Date: 20010418
Docket: 2000-4099-IT-I
BETWEEN:
DENNIS DUGGAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] This appeal pursuant to the Informal Procedure was heard at Edmonton, Alberta on March 23, 2001. The Appellant was the only witness. At the outset, the Court was advised that the Appellant's address respecting this appeal has changed to Gordon D. Beck, Field Atkinson & Perraton, 2000 Oxford Tower, 10235-101 Street, Edmonton, Alberta, and that is so ordered.
[2] The particulars relating to this matter are set out in paragraphs 9 to 12 inclusive of the Reply to the Notice of Appeal, which read:
9. The Minister confirmed the reassessments by means of a Notice of Confirmation dated June 26, 2000.
10. In so reassessing the Appellant, the Minister made the following assumption of facts:
(a) the facts as stated above;
(b) the Appellant was a director and shareholder of Rogers & Associates Management Consultants Ltd. ("Rogers");
(c) Rogers failed to collect and remit payroll taxes ("Source Deduction") to the Minister;
(d) Rogers ceased business operations in September of 1985;
(e) the Minister raised an assessment against the Appellant pursuant to section 227.1 of the Income Tax Act on February 27, 1987;
(f) Rogers was dissolved on August 5, 1988 for failure to file annual reports;
(g) the Appellant filed for an assignment into bankruptcy in 1995;
(h) the Appellant made a consumer proposal to the creditors which resulted in a payment of $41,000 to the trustee in October of 1995;
(i) the creditors accepted the consumer proposal of the Appellant;
(j) the Appellant claimed the $41,000 payment to the trustee as an ABIL on his 1995 income tax return;
(k) the payment of the Source Deduction liability was not incurred for the purpose of gaining or producing income from a business or property;
(l) the payment of the $41,000 by the Appellant was not as a result of a loan guarantee for Rogers;
(m) when the Appellant paid the trustee the $41,000, Rogers had been struck off the corporate registry system;
(n) in his 1995 Taxation Year, the Appellant did not dispose of any property that was a share in the capital stock of a small business corporation;
(o) in his 1995 Taxation Year, the Appellant was not owed a debt by a Canadian Controlled Private Corporation that became a bankrupt with the meaning of subsection 128(3) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp) (the "Act") as amended;
(p) in his 1995 Taxation Year, the Appellant was not owed a debt by a Canadian Controlled Private Corporation that was a corporation referred to in Section 6 of the Winding up Act that is insolvent (within the meaning of that Act).
B. ISSUES TO BE DECIDED
11. The issues are:
(a) whether or not the Appellant lent Rogers $41,000 in his 1995 Taxation Year, and if so, was it for the purpose of gaining or producing income from a business or property; and
(b) whether or not the Appellant is entitled to an ABIL in his 1995 Taxation Year in the amount of $26,798?
C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT
12. He relies on sections 3 and 227.1; subsections 128(3) and 248(1); paragraphs 38(a), 39(1)(c) and 50(1)(a) and subparagraph 40(2)(g)(ii) of the Act, for the 1995 Taxation Year.
[3] Respecting the assumptions in paragraph 10 of the Reply, the Court finds:
1. The following were not refuted – (b), (c), (d), (e), (f), (g), (h), (i), (j), (m), (n), (o) and (p).
2. In the foregoing there are two discrepancies.
(a) Assumption (c) refers to Rogers failure to "collect" payroll taxes.
(b) Assumption (f) refers to Rogers as dissolved, whereas assumption (m) describes it as struck from the corporate registry. In these circumstances the Court finds that Rogers was struck from the registry as a consequence of failing to file corporate returns and that the striking occurred on August 5, 1988, after the Appellant was assessed on February 27, 1987.
