2014 QCCA 734, 2014 QCCA 734

Johnson c. Agence du revenu du Québec 2014 QCCA 734 COURT OF APPEAL CANADA PROVINCE OF QUÉBEC REGISTRY OF MONTRÉAL No: 500-09-023072-127 – 500-09-023073-125 (500-80-009746-075 – 500-80-009747-073) DATE: April 9, 2014 CORAM : THE HONORABLE LOUIS ROCHETTE, J.A. FRANÇOIS DOYON, J.A. JACQUES A. LÉGER, J.A. CHARLES S. JOHNSON (500-09-023072-127 ) and THOMAS P. HINCHEY (500-09-023073-125) APPELLANTS – plaintiffs v.

AGENCE DU REVENU DU QUÉBEC RESPONDENT – defendant JUDGMENT [ 1 ] The appellants are appealing a judgment rendered on September 27, 2012 by the Court of Québec, District of Montreal, administrative and appeal division (the Honourable Mr. Justice Jacques Paquet), dismissing their respective motions instituting proceedings to vacate assessments established on March 8, 2007 by the respondent, Agence du revenu du Québec (ARQ), pursuant to

section 24.0.1 of the Tax Administration Act (the “Act”), [1] holding them personally liable for the tax debt of the bankrupt company C.S. Brooks inc. [2] [ 2 ] C.S. Brooks (the “Company”), a textile manufacturing company, was incorporated under the laws of Delaware and had establishments in Sherbrooke and Magog. In the early 2000s, overseas competition in the textile industry led to a reduction in the Company’s profitability. By this time, the Company had accumulated a significant tax debt, in the amount of $6 270 331.71, owed to the provincial government. In November 2000, the Company and the ARQ came to an agreement on a

schedule of payments for the Company’s tax arrears. In 2006, with the tax debt still at over $6 million, the Company filed for bankruptcy. Notices of assessment were sent shortly thereafter to the appellants as directors of the Company. [ 3 ] The appellants unsuccessfully challenged their assessments in the Court of Québec. The trial judge found that Mr. Hinchey was a de facto director, based on the Company’s annual declarations and on the testimony of employees working under him. With respect to the defence raised under

section 24.0.2 of the Act, he noted that neither Mr. Hinchey nor Mr. Johnson testified to adduce evidence of their personal circumstances: [47] Dans le cas sous étude, comme les appelants Johnson et Hinchey n’ont pas témoigné, je n’ai pas d’autres éléments pour trancher la question que la preuve documentaire soumise, les interrogatoires avant procès d’ex-officiers de Brooks et la reconnaissance par la défenderesse de certains faits. L’absence de témoignages de Johnson et Hinchey ne permet pas de savoir si des éléments qui leur sont propres existent et éventuellement de les prendre en compte . Dans le cadre d’une procédure fondée sur l’article 24.0.2 de la

Loi sur l’administration fiscale , le témoignage des intéressés revêt selon moi une grande importance, si l’on veut connaître toutes les circonstances .

En n’étant pas présents à l’audience, Johnson et Hinchey se privent du droit d’être entendus dans le cadre de leur appel. [Emphasis added, references omitted] [ 4 ] After having referred to the oral and written evidence, the judge concluded: [61] En prenant en compte l’ensemble des circonstances, je dois conclure que Johnson et Hinchey ont agi vis-à-vis la défenderesse d’une manière qui ne leur permet pas de prétendre l’avoir fait avec soin, diligence et habilité raisonnable.

Conscients de la situation financière difficile de Brooks, ils ont délibérément ordonné aux officiers en place à Magog de ne pas payer la défenderesse. [62] Leur intention évidente de privilégier le projet Donna Karan et certains créanciers au détriment de la défenderesse ne correspond pas au standard objectif de l’administrateur qui agit avec soin, diligence et habilité raisonnable. [63] La preuve ne permet pas de conclure que ce serait la protection des emplois qui dictait les décisions des administrateurs, mais que c’est plutôt le désir de privilégier le projet Donna Karan et la poursuite de l’entreprise à leur bénéfice.

