Docket: 2004-226(GST)G

BETWEEN:

J. DAVID O'KEEFE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on April 11 and 12, 2006 at Saint John, New Brunswick.

Before: The Honourable D.G.H. Bowman, Chief Justice
Appearances:
Counsel for the Appellant:	Rodney J. Gillis, Q.C.
Counsel for the Respondent:	Cecil S. Woon Lisa Wight

____________________________________________________________________

JUDGMENT

          The appeal from the assessment made under Part IX of the Excise Tax Act, notice of which is dated July 24, 2002 and bears number 68045, is allowed with costs and the assessment made under section 323 of the Excise Tax Act is vacated.

Signed at Ottawa, Ontario, this 2^nd day of May 2006.

"D.G.H. Bowman"

Bowman, C.J.

Citation: 2006TCC250

Date: 20060502

Docket: 2004-226(GST)G

BETWEEN:

J. DAVID O'KEEFE,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Bowman, C.J.

[1]      This appeal is from an assessment made under section 323 of the Excise Tax Act ("ETA") in the amount of $201,541.02 in respect of unremitted net tax of Wicklow Logging Co. Ltd. ("Wicklow"). Under section 323, where a corporation fails to remit to the Receiver General net tax under the ETA, the directors are jointly liable with the corporation for the unremitted tax. A director can escape this derivative liability by demonstrating that he or she used "due diligence". This expression is simply a shorthand way of expressing the test in subsection 323(3) which reads:

        (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.

[2]      There is a vast jurisprudence on what this test involves. The most frequently quoted case is Soper v. The Queen, [1997] 3 C.T.C. 242 (FCA) written by Robertson J.A. of the Federal Court of Appeal, concurred in by Linden J.A. There are concurring reasons by Marceau J.A.. Soper is a carefully articulated and erudite disquisition on the subject of directors' liability under our fiscal statutes and counsel for the respondent quoted extensively from it. Basically, however, it boils down to a question of fact: what would a reasonable person have done in the circumstances at the time to prevent the failure of the corporation to remit the tax? The test is a factual one and is essentially one of reasonableness.

[3]      The main witness for the appellant was the appellant himself, Mr. O'Keefe. I found him credible and his testimony was not shaken on cross-examination. The facts alleged by the appellant in support of his defence of due diligence as a director are set out succinctly in the notice of appeal, as follows:

1.       Mr. J. David O'Keefe has been assessed under Section 323(1) of the Excise Tax Act in the amount of $201,541.02 in respect of a failure to remit net tax as required under Section 228(2) by Wicklow Logging Co. Ltd. on or about January 31, 2000, February 29, 2000, April 30, 2000, December 31, 2000.

2.       The tax payer was a Director of Wicklow Logging Co. Ltd. (Wicklow)

3.       The tax payer was a Director of Juniper Lumber Co. Ltd. (Juniper) until he resigned sometime in the late summer of 2000.

4.       In a letter dated July 9, 2002 from CCRA to the tax payer, CCRA noted that they intended to assess the tax payer as he had not, in their opinion, met the due diligence defence standards for the following reasons:

      "As a director of your largest receivable, you were in a position through both companies to have control and knowledge of the repercussions of this lack of action."

5.       Wicklow's largest receivable was from Juniper.

6.       J. David O'Keefe exercised no control over Wicklow and Mitchell Corey a Director of Wicklow carried out all of the business activities.

7.       On or about March 7, 2000, Wicklow's only customer Juniper filed for and was granted protection under the CCAA. At the time of filing Wicklow was owed $3,090,148.40 by Juniper.

8.       Wicklow at the time owed to the Bank of Nova Scotia the sum of $2,382,205.96 on a letter of credit.

9.       On March 14, 2000 J. David O'Keefe wrote to the Bank of Nova Scotia expressing concern over Mr. Corey's conduct in relation to Wicklow's operation attempting to put a freeze on the company's bank account which attempt was unsuccessful.

10.     On April 4, 2000 J. David O'Keefe received correspondence from the Bank demanding immediate repayment of all amounts owed by Wicklow.

11.     On April 7, 2000 J. David O'Keefe determined that the Bank in fact had increased Wicklow's line of credit when the credit was not needed and when he as a Director was not consulted. On becoming aware of such he notified Mr. Corey's solicitor and instructed him to return the sum of $139,500.00 so as to honor the outstanding obligations of Wicklow that it had to Revenue Canada, the Bank and unsecured creditors.

