Docket: 2003-2011(GST)I

BETWEEN:

CHRISTOPHER ZABORNIAK,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on common evidence with the appeal of Cheryl Zaborniak, (2003-2016(GST)I) on May 20, 2004, at Winnipeg, Manitoba,

By: The Honourable Justice E.A. Bowie
Appearances:
Agent for the Appellant:	Kornelius Loewen
Counsel for the Respondent:	Penny Piper

____________________________________________________________________

JUDGMENT

          The appeal from the Notice of Assessment - Third Party pursuant to subsection 323(1) of the Excise Tax Act, notice of which is dated April 25, 2004 and bears number 55406, for the period August 1, 1996 to July 31, 1998 is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant shall not be assessed for any amount in excess of $32,324.57.

Signed at Ottawa, Canada, this 13th day of August, 2004.

"E.A. Bowie"

Bowie J.

Docket: 2003-2016(GST)I

BETWEEN:

CHERYL ZABORNIAK,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on common evidence with the appeal of Christopher Zaborniak, (2003-2011(GST)I) on May 20, 2004, at Winnipeg, Manitoba,

By: The Honourable Justice E.A. Bowie
Appearances:
Agent for the Appellant:	Kornelius Loewen
Counsel for the Respondent:	Penny Piper

____________________________________________________________________

JUDGMENT

          The appeal from the Notice of Assessment - Third Party pursuant to subsection 323(1) of the Excise Tax Act notice of which is dated April 25, 2004 and bears number 55405, for the period August 1, 1996 to July 31, 1998 is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant shall not be assessed for any amount in excess of $32,324.57.

Signed at Ottawa, Canada, this 13th day of August, 2004.

"E.A. Bowie"

Bowie J.

Citation: 2004TCC560

Date: 20040813

Docket: 2003-2011(GST)I 2003-2016(GST)I

BETWEEN:

CHRISTOPHER ZABORNIAK and CHERYL ZABORNIAK,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Bowie J.

[1]      The Minister of National Revenue has assessed Cheryl Zaborniak and her brother Christopher Zaborniak under section 323 of the Excise Tax Act[1](the Act). They, along with a third sibling, owned all the shares of Zabco Holdings Inc., and were its only directors. Zabco owned and operated a Tim Horton franchise, and in the course of its business it collected goods and services tax (GST). Zabco failed to file returns under the Act, as it was obliged to do on an annual basis, and it failed as well in its obligation to remit the appropriate amount of GST. Following an audit, the Minister assessed Zabco in respect of the periods ending July 31, 1997 and July 31, 1998 as follows:

Period	Net Tax	Interest	Penalty	Total
1996-08-01 to 1997-07-31	$3,211.56	$834.10	$1,069.60	$5,115.26
1997-08-01 to 1998-07-31	24,500.00	3,628.95	4,186.25	32,315.20
	$27,711.56	$4,463.05	$5,255.85	$37,430.46

Unable to collect from Zabco, the Minister invoked his statutory power to assess the Appellants as directors for the unremitted net tax, interest and penalties of $37,430.46. It is these assessments that are now under appeal. The appeals were heard together on common evidence.

[2]      There is only one fact that is in dispute, and that is the quantum of net tax, interest and penalty owing by Zabco at the time the derivative assessments now under appeal were made. The Appellants do not contest that Zabco was assessed for each of the two periods, or that it failed to pay the amounts for which it was assessed. They do not dispute that Zabco did not challenge either of the assessments against it by either objection or appeal. Nor do they dispute that on February 4, 2000 the Minister filed a certificate under section 316 of the Act in the Federal Court in respect of the unpaid net tax, penalty and interest totalling $32,324.57 for which Zabco was then liable, or that a writ of seizure and sale was issued on February 4, 2000 and returned nulla bona on April 10, 2001. The Appellants neither pleaded nor argued that they were entitled to the protection of the due diligence defense that subsection 323(3) affords to corporate directors.

