Buckingham v. The Queen

Buckingham v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2010-05-06
Neutral citation
2010 TCC 247
File numbers
2008-2817(IT)G
Judges and Taxing Officers
Wyman W. Webb
Subjects
Income Tax Act
Decision Content
Docket: 2008-2817(IT)G
BETWEEN:
KEVIN RICHARD BUCKINGHAM,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard together on common evidence with the appeal of
Kevin Richard Buckingham (2008-2877(GST)G)
on March 8 and 9, 2010 at Fredericton, New Brunswick
Before: The Honourable Justice Wyman W. Webb
Appearances:
Counsel for the Appellant:
Andrew D. Rouse
Counsel for the Respondent:
Darlene M. Lamey
____________________________________________________________________
JUDGMENT
The appeals from the assessments of the Appellant as a director of Mosaic Technologies Corporation (“Mosaic”) and its subsidiary corporations are allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is not liable as a director of Mosaic, Multimedia Ventures (Alberta) Inc., Multimedia Ventures Inc., and 6678 British Colombia Ltd. for any amounts that any of these companies failed to remit under the Income Tax Act (Canada), the Canada Pension Plan or the Employment Insurance Act or any of the penalties and interest related to these amounts.
Signed at Toronto, Ontario, this 6th day of May, 2010.
“Wyman W. Webb”
Webb, J.
Docket: 2008-2877(GST)G
BETWEEN:
KEVIN RICHARD BUCKINGHAM,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard together on common evidence with the appeal of
Kevin Richard Buckingham (2008-2817(IT)G)
on March 8 and 9, 2010 at Fredericton, New Brunswick
Before: The Honourable Justice Wyman W. Webb
Appearances:
Counsel for the Appellant:
Andrew D. Rouse
Counsel for the Respondent:
Darlene M. Lamey
____________________________________________________________________
JUDGMENT
The appeal from the assessment of the Appellant as a director of Mosaic Technologies Corporation by Notice of Assessment – Third Party No. A106067, dated April 20, 2005, for the unremitted GST/HST amounts together with the related interest and penalties is dismissed.
Signed at Toronto, Ontario, this 6th day of May, 2010.
“Wyman W. Webb”
Webb, J.
Citation: 2010TCC247
Date: 20100506
Dockets: 2008-2817(IT)G
2008-2877(GST)G
BETWEEN:
KEVIN RICHARD BUCKINGHAM,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb, J.
[1] The Appellant was assessed, pursuant to section 323 of the Excise Tax Act, as a director of Mosaic Technologies Corporation (“Mosaic”) for the following amounts of unremitted GST/HST and the penalties and interest related thereto[1]:
Date of the Assessment of Mosaic
Period Covered
Payment Due Date
Unremitted GST/HST
Penalty and interest
Unremitted GST/HST, penalties and interest
September 23, 2003
Jan. 1/03 to Mar. 31/03
April 30, 2003
$86,614
$15,938
$102,552
September 3, 2004
Apr. 1/03 [2] to June 30/03
July 30, 2003[3]
$53,827
$8,523
$62,350
Total:
$140,441
$24,461
$164,902
[2] The Appellant was also assessed, pursuant to section 227.1 of the Income Tax Act, the provisions of the applicable provincial income tax statutes, section 21.1 of the Canada Pension Plan and section 83 of the Employment Insurance Act, as a director of each of the following companies, for unremitted source deductions (federal income tax, provincial income tax, CPP premiums, and EI premiums) and the penalties and interest related thereto:
Multimedia Ventures (Alberta) Inc.
Date of Assessment
Period Covered
Federal Tax
Provincial Tax
CPP
EI
Penalty and Interest
Total
Oct. 16, 2002
Aug. 16/02 to Aug. 31/02
$14
$14
Nov. 19, 2002
Sept. 1/02 to Sept. 15/02
$1,018
$1,018
Dec. 6, 2002
Sept. 16/02 to Sept. 30/02
$1,044
$1,044
Jan. 14, 2003
Oct. 1/02 to Nov. 30/02
$10,319
$10,846
$21,165
Jan. 29, 2003
Dec. 1/02 to Dec. 31/02
$11,292
$3,748
$15,039
May 30, 2003
Jan. 1/03 to Feb. 28/03
$12,913
$7,877
$9,946
$5,632
$10,568
$46,934
May 30, 2003
Mar. 1/03 to Apr. 30/03
$21,068
$12,851
$9,634
$43,553
July 9, 2003
June 1/03 to June 15/03
$265
$265
Aug. 4, 2003
June 1/03 to June 15/03
$5,081
$3,099
$1,247
$9,427
Oct. 7, 2003
Jan. 1/02 to Dec. 31/02
$3,936
$1,131
$5,067
April 7, 2004
June 16/03 to June 30/03
$973
$1,851
$2,324
$1,093
$1,645
$7,886
Total
$61,646
$25,678
$16,206
$6,725
$41,160
$151,412
Multimedia Ventures Inc.