12.     The day to day operations of Wicklow was always carried on by Mitchell Corey and the financial aspects were dealt with by Mitchell Corey's accountant Roger Rogers. Mr. J. David O'Keefe wrote to Mitchell Corey on June 30, 2000 advising that as a direct result of his unauthorized action the operations of Wicklow had ceased and that the Bank of Nova Scotia had demanded its loans.

13.     He further advised that as Mr. Corey had seized control of Wicklow, that he should have insured that the records of the corporation were kept current and further that all of the funds paid out by Mr. Corey in March 2000 totaling $139,500.00 should have been used to cover legitimate expenses.

14.     Wicklow had been assessed for an outstanding HST in the amount of $277,531.00. During the year 2000 J. David O'Keefe requested the company pay the amount as it was clearly at fault, however Mr. Corey decided to fight the assessment.

15.     During the spring and summer of 2000 a verification and enforcement officer from CCRA worked on the file and others at Juniper, New Brunswick and advised that the Department should place a lien to recover this money.

16.     In early March 2000 J. David O'Keefe and his sister Susan O'Keefe met with Mr. Corey to ascertain whether Wicklow Logging Co. Ltd. would continue to supply wood to Juniper in order to keep Juniper operating. Mr. Corey refused.

17.     At about the same time upon review of the financial statements of Juniper it was determined that there were accounting irregularities in that the audited financial statements of Juniper were substantially overstating Juniper's wood inventory. Within a week of this discovery J. David O'Keefe and Susan O'Keefe acting as responsible Directors of Juniper caused an application to be made to the Court to protect the assets of Juniper under the CCAA for the benefit of its creditors which would include Wicklow.

18.     The issue on this Appeal is the taxpayers liability under Section 323(1) of the Excise Tax Act in the amount of $177,086.68 and for the tax payers arrears of interest and penalties plus interest and penalties thereon since the date of the original assessment.

19.     The questions is whether the taxpayer met the standard necessary to be exempted from liability under the due diligence defence provisions of Section 323(3) of the Excise Tax Act.

At the end of the notice of appeal, Mr. O'Keefe made the following statement:

I, J. David O'Keefe attempted in every way possible to ensure all the Creditors of Juniper in which I was a Director and Wicklow in which I was a Director, were paid. The operation of Wicklow was entirely in the hands of Mitchell Corey and his accountant. That I went so far as advising Mr. Rocksborough, a representative of CCRA at the time of the audit in early 2000, the Third Party Demand should issue prior to Wicklow's bankruptcy and if it had done so, there would have been sufficient funds to satisfy the HST claim.

Essentially Mr. Corey took control of the company and excluded me from any operation of Wicklow.

[4]      The facts as set out in the notice of appeal have been substantially proved through the documents and through the testimony of Mr. O'Keefe.

[5]      The assumptions on which the Minister of National Revenue confirmed the assessment are set out in paragraphs 19 and 20 of the reply to the notice of appeal. I find it a little unusual to state assumptions on which a confirmation is based but not those upon which the assessment is based. I do not, however, propose to explore this interesting point since I am satisfied that whoever had the onus the appellant has demonstrated due diligence. Paragraphs 19 and 20 read:

19.        In so confirming the assessment, the Minister assumed the following facts:

            a)       the facts stated and admitted above;

            b)       the Corporation was in the business of supplying wood;

            c)       at all relevant times, the Corporation was registered under Part IX of the Excise Tax Act, R.S.C. 1985, c. E-15, as amended (the "Act");

            d)       the Corporation was required by the Act to file its GST returns on a monthly basis;

            e)       at all relevant times, the Appellant was a director of the Corporation;

            f)        at all relevant times, the Appellant was the President and 50% owner of the Corporation;

            g)       the Appellant provided a personal guarantee for $400,000 in respect of the Corporation's indebtedness to the Bank of Nova Scotia

            h)       the Appellant is a knowledgeable and experienced businessman;

            i)        the Appellant was involved with the day to day operations of the Corporation;

            j)        the Corporation failed to remit to the Receiver General the net GST collectible as follows:

