Date: 20010426
Docket: 98-915-GST-I; 98-917-GST-I
BETWEEN:
ANSON QUON and
EDWARD GRYSCHUK,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Mogan J.
[1] The appeals of Anson Quon v. The Queen (Court File No. 98-915-GST) and Edward Gryschuk v. The Queen (Court File No. 98-917-GST) were heard together on common evidence. For convenience, I shall refer to the individual Appellants when necessary by their respective surnames "Quon" and "Gryschuk". At all material times, the Appellants were the only two directors of Edan Food Sales Inc. (referred to herein as either "Edan Foods" or "the Company"). When Edan Foods ceased carrying on business in 1994, there was approximately $20,000 of goods and services tax ("GST") which the Company had received but failed to remit to the Receiver General for Canada. By Notice of Assessment dated June 10, 1996, the Minister of National Revenue assessed Quon and Gryschuk under section 323 of the Excise Tax Act in their capacity as directors of the Company for the Company's failure to remit the $20,000 of GST. The Appellants have appealed from those two assessments and have elected the informal procedure.
[2] Section 323 of the Excise Tax Act imposes a liability on the directors of a corporation in certain circumstances where the corporation has failed to remit an amount of GST. For all practical purposes, section 323 of the Excise Tax Act is the same as section 227.1 of the Income Tax Act. Therefore, cases interpreting and applying section 227.1 of the Income Tax Act are relevant and useful in appeals from assessments under section 323 of the Excise Tax Act.
[3] Edan Foods began its business in 1988. Its principal business was the wholesale distribution of food products; buying in bulk and then reselling in smaller lots. Out of this principal business, it developed two sidelines. The first was private labelling. On behalf of a client, Edan Foods would contract with one of its suppliers to put the client's private label on a particular product. The second was acting as broker for some clients who wanted to purchase certain products like seafood, crackers and cookies. In the Company's overall business, Gryschuk was primarily responsible for buying and selling the products while Quon was primarily responsible for administration and finance.
[4] All of the evidence shows that Edan Foods was undercapitalized from the start. There are no audited financial statements but there are some unaudited financial statements and a report from Doane Raymond Limited. Exhibit R-3 contains a balance sheet as at February 28, 1994 showing: (i) paid-up capital of only $100; (ii) advances from shareholders of $206,000; (iii) bank indebtedness of $661,000; (iv) trade accounts payable of $740,000; and (v) a deficit of $911,000. Exhibit A-3 is a set of unaudited financial statements for the year ended April 30, 1992 with comparable amounts for 1991. In summary, the Company was indebted to its bank for $339,000 at April 30, 1991 and for $530,000 at April 30, 1992.
[5] The Company did all of its banking with the Royal Bank of Canada ("the Bank"). Exhibits A-3 and R-3 show that the Company's indebtedness to the Bank increased as follows:
Fiscal Year Debt to Bank
April 30, 1991 $339,000
April 30, 1992 $530,000
February 28, 1994 $661,000
The big increase in bank debt occurred from 1991 to 1992. Exhibit A-4 is a letter dated December 4, 1992 from Edan Foods to the Bank requesting (at page 4) that the Bank forbear until June 30, 1993 from demanding payment of loans or taking steps to enforce its security. The letter defines itself as a "Forbearance Agreement" (page 7) and is acknowledged by the Bank. James F. Brodie, a senior employee of the Bank who testified as a witness for the Appellants, described a forbearance agreement as a document in which the Bank and its client would agree upon (i) the amount owing to the Bank; (ii) the security held by the Bank; (iii) the terms of payment by the client; and (iv) the terms on which the Bank would continue to operate the client's account.
[6] When the Bank sees that one of its clients is in trouble, it will usually want a forbearance agreement. If the Bank tries to collect a loan outside of a forbearance agreement, the client could deny the amount owing or the type of security held by the Bank. Within a forbearance agreement, however, all of the important facts are acknowledged and if, at a later date, the Bank attempts to collect its loan or loans, the client cannot deny any fact spelled out in the forbearance agreement. Mr. Brodie stated that the Bank would want a forbearance agreement only in those circumstances where it thought that its loan was at risk.
