Executive Summary: Key Legal and Evidentiary Issues

• Director’s liability under section 323 of the Excise Tax Act turned on whether the Minister satisfied the statutory preconditions in paragraph 323(2)(a), including registration of a Federal Court certificate and a writ of execution returned unsatisfied.

• The validity of the underlying GST assessment against 9193-6047 Québec Inc. was contested on the basis that the notice of assessment was allegedly sent to the wrong address, even though it was mailed to the appellant’s elected domicile and residence.

• Entitlement to input tax credits was denied because the MMax Group invoices produced at trial did not meet the mandatory documentary requirements in subsection 169(4) of the Excise Tax Act and the Input Tax Credit Information (GST/HST) Regulations.

• Allegations that 9193 was involved in a false invoicing or “carousel” scheme were not accepted where the Minister did not amend the Reply and the evidence did not establish circular, artificial or concerted transactions among the parties.

• The court found a computation error in 9193’s net tax, as GST amounts collected in October 2012 were improperly included in the quarterly reporting period ending March 31, 2013, requiring a reduction of $5,693.79.

• Arguments that the Minister should have assessed Mr. Gupta instead of the appellant failed because the appellant was the only de jure director during the relevant periods and section 323 does not oblige the Minister to select one director over another.

Factual background and business operations

The appeal concerns a derivative assessment under section 323 of the Excise Tax Act (ETA) issued against Marvin Darville as director of 9193-6047 Québec Inc. (9193). The assessment, dated February 12, 2015, was for $50,819.68 in respect of unremitted net tax, interest and penalties for the quarterly reporting periods ending March 31, 2013 and June 30, 2013.

Darville immigrated to Canada from the Bahamas in 2010. In 2012, he met Anil Gupta, who explained the operations of 9193 and convinced him to “purchase” the company in October 2012 for $1,000. Darville testified that he also invested an additional $6,000, having been told that 9193 was going through hard times and needed capital.

Because Gupta apparently could not open a bank account, and to protect his investment, Darville agreed to become the sole director. He became director of 9193 as of October 9, 2012 and held sole signing authority over the corporate bank account.

Documents described 9193’s operations as “import and export of computer chips” and “distribution de produit eletronic [sic]”, while Darville described the business as the purchase and sale of computer hardware, software and parts.

The business operated on a daily basis. Merchandise was purchased from MMax Group (Canada) Inc. (MMax Group) in Markham, Ontario and shipped to Kingston, Ontario. Gupta would drive from Montréal to Kingston to pick up the merchandise and then return to Montréal to sell it to Solik Info Inc. (Solik) and another company whose name Darville could not recall. Darville accompanied Gupta on some of these daily trips and was able to describe the operations on that basis.

Payment followed a set pattern. At Solik’s premises, a cheque payable to 9193 was issued for the merchandise. Darville took the cheque to a nearby TD Bank to have it certified, then crossed the street to a BMO branch where 9193 held its corporate account and deposited the certified cheque. He then purchased a bank draft from BMO and deposited it at a CIBC branch into an account designated for payment to MMax Group for the next day’s shipment. Darville described the delivery and related financial transactions with Solik as taking about twenty minutes.

Darville did not look inside the boxes shipped to Kingston and delivered to Solik. He testified that he helped unload the boxes at the back of Solik’s warehouse, after which he and Gupta would go to the front to collect the cheque while Solik’s staff checked the boxes in the back.

Darville stated that he and Gupta each received about $500 a week as “salary” withdrawn from 9193’s bank account, but he could not speak to the company’s finances beyond these amounts and was unable to estimate its gross sales.

Within three or four months of his involvement, Darville began receiving correspondence from Revenu Québec on behalf of 9193. At first, he “chucked them aside” because they were not important to him. He then approached Gupta and pressed him to file tax returns for 9193. Gupta reassured him that 9193 had an accountant who would resolve matters with Revenu Québec. Darville said he met the accountant at most four times and was left with the impression that the accountant was not very interested in providing assistance.

Darville last heard from Gupta in the fall of 2013. He claimed Gupta stole merchandise and was never heard from again.