Period Ending	Net GST unremitted	Interest	Penalty	Total
31-Jan-2000	$86,729.71	$3,209.22	$3,232.81	$93,171.74
29-Feb-2000	86,142.00	2,236.19	2,248.41	90,626.60
30-Apr-2000	0.00	5,895.35	6,952.89	12,848.24
31-Dec-2000	314.73	19.98	30.20	364.91
31-Jan-2001	3,900.24	251.29	378.00	4,529.53
Unpaid amounts assessed under s. 323 ETA	$177,086.68	$11,612.03	$12,842.31	$201,541.02

            k)       on November 22, 2000, a receiving order was made against the Corporation under the Bankruptcy and Insolvency Act;

            l)        on February 6, 2001, a Proof of Claim for $647,638.31 in respect of the Corporation's liability referred to in subparagraph (j) was sent to the Corporation's trustee in bankruptcy;

            m)      on March 5, 2001, an Amended Proof of Claim for $436,244.13 in respect of the Corporation's liability referred to in subparagraph (j) was sent to the Corporation's trustee in bankruptcy;

            n)       at all relevant times, the Appellant was a director of Juniper Lumber Co. Ltd. ("Juniper");

            o)       at all relevant times, the Appellant was the President and Chief Operating Officer of Juniper;

            p)       the Appellant was involved with the day to day operations of Juniper;

            q)       Juniper's business consisted of forestry, sawmill and the manufacture of "l-joist";

            r)        Juniper was the Corporation's largest customer;

            s)       in late 1999, Juniper was experiencing cash flow problems;

            t)        in late 1999, the Appellant was aware of Juniper's financial difficulties;

            u)       from late 1999, the Appellant permitted the Corporation to continue to supply wood to Juniper;

            v)       by March 7, 2000, Juniper owed the Corporation in excess of $3 million;

            w)      from late 1999, the Appellant knew that Juniper could not pay for the wood it purchased from the Corporation;

            x)       from late 1999, the Corporation was in financial difficulties;

            y)       from late 1999, the Appellant knew or ought to have known that the Corporation was in financial difficulties;

            z)       from late 1999, the Appellant knew or ought to have known that the Corporation could have a problem or potential problem with remittances; and

            aa)     the Appellant did not take any positive steps to prevent the Corporation from failing to remit GST to the Receiver General.

20.        The assumptions of fact outlined in subparagraph 19(o), (s) and (t) above were first made by the Minister in confirming the assessment.

[6]      As will be apparent from the reasons below, it has in my view been established that paragraphs (i), (p), (s), (t), (u), (w), (y), (z) and (aa) are wrong.

[7]      Mr. Gillis, counsel for the appellant, based his argument on four propositions which he says are supported by the case law.

          (a)       as a general rule passive directors are not free of the liability imposed under section 323 of the ETA, but different standards apply in family situations.

          (b)      Outside directors are not held to the same standards as inside directors.

          (c)      Directors are entitled to rely on the competence of managers, including accountants, to ensure that remittances are made.

          (d)      Perfection is not demanded, only reasonable care.

[8]      I am not sure that I would elevate these statements to the level of principles of general application although they have undoubtedly been factors that influenced the decision in some degree in some cases. Rather, I would say that they are all aspects of the overall factual determination that must be made in these cases whereby the conduct of the director must be tested against the touchstone of reasonableness in the particular circumstances that prevailed at the relevant time.

[9]      The circumstances in late 1999 and 2000 were these. Juniper Lumber Co. Ltd. ("Juniper") was a family-owned company, controlled by the O'Keefe family. Its day-to-day management and operation was entirely in the hands of the appellant's father, J. Beverly O'Keefe, the Chairman and Chief Executive Officer. He was, at least until he became ill on February 26, 2000, in effective control of Juniper, exercising a benevolent patriarchal autocracy. Although the appellant was given the title of President and Chief Operating Officer by his father, he was effectively excluded by his father from the management of Juniper.

[10]     A great deal of the evidence was devoted to the appellant's knowledge of and involvement in the business affairs of Juniper. Nonetheless, it is not Juniper's tax liability for which the appellant is being assessed. The premise upon which the Minister appears to have assessed the appellant as a director of Wicklow is stated in a letter to him dated July 9, 2002, from the collections officer of the Canada Revenue Agency ("CRA"):

As director of your largest receivable, you were in a position through both companies to have control and knowledge of the repercussions of this lack of action.

