BETWEEN:
and
____________________________________________________________________
Appeal heard on February 5, 2007, at Vancouver, British Columbia.
Before: The Honourable Gerald J. Rip, Associate Chief Justice
Appearances:
____________________________________________________________________
JUDGMENT
The appeal from the assessment made under Part IX of the Excise Tax Act ("ETA") notice of which is dated July 10, 2003 and bears number A101433, for the period from July 1, 1997 to March 31, 2001, is allowed with costs and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant is not liable pursuant to subsection 323(1) of the ETA for payments that Sybarite was required to remit on account of net tax on or about September 30, 1997, December 31, 1997, March 31, 1998, June 30, 1998, September 30, 1998, December 31, 1998 and March 31, 1999. On January 31, 2001 no net tax was payable in any event.
Signed at Ottawa, Canada, this 8th day of March 2007.
BETWEEN:
GLENN MARTIN BODNARCHUK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] Glenn Martin Bodnarchuk appeals a third party assessment issued by the Minister of National Revenue ("Minister") on July 10, 2003, pursuant to subsection 323(1) of the Excise Tax Act ("ETA"). The Minister assessed Mr. Bodnarchuk the amount of $141,328.24 in respect of Goods and Services Tax ("GST") collected by Sybarite Investments Ltd. ("Sybarite") for the period July 1, 1997 to January 31, 2001 and not remitted to the Receiver General of Canadaas required when he was a director of Sybarite.[1]
[2] Schedule "A" to the Notice of Assessment states that no tax was paid for the period ending March 31, 2001. According to the Notice of Assessment, the last date Sybarite failed to remit net tax was January 31, 2001.
[3] Where there is a conflict in dates on the Notice of Assessment and a schedule attached to it, I will rely on the date on the Notice of Assessment; in this case the last date Sybarite failed to remit tax was January 31, 2001. Neither the Notice of Assessment nor the schedule specifies the amount of tax Sybarite failed to remit on January 31, 2001; I conclude the amount was zero. Therefore, based on the amount of $3,168.63 being payable only on March 31, 2001, I shall deduct this amount from the total assessed. The amount in issue, therefore, is $138,159.61.
[4] Sybarite provided limousine and charter bus services in Victoria and Vancouver. The appellant worked out of the company's Vancouver office; the appellant's brother, Kenneth Bodnarchuk, worked in Victoria. The appellant was the company's president as well as a director and shareholder. The appellant's brother was also a director and shareholder.
[5] To put it in its most simple terms, Mr. Bodnarchuk's position is that although he was president and a director of Sybarite, his brother actually ran the company's business and did so in an arbitrary manner. The appellant said that he was essentially an office clerk and messenger without any say in the Sybarite's affairs. In fact, he declared, he answered to the office manager in Vancouverwhere he worked.
[6] Mr. Bodnarchuk acknowledged his responsibility under the Income Tax Act ("Act") as a director but, he insisted, he did his best.
[7] Sybarite was incorporated in April 1977 at a time when Mr. Bodnarchuk[2] was serving with the Canadian Armed Forces in Egypt. He says his signature was "forged" in the Articles of Incorporation. However, he, his brother, his mother, Adeline Bodnarchuk, and his sister, Patricia Kennedy, were listed as the incorporators and first directors of Sybarite. Mr. Bodnarchuk never took any action to contest the veracity of his signature or his position as shareholder or as director: "it was a moot point". Each of the four family members owned 25% of the outstanding shares of the company.
[8] Mr. Bodnarchuk testified that from as early as 1992 the Canada Revenue Agency ("CRA")[3] and its predecessors sent him "threatening letters" that Sybarite was in default of making payments for GST and payroll accounts. "They'd call, we'd pay." "It was a way of doing business." Mr. Bodnarchuk said that in the 1990s Sybarite owed money to everybody except its employees. If the company were "cut off" from a supplier, it would pay the supplier. The same policy was adopted for the CRA.
[9] During the course of the years, whenever the appellant received a letter from the CRA, he would make inquiries to his brother and his brother would inform him "all is fine". He had no influence on his brother and did not "follow-up" if the money had in fact been paid. He assumed the money was paid since part of his job with the company was a messenger and he would deliver an envelop to the Vancouveroffice of the CRA about twice a month.