Later in 2013, Revenu Québec audited 9193. The company had never filed its GST returns for the periods. The audit resulted in a GST assessment dated December 19, 2013 for $48,979.57 in respect of the quarterly reporting periods ending March 31, 2013 and June 30, 2013. Revenu Québec concluded that 9193 had no commercial activities and was engaged in a false invoicing scheme with other entities, but also concluded that 9193 collected and did not remit GST during the periods and assessed accordingly.

9193 did not object to the December 19, 2013 assessment and filed no appeal. After unsuccessful attempts to collect the assessed amounts from 9193, Revenu Québec proceeded against Darville as director. Darville accepted that he had been naïve in trusting Gupta and took responsibility for his business decisions, but he felt that Gupta should be held responsible for 9193’s failures to remit GST. Neither Gupta nor the accountant was called as a witness.

Issues raised on the appeal

The court identified that Darville raised five grounds of appeal: three challenging the underlying assessments of 9193 and two challenging his derivative assessment.

As to the corporate assessments, he argued:
(1) The notice of assessment to 9193 was not sent to the proper address and was therefore null and void.
(2) The assessments did not take into account input tax credits (ITCs).
(3) The net tax amount for the periods was incorrectly calculated.

In relation to his derivative assessment, he argued:
(1) The conditions in paragraph 323(2)(a) ETA were not met, so he could not be held liable.
(2) The Minister should have assessed another director instead of him.

He did not raise a due diligence defence under subsection 323(3) or rely on the limitation period in subsection 323(5).

Validity of the underlying corporate assessment and address arguments

The court confirmed that a director assessed under section 323 ETA may challenge the underlying corporate assessments.

On the address issue, Darville said the assessments against 9193 were null and void because the December 19, 2013 notice of assessment was mailed to the wrong address. The notice was mailed to 1995, avenue Alfred-Laliberté, Porte C, Montréal, Québec H3M 1X8, which was Darville’s residence.

Three search results from the Québec enterprise register dated December 21, 2012, November 1, 2013, and November 20, 2015, showed 9193’s registered domicile address as 822-276 rue Saint-Jacques, Montréal, Québec H2Y 1N3. These same search results showed that, under section 33 of the Act respecting the legal publicity of enterprises (ARLPE), Alfred-Laliberté was the elected domicile of 9193, with Darville mandated to receive documents for ARLPE purposes.

The court noted that there is authority supporting the proposition that an assessment is not complete if a notice is sent to a wrong or fictitious address, and that certain provisions of the ETA suggest such an argument can apply under the ETA. However, the judge did not understand Darville’s evidence to be that 9193, or Darville on its behalf, never received the December 19, 2013 notice.

Given that the notice was mailed to Alfred-Laliberté, a registered elected domicile under the ARLPE and Darville’s residence, the court found no basis to conclude that the assessments against 9193 were not completed. The argument that the assessments should be vacated for misaddressing was rejected.

Input tax credits and commercial activity

Darville contended that the Minister failed to account for ITCs in assessing 9193’s net tax, and any reduction in 9193’s net tax should reduce his derivative assessment.

The Respondent argued that 9193 was not entitled to ITCs because it was not engaged in a “commercial activity” within subsection 123(1) ETA, alleging it was part of a false invoicing or “carousel” scheme with MMax Group and Solik. Alternatively, 9193 was said to be disentitled to ITCs because it lacked the documentary support required by subsection 169(4) ETA and the Input Tax Credit Information (GST/HST) Regulations.

During the 2017 hearing, Justice Hogan questioned the Respondent about a possible carousel scheme based on new evidence provided by Darville. He ruled that if the Respondent wished to rely on that argument, the Reply to the Notice of Appeal would have to be amended. The Respondent never amended the Reply. The successor judge held the Respondent to Justice Hogan’s ruling and declined to consider the carousel-scheme argument.

In any event, the judge found that the evidence did not establish that 9193 was involved in a carousel scheme. No witnesses were called from the other corporate entities. There was limited evidence of artificial or fictitious transactions. The court found no evidence that transactions were circular, that the parties acted in concert, that money flowed in a predetermined manner, or that ITC refunds were claimed by those other entities.

The judge accepted that 9193 made supplies in the course of a commercial activity and that it purchased supplies from MMax Group and paid GST on those purchases. Although some invoices raised red flags, the totality of the evidence did not support a finding that 9193 was involved in a false invoicing scheme.