[7] Under the forbearance agreement (Exhibit A-4), the Company was required to accept (page 5) the Bank's appointment of Doane Raymond Limited for the purpose of reviewing the Bank's security position with respect to its loans to the Company. Exhibit A-5 is the lengthy report dated December 10, 1993 of Doane Raymond to the Bank. The tone of the Doane Raymond report was pessimistic with respect to the Company's future. At page 4, the report stated: "Liquidation of the Company's assets at present, either in a forced or orderly situation, would result in a significant shortfall in the Bank's indebtedness". The Bank became more concerned after receiving the Doane Raymond report and the Company was obliged to enter into an amended forbearance agreement dated March 10, 1994 (Exhibit A-2). In the amended forbearance agreement, the Company confirmed that its indebtedness to the Bank as at February 14, 1994 was $578,000.
[8] The date of the amended forbearance agreement (March 10, 1994 – Exhibit A-2) is close to the time of the Company’s failure to remit GST which is at the heart of these appeals. It is necessary to consider how that failure arose. As a wholesale distributor of food products, Edan Foods had an arrangement with Tetra Pak, a manufacturer of square, coated-paper containers for drink with a straw attached to the side and a small designated circle in the top to be punctured by the straw. Tetra Pak sold the packaging to the Company which would then ship it to one of its suppliers (Beatrice Foods) to fill with apple juice or other drinks. The filled containers were shipped to the Company's warehouse and the Company's staff would try to sell the packaged drink to grocery stores.
[9] According to Exhibit A-5 (page 5), Tetra Pak's goal was to market its one-litre juice package as a replacement for the standard glass or metal juice containers. Acceptance of the Tetra Pak one-litre container in the Ontario market had been difficult to achieve. Under its arrangement with Tetra Pak, the Company received a rebate of $1.00 per case of one-litre packages sold to grocery stores. This program had existed in 1993 and, in December 1993 and early January 1994, there were further discussions between the Company and Tetra Pak concerning the terms on which the program would be continued in 1994. By letter dated January 18, 1994, Tetra Pak wrote to the Company confirming the terms for 1994. That letter is part of Exhibit A-2. Because that letter is important, I will set it out in full:
Mr. Edward G. Gryschuk
Edan Food Sales Inc.
3425 Laird Road, Unit 8
Mississauga, Ontario
L5L 5R8
Dear Ed,
Re: 1994 1L TBA Support Program
As per our discussion we are pleased to confirm the following:
1) $125,000 advanced in January
125,000 advanced in February
125,000 advanced in March
2) At the end of March we will review Edan Food Sales performance. If both companies are satisfied we will advance a further $125,000 during the month of April.
3) The objective for 1994 is to sell 500,00 (sic) cases of 1 litre TBA.
4) Should there be a shortfall to this amount (500,000 cases), Edan Food Sales will return the difference to Tetra Pak at $1.00 per case. We will also calculate 1993 performance in the same way, i.e. dollars advanced by Tetra Pak minus 1 litre TBA cases sales from Edan Foods Sales 1 litre TBA at $1.00 per case = amount owed to Edan Food Sales by Tetra Pak or amount owed to Tetra Pak by Edan Food Sales.
5) Program in effect is for sales of 1 litre TBA under the Edan Foods Sales label east of the Manitoba border.
Thank you for your support and we look forward to a successful 1994.
Regards,
"Rolly Levasseur"
General Manager, Central Region
[10] Although the letter speaks of payments to be made by Tetra Pak to the Company in January, February and March with a possible further payment in April, Mr. Gryschuk's evidence is that the program did not start in January. The first three payments were received from Tetra Pak as follows (see Exhibit A-11):
February 24, 1994 $125,000
March 1, 1994 125,000
April 4, 1994 125,000
The above payments were intended to be used in the promotion and sale of Tetra Pak products. Because the Company was providing a service for the payments, Tetra Pak paid the full GST of 7% on each payment. Therefore, the Company received GST of $8,750 on each of the above three dates in addition to the so-called rebate of $125,000.