[3]      The only ground on which the Appellants attack these derivative assessments is their assertion that the assessment of Zabco for the second period was incorrect. The only evidence that they produced to support that contention was the testimony of their agent, Mr. Kornelius Loewen, C.A., and Exhibit A-1, which is a schedule prepared by Mr. Loewen whereby he computed the liability of Zabco for GST in respect of the second period to be "roughly $14,190.08". Two questions are therefore raised. First, is it open to the Appellants on these appeals to go behind the Minister's assessment of Zabco for the period ending July 31, 1998, to show that it was incorrect? Second, if that course is open to the Appellants, does Mr. Loewen's evidence satisfactorily discharge the Appellants' burden of proof? For the reasons that follow, I would answer both these questions in the negative.

[4]      In enacting Part IX of the Act, Parliament made provision whereby the liability of a registrant to pay net tax, together with any interest or penalty, may be fixed by the Minister by means of an assessment made under subsection 298(1). Section 299 is carefully drafted to provide that the registrant's liability is precisely fixed by any such assessment. It is deemed to be valid and binding, subject only to either a subsequent reassessment by the Minister, or being vacated following the process of objection and appeal that is provided for in sections 301 to 307.[2] The processes for objection and appeal are available only to the person who has been assessed.[3] The amount of net tax, interest or penalty assessed, subject only to reassessment, or vacating of the assessment as a result of an objection or an appeal, is a debt due to Her Majesty in Right of Canada,[4] and when so certified by the Minister under section 316 the certificate is deemed to be a judgment of the Federal Court.

[5]      Among the many provisions that Parliament has enacted for the collection of unpaid net tax, interest and penalties of registrants is section 323 which looks to the directors of a delinquent corporation if they have failed in their duty of due diligence in managing its affairs. It reads:

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(2) A director of a corporation is not liable under subsection (1) unless

(a)         a certificate for the amount of the corporation's liability referred to in that subsection has been registered in the Federal Court under section 316 and execution for that amount has been returned unsatisfied in whole or in part;

(b)         the corporation has commenced liquidation or dissolution proceedings or has been dissolved and a claim for the amount of the corporation's liability referred to in subsection (1) has been proved within six months after the earlier of the date of commencement of the proceedings and the date of dissolution; or

(c)         the corporation has made an assignment or a receiving order has been made against it under the Bankruptcy and Insolvency Act and a claim for the amount of the corporation's liability referred to in subsection (1) has been proved within six months after the date of the assignment or receiving order.

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.

323(4) The Minister may assess any person for any amount payable by the person under this section and, where the Minister sends a notice of assessment, sections 296 to 311 apply, with such modifications as the circumstances require.

323(5) An assessment under subsection (4) of any amount payable by a person who is a director of a corporation shall not be made more than two years after the person last ceased to be a director of the corporation.

323(6) Where execution referred to in paragraph (2)(a) has issued, the amount recoverable from a director is the amount remaining unsatisfied after execution.

323(7) Where a director of a corporation pays an amount in respect of a corporation's liability referred to in subsection (1) that is proved in liquidation, dissolution or bankruptcy proceedings, the director is entitled to any preference that Her Majesty in right of Canada would have been entitled to had the amount not been so paid and, where a certificate that relates to the amount has been registered, the director is entitled to an assignment of the certificate to the extent of the director's payment, which assignment the Minister is empowered to make.

323(8) A director who satisfies a claim under this section is entitled to contribution from the other directors who were liable for the claim.

The liability that this section imposes on the directors, jointly and severally with the corporation, is "... to pay that amount and any interest thereon or penalties relating thereto"; that amount, read in its context in subsection 323(1), and having regard to the scheme of subdivision e of the Act, can only mean the amount of net tax that the corporation has failed to remit as required. Section 323 only permits the Minister to assess a director where that amount is either an amount that is deemed to be a judgment debt for which execution against the debtor has been returned unsatisfied,[5] or else a claim proved in liquidation or dissolution proceedings, or in bankruptcy.[6] In the present case it is a (deemed) judgment debt.