Date of Assessment
Period Covered
Federal Tax
Provincial Tax
CPP
EI
Penalty and Interest
Total
Dec. 6, 2002
Sept. 1, 2002 to Sept. 30, 2002
$547
$547
Jan. 17, 2003
Oct. 1, 2002 to Oct. 31, 2002
$497
$497
Mar. 26, 2003
Jan. 1, 2002 to Dec. 31, 2002
$3,234
$3,234
Mar. 26, 2003
Jan. 1, 2003 to Feb. 28, 2003
$2,986
$2,986
June 11, 2003
Mar. 1, 2003 to Apr. 30, 2003
$12,512
$4,775
$17,287
July 9, 2003
May 1, 2003 to May 31, 2003
$586
$586
Aug. 4, 2003
May 1, 2003 to May 31, 2003
$3,477
$2,121
$854
$6,452
Oct. 8, 2003
January 1, 2002 to December 31, 2002
$2,420
$674
$3,094
April 7, 2004
April 1, 2003 to June 30, 2003
$3,481
$2,123
$2,084
$182
$1,922
$9,792
Total
$19,470
$4,244
$4,504
$182
$16,075
$44,475
6678 British Columbia Ltd.
Date of Assessment
Period Covered
Federal Tax
Provincial Tax
CPP
EI
Penalty and Interest
Total
Oct. 16, 2002
Aug. 16/02 to Aug. 31/02
$6
$6
Nov. 19, 2002
Sept. 1/02 to Sept. 15/02
$1,070
$1,070
Dec. 6, 2002
Sept. 16/02 to Sept. 30/02
$1,062
$1,062
Dec. 20, 2002
Oct. 1/02 to Nov. 30/02
$7,696
$9,336
$17,032
Jan. 17, 2003
Oct. 1/02 to Oct. 15/02
$1,122
$1,122
Jan. 28, 2003
Dec. 1/02 to Dec. 31/02
$1,664
$1,606
$3,270
April 25, 2003
Jan. 1/03 to Feb. 28/03
$1,934
$5,284
$3,511
$8,734
$19,463
April 25, 2003
March 1/03 to March 15/03
$3,086
$1,883
$2,614
$1,478
$2,570
$11,632
June 2, 2003
March 16,/03 to April 15/03
$9,373
$5,718
$4,124
$19,216
June 4, 2003
April 16/03 to April 30/03
$4,564
$2,784
$1,991
$9,339
Aug. 1, 2003
June 1/03 to June 15/03
$4,808
$2,933
$1,988
$9,729
Aug. 27, 2003
Jan. 1/02 to Dec. 31/02
$2,303
$1,179
$3,481
April 7, 2004
Jan. 1/03 to June 30/03
$2,555
$1,558
$2,289
$805
$1,805
$9,012
Total
$26,320
$14,876
$21,850
$5,794
$36,593
$105,434
Mosaic
Date of Assessment
Period Covered
Federal Tax
Provincial Tax
CPP
EI
Penalty and Interest
Total
Dec. 6, 2002
Sept. 16/02 to Sept. 30/02
$1,122
$1,122
Feb. 20, 2003
Oct. 1/02 to Dec. 31/02
$30,192
$13,463
$43,655
Feb. 26, 2003
Jan. 16/03 to Jan. 31/03
$1,428
$1,428
March 12, 2003
Jan. 16/03 to Jan. 31/03
$7,943
$4,845
$2,092
$14,879
March 26, 2003
Jan. 1/03 to Feb. 28/03
$16,252
$9,914
$9,969
$5,509
$11,397
$53,041
June 11, 2003
March 1/03 to April 30/03
$37,626
$22,952
$16,022
$76,600
July 9, 2003
June 1/03 to June 15/03
$125
$125
Oct. 8, 2003
Jan. 1/02 to Dec. 31/02
$3,558
$949
$4,508
April 7, 2004
June 1/03 to Aug. 31/03
$4,102
$2,502
$2,751
$1,540
$2,292
$13,187
Total
$96,115
$40,213
$16,278
$7,049
$48,890
$208,545
[3] There are some assessments that cover the same period or periods of time as others. However since these assessments are assessments of income tax amounts and CPP and EI premiums that should have been remitted in relation to salaries or wages paid to employees, the additional assessments for a period for which an assessment was already issued presumably simply reflect additional amounts that should have been remitted for that period. Such assessments would therefore not be intended to reflect the entire amounts that should have been remitted for that period. This would not be the same as an assessment of income tax liability for a taxation year which reflects the total tax liability for a taxation year. The Appellant did not contest that any of the amounts in relation to which he was assessed as a director were not payable by Mosaic or any of its subsidiaries. The only basis for the Appellant’s appeal was that he was not liable for such amounts as a result of the provisions of subsection 227.1(3) of the Income Tax Act and subsection 323(3) of the Excise Tax Act.