[11] The Company's fiscal year ended on April 30th. Its quarterly reporting periods for GST purposes ended on July 31, October 31, January 31 and April 30. When filing GST returns, the Company rarely had a liability because almost all of its food products were zero-rated for GST purposes. In almost every quarterly reporting period from 1991 to 1994, the Company's input tax credits would exceed any GST payable and the Company would claim a refund. Set out below is certain information extracted from Exhibit A-1 showing the net GST liability or the refund claimed by the Company starting in 1991:
|
Reporting Period |
Net Liability (Refund Claimed) |
|
$ |
|
|
91-01-31 |
(19.19) |
|
91-04-30 |
(31,105.38) |
|
91-07-31 |
(7,116.76) |
|
91-10-31 |
(4,695.25) |
|
92-01-31 |
(7,096.22) |
|
92-04-30 |
(6,650.58) |
|
92-07-31 |
(5,263.15) |
|
92-10-31 |
(6,700.70) |
|
93-01-31 |
(5,088.76) |
|
93-04-30 |
(1,628.67) |
|
93-07-31 |
*4,916.83 |
|
93-10-31 |
(299.74) |
|
94-01-31 |
(3,858.71) |
|
94-04-30 |
*20,536.30 |
|
94-07-31 |
(2,326.51) |
* only two quarters show net liability
[12] From the above table, it is apparent that the Company had a GST liability for only the two reporting periods ending July 31, 1993 and April 30, 1994. The amount of $4,916.83 was remitted in August 1993 but the amount of $20,536.30 for the period ending in April 30, 1994 was never paid and is the subject of the assessments against the two Appellants as directors of the Company. The liability of $20,536.30 is directly linked with the Company's arrangement with Tetra Pak because it was the receipt of the GST payments from Tetra Pak in the aggregate amount of $26,250 (3 times $8,750) in February, March and April 1994 which triggered that liability.
[13] The relevant provisions of the GST legislation which impose a liability on corporate directors are as follows:
323(1) 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.
...
323(3) 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 these appeals, the two Appellants acknowledge that the Company has an unpaid GST liability of $20,536.30 but they claim that they have satisfied the due diligence provisions in subsection 323(3). A significant part of the Appellants' defence against the assessments is based on the powerful role which the Bank played in the Company's affairs throughout 1994.
[14] In paragraphs 4, 5, 6 and 7 above, I described how the Company was undercapitalized; how it relied on extensive financing from the Bank; and how the Bank required a forbearance agreement (Exhibits A-2 and A-4) with the Company because it thought its loans were at risk. Counsel for the Appellants called three witnesses who were either employees or retired former employees of the Bank. Their evidence was consistent and, in some ways, overlapping and redundant. I have already referred to Mr. Brodie (paragraphs 5 and 6). The other two Bank witnesses were F.G. Moore and D. de Klerk. All three were involved in the Edan Foods account and knew first-hand that the Bank's loans to the Company were at risk. Mr. Brodie reported to Mr. Moore who was manager of special loans. Mr. Moore described a special loan as one in which the Bank had a serious risk of loss.
[15] Mr. Moore remembered Edan Foods and the two individual Appellants. He knew that the Bank's loan to the Company was in peril and he discussed it with the Appellants and with colleagues at the Bank. He was involved instructing the Bank's lawyers with respect to the first forbearance agreement (Exhibit A-4, December 4, 1992). The Bank's demand for payment would have put the Company out of business. Exhibit A-4 deferred any such demand by the Bank and granted the Company some time to improve its financial position. In exchange, the Bank insisted on the right to an independent review of the Company's affairs by Doane Raymond. With a forbearance agreement in place, the Bank would ordinarily have a restraint on any account of the client. A restraint, in bank lingo, is a condition which would require a client to obtain the bank's consent before issuing a cheque to any third party. If a debtor/client under restraint issued a cheque to a third party without the bank's consent, when the cheque was presented for payment, the account manager at the bank might return the cheque NSF or call the client to discuss the cheque.
[16] The Company was under restraint by the Bank from the time of the first forbearance agreement (December 4, 1992). After the Doane Raymond report (Exhibit A-5, December 10, 1993), the Company was under even greater scrutiny; and the Bank required an amended forbearance agreement (Exhibit A-2, March 10, 1994). From the evidence of Mr. Quon and the Bank witnesses, I conclude that throughout the period from January to August 1994 (when a receiver was appointed) there was constant contact (two or more times a week and daily at certain times) between persons representing the Bank and the Company. It is clear from the draft amended forbearance agreement (Exhibit A-6) and the signed agreement (Exhibit A-2) that the Bank knew about the Company's arrangement with Tetra Pak and was relying on the Company's ability to sell the Tetra Pak products and retain the rebate amounts. The three big payments from Tetra Pak, each in the amount of $133,750 ($125,000 rebate plus $8,750 GST) were deposited in the Company's account at the Bank and mingled with the Company's other funds.