[11]     This view was continued at the objection level. In the letter of May 22, 2003, from the appeals officer, the following appears:

The period of time that was important is this case was when Mr. O'Keefe knew in early 2000 that Juniper could not meet it's [sic] obligations to satisfy the payables due Wicklow. He allowed Wicklow to continue supplying the products to Juniper thereby increasing Wicklow's obligations for HST.

[12]     Despite the emphasis placed upon Mr. O'Keefe's supposed knowledge of the financial affairs of Juniper, it is clear from the evidence that the appellant did not know anything about whatever financial difficulties Juniper was having until after his father's illness when he discovered, to his great surprise, that the inventory of wood in the books of Juniper was inflated by about $15,000,000. It seems that this was done without the appellant's knowledge by his father to support additional financing.

[13]     The result was the appellant and his sister immediately applied for protection for Juniper under the Companies Creditors Arrangement Act ("CCAA"). The significant shortfall in inventory caused the mill to be closed down temporarily.

[14]     In light of the importance attached to the appellant's alleged involvement in and knowledge of the affairs of Juniper, I shall deal in greater detail with this part of the case although I think that his relationship to Juniper is overemphasized. It may well be, however, that the difficulties that he discovered that Juniper was in after his father's illness may have had a bearing on how much attention he could pay to Wicklow's goods and services tax ("GST") remittances. The theory is that the appellant's knowledge of the financial condition of Juniper in late 1999 and early 2000 (which I find he did not have until late February 2000) meant that he could have prevented Juniper from buying lumber from Wicklow with the result that further liability for GST would not have arisen. This is a novel theory that I have not heard before in the directors' liability cases that I have seen. I shall try to state the theory as follows:

"You were a director of both Wicklow and Juniper. In your capacity as a director of Juniper you could have stopped Juniper from buying lumber from Wicklow. This would have meant that no further liability for GST would have arisen. That would have prevented Wicklow from having any "net tax" to remit under section 228 of the ETA."

[15]     In other words, the failure of Wicklow to remit net tax that the Crown alleges the appellant should have prevented arises from a failure by the appellant as a director of Juniper to ensure that Juniper did not buy wood from Wicklow so that the liability to remit net tax would never have arisen in the first place.

[16]     With respect, I think the theory is flawed as a matter of law and the factual underpinning upon which it is founded is precarious in the extreme. The requirement to remit net tax under section 228 and the failure to do so under section 323 presupposes that the tax liability exists. Here the notion seems to be that if the appellant had been duly diligent as a director of Wicklow, he should, as a director of Juniper, have ensured that Juniper bought no more wood so that the liability by Wicklow to remit net tax would never have arisen.

[17]     The factual basis upon which the rather questionable theory is grounded is conjectural, to say the least:

          (a)       The appellant did not know of Juniper's financial condition until he discovered, at the end of February 2000, the inflated inventory values at which time he immediately moved under the CCAA. Up to that point his father consulted behind closed doors with Mitchell Corey, the person in day-to-day control of all affairs of Wicklow. It is probable that his father knew of the financial condition of Juniper and of Wicklow and in all likelihood so did Corey.

          (b)      There is absolutely nothing the appellant could have done to stop Juniper from buying logs from Wicklow. His father made the decisions about Juniper's purchases up until February 26, 2000, and within about a week the CCAA proceedings had intervened. Even if the appellant could have stopped Juniper from buying wood from Wicklow (and he could not have done so) it would have caused the mill to close and would have put a large number of employees out of work. Juniper's ability to buy wood was essential to its continued production and indeed its survival. It would have been totally unreasonable for the appellant to ignore his obligations as a director of Juniper and allow it to go out of business in order to ensure that Wicklow did not increase its liability for GST. The reasonableness of a director's actions must be tested within the context of business reality. Closing a large operation and putting employees out of work so that a GST liability of a supplier would not increase is not a realistic option and it is not within the realm of reasonableness. Moreover, all it would have done, in addition to putting people out of work and bringing a large New Brunswick enterprise to a halt, would have been to prevent a further liability for GST from arising.

          (c)      The theory presupposes that the appellant, as a director of both Juniper and Wicklow had an obligation to see that Wicklow's GST obligations were prevented from arising by taking steps as a director of Juniper that would not necessarily have been in Juniper's best interests. I do not need to decide what, as a matter of corporate law, a director in such a position should have done,[1] but I have no difficulty deciding that as a matter of common sense he had an obligation to try to act in a way that was not inimical to the interests of both companies. A purist might say that if he perceived a conflict he should resign as a director of both companies. This might have satisfied one's notion of corporate rectitude but all it would have accomplished would have been to put both companies into an even bigger mess than they were already in.