[6]      If there were no authority on the subject, I would have had no hesitation in finding that the statutory language is clear, and that it leaves no room for a collateral attack on the judgment debt in the course of an appeal from an assessment under section 323. This is true of both the French and the English versions of the statute.[7] I would therefore feel constrained by the judgment of the Supreme Court of Canada in Shell Canada Ltd. v. Canada.[8] The present Chief Justice said there:

... Where the provision at issue is clear and unambiguous, its terms must simply be applied: ... [9]

There have, however, been conflicting decisions of this Court on the point since the decision of the Federal Court of Appeal in Gaucher v Canada[10]. That case dealt with an assessment made under section 160 of the Income Tax Act, which renders a non-arm's length recipient of a gratuitous transfer of property from a delinquent taxpayer liable, jointly and severally with the transferor, for the transferor's tax liability, up to a limit defined as the lesser of the extent to which the value of the property transferred exceeds the value of any consideration that may have been given for it, and

the total of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year.[11]

It was the latter expression that applied in that case. The Federal Court of Appeal held that this Court had erred in finding that the Appellant in an appeal from a derivative assessment made under section 160 could not dispute the amount of the tax liability of the principal debtor for the year in question, notwithstanding that the principal debtor had objected to the assessment and then pursued his right of appeal from it to this Court, all without success. The reasoning of the Court, as I understand it, is that the initial assessment against the primary taxpayer does not "bind" the secondary taxpayer, but only the primary taxpayer, for reasons arising out of the rules of natural justice. Since then there have been at least six decisions of this Court in cases where directors assessed under section 323 have sought to make a collateral attack on the primary assessment. In most of those cases,[12] it was not necessary to decide whether section 323 suffers from ambiguity. Only the decisions of Garon C.J. in Schuster v. Canada[13] and Tardif J. in Maillé v. Canada[14] have discussed the issue whether Gaucher applies to section 323. They both concluded that it does not, primarily because a director will normally have had the opportunity to influence the corporation's decision whether to appeal. That was certainly true in this case, where the Appellants are two of the three directors and shareholders of a small family business.

[7]      Whatever ambiguity may be found in section 160 of the Income Tax Act, I am not able to identify one in section 323, and that is a prerequisite to any departure from the plain words: see Bell ExpressVu Limited Partnership v. Rex[15] at paragraphs 28 to 30. Iacobucci J. said there:

... ambiguity cannot reside in the mere fact that several courts - or for that matter several doctrinal writers - have come to differing conclusions on the interpretation of a given provision. ...

To find that the Appellants in this case have a right to dispute the quantum of the judgment debt would require that I add to subsection 323(1), by implication, the words "or such lesser amount as the corporation might have been found liable to remit following a successful appeal of its assessment". I simply have no mandate to do that. I am in agreement with the conclusions reached by Garon C.J. and Tardif J. I note that these decisions have been criticized and described as "not ... good law".[16] I disagree. The policy is certainly a legitimate subject for criticism, but that criticism should be directed to Parliament, for it is there and not in the Court that policy is formulated: see Shell Canada Ltd., supra, at paragraphs 43 to 48; the Queen v. Ray,[17] at paragraph 14.

[8]      Mr. Loewen said candidly in giving his evidence that he was working with something less than the complete records of Zabco. A dispute of some kind had apparently arisen between the two Appellants and their brother, with the result that the brother had removed many of the financial records of the company. Mr. Loewen was, therefore, left in the position that he had to prepare Exhibit A-1 from records that were not complete. Even those records were not produced in evidence to support Mr. Loewen's ex post facto analysis. This evidence falls far short of what would be required to show that the assessor's computation of the net tax owing for the second period under appeal is incorrect.