[17] On August 17, 1994, Elaine Quon (a relative of Anson Quon and a creditor of the Company) appointed Paddon & Associates Inc. to be the receiver of the Company. The Bank wanted Elaine Quon to appoint a receiver as a matter of public relations because the Bank does not like to be seen as appointing a receiver. The Bank paid the fees of Paddon & Associates because there was no amount recovered by Elaine Quon. Immediately after the receiver was appointed, Gryschuk was released from employment by the Company but Quon was retained to liquidate certain assets and wind down the Company's business. In late December 1994, the Appellants, under some pressure from the Bank, caused the Company to make a voluntary assignment in bankruptcy.
[18] Quon testified that he could not determine whether the Company owed any GST for the quarter ending April 30, 1994 until after April 30 when all of the GST collected and input tax credits could be tallied. Exhibit A-11 is a GST calculation on Edan Foods stationery for the period February 1 to April 30, 1994 showing net GST payable in the amount of $20,536.30 although the final amount has been cut off in the photocopy. A different photocopy is attached to Exhibit R-4 showing $20,536.30 as the GST owing. Exhibit A-11 received much attention in evidence as to whether the GST calculation was made in May 1994 or at a later time, perhaps July 1994. I am satisfied that the calculation in Exhibit A-11 was performed in early May 1994 because (i) it would be the logical time to perform it immediately after the end of the quarterly reporting period; and (ii) Gryschuk and Quon both knew in May that the Company owed about $20,000 in GST when they brought that liability to the Bank's attention. A GST liability as at April 30 would be significant in the minds of Gryschuk and Quon because it was only the second quarterly period since the inception of GST when an amount was owing (see the summary in paragraph 11 above); and the liability would not be a surprise following the receipt of $26,250 in GST from Tetra Pak within that quarterly period.
[19] There is no doubt in my mind that the Company's GST liability was discussed with the Bank in May 1994, and perhaps as early as April. There is a conflict, however, concerning the Bank's response. The evidence of Gryschuk and Quon is consistent. They stated that they knew about their potential personal liability as directors of the Company and that on a number of occasions they either asked the Bank for consent to pay the GST or asked the Bank when the GST would be paid. According to the Appellants, on each occasion some person representing the Bank said "Don't worry about the GST. It will be paid", or words to that effect. The Appellants took some comfort from that assurance by the Bank.
[20] The evidence from the Bank witnesses does not confirm what the Appellants claim was the Bank's response. Mr. Moore was the most senior Bank person to testify. He stated that when a client was under restraint (as Edan Foods was in 1993 and 1994), the Bank would consent to the payment of only critical debts like wages, rent, utilities and essential suppliers to permit the continued operation of the client's business. Mr. Moore regarded the remittance of source deductions from wages as a critical debt for which he would authorize a client's cheque but he would not regard a GST liability as a critical debt and he would not authorize a client's cheque to pay such liability. He stated that the Bank's objective with a client under restraint was to give the client a chance to survive and to give the Bank a chance to maximize its loan recovery.
[21] I accept the evidence of the Bank witnesses concerning what they said to Gryschuk and Quon with respect to the $20,000 GST liability. First, they were the Appellants' witnesses and they were more objective. And second, their evidence is consistent with other Bank policies which they described. The Bank looked upon source deductions from wages as being "in trust" without regard to whether they were so designated or kept apart; but the Bank looked upon GST and provincial sales tax as commingled with all corporate funds. Mr. Moore said that the Bank would not refuse consent to the remittance of any amounts actually held in trust for the Crown. He also said that if the Bank had been told that the $20,000 for GST had been collected and set aside or segregated, the Bank probably would have consented to the GST payment. The Company had not kept any funds separate and apart with respect to its $20,000 GST liability. Mr. Moore stated that he would not assure any client that a GST liability would be paid and, in his 20 years' experience in special loans, he had never given such assurance.
[22] Although I accept the evidence of the Bank witnesses concerning what they said to Gryschuk and Quon, such acceptance is not an adverse reflection on the credibility of Gryschuk and Quon. I found both of the Appellants to be highly credible. In my view, they were hearing from the Bank only what they wanted to hear and repeating in Court what they thought they had heard. The Bank had been lenient toward the Company permitting it to stay in business until the last half of 1994 when a less lenient bank might have called its loans and put the Company out of business at an earlier time. The Appellants had come to rely on that leniency. They had received a copy of the Doane Raymond report. They knew that the Company's assets were not adequate to pay off its loans and yet the Bank continued to finance the Company even when the large payments from Tetra Pak in February and March 1994 had failed to reduce the Bank loans. The Appellants seemed to think that the Bank's leniency would continue indefinitely.