[10] In early 1996, Sybarite was again in arrears of GST. Mr. Bodnarchuk recalled that his brother arranged financing for the company with the Canadian Western Bank. The company became bankrupt on February 16, 2001, when it made a proposal in bankruptcy.
[11] Mr. Bodnarchuk testified to never having had a relationship with his brother. The appellant has not spoken to his brother since 2001. In his view, once his brother got financing with the Canadian Western Bank, his brother and sister-in-law controlled the company. The appellant insisted he was a director in theory only. He was, he suggested, forced to be a director or he would lose his job with Sybarite. When his mother and sister ceased to be directors in 1994 his brother "fired" them, even though each was an equal shareholder in the company.
[12] Mr. Bodnarchuk said his position at Sybarite was to "hang around the office" and "make work". He had no signing authority until the last months before the company's bankruptcy. His brother "hired everybody". The appellant declared that he had no real responsibility, not even to open mail. He insists that he was not involved in the day-to-day affairs of the company; he "basically hung around" and got a salary. Mr. Bodnarchuk, who dropped out of school in grade 12, said that except for the army, this was the "only thing I've done since I left school . . . If I resigned as a director I would lose my job". He got a wage from the company and was happy.
[13] When a document was presented for his signature as president, he signed the document; he would read what he signed. He also "got involved" when he received warning letters from the CRA and would telephone his brother and ask "if it's being handled". Again, his brother would tell him all was "O.K.".
[14] After 1996, Mr. Bodnarchuk testified, he remained as a director of the company but never consented to be a director. There were no shareholders' meetings to elect directors. In answer to assumptions relied on by the Minister in assessing, Mr. Bodnarchuk denied signing financial statements, stating he did not understand financial statements. He also answered that he assumed any money owed to the government had been paid "because we'd pay after a phone call". He said he was unaware how much money was owed by the company. He knew the company owed money by hearing conversations in the office. In the last three to four months before bankruptcy he had cheque signing authority and signed "on Ken's faxed instructions".
[15] Mr. Bodnarchuk produced a copy of a list of instances CRA contacted him from March 1994 to July 2003 when the assessments were issued. The Minister's officials concluded that they were in contact with him on at least 34 occasions. These included nine occasions when director's liability warning letters were sent, the first such letter was sent in May 1994 with respect to income tax amounts withheld and not remitted. In most cases these letters were sent to both brothers. Contacts also included verbal advice of "due diligence" to Mr. Bodnarchuk and legal warnings and direct contact with him by a collections officer. The collections officer also learned of efforts Mr. Bodnarchuk was making in 1996 to mortgage his home to pay amounts owing by Sybarite. In 1999, a collections officer warned Mr. Bodnarchuk to "make himself aware of company's affairs". The tax authority also was aware that Mr. Bodnarchuk had applied to a bank for a loan but did not qualify.
[16] Immediately prior to Sybarite's bankruptcy Mr. Bodnarchuk started to sign financial statements and worked on payroll. His brother told him that "it's your new thing". Mr. Bodnarchuk acknowledged his limited activity in Sybarite's bankruptcy proceedings, writing to the trustee and contacting the CRA.
[17] The respondent's position is that Sybarite failed to remit an amount of net tax or to pay an amount of tax as required by subsections 228(2) and (2.3) or section 230.1 of the ETA, as described in section 323.1 of the ETA, and in accordance with section 323.1 Mr. Bodnarchuk is liable to pay such amount and any interest on, or penalties relating to, the amount. The Crown asserts that Mr. Bodnarchuk did not exercise the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances: subsection 323(3) of the ETA.
[18] Mr. Bodnarchuk, on the other hand, says that he was duly diligent in the circumstances, that his brother was a domineering personality who controlled the affairs of the company. Mr. Bodnarchuk was happy to mind his own business - which was minor - and get paid by the company.
[19] While Mr. Bodnarchuk's testimony was self-serving, as one would expect it to be, his testimony withstood the rigours of cross-examination. Mr. Randeep Hundal, an appeals officer and witness for the respondent, reviewed the appellant's Notice of Objection; he also prepared the list of contacts by the CRA with Mr. Bodnarchuk which the latter referred to in his evidence. Mr. Hundal stated that there were contacts with Mr. Bodnarchuk that were not described on his list.
