The Estate of Bela Miklosi v. The Queen

The Estate of Bela Miklosi v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2004-05-03 Neutral citation 2004 TCC 253 File numbers 2003-2265(GST)I Judges and Taxing Officers Brent Paris Subjects Part IX of the Excise Tax Act (GST) Decision Content Citation: 2004TCC253 Date: 200405 Docket: 2003-2265(GST)I BETWEEN: THE ESTATE OF BELA MIKLOSI, Appellant, and HER MAJESTY THE QUEEN, Respondent, AND Docket: 2003-2266(GST)I THE ESTATE OF MANON BRODEUR MIKLOSI, Appellant, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] REASONS FOR JUDGMENT Rendered orally from the bench at Montréal, Quebec, on March 10, 2004. Paris J. [1] The following are the reasons for judgment in the two cases mentioned: The Estate of Manon Brodeur Miklosi and The Estate of Bela Miklosi. [2] 2842-7219 Québec Inc., incorporated in 1990, operated a bar called The Loft in Montréal. The role of Bela Miklosi and Manon Miklosi (hereinafter the “Appellants”) in this business was limited, given that it was managed by their son, Dominique Miklosi, and his partner, Frédérick Tur. Bela Miklosi, now deceased, was a long-standing director of the company, and the Respondent assumed that Manon Miklosi was a de facto director. [3] As directors, the Appellants had been assessed under subsection 323(1) of the Excise Tax Act[1] (hereinafter the “Act”). Under this section, the director of a corporation is liable for the Goods and Services Tax that the corporation fails to remit. In this case, the company failed to remit a total of $129,901 in GST payable on its sales for the period of January 1994 to June 1997. The total amount of the assessment for each of the Appellants is $200,746.55, which includes the amount of taxes not remitted, a penalty, and interest. These appeals were heard together, on common evidence. [4] Although the facts involve the same company, the status of the Appellants was not identical, and I propose to consider the issues at bar separately for each of the Appellants. [5] The appeal of Ms. Miklosi raises the following questions. Was she a de facto director during the period at issue? It was admitted that she was not a de jure director. If she was a de facto director, was the assessment made more than two years after she last ceased to be a director and, if not, did Ms. Miklosi meet the criterion for reasonable diligence as set out in subsection 323(3) of the Act? [6] The appeal of Mr. Miklosi raises the following questions. Was the assessment made more than two years after he last ceased to be a director, and, if not, does Mr. Miklosi meet the criterion for reasonable diligence set out in subsection 323(3) of the Act? [7] The facts. The company was incorporated in September 1990. Forty-five percent (45%) of the shares in the company belonged to 2842‑6633 Québec Inc., whose sole shareholder was Raymonde Tur, Frédérick Tur’s mother, and forty-five percent (45%) of the shares were owned by 2842-4893, in which the Appellants are equal shareholders. The remaining ten percent (10%) of the shares in the company were held by 2853-5268 Québec Inc., whose shareholders were not identified. [8] The annual returns filed by the company for 1994 to 1997 indicate that its directors were Dominique Miklosi, Chair, Frédérick Tur, Vice-Chair, and Bela Miklosi, Secretary-Treasurer. The return filed for 1998 indicated that Frédérick Tur and Bela Miklosi were no longer directors. [9] Ms. Miklosi testified that she and her spouse became involved in the company to help their son, who was nineteen years old at the time the company was formed. Her son’s partner, Frédérick Tur, was approximately the same age. The Appellants decided that, given their son’s young age and the type of establishment he was operating, and given the fact that Ms. Miklosi and Ms. Tur had invested money in the company, they wanted to oversee the company’s activities. [10] Ms. Miklosi claimed that she worked part-time for the company, for approximately one hour each afternoon, to keep the books, place orders, and answer the telephone. She and Ms. Tur signed all the cheques and handled the paperwork. She rarely saw her son or Frédérick Tur, because they usually worked at night at the bar, and stayed awake until 6:00 a.m. An external accountant was responsible for the company’s accounts; this is the person to whom Ms. Miklosi submitted the information she organized. [11] In late 1997, the company underwent a tax audit; consequently, assessments were made for the company for substantial amounts of GST and QST relating to sales that the company allegedly failed to report. Ms. Miklosi insists that the company reported all of its income and that the auditor did not take into account the discounts given to students during special events held at the bar or the fact that the company remitted the entry fees for these events to the student councils that organized the events. [12] The company did not object to these assessments. According to Ms. Miklosi, she wanted the company to file an objection, but the company directors were convinced that no one would believe their version of the facts and that an objection would be useless. The Minister of Revenue of Quebec attempted to collect the tax debt from the company, but was not successful. The company operated Le Loft until August 1999, and it appears that its assets were sold in September 1999. [13] In making Ms. Miklosi’s assessment, the Minister assumed that she had regularly represented herself in company documents as a director of the