[18]     The following passage from the appellant's affidavit filed in support of the application under the CCAA is illustrative of the chaotic situation that existed in the early months of 2000:

CURRENT URGENT ISSUES FACED BY THE COMPANIES

INVENTORY LEVELS

39.        Timber inventory, the raw material used in the sawmill, is held in two categories: "inventory in yards" and "inventory in woods".

Inventory in yards is that inventory at or near the sawmill that is readily available for use in production and could include both Crown Cut and Purchased Wood. Inventory in woods is Crown Cut inventory that has not yet been transported out of the forest.

40.        Notwithstanding the inventory value shown on Juniper's unaudited internal January financial statements and on the February Certificate, it has recently been determined that the amount of wood actually in inventory is significantly lower than stated. Juniper intends to have this discrepancy investigated and to retain the services of a professional inventory assessor to determine the exact levels of its inventory.

41.        Due to weather and road conditions, inventory in woods is not available for use in production at this time. Based on the latest available estimates, I believe that there is only sufficient inventory in yards for a few days production. Accordingly, it is necessary for Juniper to buy wood or it will be forced to cease production.

SUPPLIER ISSUES

42.        Two suppliers, Wicklow Logging Co. Ltd. ("Wicklow") and Glassville Logging Co. Ltd. ("Glassville") filed statements of claim, in the amounts of $3,250,274.41 and $1,205,248.88 respectively, pursuant to the Woodsmen's Lien Act on February 25, 2000, and writs of attachment have been issued.

43.        At approximately 9:30 p.m. on March 6, 2000, Mr. Mitchell Corey of Wicklow and Glassville arrived at the Juniper premises with Deputy Sheriffs to execute the writs of attachment. The Deputy Sheriffs instructed Juniper employees to unload trucks that were ready to depart with deliveries of finished goods, that no raw materials were to be used and no finished goods were to be removed from the site. I also understand from discussions with employees present, that Mr. Corey by his actions prevented suppliers who were attempting to deliver timber at that time from completing those deliveries.

44.        These actions have resulted in a temporary closure of the sawmill and prevented Juniper from honouring its commitments to its customers. Unless the CCAA order sought is granted, it will not be possible to resume operations and additional employee termination will result.

CASH SHORTAGE

45.        As noted above, the Operating Line is currently approximately $1.3 million above the available borrowing limit, even without factoring in the inventory shortages. As there is only minimal inventory on hand, it will be necessary to continue to purchase wood to maintain production.

46.        Based on estimated cash flow forecasts recently prepared, even if sawmill operations were reduced to one shift, thus reducing the amount of wood purchasing, the required operating line would increase to approximately $22.5 million in order to maintain operations to the end of March 2000 if no CCAA filing were made. Such a level of funding is not available to Juniper under existing circumstances.

MANAGEMENT

47.        As noted above, J. Beverly O'Keefe has been responsible for all aspects of the day-to-day management of Juniper. On Saturday, February 26, 2000, Mr. O'Keefe was taken ill and hospitalized. He currently remains hospitalized and unable to participate in the management of the business and has resigned his position as an officer and director of Juniper and Connell. On an interim basis, I have taken responsibility for plant operations.

48.        Juniper is actively seeking an external CEO to take control, on an interim basis, of Juniper's operations as soon as possible. The intent is to hire an individual with significant experience in the Canadian forestry and lumber industry, and who is acceptable to the Lenders. It is also Juniper's intention to strengthen its financial management team.

[19]     I turn now to what seems to me to be the relevant question concerning what steps the appellant could reasonably have taken to prevent the failure of Wicklow to remit the net tax of $201,541.02. I note that included in this amount are two amounts of $86,729.71 and $86,142.00 set out in Schedule A to the assessment of Mr. O'Keefe (Tab 2 of Exhibit AR-1) are described as "return assessment" whereas the rest of the $201,541.02 is made up of amounts described as "audit assessment". The difference between these two designations is that, according to the evidence of the CRA official, a "return assessment" is one that is based upon a return that has been filed whereas an audit assessment is not. What this indicates to me is that over $172,000 of the unremitted GST was assessed upon the filing of GST returns so that Wicklow was apparently filing returns.