[4] The assessed amounts also include amounts for provincial income taxes. In the Notice of Appeal filed by the Appellant, there is a reference to the Income Tax Act, the Canada Pension Plan and the Employment Insurance Act. Counsel for the Appellant confirmed in writing following the hearing that the Appellant was not appealing that part of the assessment that was based on provincial income taxes that should have been remitted (which would include the interest and penalties related to these amounts). If the Appellant would have been appealing the assessment of these amounts, then the issue would have been whether this Court has jurisdiction to hear that appeal.
[5] This Court was formed by an Act of Parliament, the Tax Court of Canada Act. The jurisdiction of this Court is set out in section 12 of that Act and in particular subsection 12(1) of this Act provides as follows:
12. (1) The Court has exclusive original jurisdiction to hear and determine references and appeals to the Court on matters arising under the Air Travellers Security Charge Act, the Canada Pension Plan, the Cultural Property Export and Import Act, Part V.1 of the Customs Act, the Employment Insurance Act, the Excise Act, 2001, Part IX of the Excise Tax Act, the Income Tax Act, the Old Age Security Act, the Petroleum and Gas Revenue Tax Act and the Softwood Lumber Products Export Charge Act, 2006 when references or appeals to the Court are provided for in those Acts.
(emphasis added)
[6] Under the statute by which this Court was formed, the jurisdiction is limited to appeals under the statutes named in subsection 12(1) and some other statutes and other matters listed in the other subsections of section 12. No jurisdiction is granted to this Court under the Tax Court of Canada Act to hear appeals on matters arising under any provincial income tax statute.
[7] Subsection 84(2) of the New Brunswick Income Tax Act (which is the province where the head office of Mosaic was located and where it appears that a significant part of the operations of the companies was located) provides as follows:
84(2) Subject to subsection (4), an appeal from an assessment under this Act lies to the Court in respect of any question relating,
(a) in the case of an individual, to the determination of
…
(v) the liability of a director to pay an amount under section 227.1 of the Federal Act as that section applies for the purposes of this Act because of section 109…
[8] Section 109 of the New Brunswick Income Tax Act provides as follows:
109 Section 227.1 of the Federal Act applies for the purposes of this Act.
[9] Court is defined in section 1 of this Act as follows:
“Court” means The Court of Queen’s Bench of New Brunswick;
[10] Therefore it is clear that any appeal that the Appellant may wish to pursue in relation to the assessment of the amounts that should have been remitted under the New Brunswick Income Tax Act would have to be made to the Court of Queen’s Bench of New Brunswick.
[11] Multimedia Ventures (Alberta) Inc., Multimedia Ventures Inc., and 6678 British Colombia Ltd. were subsidiaries of Mosaic. Mosaic and its subsidiaries carried on an education business. The Appellant and his family acquired control of Mosaic around 1997. At that time, Mosaic (then named “Mosaic Recycle Paper”) was a Vancouver shell company that had been a publicly traded company for several years. Following the acquisition of Mosaic, the Appellant started looking for acquisitions to commence carrying on business. The company acquired two schools (applied multimedia training centers), Pitman Business College (which was the oldest secretarial school in Canada), and a small college in Regina.
[12] In addition to the schools that were acquired, Mosaic also had a division that prepared online courses for large corporations and governments. In the draft share exchange offer (which is discussed further below) the company is described in early 2003 as follows:
Mosaic Technologies Corporation is a publicly listed, Fredericton New Brunswick based e-learning educational technologies company which designs and develops world-class products and services for its customers and clients by integrating traditional teaching methodologies and technology enhanced interactive learning activities through its facilities across Canada.