[20] The respondent argued that Mr. Bodnarchuk was not the innocent victim that he portrayed. He knew of the company's defaults in paying taxes throughout the 1990s and took no positive steps to pay GST as the amounts became due. The Crown rejected Mr. Bodnarchuk's characterization of his position at Sybarite. He was, after all, the company president.
[21] Robertson J.A. summarized his findings in respect of the standard of care required by subsection 227.1(3) of the Act in Soper v. Canada,[4] at paragraphs 37 and 38:
¶ 37 . . . 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).
¶ 38 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".
[22] Later, Robertson J.A. applied the standard of care in subsection 227.1(1) of the Act (that he described in Soper, supra), to section 323.1 of the ETA in Drover v. Canada.[5] In both Soper and Drover he considered the liability of a person who is classified as an outside as opposed to an inside director; the liability is not dependent simply upon whether a person is one or the other. He described inside directors as:[6]
¶ 41 . . . 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.
[23] However, a positive duty to act arises when an outside director obtains information, or becomes aware of facts, which may lead one to conclude that there is, or could reasonably be, a potential problem with remittances, Robertson J.A. warned. "Put differently", he added "it is indeed incumbent upon an outside director to take positive steps if he or she knew, or ought to have known, that the corporation could be experiencing a remittance problem".[7]
[24] A different panel of the Court of Appeal considered subsection 323(1) of the ETA in Smith v. Canada.[8] Sharlow J.A. reviewed the standard of care contemplated by subsection 323(1) of the ETA and subsection 227.1(1) of the Act at paragraphs 9, 10, 11, 12, 13 and 14:
¶ 9 The Soper decision, supra, established that the standard of care described in the statutory due diligence defence is substantially the same as the common law standard of care in Re City Equitable Fire Insurance Co., [1925] Ch. 407 (Eng. C.A.). It follows that what may reasonably be expected of a director for the purposes of subsection 227.1(1) of the Income Tax Act and subsection 323(1) of the Excise Tax Act depends upon the facts of the case, and has both an objective and a subjective aspect.
¶ 10 The subjective aspect of the standard of care applicable to a particular director will depend on the director's personal attributes, including knowledge and experience. Generally, a person who is experienced in business and financial matters is likely to be held to a higher standard than a person with no business acumen or experience whose presence on the board of directors reflects nothing more, for example, than a family connection. However, the due diligence defence probably will not assist a director who is oblivious to the statutory obligations of directors, or who ignores a problem that was apparent to the director or should have been apparent to a reasonably prudent person in comparable circumstances (Hanson v. Canada (2000) 260 N.R. 79, [2000] 4 C.T.C. 215, 2000 D.T.C. 6564 (F.C.A.)).
¶ 11 In assessing the objective reasonableness of the conduct of a director, the factors to be taken into account may include the size, nature and complexity of the business carried on by the corporation, and its customs and practices. The larger and more complex the business, the more reasonable it may be for directors to allocate responsibilities among themselves, or to leave certain matters to corporate staff and outside advisers, and to rely on them.
¶ 12 The inherent flexibility of the due diligence defence may result in a situation where a higher standard of care is imposed on some directors of a corporation than on others. For example, it may be appropriate to impose a higher standard on an "inside director" (for example, a director with a practice of hands-on management) than an "outside director" (such as a director who has only superficial knowledge of and involvement in the affairs of the corporation).
¶ 13 That is particularly so if it is established that the outside director reasonably relied on assurances from the inside directors that the corporation's tax remittance obligations were being met. See, for example, Cadrin v. Canada (1998), 240 N.R. 354, [1999] 3 C.T.C. 366, 99 D.T.C. 5079 (F.C.A.).
¶ 14 In certain circumstances, the fact that a corporation is in financial difficulty, and thus may be subject to a greater risk of default in tax remittances than other corporations, may be a factor that raises the standard of care. For example, a director who is aware of the corporation's financial difficulty and who deliberately decides to finance the corporation's operations with unremitted source deductions may be unable to rely on the due diligence defence (Ruffo v. Canada, 2000 D.T.C. 6317 (F.C.A.)). In every case, however, it is important to bear in mind that the standard is reasonableness, not perfection.
