Date: 20000630
Docket: 98-3839-GST-I
BETWEEN:
JON DONALD HUGH KINGSBURY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bell, J.T.C.C.
ISSUE:
[1] Whether the Appellant, as a director of C.P.I. Industries Ltd. ("CPI") is liable under subsection 323(1) of Part IX of the Excise Tax Act ("Act") for the failure of CPI to remit an amount of net tax [Goods and Services Tax ("GST")] and penalties for the following periods:
(a) August 1, 1994 to October 31, 1994;
(b) November 1, 1994 to January 31, 1995; and
(c) February 1, 1995 to April 30, 1995.
FACTS:
[2] The Appellant was the president, secretary and sole director of CPI in 1994 and 1995. He acknowledged that he was an experienced businessman who was aware of the responsibilities of being a director and officer of a corporation. CPI was in the business of water main and sanitary main replacement and was engaged in general contract work for the City of Delta. CPI obtained a LABOUR AND MATERIAL PAYMENT BOND and a PERFORMANCE BOND, each from The Continental Insurance Company of Canada. CPI received progress payments which included GST amounts. The Appellant stated that he had ten or twelve people working for him and that they looked after the collection of and paying of bills. He said that the company had a full accounting department and that he didn't have the day to day "looking after of that". The Appellant admitted knowing that CPI was required to file quarterly GST returns. On cross-examination the Appellant was not able to say that CPI did not file returns for the three periods until August, 1995. The following exchange took place on cross-examination:
Q. So if I put it to you that they were not filed until August, 1995, you would disagree with me?
A. I wouldn't agree or disagree ...
[3] In response to a question on cross-examination as to what CPI was doing with the progress payment funds it received, the Appellant said:
A. Day-to-day business. I would imagine the payrolls would have been the priority for families that worked for the company. I didn't have the day-to-day operation. I didn't do the day-to-day payments. All I did was -- it went through a whole system. We had a computer set up. It was approved through a process of three people. As the bills came in, they got approved, they got passed on. They got paid as funds became available. Funds on construction companies that run with 10 per cent hold-backs sometimes run short and then when the final amounts come in they get paid.
Q. CPI did not set aside the GST portions of the progress payments it received along the way, did it?
...
A. I had no way of knowing that.
...
A. Payments that would come in on progress payments would be put into -- into the control of the -- of the -- just a general bank account, because there was no special bank account to start setting aside any amounts of money. It was just all day-to-day, day-to-day business operation.
Q. So would CPI, then, in all likelihood have paid out the entire amount of progress payments, including GST amounts, to operate on a day-to-day basis?
A. At times probably, at times not. It would depend on what area of time you're talking about.
Q. Well, in particular, I'm talking about from August of 1994 until the end of April,1995?
A. At that point, I'd have to refer back to the accounting and I can't really comment on it without having to review all that.
Q. Now, to your knowledge, did CPI ever remit the GST arrears that it owed for the periods ending October 31st, 1994, January 31st, 1995 and April 30th, 1995?
A. The three amounts, the $44,000?
Q. Yes.
A. I understand, when we wrapped the business up that they were not paid. ...
[4] In response to a question of what type of remittance system CPI had, the Appellant said that CPI had a full accounting system with two persons in the office looking after all the various government taxes, including GST and that they reported to the head accountant, Rosemary, who prepared the GST returns and filed them. The Appellant then said:
The payment of them would be automatic due course, up until the period when the company started to run out of money and was unable to pay. I guess they sat there waiting to be paid. When they informed me, I got hold of the Tax Department and informed them what was going to happen and who they could get the funds from.
HIS HONOUR: When they informed you of what?
A. Well, Rosemary told me that there was an outstanding amount to the GST. I was a bit surprised.
HIS HONOUR: When?
A. Well, sort of towards the end when we decided -- when I decided to close the company down because there wasn't enough funds to pay the suppliers that were in existence and to complete the contract -- contracts that were done in the company. ... So she informed that there was money owing and I contacted the GST department at that point and said look, here's the amounts that are owing and here's where they're owing from and you should put a claim with the bonding company to get this -- to get this payment.