[13] The Appellant was the chairman of the board of Mosaic. The company also had a president and Chief Executive Officer (Don Whitty) and a Chief Financial Officer (Stephen Hutchinson).
[14] In 1998 or 1999 the shares of Mosaic started to trade on the TSX Venture Exchange. Mosaic earned a profit in 2000. The following table shows the profit (or loss) earned (or incurred) by Mosaic during the years 1999 to 2002:
1999
2000
2001
2002
Profit (Loss)
($970,899)
$253,110
($451,161)
($1,446,396)
[15] Mosaic was only profitable for one year following its rebirth as an education company. The Appellant stated that it was profitable for the first three quarters of 2001 but following the events of 9/11 (September 11, 2001), the business environment changed significantly. As the Appellant stated:
A. After 9/11, it became clear really to the Board and myself that...and senior management, that things weren’t quite going to be the same again. And like I said before, six (6) months after 9/11, the phones virtually stopped ringing, not just with us, but with everybody.
[16] Subsection 323(3) of the Excise Tax Act and subsection 227.1(3) of the Income Tax Act provide a defence for a director in relation to an assessment for unremitted amounts by a corporation, which is the same in both statutes. Subsection 83(2) of the Employment Insurance Act and subsection 21.1(2) of the Canada Pension Plan provide that subsections 227.1(2) to (7) of the Income Tax Act apply for the purposes of those Acts and therefore the same defence is available to a director who is assessed for unremitted premiums under the Employment Insurance Act and unremitted contributions under the Canada Pension Plan. Subsection 323(3) of the Excise Tax Act provides as follows:
(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.[4]
[17] In Higgins v. The Queen 2007, TCC 469, [2007] G.S.T.C. 103 I made the following comments:
6 The Federal Court of Appeal in Soper v. R., [1997] 3 C.T.C. 242, completed a detailed analysis of the due diligence defence in subsection 227.1(3) of the Income Tax Act which has identical wording to that found in subsection 323(3) of the Act. The Federal Court of Appeal noted that federal statutes with the same language should be interpreted in the same manner. In particular the Federal Court of Appeal was focused on the provisions of the Canada Business Corporations Act (“CBCA”) which also imposes a duty upon a director and uses the same language as found in the Act and the Income Tax Act in relation to the due diligence defence. In Soper, supra, Robertson J. A. of the Federal Court of Appeal made the following comments:
19 In my view, it is not simply a fortuitous occurrence that subsection 227.1(3) of the Income Tax Act adopts the same language as found in subsection 122(1)(b) of the Canada Business Corporations Act, for both statutory provisions relate to the standard of care to be exercised. Admittedly, the CBCA provision deals with the standard of care owed to the corporation while the taxation provision concerns the standard of care owed to the Crown and Canadian taxpayers. However, that distinction does not serve to nullify the relevance of the standard set out in the CBCA, if only because of the presumption of coherence between statutes. That elementary principle of statutory interpretation is explained by P.-A. Côté in The Interpretation of Legislation in Canada, 2nd ed. (Cowansville, Quebec: Les Editions Yvon Blais Inc., 1991) at 288, 290:
Different enactments of the same legislature are supposedly as consistent as the provisions of a single enactment. All legislation of one Parliament is deemed to make up a coherent system. Thus, interpretations favouring harmony between statutes should prevail over discordant ones, because the former are presumed to better represent the thought of the legislator.
This presumption of coherence in enactments of the same legislature is even stronger when they relate to the same subject matter, in pari materia. Apparent conflicts between statutes should be resolved in such a way as to re-establish the desired harmony.
...
To sum up, the presumption of coherence in related legislation applies particularly to statutes of the same legislature. But it is also relevant to statutes of different jurisdictions, as one legislature may be deemed to imitate the form or be consistent with the substance of a statute enacted by another.
Thus, in order to determine whether the common law standard of care was modified by statute, it is both appropriate and instructive to consider not only the due diligence provision set out at subsection 227.1(3) of the Income Tax Act but also the analogous, and virtually identical, standard of care provisions found in the Canada Business Corporations Act.
7 The conclusion of Robertson J. A. was that the provisions of paragraph 122(1)(b) of the CBCA and subsection 227.1(3) of the Income Tax Act provided for an objective subjective test to be applied in analyzing the standard set out in these sections.
