Fox v. R. – TCC: Tax Court rejects director’s “due diligence” defence

Fox v. R. – TCC:  Tax Court rejects director’s “due diligence” defence

Fox v. The Queen (February 28, 2018 – 2018 TCC 43, Russell J.).

Précis:  The taxpayer was assessed as a director for unpaid source deductions and GST.  The taxpayer, who was self-represented, argued that he had met the “due diligence” standard in attempting to keep the corporation’s remittances current.  The Court did not accept  his arguments, finding that he had failed to meet the “stricter standard” the Federal Court of Appeal had propounded in the case of R. v. Buckingham, 2011 FCA 142.  As a result the appeals were dismissed.  There was no order as to costs since these were all informal procedure appeals.

Decision:   This case boiled down to whether the taxpayer had met the standard applicable to a due diligence defence.  The Court found he had not:

[27]         The above-cited portions of Campbell describe a variety of initiatives made by the director in that case, “to meet CRA remittances”, as highlighted by that Court. They include providing a series of post-dated cheques, ensuring that client payments would be deposited to the corporate account on day of receipt so as to help ensure the bank could not block the money being used for remittances, watching for bad weather which could provide an extra day before client cheques went to bank’s clearing–house in Nova Scotia, advising CRA to place a requirement to pay against one of the pertinent company’s larger debtors and other third party accounts, maintenance of a separate account for source deductions, and convincing the bank to allow the corporate account to go into overdraft so that source deductions could be made.

[28]         The Appellant argued that Campbell is an apt precedent for the case at bar. In his submission, in both cases external factors created the cash-flow challenge, in both cases corporate records were inadvertently destroyed, in both cases the director contributed personal funds, in both cases corporate staff were reduced and expenses controlled, in both cases the director took no salary, in both cases the directors sought to negotiate a bank loan (in Campbell the director was successful). The Appellant urged that in both cases the directors “did everything reasonably possible”.

[29]         The Respondent submitted that the Company had a history of delayed GST/HST filing and T2 corporate tax filing, and that the Appellant’s first priority was to keep the Company operating. There was no evidence the Appellant took any steps to stop failures to make remittances. The Respondent said this was not due diligence. There were no separate accounts for remittances in the case at bar, unlike in Campbell. The saved money through non-remittances in the case at bar was used to keep the Company running. In the case at bar there were no net GST/HST payments other than for $2,600 total.

[30]         I am in agreement with the Respondent that here the Appellant has not established entitlement to the available defence of due diligence in response to the director’s liability assessments against him. Citing Buckingham and Belthazard, I do not observe the general focus of the Appellant as seeking to stop non-remittances, as opposed to continuing with non-remittances while keeping his Company going so that in the longer term someone might buy the Company or invest in it and thus provide funding to presumably reimburse CRA. Reading the Collections minutes in respect of the Appellant shows that CRA was seeking to contact and generally pursuing the Appellant for solutions and payments well more than the Appellant was engaged in initiatives seeking to satisfy CRA regarding continued non-remittances. In this regard the efforts made by the director in Campbell, noted above, compare quite more favourably in terms of self-initiative in engaging in actions to curb non-remittances, that at least somewhat placated CRA.

[31]         Furthermore, insofar as the Appellant prominently cites and relies upon Campbell, in fact that decision shortly preceded the FCA’s seminal decision of Buckingham, which included language encouraging “stricter standards” to be utilized in applying the defence to due diligence in director’s liability cases. Buckingham is the governing jurisprudence - not Campbell.

As a result the appeals were dismissed.  There was no order as to costs since these were all informal procedure appeals.