Date: 19980924
Docket: 96-2999-GST-G
BETWEEN:
FAZAL KHAN
Appellant
AND:
HER MAJESTY THE QUEEN
Respondent
Reasons for judgment
(Delivered orally from the Bench at Vancouver, B.C., on Thursday, September 24, 1998)
HIS HONOUR: This is an appeal from an assessment under the GST sections of the Excise Tax Act, dated July 4th, 1995. The Minister of National Revenue charged the Appellant the amount of $110,245.30 director's liability under subsection 323 of the Act for an amount owing by Cankut Developments Incorporated for unremitted GST in 1991.
The Respondent submits that the Appellant did not exercise the degree of care, diligence and skill to prevent the failure to remit the net tax that a reasonably prudent person would have exercised in the circumstances in this case.
The Appellant is a 41-year-old, intelligent insurance agent who lives with his wife, four children and father. He submits that he acted as a nominee director and took no actual part in the decision-making process of the company. He added that all business decisions were made by the principal of the company, John Halani, and the Appellant's father, and he acted strictly in accordance with the directions of his father and John Halani.
The Appellant's father testified that he had considerable experience in the construction business in Northern British Columbia and suffered serious financial difficulties during an economic slowdown in the early 1980s. In 1989, he entered into a business venture with John Halani for the construction and sale of 18 condominium units in Southern British Columbia.
Mr. Khan was to use his expertise towards the purchase of the land, arranging the mortgage financing and construction of the units. Mr. Halani was the money man and was to advance funds if and when required. They were each issued 50 per cent of the shares of the corporation. Because of his concern for past creditors, Mr. Khan had his shares placed in the name of his son, the Appellant, and had the Appellant appointed director. At all times the Appellant was a trustee only and represented his father's interests as a director.
During the construction stage from October 1990 to January 1991, the project required funds in addition to the mortgage advances, and Mr. Halani introduced investors, Anar Ahamed, who later became his wife, and Robert Underwood, his employee, a night manager in a hotel owned by Mr. Halani.
The Appellant gave the following evidence which I accept.
February 16th, 1990: I became a director of Cankut on my father's behalf at his request. I was a director in name only and did not participate in the running of the company. Neither my father nor myself had invested any money in the business. Father brought his real estate development experience to the partnership, and John Halani brought his financial resources and business experience to the partnership.
August 13th, 1990: My father's interest in Cankut was starting to be diluted with the addition of two new partners, Robert Underwood and Anar Ahamed. This was because the project needed more money than originally expected. My father signed the September 7th, 1990 resolution regarding financing, along with Mr. Halani and Robert Underwood and Anar Ahamed.
January 15th, 1991: My father's interest was further diluted since further funds were needed by the company and additional equity was taken by John Halani and his future wife, Anar, for their increased investment in the company. At this point, my father's involvement with the company was practically over since Mr. Halani had effective control of the company. For all intents and purposes, my father and myself ended our involvement with the company.
June 10th, 1991: The first of the units which gave rise to the GST assessment was sold. Neither I nor my father had any involvement with the sale of the units, and I had no idea there was any problem with the remittance of GST until I received the March 4th, 1994 letter from Revenue Canada.
John Halani assumed control and responsibility of Cankut after dilution of my father's interest in the company. Mr. Halani was and is a highly successful businessman, former treasurer and president of the Vancouver Multi-cultural Society, owner of the Tropicana Motor Inn on Robson Street, and to the best of my knowledge, is a millionaire.
I could be considered an outside director since I was not involved in the running of Cankut's business and was instead involved in my own insurance business. I was director in name only and had nothing to do with the management of the company, nor did I have any duties or responsibilities as a director.
In summary, I believe I should not be held liable for Cankut's GST liability for all the reasons noted above, and primarily for the following two reasons: My consent to act as a director states that in the event I revoke this consent, this consent shall cease to have effect from the effective date of such revocation. I revoked my consent in early 1991. Number two, I became director of Cankut on my father's behalf and at his request.
He added:
Due to my particular circumstances and certain similarities in my situation with other cases in the various Tax Court Cases submitted, I believe I should not be liable under subsection 323(3) of the Act.
He referred the Court to the following cases; Fitzgerald v. Her Majesty the Queen, 92 DTC 1019; Tyfair v. Her Majesty the Queen, 95 DTC 462, Blackwood v. Her Majesty the Queen, GST Cases 2090, McMartin v. Her Majesty the Queen, GST Cases 3010, and Soper v. Her Majesty the Queen, 97 DTC 5407.
The Respondent relied on facts that include the following, taken for the most part from the Reply to the Notice of Appeal.
The Appellant consented to act as director of Cankut provided that the consent would continue in effect and he would remain director as long as he was re-elected to the Board by the members and had not either revoked his consent or resigned from the Board of Directors of Cankut.
The Appellant never tended his resignation to the Board of Directors of Cankut and never revoked the consent to continue to act if re-elected to the Board of Directors. The Appellant was still listed as director on Form 10, filled out on October the 16th, 1990. The Appellant owned 50 per cent of Cankut when he became one of the two directors in February 1990.