8 The Supreme Court of Canada in Peoples Department Stores Inc (Trustee of) v. Wise, 2004 S.C.C. 68, [2004] 3 S.C.R. 461, made the following comments in relation to the objective subjective test as set out by the Federal Court of Appeal in Soper:
63 The standard of care embodied in s. 122(1)(b) of the CBCA was described by Robertson J.A. of the Federal Court of Appeal in Soper v. R. (1997), [1998] 1 F.C. 124 (Fed. C.A.), at para. 41, as being "objective subjective". Although that case concerned the interpretation of a provision of the Income Tax Act, it is relevant here because the language of the provision establishing the standard of care was identical to that of s. 122(1)(b) of the CBCA. With respect, we feel that Robertson J.A.'s characterization of the standard as an "objective subjective" one could lead to confusion. We prefer to describe it as an objective standard. To say that the standard is objective makes it clear that the factual aspects of the circumstances surrounding the actions of the director or officer are important in the case of the s. 122(1)(b) duty of care, as opposed to the subjective motivation of the director or officer, which is the central focus of the statutory fiduciary duty of s. 122(1)(a) of the CBCA.
9 The Supreme Court of Canada again noted that because the language in paragraph 122(1)(b) of the CBCA is identical to that found in subsection 227.1(3) of the Income Tax Act (which is also identical to the language set out in subsection 323(3) of the Act) the provisions are to be interpreted in the same manner. Therefore, in my opinion, the conclusion is that the Supreme Court of Canada has modified the objective subjective test as set out by the Federal Court of Appeal in Soper and instead has adopted an objective standard that now should be used not only for the purposes of paragraph 122(1)(b) of the CBCA but also for the purposes of section 227.1(3) of the Income Tax Act and subsection 323(3) of the Act.
10 The Supreme Court of Canada in Peoples Department Stores Inc. also made the following comments in relation to this duty:
67 Directors and officers will not be held to be in breach of the duty of care under s. 122(1)(b) of the CBCA if they act prudently and on a reasonably informed basis. The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known. In determining whether directors have acted in a manner that breached the duty of care, it is worth repeating that perfection is not demanded. Courts are ill-suited and should be reluctant to second-guess the application of business expertise to the considerations that are involved in corporate decision making, but they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made.
11 Therefore the issue in this case is whether the Appellants have acted prudently on a reasonably informed basis and have met the objective standard imposed upon them of exercising the duty of care, diligence and skill to prevent the failure to remit the HST that a reasonable prudent person would have exercised in comparable circumstances.
[18] It seems to me, as I had concluded in Higgins, that since:
(a) the objective subjective standard as described by Justice Robertson in Soper, was determined based on his review of paragraph 122(1)(b) of the Canada Business Corporations Act (the “CBCA”) (which he described in paragraph 19 of his decision as “the analogous, and virtually identical, standard of care provisions” as found in subsection 227.1(3) of the Income Tax Act); and
(b) the Supreme Court of Canada in Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 S.C.C. 68, [2004] 3 S.C.R. 461 in dealing with the standard of care imposed by paragraph 122(1)(b) of the CBCA specifically addressed the objective subjective standard as set out by Justice Robertson in Soper and indicated that it should be an objective standard,
that the standard of care imposed by subsection 227.1(3) of the Income Tax Act and subsection 323(3) of the Excise Tax Act should be the same as the standard of care imposed by paragraph 122(1)(b) of the CBCA and therefore is an objective standard.
[19] The Appellant in this case also sought to classify himself as an “outside director” until 2003. This classification is based on the comments of Justice Robertson in Soper when he stated that:
32 … I intend to focus on the category of cases respecting the distinction between inside and outside directors since that line of authority is the most pertinent to this appeal.
33 At the outset, I wish to emphasize that in adopting this analytical approach I am not suggesting that liability is dependent simply upon whether a person is classified as an inside as opposed to an outside director. Rather, that characterization is simply the starting point of my analysis. At the same time, however, it is difficult to deny that inside directors, meaning those involved in the day-to-day management of the company and who influence the conduct of its business affairs, will have the most difficulty in establishing the due diligence defence. For such individuals, it will be a challenge to argue convincingly that, despite their daily role in corporate management, they lacked business acumen to the extent that that factor should overtake the assumption that they did know, or ought to have known, of both remittance requirements and any problem in this regard. In short, inside directors will face a significant hurdle when arguing that the subjective element of the standard of care should predominate over its objective aspect.
