Director Wins; Taxpayers Lose Half a Million

In Bekesinski v. The Queen, credibility played a central role in the eventual outcome of the case. Penalties in the amount of $477,546.08 for unremitted income tax and employer contributions were owing pursuant to subsection 227.1(1) of the Income Tax Act (the “Act”).

At issue was whether a backdated resignation of a director could avail him from a corporate debt in respect of the 2001, 2002 and 2003 taxation years for the company. The appellant argued that he resigned as a director from the company on July 20, 2006 and that the Canada Revenue Agency (CRA) was barred from raising the assessment because it was too late, it was beyond the two year limitation period set out in subsection 227.1(4) of the Act. The resignation, however, was backdated to the effective date of July 20, 2006.

Following some financial difficulties, the appellant began using his home address as the registered records office for his corporation. After his purported resignation in 2006 the appellant testified that he gave the document to his wife to place in the corporate record book. Eventually he packed up all the corporate records and stored them in boxes. No one except the appellant and his wife knew about his resignation until he informed the CRA about it in 2011. He stated that he did not advise the creditors of the corporation because based on his personal guarantees they were pursuing him, rather than the Corporation.

The CRA offered no evidence that the resignation was backdated. There was no ink dating (although an ink analysis was done, it was judged inadmissible during an in trial voir dire).

Credibility, therefore, played a central role in this case.

The appellant’s witnesses (the former lawyer and his wife, among others) were not stellar, but they were consistent and credible. They were convincing enough to demolish the Minister of National Revenue’s (the Minister) assumptions and therefore the onus shifted to the Minister to rebut the prima facie case and to prove his assumptions. Since the Minister adduced no evidence, the appellant was entitled to succeed.

At paragraph 48 the Honourable Justice Diane Campbell referred to the Minister’s pleadings as “sloppy and inadequate and detrimental” to the CRA’s success. Justice Campbell questioned the authenticity of the resignation but was compelled to find in his favour because, as she stated, “without the appropriate evidence before me, I must allow the appeal.” She did so with much hesitation, not allowing costs to the victorious side, which is the common practice, because appellant counsel made “blatantly incorrect propositions”.

The result:  close to a half-million dollars of lost revenue on top of the salaries that had to be paid throughout the proceeding.