However, entitlement to ITCs still depended on satisfying subsection 169(4) ETA and the ITC Regulations. The Federal Court of Appeal in Systematix Technology Consultants Inc. was cited for the proposition that these documentary requirements are mandatory.

The documentation provided in this case did not meet those requirements. It was only on the first day of hearing that Darville produced any MMax Group invoices, and none had previously been provided to the Respondent or Revenu Québec. Four invoices were put into evidence; one did not relate to 9193 at all. The remaining three, dated February 5, 2013, February 25, 2013, and March 6, 2013, each failed, for different reasons, to meet the ITC requirements.

For the February 5, 2013 invoice, the court found that the indicated purchase amount for taxable supplies paid to MMax Group by 9193 was not accurate. This conclusion was based on an invoice from 9193 to Solik showing that the same taxable supplies were sold to Solik at a reduced price. No explanation was given as to why 9193 would purchase goods from MMax Group and then sell them the next day at a lower price in the course of its business. The judge held that this deficiency meant 9193 had not obtained “sufficient evidence” that would enable the amount of the ITC to be determined, particularly regarding “the total amount paid or payable for all of the supplies.”

The February 25, 2013 invoice was deficient for the same reason and also because the corresponding sale to Solik appeared to have occurred on February 22, 2013. No explanation was offered for what appeared to be a sale of goods before ownership. The court concluded that this invoice did not satisfy the ITC requirements either.

The March 6, 2013 invoice, covering shipping charges, contained no mention of GST/HST paid by 9193, and there was no statement that tax was included in the amount. The judge noted that section 3(b)(iv) of the ITC Regulations requires such a statement where applicable, and therefore there was no evidence of GST/HST having been paid on that invoice. This invoice also did not meet the ITC requirements.

Darville’s position was not restricted to these invoices; he asked the court to remit the matter to the Minister so that ITCs could be recalculated for 9193. In closing submissions, however, his agent stated there were no other MMax Group invoices. No further evidence was provided from which any ITC amount could be determined.

The judge held that the ITC requirements exist for a reason and that neither the Minister nor the court could guess what the proper ITC amounts should be. Because 9193 did not obtain proper supporting documentation that would allow the tax authorities to determine the correct ITC amounts, it would not have been entitled to any ITCs. Accordingly, no adjustment was made to Darville’s assessment on the basis of ITCs.

Net tax calculation and misallocation of reporting periods

The December 19, 2013 notice of assessment against 9193 totalled $48,979.57, consisting of net tax, arrears interest and failure-to-file penalties for the quarterly periods ending March 31, 2013 and June 30, 2013. For the March 31, 2013 quarter, the total assessed amount was $7,882.51; for the June 30, 2013 quarter it was $41,097.06.

The Respondent called Michel Boulet, an auditor at Revenu Québec, though he was not the original auditor on 9193’s file. His evidence, which included the working papers of the original auditor, suggested that the net tax assessed for the March 31, 2013 reporting period was too high.

Those working papers showed that the total net tax assessed for the March 31, 2013 quarter was $7,414.31 and that, in computing that figure, Revenu Québec had included unremitted GST amounts from outside that quarterly reporting period. Specifically, GST amounts of $1,641.90, $1,083.33 and $2,968.56 collected in October 2012 were added into the assessment for the March 31, 2013 period.

The judge noted that, while a notice of assessment under the ETA may assess multiple reporting periods, he could not find authority allowing GST owing from one reporting period to be included in the assessment of another period. He had no reason to doubt that 9193 failed to remit the October 2012 GST amounts, but he concluded those amounts should have been assessed in respect of the reporting period ending December 31, 2012, not included in the March 31, 2013 quarter.

Because the October 2012 amounts of $1,641.90, $1,083.33 and $2,968.56 were not properly part of the reporting periods assessed in the December 19, 2013 notice, the total amount of that notice should have been reduced by their total ($5,693.79), with interest and penalties adjusted accordingly. As Darville’s derivative assessment mirrored 9193’s liability for those quarters, his own assessment had to be reduced by the same net tax amount.