(emphasis added)
[20] Although, as noted above, it does not seem to me that there is any longer a subjective element to the standard of care, the distinction between inside directors and outside directors is still relevant. The Supreme Court of Canada in Peoples Department Stores Inc. (Trustee of) stated that:
67 Directors and officers will not be held to be in breach of the duty of care under s. 122(1)(b) of the CBCA if they act prudently and on a reasonably informed basis. The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known.
[21] The circumstances about which inside directors (those involved in the day-to-day management of the company and who influence the conduct of its business affairs) will know (or ought to know) will be different from the circumstances about which outside directors will know (or ought to know). Therefore it seems to me that the distinction between inside directors and outside directors is still relevant and is still the starting point for the analysis. Inside directors would know or would be expected to know more about the day-to-day operations of the company, the circumstances related to the financial affairs of a company (and its ability to meet its remittance obligations and its compliance with these obligations) and about potential problems than outside directors.
[22] It is the position of the Appellant that he was not an inside director of Mosaic until February 13, 2003. However, it seems to me that the Appellant was an inside director long before February 13, 2003 and was an inside director prior to the first default in the remittance of payroll amounts or GST/HST that is in issue in this Appeal.
[23] The Appellant and his family acquired Mosaic in 1997. The Appellant is the only person who was a director of all of the companies listed above. It seems obvious from the testimony of the Appellant that he was directly involved in the acquisitions of the businesses that were directly or indirectly acquired by Mosaic. The Appellant was also the largest shareholder of Mosaic.
[24] The Chief Financial Officer (Stephen Hutchinson) resigned in the spring of 2002. Prior to his resignation, Robert Baird, who appears to be the person who was responsible for preparing the remittance forms and the GST/HST returns, reported to Stephen Hutchinson. During cross examination the Appellant acknowledged that he directed Robert Baird. Although it is not clear when the Appellant began directing Robert Baird, it is more likely than not that this occurred following the resignation of Stephen Hutchinson in the spring of 2002. The Appellant also referred to Robert Baird’s office being at the other end of the building which indicates that the Appellant had an office at Mosaic. Since the Appellant had an office at Mosaic and was directing Robert Baird this indicates that the Appellant was involved in the day-to-day operations of Mosaic. The Appellant also had signing authority for the bank account of the company which indicates that he was involved in the day-to-day operations.
[25] The Appellant also referred to various initiatives that Mosaic was pursuing to raise capital. It appears that following the events of 9/11, a great deal of the Appellant’s time would have been devoted to pursuing options to raise capital and deal with the declining sales. The Appellant noted in his testimony that he and Don Whitty had travelled to Toronto in early 2002 to arrange to have the paperwork started for a proposed equity issue.
[26] It also appears that the other directors were resigning their positions. The following shows the dates of resignation from the Board of Directors of Mosaic, for those persons who were directors as of September 11, 2001, based on the documents that were filed under the CBCA:
Name
Date of Resignation
Richard Buckingham
Carey Edwards
May 10, 2002
Allen Ruben
February 28, 2003
Michael Bishop
Brian Neill
March 1, 2003
Lucille Pacey
[27] The Appellant stated that Michael Bishop (who is related to the Appellant) also had resigned as a director. Although the Appellant could not provide a specific date he stated that Michael Bishop left “quite early”. The Appellant also stated that Lucille Pacey (who lived in Vancouver) had also resigned as a director, although again the Appellant could not provide a specific date.
[28] The Appellant also stated, in an affidavit that he had previously submitted to the CRA to support another director whom the CRA was proposing to assess, that he arbitrarily appointed the other person as a director of one of the subsidiary companies without that person’s consent. In the Affidavit (which was sworn on November 20, 2004) the Appellant stated as follows:
1. I was a director of Mosaic Technologies Corporation (“Mosaic”) and played a significant role in the operation of Mosaic.
2. Mosaic had two subsidiary companies, Multimedia Ventures Inc. (“MVI”) and Multimedia Ventures (Alberta) Inc. (“MVAI”). MVI and MVAI operated multimedia training centers in Manitoba and Alberta respectively.
3. When Mosaic purchased the multimedia training centers, I put Allen Ruben (“Ruben”) down as a director for both MVI and MVAI as he was director of Mosaic and I thought the companies needed at least two directors.