[20]     In answer to this question, what the appellant might have done, the respondent's answer is simple: "He could have caused Wicklow to pay the tax." This is easy enough to say but, with respect, it is not that simple. For one thing, the appellant was effectively excluded from Wicklow's affairs by Mitchell Corey, who had improperly appropriated about $139,000 of Wicklow's funds.

[21]     The affairs of Wicklow were run by Corey and the appellant had no effective power to influence the conduct of the company despite his title and directorship. Moreover, the accounting for GST as well as the filing of GST returns was done by an accountant, Roger Rogers. Mr. O'Keefe had no reason to believe that the GST remittances were not being made until the default had already occurred and it was too late for him to do anything about it, even if he could have. He was entitled to rely upon Rogers and upon Corey at least until Corey started appropriating funds from Wicklow.

[22]     The relationship of Wicklow, Corey and the appellant is set out in the following exchange of correspondence between Corey and the appellant. The first letter dated June 20, 2000 is from Corey to the appellant and the second, dated June 30, 2000, is from the appellant to Corey.

June 20, 2000

Re: Wicklow Accounting

Dear David,

            As you are aware, the operations of Wicklow Logging Co Ltd. have been adversely effected by the situation at Juniper Lumber over the last few months. Thus, it is becoming increasingly important that decisions be made to properly handle the affairs of Wicklow. There are issues such as the completion of HST returns, payroll remittances, T4's, the year-end audit, etc..., which must be addressed. However, as the books and records of Wicklow have not been updated since January 2000 this is difficult.

            To ensure that I, as a director and owner, continue to conduct myself in a just manner, I request that you provide your views on this matter. The records can be completed by my office, you, or can be done by an independent third party. However, the costs of completion by a third party may be prohibitive, as Wicklow does not have access to any source of funding. You should also address how the year-end audit will be paid for.

Should you have any questions please do not hesitate to contact.

Sincerely,

(original signed by)___

Mr. Mitchell Corey

- - -

June 30, 2000

Dear Mitchell:

Re: Wicklow Logging Co. Ltd. ("Wicklow")

I am in receipt of your letter of June 20, 2000 which has improperly been placed on the letterhead of Wicklow Logging Co. Ltd. As a direct result of your unauthorized actions, the operations of Wicklow have ceased and Bank of Nova Scotia has demanded its loans. Bank of Nova Scotia should appoint a receiver of Wicklow and that is the only person with whom I will deal with in regards to the issues raised in your letter.

It is you who has seized control of Wicklow, and it is you who should have ensured that these matters were attended to. Why now are you so concerned regarding these records? Your conduct was unauthorized and inappropriate, the particulars of which include taking over $30,000 salary (I do expect you have made the necessary tax remittances), to which you were not entitled, and in retaining lawyers, at a cost of more than $100,000, to conduct unauthorized litigation, which could only benefit you, and not Wicklow. I am concerned that the records be properly completed. I also wish to ensure that Wicklow's claim against Juniper and Connell be paid to Bank of Nova Scotia.

As a result of your unauthorized and damaging conduct to date, I shall have no further involvement with you in relation to Wicklow or otherwise. It will be necessary for an independent third party to attend to these matters. That person should be a receiver appointed by Bank of Nova Scotia

                                                Yours truly,

                                                J. David O'Keefe

[23]     The full flavour of the predicament in which Mr. O'Keefe found himself is set out in his letter to the CRA of February 25, 2002. I reproduce it below because it illustrates the efforts of a reasonable and intelligent man to deal with a cataclysmic situation brought on, on the one hand, by his father's illness and the disastrous financial condition of Juniper and, on the other, the conduct of Mitchell Corey. The letter reads:

Dear Sir:

Re:        WICKLOW LOGGING CO LTD

            Account no: 13540 6338 RT0001

I have received your letter of February 6.

I was a director of Wicklow Logging Co. Ltd. I exercised no control over the corporation and Mr. Mitchell Corey, also a director, carried out all business activities.

On and about March 7, 2000, Wicklow's only customer filed for and was granted protection under the CCAA. At the time of filing, Wicklow was owed $3,090,148.40 by this customer. In turn, Wicklow owed the Bank of Nova Scotia $2,382,205.96 against it's line of credit. Soon after, the bank put a freeze on this operating line, thus rendering Wicklow inoperable.