Preconditions to director liability under paragraph 323(2)(a) ETA

In challenging his derivative assessment dated February 12, 2015, Darville argued that the preconditions in paragraph 323(2)(a) ETA were not satisfied and that his assessment should therefore be vacated.

Paragraph 323(2)(a) provides that a director is not liable under subsection 323(1) unless a certificate for the corporation’s liability has been registered in the Federal Court under section 316 and execution on that amount has been returned unsatisfied in whole or in part. The Respondent had the burden of proving these preconditions.

The evidence showed that a certificate under section 316 ETA, dated June 2, 2014, was registered in the Federal Court on June 6, 2014, identifying an unpaid amount by 9193 of $50,095.03. A writ of execution against 9193 was then issued on October 6, 2014. A “Rapport non est inventus” dated November 7, 2014 was prepared by the bailiff responsible for executing the writ.

Darville did not dispute that these steps were taken. Instead, he argued that the Respondent had not shown that execution was returned unsatisfied because the certificate, writ and bailiff’s report identified 9193 as located at the rue Saint-Jacques address. He said that, since he had elected the Alfred-Laliberté address under section 33 of the ARLPE as the domicile for receiving documents, the bailiff should have gone there instead of the rue Saint-Jacques address. On this basis, he argued that the precondition in paragraph 323(2)(a)—that execution be returned unsatisfied—was not met.

The court recalled that, under section 98 of the ARLPE, the registered information in the enterprise register, including the corporation’s domicile, creates a rebuttable presumption in favour of third parties acting in good faith. The Minister is such a third person in good faith absent proof to the contrary.

The judge also referred to paragraph 323(2)(a) and case law stating that it does not impose an obligation on the Minister to make reasonable efforts when directing the sheriff or to search for a specific asset. The Federal Courts Rules on writs of execution are complemented by provincial laws of execution. Because the writ was to be executed in Québec, the judge considered the Civil Code of Québec and Code of Civil Procedure and saw nothing in those enactments requiring a creditor to make reasonable efforts to search for assets.

The judge acknowledged that the Minister could have instructed the bailiff to attend at Alfred-Laliberté, but he found that address to be the appellant’s personal residence rather than the corporation’s domicile. He stated that it was not unreasonable to think a bailiff would be better served attending 9193’s place of business where its assets might be found rather than the personal residence of its director. He also noted that the rue Saint-Jacques address was listed on 9193’s corporate bank account agreements.

In light of this, the court held that the Respondent had met the burden of proving the precondition in paragraph 323(2)(a).

Choice of director and joint and several liability

Darville acknowledged that he was the de jure director of 9193 at all material times, and the evidence confirmed this. His evidence was that Gupta was the mastermind behind 9193’s operations and thus a de facto director. He felt he had been taken advantage of and argued that the Minister should have assessed Gupta instead of him.

The court accepted Darville’s account of Gupta’s involvement but noted that section 323 ETA does not require the Minister to choose among directors based on equitable considerations. Section 323 states that the directors of a corporation may be “jointly and severally, or solidarily, liable together with the corporation” for its failures, which confirms that the Minister is not obliged to assess one director rather than another.

The evidence also showed that Darville was the only de jure director of 9193 during the relevant period of GST non-remittance. Information in the Québec enterprise register indicated Gupta’s role as director and president ended on October 9, 2012. Darville was listed as the sole director on 9193’s banking agreements and on the GST/HST application for registration.

The court therefore found no basis to vacate his assessment on the ground that Gupta should have been assessed instead.

Costs and overall outcome

The Respondent requested costs but provided no grounds in support. Although the appeal was allowed, the judge observed that the Respondent was largely successful. There had been delays in completing the appeal, some attributable to Darville and others beyond his control, including the COVID-19 pandemic and the passing of Justice Hogan. In the circumstances, the court decided not to award costs to either party.

In conclusion, the appeal was allowed, without costs. The assessment of Darville under section 323 ETA is to be reduced to account for the net tax amount of $5,693.79 that was incorrectly included in 9193’s quarterly reporting period ending March 31, 2013, with interest and penalties to be adjusted accordingly. The successful party on the appeal is the appellant, Marvin Darville, and the court ordered that the amount assessed against him be reduced by $5,693.79, with related interest and penalties adjusted.