4. I did not receive and never did receive Ruben’s consent to make him a director of MVI and MVAI.
5. There was never a director’s meeting held with respect to MVI or MVAI and Ruben was not involved in any way with the operation of either company.
[29] This illustrates that the Appellant had a significant amount of influence over Mosaic and its subsidiaries. The Appellant also acknowledged in the first paragraph of his affidavit that he “played a significant role in the operation of Mosaic”.
[30] It seems to me that the Appellant was an inside director before the first default in remittances which is in issue in this appeal occurred (which would be in the fall of 2002).
[31] Therefore the issue is whether the Appellant, as an inside director, “act[ed] prudently and on a reasonably informed basis”. Were his decisions “reasonable business decisions in light of all the circumstances about which [he] knew or ought to have known”?
[32] In this case, it seems to me that the analysis in relation to the employee deductions should be dealt with separately from the analysis related to the unremitted GST/HST. In McKinnon v. The Queen 2003 TCC 884, 2004 D.T.C. 2049, [2004] 2 C.T.C. 2302, then Associate Chief Justice Bowman made the following comments:
18 Another argument that is frequently made in these cases and which I regard as fallacious runs somewhat as follows: “You were stealing from money held in trust for the Crown to run your business and pay your employees”. This is, I think, an inaccurate and unfair characterization. It implies that there is a separate account (or cookie jar if you will) into which the payroll deductions are put and then withdrawn to pay the company's expenses. The fact is there is no cookie jar, real or notional, and no money to put into it even if there were. The net amount paid to the employees is all there is to go around. The employees, suppliers and other creditors are paid because if they are not the business will be closed down. Where, as here, unforeseen supervening events make it impossible for the payroll deductions to be paid to the government, I do not think there is anything the appellant could reasonably have done to ensure the payment.
[33] The amounts for payroll deductions are not funded by a third party but are paid from whatever resources the company might have available to it. The remittance obligations are part of the costs related to the employees. During cross examination the Appellant stated at one point that there was not usually much money in the account. He also admitted that the amounts that had been deducted from the payroll payments were being used to pay other bills. However, no specific amounts were identified and no banking statements were introduced to show the amount that was in the bank account at any particular time. While an employer may have continuing obligations to employees, it does not necessarily mean that the employer has received the necessary funds to pay these obligations. For example, if the total amount of salaries payable on a particular day is $100,000 and the total source deductions that are to be deducted therefrom and remitted is $25,000, the net amount payable to the employees is $75,000. If the employer only has $75,000 in its bank account, then paying the employees $75,000 will reduce the bank account balance to nil. There simply would not be any money left to hold in trust. No third party has paid $100,000 to the employer to cover the payroll and the employer must fund both the $75,000 payable to the employees and the $25,000 payable for the source deductions from whatever sources it might have, if it can. This is different from the amounts to be remitted for GST/HST which are funded by the third parties upon whom the GST/HST is imposed. I will therefore deal with these remittance obligations separately.
Unremitted Payroll Amounts
[34] As noted above the first year that Mosaic made a profit (and the only year that it made a profit) was 2000. At the end of December 2000 the company had just under $760,000 in cash and short term deposits. The total current assets of the company at that time were over $2.1 million. The Appellant also stated that the company was profitable for the first three quarters of 2001. However there were a number of events that were beyond the control of the company that led to its demise.
[35] As had been previously mentioned, the events of 9/11 had a detrimental affect on the business of the company. As well the company had signed a non‑binding letter of intent with Innovatia in relation to a proposed contract with Nortel. In order to be able to fulfill its obligations under this contract the company had to hire additional employees. The contract was expected to produce revenues of approximately $4 million a quarter. That would have been a very significant amount for a company that reported total revenue in 2000 for 12 months of $4.9 million.
[36] However a formal contract was never executed. The Appellant described the circumstances as follows:
A. So the first three (3) quarters of 2001, the company was profitable and we were getting ready to... We had signed a letter of intent, I believe, late 2001, a non-binding letter of intent with Innovatia to start a very significant contract for Nortel. So the company had to wrap up its intellectual capacity by way of hiring people to handle the contract.
Q. H’m.
A. In 2001, about midway through it, Nortel were dragging their heels a bit, then we had 9/11, and the bottom seemed to fall out really of everything in the technology business, and...