company. Counsel for the Respondent maintains that the documentary evidence filed with the Court clearly shows that Ms. Miklosi acted as a de facto director of the company. The following is a list of these documents, which bear Ms. Miklosi’s signature: [TRANSLATION] One. A lease signed on December 18, 1990, for the premises occupied by the bar, located on Ste-Catherine St. in Montréal. The lease was signed by Bela Miklosi on behalf of the company, and by Ms. Miklosi in the section identified as: “Second authorized signature or witness.” Mr. and Ms. Miklosi also signed Appendix D of the lease. In this section, Mr. Miklosi indicated that he was signing on behalf of the company, and Ms. Miklosi indicated that she was signing as a witness. Two. A registration form for the company with the ministère du Revenu du Québec for the purpose of the Quebec Sales Tax, dated April 27, 1992. Ms. Miklosi completed this document and signed it in her capacity as Secretary. In the field reserved for the names of officers and directors of the company, she entered the names of Bela and Dominique Miklosi and Frédérick Tur. Three. The company’s income tax returns for the years ended December 31, 1995, and 1996, signed by Ms. Miklosi on March 19, 1996, and April 8, 1997. Ms. Miklosi signed as a director in two areas in the 1995 return and in one area in the 1996 return. She also signed in the area marked “Director” on the financial statement filed with the 1995 return. It should be noted that, in each of these returns, in the area reserved for the names of the directors, only Dominique and Bela Miklosi and Frédérick Tur are identified. Four. GST and QST returns for the periods beginning in January 1994 and ended in September 1998, signed by Ms. Miklosi, and a cheque payable to the Minister of Revenue of Quebec, dated October 31, 1998, signed by Ms. Miklosi and Raymonde Tur. Ms. Miklosi admits that she signed these documents. [14] With respect to the company’s income tax returns, she denies that she intended to represent herself as a director of the company within the legal meaning of the term. She claimed that she signed them hastily, because they had to be filed within a very short timeframe. She received them from the accountant, who asked her to sign them, and she did so without considering the implications. She did not know what to enter in the area marked “Function or Title.” She believed that the title of “director” meant that she was responsible for managing the company’s office. [15] I am not persuaded that the documents filed with the Court show that Ms. Miklosi intended to represent herself as a director of the company. With the exception of the income tax returns, she never gave herself the title of director. I cannot conclude that Ms. Miklosi signed the forms, GST and QST returns, and company cheques as a director. There is no evidence that this was the case, and the duties she performed are not necessarily those of a director. [16] Moreover, the fact that she identified herself as Secretary in another document is not conclusive either. The position of Secretary in a company and the duties of an officer are not equivalent to the position of director. I acknowledge that Ms. Miklosi gave herself the title of director in two instances in the income tax returns, but these documents contradict the identity of the company’s directors. [17] I accept Ms. Miklosi’s testimony whereby she did not intend to give herself the role of director by signing the income tax returns. The evidence does not show any other actions on her part that could be unequivocally qualified as the actions of a director. The role of a director is to manage a company’s business and to make important decisions on its behalf. The testimony of Ms. Miklosi shows that her role in the company’s business was very limited, and this testimony was not contradicted during cross-examination. [18] I must conclude that she was not the de facto director of the company during the period at issue. Thus, one of the conditions to the application of subsection 323(1) of the Act has not been met. Given this conclusion, it is not necessary to consider the other arguments raised in favour of Ms. Miklosi, and her appeal is allowed. [19] In the case of Mr. Miklosi, the first issue at bar is whether the Minister’s assessment was made within the timeframe prescribed by the Act. Subsection 323(5) of the Act stipulates that an assessment made for an amount payable by a director expires two years after he ceases to be a director. The agent for the Appellants maintains that Mr. Bela Miklosi resigned more than two years prior to the date of the assessment, on April 5, 2000. [20] Mr. Dominique Miklosi, son of the Appellants and Chair of the company, testified that his father had given him his written resignation, dated December 3, 1997. He did not recall the date on which his father gave him the document. In response to a leading question asked by the agent for the Appellants, he agreed that he had received the resignation in January or February 1998. He explained that the date entered on the resignation represented the real situation and that he and his father had agreed that he would no longer participate in managing the corporation’s business. [21] The resignation letter was filed with a copy of a company resolution. The resolution document was not dated and related details of the resignation of Bela Miklosi and Frédérick Tur. Dominique Miklosi remained as the sole director. A notice of these changes was not sent to the Inspector