[64] Le transfert, au fil des années, de sommes importantes de Magog aux Etats-Unis se fait au détriment de la défenderesse. Plutôt que d’ordonner ces transferts, Johnson et Hinchey devaient s’assurer que la défenderesse était payée. S’ils avaient agi de cette manière, ils auraient pu être considérés comme ayant été des administrateurs soigneux, diligents et raisonnablement habiles. [ 5 ] The appellants claim that the trial judge erred in finding that Mr. Hinchey was a de facto director, particularly in finding that Mr.

Hinchey decided which creditors should be paid and signed the Company’s annual declarations listing him as a director. Furthermore, they argue that Mr. Johnson was the sole decision maker within the Company and that the judge failed to take into account the existence of instalment agreements negotiated with the respondent. Regarding this last point, they rely on the Federal Court of Appeal’s decision in Balthazard v. The Queen. [3] [ 6 ] A taxpayer contesting an assessment bears the burden of making a prima facie case that the assessment is erroneous.

He has to “demolish” or to undermine the Minister’s assumptions. [4] The appellants failed to meet this burden of proof. Moreover, the respondent has established the veracity of its claims. [ 7 ] Mr. Hinchey had to show that his notice of assessment erroneously identified him as a de facto director of the Company in order to avoid liability under

section 24.0.1 of the Act. Mr. Johnson, and subsidiarily Mr. Hinchey on the assumption that he acted as a director at the time of the omission to remit, had the burden to establish that they acted with reasonable care, dispatch and skill, pursuant to

section 24.0.2. [ 8 ] On these issues, the appellants raise questions of fact or mixed fact and law. It is trite law that, in order to succeed, the appellants must point to a palpable error and explain its overriding consequence on the outcome of the decision. [5] They have failed to do so. [ 9 ] Regarding status as a de facto director, the trial judge’s conclusion is well supported by testimonial evidence describing Mr. Hinchey’s role within the Company and the importance of the decisions he made between 2000 and 2006.

Chief among those decisions in the instant case was the one to use monies owed to the Crown for a Company project, namely the Donna Karan line. As for the annual declarations, Mr. Hinchey pleads that they were submitted using a signature stamp without his knowledge, though no evidence was put forward in support of such a claim. We therefore see no reason to disturb the trial judge’s finding on this first ground of appeal. [ 10 ] The appellants have also failed to demonstrate that the trial judge erred in his assessment of their defence under

section 24.0.2 of the Act. They claim that the ARQ should not be permitted to assess the directors after concluding an agreement with the Company to

schedule payments for its tax arrears. [ 11 ] The appellants’ argument is an attempt to hide behind an agreement for which they failed to provide proper support, given that they did not hold up their end of the agreement. Negotiations began in 2000 to settle the Company’s tax bill of over $6 million. By the time the notices of assessment were sent to Mr. Hinchey and Mr. Johnson in 2006, the amount owed by the Company to the ARQ had actually grown. If efforts were made to settle the account through this agreement, there is nothing to show for it in the result.

The judge rightly concluded that the evidence showed a routine failure on the part of the Company to respect its commitment. [ 12 ] Finally, Balthazard provides no support for the appellants’ position.

In that case, the court was satisfied with the explanations given by the appellant, who was described by the trial judge as a man of integrity. [6] Indeed, the judge wrote that “ […] evidence in the record shows clearly that the appellant concerned himself with […] tax remittances as soon as this business began having financial difficulties and that he made a number of arrangements, both to turn the business around and to ensure that the GST-related net tax was remitted.” [7] No such evidence has been adduced in the present case. FOR THESE REASONS , THE COURT : [ 13 ] DISMISSES the appeals, with costs.

LOUIS ROCHETTE, J.A. FRANÇOIS DOYON, J.A. JACQUES A. LÉGER, J.A. Mtre Dominic Charles Belley NORTON ROSE FULBRIGHT CANADA For the appellants Mtre Christian Boutin LARIVIÈRE MEUNIER, avocats REVENU QUÉBEC For the respondent Date of hearing: March 28, 2014