Fengos v. R. – TCC: Outside director who did nothing in relation to his duties not duly diligent.

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Fengos v. The Queen (July 17, 2014 – 2014 TCC 253) was a GST director’s liability decision. The appellant was an “outside” director of the debtor corporation:

[2] Good morning. I will now deliver my reasons in the appeal of Spiros Fengos. The appellant is appealing from an assessment dated January 12, 2012, which was issued under section 323 of the Excise Tax Act. Section 323 imposes solidary liability on a director of a corporation for that corporation’s failure to remit an amount of net tax. The amount of the assessment including tax and penalties is less than $3,000.

[3] It is not disputed that the corporation Levisted inc. defaulted on remitting net tax amounts for the period from January 1 to December 31, 2006. The amounts in question were due on April 2, 2007. It is not disputed that the appellant was a director of Levisted inc., a corporation incorporated under the Quebec Companies Act.

[12] The appellant testified that he became a shareholder and director of Levisted as a favour to Gérald Lévis. In the past, the appellant had purchased non‑pharmaceutical products from a company that at the time belonged to Mr. Lévis. Mr. Lévis’s former company had gone bankrupt, and Mr. Lévis wanted to start a new company in which he would work with his two sons.

[13] The appellant helped Mr. Lévis in two ways. On the one hand, he became a shareholder by buying treasury shares of the new company for $25,000 at the end of 2002. On the other hand, he guaranteed a $50,000 line of credit just over a year later. He was hoping to eventually make a little money from his investment; he also became a director of Levisted at the time.

[14] The appellant’s testimony was very clear that he was inactive as a director. He had never attended a board of directors’ meeting. He had never asked to see financial statements or reports. He did not ask questions. He did not receive reports or statements of account from the bank with regard to the line of credit or to anything else. He received a financial report from the company, if I understood the evidence correctly, for the company’s first fiscal year. There is no evidence that he asked what was happening with GST remittances.

[15] Mr. Lévis came to see the appellant every two or three months, but Mr. Lévis’s visits were as a supplier for the appellant’s pharmacies. When the appellant saw Mr. Lévis, their conversations were very general and informal, and he concluded that everything was going well with the company.

[16] After June 21, 2006, and before 2009, the appellant’s involvement as a director of Levisted did not increase; he received no communications regarding the company until the bank asked him to honour his guarantee.

Put quite simply the Tax Court held that an outside director who did nothing in connection with a corporation and knew nothing about its affairs could not avail himself of the “due diligence” defense:

[18] The appellant claims that he is an outside director and that he only became liable when he knew that the business was having difficulties. According to the appellant, because he was not informed of the company’s difficulties, the consequence is that he had no obligation to act and that he is not liable as a director.

[19] The appellant was not involved day to day in the company’s operations, and I agree that he was an outside director. However, I have carefully read the case law on which the appellant is relying, and I cannot use the interpretation proposed by the appellant. In this case, not only was the appellant not informed, but he also made no effort to be informed. That does not constitute due diligence.

The appeal was dismissed from the bench.