[5] The Appellant said the W.C.B. of British Columbia filed against the bonding company for payment of monies due it and was paid that money. The Appellant then said that he relied on the accounting system that CPI had implemented.
[6] On re-examination, the Appellant said that he had done everything he could to get the GST money for the Tax Department. He said that he knew that there is a responsibility as a director to pay and to be responsible for GST. He also said:
But I also understand that when you do everything you can to get the Department to file, because I couldn't file against the bonding company, I can't ... I couldn't file because I was the owner of CPI. The Tax Department needed to file. The Tax Department went after the holdback, rather than filing. I think they made a fundamental mistake. I tried to explain that to them.
[7] After emphasizing how forceful he was in attempting to persuade the department to seek the monies under the bond he testified that he had been wiped out, that he and his wife had lost their home, had lost everything and substantial multi-hundred thousand dollar judgments had been issued against him.
ANALYSIS AND CONCLUSION:
[8] I have sympathy with the Appellant's position. In the real world of business a taxpayer, when in financial difficulty, is literally driven to pay employees and suppliers in order to remain in business. Nothing in the struggle to survive could be more understandable. However, subsection 323(1) of the Act imposes a strict test. It reads:
Where a corporation fails to remit an amount of net tax as required under subsection 228(2) or (2.3), 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.
(emphasis added)
[9] Subsection 228(2) provides that a person shall remit net tax to the Receiver General:
... on or before the day on or before which the return for that period is required to be filed.
[10] It is clear from the evidence that CPI failed to remit the required amounts for the three periods in question on a timely basis. There is no discretion in this section which may be exercised by this Court in circumstances where such failure takes place.
[11] Section 323(3) provides that 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. In Neil Soper v. Her Majesty the Queen, [1997] C.T.C. 242, Robertson, J.A., at 262 in discussing subsection 227.1(3) of the Income Tax Act[1], said:
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 and background of the director, as well as his or her corporate circumstances in the form of, inter alia, the company's organization, resources, customs and conduct. Thus, for example, more is expected of individuals with superior qualifications (e.g. experienced business-persons).
The standard of care set out in subsection 227.1(3) of the Act is, therefore, not purely objective. Nor is it purely subjective. It is not enough for a director to say he or she did his or her best, for that is an invocation of the purely subjective standard. Equally clear is that honesty is not enough. However, the standard is not a professional one. Nor is it the negligence law standard that governs these cases. Rather, the Act contains both objective elements - embodied in the reasonable person language - and subjective elements - inherent in individual considerations like "skill" and the idea of "comparable circumstances". Accordingly, the standard can be properly described as "objective subjective".
At 263 the learned Justice said:
... In short, inside directors will face a significant hurdle when arguing that the subjective element of the standard of care should predominate over its objective aspect.
He then stated that a 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.
[12] The Appellant submitted that he did everything he could in advising the Tax Department that it could apply to the bonding company for payment of the GST. I accept, without reservation, the Appellant's evidence in this regard. Unfortunately this occurred after the date of the requirement to remit net tax amounts. While the Respondent was not required to pursue its course of potential collection, namely the bonding company, its failure so to do may have contributed to the punishing assessment of tax, interest and penalties. No explanation was given on behalf of the Respondent for this failure.
[13] The Court simply does not have the discretion to compromise the direction contained in subsection 323(1). Although the Appellant caused CPI to pay salaries and suppliers instead of GST, the amount of GST required to be paid had been collected by it but not remitted on a timely basis. Nothing could be more normal than the business decision to pay salaries and suppliers, based upon the company's urge to survive. However, the Appellant, the president and sole director of the company and an experienced businessman cannot, by selecting trade creditors and salaried employees over the statutory obligation to remit GST amounts be said to have "exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances". Accordingly the appeal will be dismissed.
[14] Section 281.1 of the Act provides that the Minister may waive or cancel interest and penalties payable under section 280, the section under which the penalty and interest were imposed in this case. Although the Court cannot direct the Minister to waive or cancel interest, it is strongly recommended, in the circumstances of this case, that he do so.
Signed at Ottawa, Canada this 30th day of June, 2000.
"R.D. Bell"
J.T.C.C.