[23] I have already stated in paragraph 2 above that section 323 of the GST legislation is, for all practical purposes, the same as section 227.1 of the Income Tax Act. In Soper v. The Queen, 97 DTC 5407, the Federal Court of Appeal laid down some useful guidelines with respect to directors' liability. Robertson J.A. (writing for himself and Linden J.A.) stated at page 5416:
This is a convenient place to summarize my findings in respect of subsection 227.1(3) of the Income Tax Act. The standard of care laid down in subsection 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 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'.
And at page 5417, he further stated:
At the outset, I wish to emphasize that in adopting this analytical approach I am not suggesting that liability is dependent simply upon whether a person is classified as an inside as opposed to an outside director. Rather, that characterization is simply the starting point of my analysis. At the same time, however, it is difficult to deny that inside directors, meaning those involved in the day-to-day management of the company and who influence the conduct of its business affairs, will have the most difficulty in establishing the due diligence defence. For such individuals, it will be a challenge to argue convincingly that, despite their daily role in corporate management, they lacked business acumen to the extent that that factor should overtake the assumption that they did know, or ought to have known, of both remittance requirements and any problem in this regard. 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.
[24] Quon and Gryschuk were inside directors because they were the only directors of the Company and were, in fact, involved in the day-to-day management of its business. This does not fix them with an absolute liability but they will have more difficulty in establishing the due diligence defence. Having regard to the many reported cases, there is a basic difference between the failure to remit source deductions from wages for income tax purposes and the failure to remit GST for a quarterly reporting period. On a particular pay day, wages are totally payable by the employer to the employee. It is only the operation of subsection 153(1) of the Income Tax Act which requires that a portion of such wages be deducted at the source and remitted. The amount so deducted is deemed to be held in trust under subsection 227(4). The amount so deducted and deemed to be held in trust cannot be diminished by any other liability which may exist as between the employer and the Minister of National Revenue because that amount would otherwise be payable to the employee. In other words, there is no reason for any employer to believe that its obligation to remit an amount deducted at source from wages will be reduced by any refund owing by the Minister to the employer.
[25] Under the GST legislation, any amount collected as or on account of tax is deemed to be held in trust under subsection 222(1) "until it is remitted to the Receiver General or withdrawn under subsection (2)". The designated subsection provides as follows:
222(2) A person who holds tax or amounts in trust by reason of subsection (1) may withdraw from the aggregate of the moneys so held in trust
(a) the amount of any input tax credit claimed by the person in a return under this Division filed by the person in respect of a reporting period of the person, and
(b) any amount that may be deducted by the person in determining the net tax of the person for a reporting period of the person,
as and when the return under this Division for the reporting period in which the input tax credit is claimed or the deduction is made is filed with the Minister.
The significant difference under the GST legislation is that the tax collected and deemed to be held in trust by a particular taxpayer can be diminished by other liabilities which may exist as between that same taxpayer and the Minister of National Revenue. Specifically, the amount of any input tax credit claimed by the taxpayer may be withdrawn from the amounts deemed to be held in trust. In the circumstances of these appeals, the amount of input tax credits claimed by the Company almost always exceeded any amount of GST collected and deemed to be held in trust by the Company. See the table in paragraph 11 above.
[26] In the 14 quarterly reporting periods from January 31, 1991 to July 31, 1994, the Company claimed a refund in 12 periods and showed a net GST liability in only two periods. The second period of liability was February 1 to April 30, 1994 giving rise to the amount of $20,536.30 which is the amount in issue in these appeals. According to Exhibit A-11, the GST liability can be summarized as follows:
GST collected on sales $ 6,406.65
GST from Tetra Pak 26,250.00
Total collected 32,656.65
Input tax credits plus GST accrued 12,120.35
Net liability $20,536.30
[27] According to the Federal Court of Appeal in Soper, the standard of care laid down for a director contains subjective elements implied by the words "skill" and "comparable circumstances" and objective elements implied by the words "reasonably prudent person". In this dispute between the Appellants and the Minister of National Revenue, I have concluded that the two Appellants have satisfied the standard of care for directors both subjectively and objectively. They start as inside directors. They were the only directors and they managed the Company's day-to-day business. The original forbearance agreement (Exhibit A-4) is dated December 4, 1992. From that date until the voluntary assignment in bankruptcy in December 1994, the Company was under restraint by the Bank and could not issue any cheque without the Bank's consent. Over a 20-month period from December 1992 to August 1994 (when a receiver was appointed), the Appellants had managed the Company's business and had become accustomed to obtaining the Bank's consent for all cheques necessary to continue that business.