[25] In Smith, supra, the appellant was held not to be an inside director because he was not involved in the daily management of the company.
[26] I find that Mr. Bodnarchuk was not involved in the daily management of Sybarite and for practical purposes he was not an inside director. The evidence is that although he was a shareholder, director and even president of the company, he was taking orders from the Sybarite's office manager in Vancouver. His brother ran the show and the appellant failed to object or make queries because he feared for his job, or rather, his loss of pay from the company.
[27] Nevertheless, as the respondent argued, during the months leading to Sybarite's bankruptcy, Mr. Bodnarchuk was able to address the affairs of the company and played a role he did not play earlier. However, as Mr. Bodnarchuk testified, it was his brother who permitted him to play this new role. By this time Sybarite was already in default to the Crown.
[28] Mr. Bodnarchuk was quite candid in acknowledging that the CRA was treated as any other creditor and got paid by Sybarite only when it got nasty and demanded payment and he knew this was the way Sybarite operated.
[29] The key question is, in the circumstances, what could have Mr. Bodnarchuk have done to prevent Sybarite's failures to remit or pay?
[30] Subjectively, Mr. Bodnarchuk was not a sophisticated person. He was overly intimidated by his brother. He saw what happened to his mother and sister when they resigned as directors and did not want to follow in their footsteps. He had no other work background other than membership in the Canadian Armed Forces when he was younger. He felt he could not obtain employment elsewhere and had to keep the job he had. At trial he described himself being casually employed. He had no business acumen or experience. It is not unreasonable to conclude that a person caught in comparable circumstances as Mr. Bodnarchuk, with Mr. Bodnarchuk's insecurities and fears, would have acted in the same way as Mr. Bodnarchuk.
[31] The company's business, however, was not a large or complex business. Mr. Bodnarchuk knew that the company had a history of making late payments to the CRA. But, until near the end, he was "out of the loop". He relied on assurances from his brother that payments were being made and it was he who would deliver payments to the Vancouveroffice of the CRA. He believed that, although the payments were late, they were being paid when demanded.
[32] On the particular facts of this appeal, I find that the appellant is not liable for Sybarite's failures to pay or remit net tax as required until such time as he was allowed to become active in the affairs of the company. This was approximately three or four months before February 16, 2001, that would be November 1, 2000. Until November 1, 2000, he acted in the manner as would a reasonably prudent person with his experience and skill, or lack thereof, would have acted in comparable circumstances. He was unable to prevent the company's failures to pay or remit because he had absolutely no say or influence in the company's operations, including the decision to make or not make timely payments on account of GST.
[33] The appeal is allowed with costs and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that the appellant is not liable pursuant to subsection 323(1) of the ETA for payments that Sybarite was required to remit on account of net tax on or about September 30, 1997, December 31, 1997, March 31, 1998, June 30, 1998, September 30, 1998, December 31, 1998 and March 31, 1999. On January 31, 2001 no net tax was payable in any event.
Signed at Ottawa, Canada, this 8th day of March 2007.
"Gerald J. Rip"
Rip A.C.J.
COURT FILE NO.: 2005-1339(GST)G
STYLE OF CAUSE: GLENN MARTIN BODNARCHUK v. HER MAJESTY THE QUEEN
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: February 5, 2007
REASONS FOR JUDGMENT BY: The Honourable Gerald J. Rip, Associate Chief Justice
DATE OF JUDGMENT: March 8, 2007
APPEARANCES:
|
For the Appellant: |
The Appellant himself |
|
Counsel for the Respondent: |
David Everett |
COUNSEL OF RECORD:
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada
[1] The tax assessed of $141,328.24 included tax of $101,503.14, interest of $18,178.81 and penalties of $21,646.29.
[2] Mr. Bodnarchuk in these reasons for judgment refers to the appellant and not his brother.
[3] Any reference to CRA in these reasons for judgment includes reference to Revenue Canada or Canada Customs and Revenue Agency, as may have been the case at the relevant time.
[4] [1997] F.C.J. No. 881 (QL), [1997] 3 C.T.C. 242.
[5] [1998] F.C.J. No. 647 (QL), para. 6.
[6] Soper, supra, at para. 41.
[7] Soper, supra, at para. 50.
[8] [2001] F.C.J. No. 448 (QL).