General of Financial Institutions prior to filing the annual return in the fall of 1998. During cross-examination, Dominique Miklosi claimed that he did not recall whether he had signed other resolutions and appeared to be unaware of whether the company kept a minutes book. [22] Counsel for the Respondent maintains that Bela Miklosi continued to be the director of the company until a statement of amendment was sent to the Inspector General of Financial Institutions. He argued that the resignation of a director is meaningful to third parties only where the change of director has been disclosed through the filing of a statement of amendment. [23] He relies on section 62 of the An Act respecting the legal publicity of sole proprietorships, partnerships and legal persons,[2] (hereinafter the “Publicity Act”). Section 62 of this Act specifically stipulates that “the information relating to each registrant is proof of its contents in favour of third persons in good faith from the date on which it is entered in the statement of information.” This provision allows third parties who consult the public record maintained by the Inspector General of Financial Institutions to assume that the information contained therein is accurate. [24] In my view, the assumption in section 62 of the Publicity Act is refutable and a director is entitled to provide evidence in support of the date of his resignation. A director cannot be held responsible for an omission that is not caused by him, because the company, not the director, is obligated to advise the Inspector General of the resignation of a director. The director’s only obligation is to submit a notice of his resignation to the company. The company is then responsible for notifying the Inspector General of this resignation. In my view, the Appellant did not successfully refute the assumption contained in the Publicity Act or the assumption of the Minister as it appears in the Reply to the Notice of Appeal, namely, that Bela Miklosi was a director of the company. [25] I grant very little weight to the testimony of Dominique Miklosi. He did not appear to have a very clear memory of the events at issue, and he was unable to provide the date on which his father handed him his resignation without prompting from his agent. Furthermore, he was unable to provide a reason why the directors’ resolution relating to the resignation was not dated. [26] In the absence of any evidence to corroborate the testimony of Dominique Miklosi, I conclude that he did not demonstrate, on the balance of probabilities, that Bela Miklosi resigned more than two years prior to the assessment at issue. However, it must still be determined whether Bela Miklosi meets the criterion for reasonable diligence, as set out in subsection 323(3) of the Act, which states: 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. [27] In Soper v. The Queen, [1998] 1 F.C. 124, cited by the agent for the Appellants, the Federal Court of Appeal set out the criteria to be applied in determining whether a director has shown reasonable diligence. The standard of care stipulated in the Act contains both objective and subjective components, and a distinction is made between internal directors and outside directors. [28] Whether the director meets the standard for prudence is a question of fact that must be dealt with in light of the personal knowledge and experience of the director. The evidence in this case tends to show that Bela Miklosi was not involved in the company’s business and that he was often outside of Montréal, owing to his work as an engineer. He was, rather, an outside director and, for this reason, he is not subject to the more stringent standard of diligence that can be applicable to internal directors. [29] In Soper, Robertson J. explained the expectations of an outside director in this type of case. At paragraph 53, he states: In my view, the positive duty to act arises where a director obtains information, or becomes aware of facts, which might lead one to conclude that there is, or could reasonably be, a potential problem with remittances. Put differently, it is indeed incumbent upon an outside director to take positive steps if he or she knew, or ought to have known, that the corporation could be experiencing a remittance problem. [30] Unfortunately, the evidence presented to the Court in this case does not clearly show what went on within the company during the period in which the taxes were not remitted. It is impossible for me to determine whether Bela Miklosi knew or should have known that a problem existed with respect to GST and QST remittances. [31] Even though Manon Miklosi insisted that the company met all of its tax obligations, it was not shown that the assessment of the company was ill-founded. The Minister’s assumption that the company failed to remit nearly $130,000 in GST and QST remains intact, and I am obligated to accept the assertion that the company was not reporting all of its sales. [32] Without knowing what steps Bela Miklosi took to keep abreast of the company’s activities, and without knowing what system the company put in place to ensure the accurate accounting of its sales, I cannot say that, in this case, he demonstrated reasonable diligence to prevent negligence on the part of the company. [33] For these reasons, the appeal of Bela Miklosi is dismissed. Signed at Ottawa, Canada, this 3rd day of May 2004. “B. Paris” Paris J. Certified true translation Colette Dupuis-Beaulne [1] R.S.C. 1985, ch. E-15 [2] R.S.Q. ch. P-45