[28] There is no evidence that the Company had failed to remit source deductions from wages. Such remittances would be consistent with Mr. Moore's description of Bank policy in paragraph 20 above. There is no evidence that the Bank's policy was ever spelled out to the Appellants. They may have assumed from the Bank's continuing consents to remit source deductions each month that the Bank would consent to the remittance of the GST liability at the end of May 1994. That is an assumption which a reasonably prudent person could make in comparable circumstances; particularly when the Company ordinarily claimed a refund on its GST quarterly returns. The Bank may have given the Appellants some bland assurance in April and May 1994 with respect to the net GST liability expecting that any such liability would be offset by GST refunds claimed in the next two or three quarterly returns. I can easily perceive a situation in April/May 1994 when the Appellants asked for consent to remit the GST, and expected the consent to be granted; while the Bank advised them not to worry about the net GST owed in May expecting that amount to be offset by GST refunds in the immediate future.
[29] On the one hand, both Appellants knew that they were operating an undercapitalized business and their ability to pay current liabilities depended on the Bank's consent. If this were a case involving a sequence of unremitted source deductions from wages, I would hold against the Appellants because the first refusal by the Bank to permit a remittance would have been adequate warning to the Appellants in their undercapitalized state. On the other hand, it appears that the Bank permitted a stream of monthly remittances of source deductions over a long period (December 1992 to May 1994) while the Company was under restraint and probably insolvent but for the Bank's leniency. Relying on the history of the Bank's leniency while the Company was virtually insolvent, a reasonably prudent director, in the shoes of either Appellant, could easily conclude in May 1994 that the Bank would permit the remittance of the GST amount ($20,536.30).
[30] The Queen v. McKinnon, LaPointe and Worrell, 2000 DTC 6593 is a recent decision of the Federal Court of Appeal affirming a decision of McArthur J. of this Court who allowed the appeals of three directors. That case involved failure to remit source deductions under the Income Tax Act. Evans J.A. (Stone J.A. concurring) stated in paragraph 56 of his reasons (at page 6602) that subsection 227.1(1) may apply even if the directors do not have de facto control over the financial operation of their corporation. Therefore, although Quon and Gryschuk did not have de facto control over the financial operation of the Company in April and May 1994, they could still be liable under subsection 323(1). The McKinnon/LaPointe/Worrell case is a good example of the difference between failure to remit a sequence of source deductions under the Income Tax Act and failure to remit for a single quarterly period under the GST legislation. Evans J.A. stated in paragraph 66 (at page 6603) that the focus should be on the conduct of the directors after October 18, 1993 "when the bank dishonoured the second remittance cheque".
[31] In McKinnon/LaPointe/Worrell, Rothstein J.A. delivered brief concurring reasons in which he stated at page 6605:
... I wish to emphasize that whether the due diligence defence will be successful is fact-driven in each case, i.e. always comparing what the directors did to prevent the failure with what a reasonably prudent person would have done in comparable circumstances. I agree with Evans J.A. that the due diligence defence is established on the facts of this case. ...
Evans J.A. had stated at paragraph 77 of his reasons (at page 6604):
Given the limitations placed upon them by the bank's de facto control of the company's finances, I am satisfied that, on the facts of this case, the directors exercised the degree of care, diligence and skill to prevent failures to remit that would have been shown by a reasonably prudent person in comparable circumstances. ...
[32] In my opinion, the dominant fact in the appeals of Quon and Gryschuk is the fact that they are assessed as directors for the only quarterly GST liability which the Company failed to pay. That comes close to absolute vicarious liability. The appeals are allowed, with such costs as are permitted treating both appeals as only one appeal.
Signed at Ottawa, Canada, this 26th day of April, 2001.
"M.A. Mogan"
J.T.C.C.