Double liability for the same corporate debt
In the recent Syed appeal, a company’s director and his sister-in-law ended up liable for the same GST debt of the company.
Syed and his brother ran an Indian restaurant in Montreal. Syed was the only shareholder and director of the company for the years in question. It reported losses year after year, and came to the attention of Revenu Québec (RQ), which administers the GST in Quebec.
The RQ auditor found the business’s reported numbers not to be credible: salaries deducted were too low for the number of employees; utilities were too high for the reported revenues; and input tax credit (ITC) claims were for purchases that were 66-87% of sales instead of the industry average of 30%. All of this led the auditor to apply a “markup” audit methodology: using liquor purchases from the Quebec Liquor Board (which could be reliably determined), calculating what that should map into in total meal and alcohol sales, and calculating GST and Quebec Sales Tax from those revenues.
RQ thus assessed the company for some $50,000 of unreported GST over four years, based on unreported revenues exceeding $700,000. On objection, this was reduced to about $44,000. When the company did not pay its assessment, had closed and had no assets, RQ assessed Syed personally, as director, for its GST debt.
The company had some cash when it closed. It paid $110,000 to Syed’s brother’s wife (Abida). RQ assessed her for the company’s unpaid liability under the “transfer of property” rule, which permits assessment of a person to whom a related person with a tax liability transfers property.
Syed and Abida both appealed. The Tax Court dismissed Abida’s appeal, and allowed Syed’s appeal only to reflect some minor concessions by RQ in the calculation of the company’s GST. The Court found that auditor’s method of calculating the unreported income to be reasonable. Syed as director did not meet the “due-diligence” defence. Abida was also liable, as the company had paid money to her while it owed GST.
Although the Court did not discuss it, this case raises a question about duplicate liability. If Syed is liable as director and Abida is liable under the “transfer of property” rule for the same corporate debt, will either one get credit once RQ has collected sufficient funds from the other? It appears not, because the two provisions do not interact with each other. One hopes that RQ will not proceed to collect the company’s debt twice. Unfortunately, the confirmation of the two appellants’ debts by the Tax Court leaves them each with an established liability that RQ Collections officials may well seek to collect without paying attention to the origins of that liability.
This letter summarizes recent tax developments and tax planning opportunities; however, we recommend that you consult with an expert before embarking on any of the suggestions contained in this letter, which are appropriate to your own specific requirements.