On March 14, 2000, I wrote to the bank about my concern over Mr. Corey's conduct in relation to the operation of Wicklow. Prior to the freeze, Mr. Corey paid himself a salary of $39,500, which he put in trust with his solicitor. Mr. Corey also paid into trust with his solicitor, a sum of $100,000. These funds were solely for the purpose of personal gain on Mr. Corey's behalf. I further wrote of my concern that the bank and I would be irreparably and further prejudiced if Mr. Corey continued. I requested that the bank continue the freeze of Wicklow's account and immediately act upon the security, which it held against Wicklow.

On April 4, 2000, I received correspondence from the bank demanding immediate payment of all amounts owed by Wicklow, including interest to date. If no payment were received by April 18, 2000, the bank would take appropriate action to recover the amounts owing. The bank also called for the guarantees of Mr. Corey and myself. It failed to call on the largest guarantor, that being Glassville Logging Co Ltd, a wholly owned Corporation of Mr. Corey's.

On April 7, 2000, I wrote to the bank to express my concerns over the failure to call Glassville's guarantee, and inform the bank that I had learned of an increase in Wicklow's line of credit. This increase was not needed and I, as a director, was not informed. This was an action between Mr. Corey and the bank.

On April 7, 2000, I wrote to his solicitor and instructed him to relinquish these funds back to the bank, so as to honor any outstanding financial obligations that Wicklow had to Revenue Canada, the bank and any unsecured creditors.

On May 3, 2000, I wrote to the bank to notify them that I had in my possession some assets of Wicklow Logging's and offered assistance in helping the bank realize their potential value. I reinforced my opinion that the bank ought to appoint a Receiver of Wicklow to protect its security.

On June 20, 2000 I received correspondence from Mr. Corey. He writes of his concern that there are a number of outstanding issues with relation to Wicklow. Issues such as HST returns, payroll remittances, T4's, the year-end audit, etc... He notes that the books had not been updated since January 2000. He states that he wants to ensure that he conducts himself in a just manner, as he is both a director and owner.

On June 30, 2000, I wrote a response to Mr. Corey's letter of June 20, 2000. I pointed out that as a direct result of his unauthorized actions, the operations of Wicklow have ceased and the bank has demanded its loans. I noted that the bank ought to appoint a receiver and that would be the only person with whom I would deal with in regards to the issues raised in his letter. I emphasized that it was he who had seized control of Wicklow, and that it was he who should have ensured that these records were keep current. I questioned his concern about these records? After all, it was he who took a salary of $39,500 (without remitting taxes) and paid into trust $100,000. These monies should have been used to cover legitimate expenditures.

On June 22, 2000, an action was served on Wicklow by Irving Oil Limited for full payment of the account, an amount under $10,000. I received correspondence from Mr. Corey's solicitor that he did not wish to defend this matter. With funds in trust, this matter could have been settled, however Mr. Corey did not release said monies.

I received a letter dated October 16, 2000, notifying me that on October 13, 2000, Grant Thornton Limited were appointed receiver of Wicklow Logging Co Ltd. Any and all requests that were bestowed upon me by the receiver were carried out in full. In different conversations with the receiver, he pointed out that Mr. Corey definitely controlled all aspects of the operation, and the majority of the information required came from his office.

On December 1, 2000, I was notified that Wicklow Logging had been placed in bankruptcy, and that Grant Thornton Limited had been appointed as trustee of the bankrupt estate. The trustee required various records, and made note that they may be in the physical possession of Mr. Corey. The trustee notified Mr. Corey, that he alone, as an Officer of the bankrupt Corporation is required pursuant to Section 159 of the Bankruptcy and Insolvency Act, to perform all duties imposed upon a bankrupt by Section 158 of the said Act and in particular, are required to attend the first meeting of creditors and upon request, to present yourself for examination before the Official Receiver. When I asked the trustee why I did not have to participate in the creditor's meeting, he informed me that it was apparent to him that I exercised no control over the company, and therefore should not have be involved with the process.