Q. And when you say technology business, are you talking about your business or...
A. Our business, our customers’ businesses. Everything seemed to get put on hold back at that point in time. So meanwhile, we had a fair... We had a fair buildup of people to handle execution of the contract, so we started... Really in 2001, we started letting people go because Innovatia and Nortel were dragging their heels with the big contract. I think it was 4 million dollars a quarter or something. It was quite significant for our company at the time.
[37] The Appellant first referred to the letter of intent being signed late 2001 but then referred to Nortel “dragging their heels” and then 9/11 occurring, so it seems to me that the Appellant simply incorrectly referred to late 2001 for the signing of the letter of intent and this letter of intent was signed in late 2000 or early 2001.
[38] Also, sometime after 9/11, the bonding company with whom Mosaic had been dealing, ceased writing vocational school training bond insurance. The example provided by the Appellant was that instead of the company paying $5,000 to post a bond for $500,000, the company had to post the cash collateral for the whole amount in order to operate the school. This would obviously tie up their cash. Included with the financial statements for 2002 is a note that identifies the following “Restricted deposits”:
2002
2001
Deposits with Private Post Secondary Education Commission of British Columbia
$74,460
Deposits with insurance companies in relation to performance bonds
$87,500
$87,500
Guaranteed Investment Certificates bearing interest at 2% per annum, maturing October 31, 2003 (note 15(b))
$50,000
$211,960
$87,500
[39] At the end of 2001 the company had just under $245,000 in cash and short-term deposits and its current assets were just over $1.5 million. The position of the company had deteriorated from what it was at the end of 2000.
[40] In early 2002, recognizing that the company was going to require additional capital, the Appellant worked on a proposed equity issue. The company with which they were dealing was American Capital Partners from Toronto and the proposal was that American Capital Partners would arrange for a capital injection of $750,000. The transactions were never consummated as American Capital Partners could not raise the necessary funds to make the capital injection. The Appellant described this event and the possibility of raising equity in the marketplace as follows:
A. It never happened because they couldn’t raise the money, and things got progressively worse through 2002, and...
Q. And when you say “things got progressively worse”, what do you mean?
A. Well, you couldn’t raise any equity.
Q. Okay.
A. The financial markets at that point in time, after the Internet implosion we will call it, in 2001/2002, in that timeframe, the market was very jittery of any of this technology stuff, which just a year before, they couldn’t get enough of it.
Q. Okay.
A. So things just got very tough.
Q. Okay. Okay. So the equity raise didn’t work. They weren’t able to raise because of the markets at that time?
A. That’s correct.
[41] Mosaic did not have a line of credit with its bank. Prior to his resignation from the company, Steve Hutchinson traveled to Winnipeg and met with the account manager of the company’s bank to explore the possibility of establishing a line of credit for the company. However the talks with the bank to establish a line of credit were not successful. The Appellant indicated that the bank was simply not willing to lend any money to them at that point in time.
[42] To reduce expenses, the company started to lay off employees and curtailed travel for the executive and management personnel of the company. Obviously the company also ceased hiring new employees.
[43] They had also contacted another brokerage company (Northern Securities) to determine if they could raise additional funds. These talks were not successful.
[44] However another company, Global Inter-Tech Inc. (“GITI”), was interested in Mosaic. This company had several of the same shareholders as American Capital Partners. This company had cash and they wanted to do a merger with Mosaic. The Appellant started working on this proposal in August or September 2002. The documents that were submitted at the hearing included a draft copy of the Share Exchange Offer Information Circular which indicated that GITI had offered to exchange two GITI shares (priced at $0.20 each) for one share of Mosaic. American Capital Partners Ltd. acted as the agent for GITI. The share exchange offer was conditional on at least 51% of the issued shares of Mosaic being tendered under the offer.
[45] The share exchange offer proposed by GITI was not accepted by the shareholders of Mosaic. The Appellant had noted that the share exchange offer would have been very dilutive to the shareholders of Mosaic. Although the Appellant was the largest shareholder, there were other persons who held significant numbers of shares and they were not comfortable with the proposed share exchange. The Appellant indicated that:
A ….The shareholders of Mosaic and the shareholders of Inter-tech Global in the end couldn’t get their arms around who was providing what, and it just didn’t work.
[46] The deal failed. Since the Appellant was personally involved in negotiating with GITI in relation to the merger, it appears to me that the reason that the merger failed was not the fault of the Appellant.
[47] In the notes to the Consolidated Financial Statements for Mosaic for the year ended December 31, 2002, there is also a reference to the company raising $170,000 from a non-executive director and $350,000