[4] The Order of Approval of the Appellant's Proposal which was made by the Registrar in Bankruptcy under the Bankruptcy Act is contained in Exhibit A-3. Pursuant to that Order, the Appellant paid a total dividend of $38,560.61 on debts totalling $835,930.31 of which Revenue Canada was owed $815,359.03 and received a gross dividend of $37,611.68. Thus the amount of that payment to the Respondent was not $41,000. However, the Appellant had previously paid some money on this account to the Respondent. The face of the Order itself reads:
Alberta #1
Estate No.: 50539
IN THE COURT OF QUEEN'S BENCH OF ALBERTA
IN BANKRUPTCY
IN THE MATTER OF THE PROPOSAL OF
DENNIS WALTER DUGGAN
OF THE CITY OF EDMONTON
IN THE PROVINCE OF ALBERTA
BEFORE MASTER W. BREITKREUZ) ON TUESDAY,
REGISTRAR IN BANKRUPTCY )THE 17TH DAY OF
IN CHAMBERS )OCTOBER, A.D., 1995
LAW COURTS, EDMONTON, )
ALBERTA )
ORDER OF APPROVAL OF PROPOSAL
THIS Motion, made by Browning Smith Inc., for an Order approving the Proposal of Dennis Walter Duggan, was heard this date at the Law Courts Building, 1A Sir Winston Churchill Square, Edmonton, Alberta.
ON READING the Report of the Trustee filed on the 25th day of September, 1995, and the Court being satisfied that the required majority of creditors have duly accepted the Proposal in the terms and conditions in the paper writing marked "A" annexed hereto and being satisfied that the said terms are reasonable and calculated to benefit the general body of creditors and that no offences or facts have been proved to justify the Court in withholding its approval, the said Proposal is hereby approved.
THIS COURT ORDERS that the said Proposal is hereby approved.
"W. BREITKREUZ"
REGISTRAR IN BANKRUPTCY
Entered this 18th day of
October, A.D., 1995.
W. BREITKREUZ "seal"
REGISTRAR IN BANKRUPTCY
[5] In paragraph B2 of the Notice of Appeal, the Appellant submitted that the liability of a director respecting source deductions is similar to that of a guarantor of a business liability.
[6] When most of the defalcations of payment of source deduction by Rogers occurred, Rogers was an active, Canadian controlled private corporation. The Appellant was at all material times, and remains, a shareholder of Rogers. He was also a director, corporate secretary and an active managing officer of Rogers at all times that it was in business.
[7] The Appellant also argues that as a director of Rogers, he became liable to the Respondent for the defalcation of Rogers as soon as it failed to pay withholdings. That is, while it was incurring defalcations on instalments during the months that it remained in business.
[8] In this case, Rogers took trust monies (eg. subsection 227(4), Income Tax Act) which it owed to Her Majesty and which Rogers should have remitted to Her Majesty as a trustee. The Appellant's statutory obligation in subsection 227.1 (1) is as follows:
227.1. Liability of directors for failure to deduct
(1) [Liability of directors for failure to deduct]
Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or section 153 or 215, has failed to remit such an amount or has failed to pay an amount of tax for a taxation year as required under Part VII or VIII, the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest or penalties relating thereto.
[9] The Income Tax Act provision respecting guarantees in subsection 39(12) refers to the guarantee and payment of a "debt". It reads:
39 (12) Guarantees
For the purpose of paragraph (1)(c), where
(a) an amount was paid by a taxpayer in respect of a debt of a corporation under an arrangement under which the taxpayer guaranteed the debt,
(b) the amount was paid to a person with whom the taxpayer was dealing at arm's length, and
(c) the corporation was a small business corporation
(i) at the time the debt was incurred, and
(ii) at any time in the 12 months before the time an amount first became payable by the taxpayer under the arrangement in respect of a debt of the corporation,
that part of the amount that is owing to the taxpayer by the corporation shall be deemed to be a debt owing to the taxpayer by a small business corporation.
A debt is anything which one person is under an obligation to pay or render to another. Similarly an arrangement does not require an agreement of parties; it is merely the putting into order, which in this case is done by the Income Tax Act in section 227.1. Subsection (1) imposes liability on those who are directors at various times – when Rogers was required to deduct, or withhold, or remit or pay. At that time the amount became payable by the Appellant. When the Appellant paid the amount he did, that amount became a debt owing to the Appellant by Rogers. (Subsection 39(12))
[10] The Appellant paid the amount in October, 1995, at which time Rogers incurred the debt to the Appellant pursuant to subsection 39(12).
[11] But in October, 1995, and for the twelve preceding months, Rogers was no longer a "small business corporation" as that is defined in subsection 248(1) since at that "particular time" its assets were not used principally in an active business carried on primarily in Canada. In fact by then Rogers had no assets and was not in active business, nor had that been the case after September, 1985. Nor was the payment made for the purpose of gaining or producing income.
[12] For these reasons, the appeal is dismissed.
Signed at Regina, Saskatchewan, this 18th day of April, 2001.
"D. W. Beaubier"
J.T.C.C.