[9]      That does not end the matter, however. Among the assumptions of fact pleaded by the Deputy Attorney General in his Reply to the Notice of Appeal are the following:

9.          ...

l)           a Certificate, issued and registered at the Federal Court of Canada on February 4, 2000, certified that the Corporation's debt under the Act was $32,324.57, including penalty and interest calculated to January 6, 2000;

m)         a Writ of Seizure and Sale was issued on February 4, 2000;

n)          the Writ of Seizure and Sale was returned Nulla Bona on April 10, 2001;

The liability of the directors is limited by the provisions of paragraph 323(2)(a) to the amount for which a certificate has been registered in the Federal Court. The Minister was not entitled, therefore, to assess the directors in this case for any amount in excess of $32,324.57. The appeals will therefore be allowed and the assessments referred back to the Minister for reconsideration and reassessment on that basis.

Signed at Ottawa, Canada, this 13th of August, 2004.

"E.A. Bowie"

Bowie J.

SCHEDULE

323(1)    Les administrateurs de la personne morale au moment où elle était tenue de verser une taxe nette comme l'exigent les paragraphes 228(2) ou (2.3), sont, en cas de défaut par la personne morale, solidairement tenus, avec cette dernière, de payer cette taxe ainsi que les intérêts et pénalités y afférents.

323(2)    L'administrateur n'encourt de responsabilité selon le paragraphe (1) que si :

a)          un certificat précisant la somme pour laquelle la personne morale est responsable a été enregistré à la Cour fédérale en application de l'article 316 et il y a eu défaut d'exécution totale ou partielle à l'égard de cette somme;

b)          la personne morale a entrepris des procédures de liquidation ou de dissolution, ou elle a fait l'objet d'une dissolution, et une réclamation de la somme pour laquelle elle est responsable a été établie dans les six mois suivant le premier en date du début des procédures et de la dissolution;

c)          la personne morale a fait une cession, ou une ordonnance de séquestre a été rendue contre elle en application de la Loi sur la faillite et l'insolvabilité, et une réclamation de la somme pour laquelle elle est responsable a été établie dans les six mois suivant la cession ou l'ordonnance.

323(3)    L'administrateur n'encourt pas de responsabilité s'il a agi avec autant de soin, de diligence et de compétence pour prévenir le manquement visé au paragraphe (1) que ne l'aurait fait une personne raisonnablement prudente dans les mêmes circonstances.

323(4)    Le ministre peut établir une cotisation pour un montant payable par une personne aux termes du présent article. Les articles 296 à 311 s'appliquent, compte tenu des adaptations de circonstance, dès que le ministre envoie l'avis de cotisation applicable.

323(5)    L'établissement d'une telle cotisation pour un montant payable par un administrateur se prescrit par deux ans après qu'il a cessé pour la dernière fois d'être administrateur.

323(6)    Dans le cas du défaut d'exécution visé à l'alinéa (2)a), la somme à recouvrer d'un administrateur est celle qui demeure impayée après l'exécution.

323(7)    L'administrateur qui verse une somme, au titre de la responsabilité d'une personne morale, qui est établie lors de procédures de liquidation, de dissolution ou de faillite a droit au privilège auquel Sa Majesté du chef du Canada aurait eu droit si cette somme n'avait pas été versée. En cas d'enregistrement d'un certificat relatif à cette somme, le ministre est autorisé à céder le certificat à l'administrateur jusqu'à concurrence de son versement.

323(8)    L'administrateur qui a satisfait à la réclamation peut répéter les parts des administrateurs tenus responsables de la réclamation.

CITATION:

2004TCC560

COURT FILE NO.:

2003-2011(GST)I and 2003-2016(GST)I

STYLE OF CAUSE:

Christopher Zaborniak and Cheryl Zaborniak and Her Majesty the Queen

PLACE OF HEARING:

Winnipeg, Manitoba

DATE OF HEARING:

May 20, 2004

REASONS FOR JUDGMENT BY:

The Honourable Justice E.A. Bowie

DATE OF JUDGMENTS:

August 13, 2004

APPEARANCES:

Agent for the Appellants:

Kornelius Loewen

Counsel for the Respondent:

Penny Piper

COUNSEL OF RECORD:

For the Appellants:

Name:

N/a

Firm:

N/a

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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