said again that he made no enquiries specifically respecting GST because he trusted Davies to perform his duties.
APPELLANT'S SUBMISSION:
[11] Appellant's counsel, reviewing the facts, stated that the Appellant had been in business with Davies since 1984, that he delegated management functions to Davies from the outset, that there had been no difficulties in ten years in respect of the trust relationship and that Davies had sole signing authority. The Appellant said that neither he nor Heath saw any need to have signing authority. He stated that the Appellant did not feel obliged to question Davies when Davies requested $10,000 for GST early in 1995. He further said that the Appellant continued to rely on Davies' management.
[12] Counsel submitted that the Appellant had been involved in different companies over the years and to suggest that he had a high level of sophistication was not borne out. With respect to Island Mortgage, he said that the accountant looked after the details and that there was no high level of sophistication attributable to the Appellant with respect to that directorship.
[13] He pointed out that GST did not exist during the corporate life of International Pay Telephone Corp. and that no experience there would have alerted the Appellant to be sensitive to that tax in the Company's circumstances.
[14] He made similar comments with respect to Capital City which ceased active business in 1980. Further, the Appellant's development company became inactive before 1990.
[15] Counsel then stated that the Company must be looked at on its own merits in order to determine if the Appellant met the requisite standard with respect to diligence. He referred to four principles from the case of Neil Soper v. Her Majesty the Queen, 97 DTC 5407. Those principles are:
1. Directors are not to be equated with trustees so far as the statutory provision that a person collecting GST shall be deemed to hold the amount in trust for Her Majesty until it is remitted to the Receiver General is concerned.[1]
2. A director need not exhibit a greater degree of skill and care than may reasonably be expected of a person of his or her knowledge and experience. The standard of care is partly objective (the standard of the reasonable person) and partly subjective in that the reasonable person is judged on the basis that he or she has the knowledge and experience of the particular individual.
3. A director is not obliged to give continuous attention to the affairs of the company nor is he or she bound to attend all board meetings.
4. In the absence of grounds for suspicion, it is not improper for a director to rely on company officials to perform honestly duties that have been properly delegated to them.
He then said that the Appellant was a director of a number of companies and, being a land developer, he would be involved with banking and other financial activities. He submitted that while the Appellant had a certain type of sophistication, it was in a particular area only. He stated that the Appellant had a trusting relationship with Davies and that it was not commercial reality to have that type of trust with someone for over ten years and later to start second guessing him. He recalled that Davies had seen to the payment of GST for four years, that he did not file the required report in respect of December and that in March, 1995 the Appellant injected enough money to pay the outstanding GST as of the quarter ended February 28, 1995. The evidence substantiated that the $10,000 would have covered the outstanding amount as of that date.
[16] Counsel submitted that the other $7,500 advanced by the Appellant was not enough to cover the outstanding GST liability. He pointed out, however, that other monies were being advanced to the Company and that the gist of the evidence was that although monies were used for the renovation of the Foggs & Sudds restaurant, amounts also were supposed to have been paid on account of GST liability. He also stated that Davies' failure to pay the GST could not be equated with the Appellant's actions and that because of the other advances, the Appellant was entitled to believe that the matter had been taken care of.
[17] Counsel stated that with respect to the Appellant's ability to influence corporate affairs, he was a director and was able to influence same. However, he submitted that commercial reality must be regarded and that the directors were a group of friends who had done business together and that he and others relied upon Davies "and rightfully so", to attend to matters such as GST and that they had no expertise in that regard. He buttressed this by stating that a director can delegate and rely on qualified financial officers unless suspicious circumstances exist. He reiterated that Heath and the Appellant were content to leave sole bank signing authority with Davies without control, that everything was satisfactory until December, 1994 and that there was nothing to suggest that Davies was not qualified for the functions entrusted to him.
