http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/108790/index.do
Maxwell v. The Queen (March 25, 2015 – 2015 TCC 74, D’Arcy J.).
Précis: The taxpayer was a professional engineer. He formed three companies (the “Three Companies”) to carry on an energy audit business in British Columbia. One company (“TEC”) was the general contractor and entered into the head contracts with clients, another (“Trak Engineering”) carried on the engineering aspects of the business while a third (“Trak Mechanical”) functioned as a payroll company. Mr. Maxwell was the controlling mind and sole director of the Three Companies. TEC entered into a large contract with an entity known as the Happy Valley Resort. The Developer of Happy Valley was always in default of its payment obligations causing TEC to take various collection actions to bring the account current. Finally the Developer retained a new engineer leaving TEC with an uncollectable account of roughly $600,000. CRA assessed Mr. Maxwell for unremitted source deductions and GST in the amount of roughly $540,000. He argued that he had been duly diligent and could not be blamed for the conduct of the Happy Valley Developer. The Court rejected his defence. Mr. Maxwell knew of the cash flow problems caused by Happy Valley but elected to continue to work on the project. He prioritized creditors and decided not to pay withholdings and GST. The Court did however limit his liability to the amounts in certificates filed with the Federal Court which reduced the overall liability somewhat. As a result the appeals were allowed to make the correction in respect of the Federal Court certificates, but not otherwise. These was no order as to costs.
Decision: These appeals arose out of a continuing default by one client of the Three Companies:
[6] Sometime in August 2005, TEC entered into a contract with an entity called Happy Valley Resort to design and build mechanical systems for a condominium project in Kelowna, British Columbia (the “Happy Valley Contract”). This was a very difficult project for the Three Companies for the simple reason that the developer of the project (the “Developer”) refused to pay its bills on a timely basis.
[7] By July 2006, the Developer owed over $700,000 under the contract with TEC. This forced the Three Companies to take collection actions, including sending a notice of payment default and breach of contract. These actions were somewhat successful, as the receivables fell to $200,000.
[8] Unfortunately, the Developer continued to defer payments under the Happy Valley Contract, resulting in an increase in the Three Companies’ receivables to $670,000 by late 2006. The receivables then dropped to $400,000 after additional collection actions by the Three Companies, but then rose once again to $600,000 by early 2007. In June 2007, the Three Companies stopped working on the Happy Valley Resort project. They filed a default notice under the Happy Valley Contract and executed a lien on the project. Notwithstanding these actions, the Three Companies have not been able to collect the amounts owed to them by the Developer.
[Footnote omitted]
Mr. Maxwell, who was the controlling mind and sole director of the Three Companies, was assessed for unremitted source deductions and GST:
[17] On May 6, 2010, the Minister assessed the Appellant for $452,347.49 under subsection 227.1(1) of the
Income Tax Act in respect of TRAK Mechanical’s unremitted source deductions and $86,222.48 under subsection 323(1) of the
GST Act in respect of TRAK Mechanical’s unremitted net tax. The Respondent indicates in her relevant Replies that these are the amounts at issue in the appeals before the Court relating to TRAK Mechanical.
[Footnotes omitted]
The Court rejected Mr. Maxwell’s due diligence defence based on the continuing default of the Developer of Happy Valley:
[33] While the Appellant may not have been able to foresee the events that occurred with respect to the Happy Valley Contract, he was the person who made the decision not to pay certain of the Three Companies’ accounts payable, including the Remittances [unremitted withholdings and GST]. In such a situation, he is not entitled to rely upon the due diligence defence contained in subsection 227.1(3) of the
Income Tax Act and subsection 323(3) of the
GST Act.
The Court did limit Mr. Maxwell’s liability to the amounts set out in certificates filed with the Federal Court:
[18] Paragraph 7 p) of the Reply in 2011-2687(IT)G states that when determining the Appellant’s liability, as a director of TRAK Mechanical, for unremitted source deductions, the Minister assumed that “on January 10, 2008, the Minister registered with the Federal Court of Canada a certificate for [TRAK Mechanical’s] liability for the Source Deductions, plus penalty and interest, in the amount of $373,673.61.” The Respondent provided the Court with a copy of the certificate.[6] The certificate is for an amount that is some $78,674 less than the amount the Minister assessed pursuant to subsection 227.1(1) of the
Income Tax Act.
[19] A similar discrepancy exists with respect to TRAK Mechanical’s unremitted net GST. The Appellant was assessed for $86,222.48. However, the Federal Court certificate is only for $74,326.29. The amount assessed exceeds the certificate amount by $11,896.19.
[20] Paragraphs 227.1(2)(a) of the Income Tax Act and 323(2)(a) of the GST Act clearly provide that the Minister may not assess an amount in excess of the amount of the Federal Court certificate. As a result, the Court will direct the Minister to reduce the assessments to the amount of the relevant Federal Court certificate.
[21] The Minister made a similar error when assessing the Appellant in respect of the unremitted source deductions of TRAK Engineering. The Minister assessed the Appellant $97,517.46 in respect of TRAK Engineering’s unremitted source deductions. However, the certificate registered by the Minister with the Federal Court was only for $86,372.61. The assessment will be reduced to the amount of the certificate: $86,372.61.
[Footnotes omitted]
As a result the appeals were allowed, but only to the extent of conforming the assessments with the Federal Court certificates. There was no order as to costs.