As you are probably aware, Wicklow had been assessed with an outstanding HST amount of $227,531. I requested at the time that the company pay the amount as it was clearly at fault. However Mr. Corey decided to fight this assessment. During the spring and summer of 2000, a Verification and Enforcement Officer from your department worked on this file and others in Juniper. I had made mention to him, that the department should put a lien in place to recover this money, as it was my belief that Wicklow would never survive. Your department did so, and recovered these monies.

In closing, I believe that I did all that I could, within my control, to see that all obligations of Wicklow were honored, including outstanding tax issues, demands from the bank, and looking after all unsecured creditors. If I am assessed the tax, I have no resources what so ever to draw on to meet this obligation.

I look forward to your response.

                                                                        Yours very truly,

                                                                        J. David O'Keefe

[24]     The facts set out in the letter are fully supported by the testimony of Mr. O'Keefe and his sister, Susan O'Keefe.

[25]     From the foregoing it will be apparent that Mr. O'Keefe was in no position, as the Crown so simplistically puts it, simply to cause Wicklow to pay the tax.

[26]     In the circumstances that existed at the time the appellant was powerless to do anything about Wicklow's unremitted GST. At this time he had been confronted with, on the one hand, a massive overstatement of the inventory of Juniper necessitating an application under the CCAA and a danger that the family company might have to close its doors and lay off its employees, and, on the other hand, an improper appropriation of funds from Wicklow by Mitchell Corey at a time when huge receivables from Juniper were going bad. As noted above, in the appellant's affidavit at paragraph 43, Mitchell Corey was suing Juniper on February 25, 2000, even before the appellant's father became ill and on March 6, 2000, he turned up to execute writs of attachment. The sky was falling in around the appellant, his world was collapsing on all sides, and the Crown suggests that in the midst of this debacle he could and should blithely have gone to Wicklow's office, done a quick audit to see if any GST was owing and simply drawn a cheque for the GST. There is no basis for concluding that he knew of Wicklow's default in making regular remittances of net tax, or that Wicklow had the money to make the payments. One thing is clear, and that is that it is fanciful to suppose that Mitchell Corey would have permitted him to sign a cheque for Wicklow's tax liability.

[27]     The respondent suggests that I should draw an adverse inference against the appellant by reason of his failure to call Corey as a witness. The principle is well established that the failure to call a witness who might have supported a party's case may, in some circumstance, justify an adverse inference against that party. The principle must be applied with a measure of common sense. Here I have no idea what Corey might have said but given the obviously antagonistic relations between the appellant and Corey, I should have thought it rather dangerous for the appellant to call a witness who was at least unpredictable and in any event potentially hostile, particularly when the appellant has on his own and without Mr. Corey, made out a very creditable case. The principle cuts both ways. I could as easily have been asked to draw an adverse inference against the Crown for its failure to call Corey. In the result, I draw no inference either way.

[28]     The respondent's position that the appellant could have caused Wicklow to pay the tax is, with respect, unrealistic. In the circumstances that prevailed in those tumultuous times, the appellant could not reasonably or realistically have taken any more steps to ensure that the GST was paid by Wicklow than he already did. The appellant was faced with the virtually insuperable task of coping with a variety of problems. He did all that could have been expected of him.

[29]     Despite Mr. Woon's very able presentation of the respondent's case, I have concluded that the appellant has amply made out the defence of due diligence.

[30]     The appeal from the assessment made under the ETA is allowed with costs and the assessment made under section 323 of the Excise Tax Act is vacated.

Signed at Ottawa, Canada, this 2^nd day of May 2006.

"D.G.H. Bowman"

Bowman, C.J.

CITATION:

2006TCC250

COURT FILE NO:

2004-226(GST)G

STYLE OF CAUSE:

J. David O'Keefe and     Her Majesty The Queen

PLACE OF HEARING:

Saint John, New Brunswick

DATE OF HEARING:

April 11 and 12, 2006

REASONS FOR JUDGMENT BY:

The Honourable D.G.H. Bowman, Chief Justice

DATE OF JUDGMENT AND REASONS FOR JUDGMENT:

May 2, 2006

APPEARANCES:

Counsel for the Appellant:	Rodney J. Gillis, Q.C.
Counsel for the Respondent:	Cecil S. Woon and Lisa Wight

COUNSEL OF RECORD:
	For the Appellant:
		Name:	Gilbert, McGloan, Gillis
		Firm:	22 King Street
			P.O. Box 7174, Station A
			Saint John, NB E2L 4S6
	For the Respondent:		John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada

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