[18] Counsel then stated that directors, when aware of a problem, have a positive duty to act. He submitted that the Appellant did act. He took the positive step of paying $10,000 out of his own pocket. He did not set up accounting controls but relied upon Davies to meet obligations. He submitted that the Appellant was not an insider as interpreted by the authorities, but rather, was an outside director who left the day-to-day business to another, namely Davies. He referred to Antonio Bianco v. M.N.R., 91 DTC 1370 in which Bianco escaped liability under section 227.1 of the Income Tax Act[2]. He submitted that Bianco had relied upon a fellow director in the same fashion that the Appellant had relied upon Davies. He then referred to Lorraine Sanford v. Her Majesty the Queen, 96 DTC 1912 which he found that Sanford was a minimal director, left the management of the company to other personnel and never saw the books. He referred to Ray Roger Tremblay v. Canada, 96 GTC 3070, Neil Soper v. H.M.Q., 97 DTC 5407 (F.C.A.) and Ann Drover v. H.M.Q., 98 DTC 6378 (F.C.A.). He submitted, in conclusion, that the Appellant had exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. He said that the Appellant was a businessman but not thereby necessarily knowledgeable respecting GST.
RESPONDENT'S SUBMISSIONS:
[19] Respondent's counsel submitted that the Appellant was an experienced businessperson who had had experience dealing with financial matters. She referred to the Appellant's knowledge of the problem in March, 1995 when he was asked to inject $10,000 into the company for payment on account of GST. She submitted that the Appellant, having knowledge of the problem at that time, could have given money to Revenue Canada, could have sought access to copies of the GST returns and could have asked the accountants what systems could have been set up. She submitted, in effect that the Appellant had not exercised a sufficient degree of care, diligence and skill "to prevent the failure" in remitting the GST.
ANALYSIS AND CONCLUSION:
[20] Section 323(1) of the Act provides that where a corporation fails to remit an amount of tax as required the directors, at the time the corporation was required to remit, are jointly and severally liable with the corporation to pay that amount and any interest or penalties relating thereto.
[21] Section 323(3) of the Act:
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.
[22] It is difficult to know what a director could do in order to escape liability in the sense of exercising an appropriate degree of care, diligence and skill to prevent the failure. Although much has been written about due diligence and taxpayer obligation, one must inevitably examine carefully the circumstances of each case. The Federal Court of Appeal in Soper (supra) said that:
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, or could reasonably be, a potential problem with remittances.
In the present appeal, the Appellant was made aware of the need for monies to meet the remittance obligations for the period ending February 28, 1995 pursuant to the request from Davies. He gave the sum of $10,000 to Davies for payment by the company of its then current obligations. It is my conclusion that the Appellant is not liable for GST for that period. However, in spite of his trust of and reliance upon Davies, he had been alerted to a problem respecting GST. In my view, the Appellant should have done more than assume that funds said to have been advanced to the company for the purpose, in part, of paying GST, were forwarded to Revenue Canada. It is further my view that a reasonably prudent person, in the Appellant's circumstances would have taken steps designed to ensure that an appropriate system of supply of information by the person charged with GST remitting responsibility, be made on a timely basis designed to afford the recipient of same to take whatever further action in the then circumstances would seem appropriate. Obviously, such a system would take into account other economic circumstances of the company. For example, if the company has financial obligations to suppliers and to employees a director should have that information so that informed decisions as to what action should be taken could be made. The obligation imposed upon directors is not theoretical or academic. It is real. Although it is commercially understandable that funds in a short money situation would be paid to certain creditors in order to keep a company in business, there is a firm statutory obligation to see that the requisite remittances are made.
[23] One must be realistic in analyzing the degree of care, diligence and skill to be employed to prevent a failure to remit. That is not always an easy task. However it seems that a director of a corporation should be satisfied that appropriate reporting procedures have been established so that he or she can take such action as would constitute the exercise of a degree of care, diligence and skill sufficient to relieve that director of liability.
[24] The appeal is allowed to the extent that the Appellant will have no liability for remitting GST on behalf of the corporation for the period ended February 28, 1994. However, he will be liable for amounts not remitted for the period from March 1, 1995 to August 31, 1996 together with penalties and interest relating thereto.
[25] No costs are awarded.
Signed at Ottawa, Canada this 19th day of August 1999.
"R.D. Bell"
J.T.C.C.