On February the 28th, 1990, the Appellant and the other director, John Halani, guaranteed a loan by Granville Savings & Mortgage Corporation to Cankut. This loan was in the approximate amount of $1,000,000. It was a first-mortgage-progress-advance-type mortgage.
The Appellant's interest in Cankut was reduced to 25 per cent in August 1990, when two other directors joined the board. An agreement was entered into on September 7th, 1990, when the new directors contributed $50,000 each. A consent resolution was signed by or on behalf of all four directors on October the 8th, 1990, agreeing to act as officers of Cankut. The Appellant had signing authority for Cankut.
In January 1991, two common shares were issued to John Halani and Anar Ahamed, both directors of Cankut, which issuance raised their interest to 33 per cent, which in turn reduced the interest of the Appellant and Robert Underwood to 16.6 per cent. A resolution was passed and signed by the other three directors on October the 8th, 1991, listing the directors of Cankut as John Halani, Anar Ahamed, Robert Underwood and the Appellant. On September 29th, 1991, both Robert Underwood and Anar Ahamed tendered their resignations. The annual report of October the 8th, 1991, listed the Appellant as director of Cankut.
Mr. Halani was a witness under subpoena. He testified, one, that he was in business with the Appellant's father, not the Appellant. Two, that about January 1991, he took effective control of the company's operations to the exclusion of the Appellant and his father. Three, that he, Mr. Halani, felt responsible for 90 per cent of the company's debts and the Appellant or his father should be responsible for 10 per cent of the tax owing. Four, that he had made arrangements for some payments. In fact, the debt at this time to Revenue Canada has been reduced to about $88,000.
Analysis
Despite the Respondent's able argument, I find it reasonable to conclude that the Appellant relied on the expertise and direction of his father and Mr. Halani. The Appellant had no involvement with the company during that period (1990 and 1991) when the GST liability was incurred.
The Respondent relied heavily on a recent decision of the Federal Court of Appeal in Soper v. Her Majesty the Queen, 97 DTC 5407. The Court was dealing with subsection 227.1(3) of the Income Tax Act, which is identical to the relevant Section 323 of the Excise Tax Act. The facts of the present case are easily distinguishable from those in Soper.
Mr. Soper, an experienced businessman, became a director of a corporation for a brief period to promote the corporation's interest and loaned his name and reputation. The Minister of National Revenue assessed him unremitted source deductions for the period while he was a director. The Federal Court of Appeal found that the standard of care in subsection 227.1(3) is flexible and is objective/subjective. Mr. Soper was found liable for the unremitted deductions.
At page 5416, Justice Robertson stated:
The standard of care laid down in ss. 227.1(3) of the Act is inherently flexible. Rather than treating directors as a homogeneous group of professionals whose conduct is governed by a single unchanging standard, that provision embraces a subjective element which takes into account the personal knowledge, background of the director, as well as his or her corporate circumstances in the form, inter alia, of the company's organization, resources, customs and conduct. Thus, for example, more is expected of individuals with superior qualifications.
I have no difficulty concluding that the Appellant, Fazal Khan, was not a de facto director. He was a nominee of his father. Mr. Halani, the father and the Appellant confirmed this fact. I accept the Appellant's testimony that he has had a very close relationship with his father throughout his life and he has followed his father's directions and requests without questions, sometimes to his detriment. He has lived with his father for most of his life, and in fact his father presently lives with the Appellant and his family.
Further, there is no doubt that when the GST indebtedness occurred in 1991, upon the sale of the condo units, Mr. Halani was in complete control of the corporation to the exclusion of the Khans. Mr. Halani was known to the Appellant as a wealthy and capable businessman and had arranged for the insertion of over $100,000 in capital and taken over control of the project. It would be unconscionable to hold the Appellant liable.
The present situation is not unlike the one that Mogan, J. dealt with in Fitzgerald v. The Minister of National Revenue, 92 DTC 1019, wherein Judge Mogan stated:
When the passive or inactive director has become a director in the context of a family business, operated by a corporation which is dominated by an uncompromising patriarch, the domestic responsibility for maintaining harmony within the family becomes interwoven with the legal responsibility to third parties in these circumstances. I think that is not reasonable to impose the same standard of care, diligence, skill on the passive family director as on the person who is truly free to become a director and does so outside the family context.
Applying the principle of substance over form, I conclude that the Appellant's father was the de facto director, and for that reason alone, the Appellant satisfied the test in subsection 323(3) of the Excise Tax Act. In addition, I find that the Appellant has successfully presented a second defence in that it was not unreasonable for him to rely on the judgment and expertise of Mr. Halani, a forceful and successful businessman who in effect ousted the Appellant and his father from the corporation during the entire period when the corporation became liable to Revenue Canada under the Excise Tax Act.
The appeal is allowed with costs.
I HEREBY CERTIFY THE FOREGOING to be a true and accurate transcript of the excerpt herein to the best of my skill and ability.
B. GORING, Verbatim Reporter