Tax Court of Canada Accepts Due Diligence Defence in Light of Sexual HarassmentOctober 1, 2020
In an exceptional decision, the Tax Court of Canada recently allowed a corporate director to appeal a notice of assessment based on the defence of due diligence, after finding that she had suffered sexual harassment for years.
Sexual Harassment of Corporate Director Results in Unpaid Invoices
The taxpayer incorporated her business in 2008; she was its sole director and shareholder.
In an otherwise male-dominated industry, she was the only female owner of a roofing company in Canada at the time. She was involved with the daily hands-on activities of the actual roofing, in addition to training employees and dealing with customers.
However, beginning in 2010, the taxpayer was forced to deal with harassment from some of the contractors, who withheld payment from the company, while demanding that she meet sexual favours ranging from a kiss, to a date, to a marriage proposal. Even where payment, in some cases, was eventually received, it impacted the business activities and created cash-flow problems in the interim. Some of the money was never collected. The taxpayer could no longer go to locations to complete the estimates herself due to the ongoing sexual overtures by contractors.
Additionally, a GST/HST remittance issue became a problem and came to light in August 2010 when the taxpayer noticed that $8,000 had been removed from the Company account by the Canada Revenue Agency (“CRA”).
Although one of the company’s bookkeeper’s responsibilities was to attend to collection of contract payments on time, those efforts were continuously frustrated with the ongoing sexual harassment and discrimination. At that point, the taxpayer pursued the idea of having payments made to the company at the job site rather than sending invoices and waiting for payment. However, when the cost quoted to implement this program was in the thousands of dollars, she testified that the decision was made to make payments to the CRA instead.
The taxpayer communicated with the CRA about the steps that she was taking to deal alternatively with the harassment and discrimination issues, but she never diverted revenue to operate the business activities. The taxpayer tried to come up with a payment arrangement with CRA.
Throughout the 2010-2012 period, the taxpayer was in constant communication with the CRA. When there were funds available to make a payment, the company did so rather than pursue other avenues. Because some of the accounts could not be collected, she repeatedly asked the CRA for a summary of the payments made throughout 2010 to 2012, but the company was provided only with its assessment.
After 2011, the company’s general manager telephoned the CRA, requesting that the remittances be done quarterly as opposed to annually as a means of keeping remittances current, but this request was denied. Additionally, the company made numerous proposals to the CRA, in respect to payment arrangements for these GST/HST remittances, but the CRA refused and advised that the entire amount had to be paid.
Toward the end of 2013, the company secured a large job but it didn’t happen, as the contractor refused to pay her because she would not agree to give him a French kiss. At that point, the taxpayer was not prepared to continue with the ongoing sexual harassment and approached her brother to take the business over and, in return, he would be responsible for the GST/HST remittances. Thus, the taxpayer resigned as director on November 1, 2013.
By June of 2014, the taxpayer’s brother had secured a large contract but the CRA seized the corporate accounts in 2015, effectively forcing the company to close its doors.
The taxpayer went to court to appeal a Notice of Assessment dated October 27, 2015 in which the Minister of National Revenue assessed the taxpayer as a director of the company for unremitted net GST/HST, plus penalty and interest, for the reporting periods from January 1, 2010 to December 31, 2012.
Court Accepts Due Diligence Defence
At issue before the court was whether, as director of the company, the taxpayer could successfully rely on a due diligence defence under subsection 323(3) of the Excise Tax Act, which states:
323. (3) Diligence (due diligence defence) – 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.
The court explained that for the taxpayer to rely on a due diligence defence, she had to establish that she had turned her attention to the GST/HST remittances and that she had exercised a duty of care, diligence and skill with a view to preventing a failure by the Company to remit these amounts.
The court stated:
“It is my view that this appeal contains “certain exceptional circumstances and facts” which allow me to conclude that [the taxpayer] may avail herself of the due diligence defence. This was not a case where the [taxpayer] simply carried on the roofing operations hoping that the Company’s fortunes would see a reversal if the economy turned around. There was nothing in the facts before me to suggest that this Company was not busy with roofing contracts or that it was operating in an unfavourable economy. The problems that this Company was encountering revolved around sexual harassment and racial discrimination. Both [the taxpayer] and her office manager […] attempted to deal with and circumvent these issues head on. This was an entirely male-dominated industry across Canada until [the taxpayer] commenced her business. There is no evidence that any GST/HST remittances were diverted to assist with the business activities. It was simply a matter of not being able to collect from many contractors as a female-run subtrade unless [the taxpayer] agreed to return sexual favours for payment of the Company’s completed subcontracts.”
As a result, the court concluded that the taxpayer’s first priority had been directed at remittances, but that due to the exceptional facts involving both sexual harassment and discrimination, the company could not collect on key contracts.
Consequently, the court found that the defence of due diligence was available to the taxpayer and the appeal was allowed.
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