The Story of Melvina Kraft and Ted Friendly

Melvina's Relationship with Ted

Melvina Kraft, a licensed realtor, befriended Ted Friendly, P. Eng, who had considerable experience in managing commercial and residential new construction projects. Unfortunately, in the last economic downturn, Ted suffered considerable losses and had to declare bankruptcy after defaulting on personal guarantees of three building projects. Ted’s bankruptcy left over $1M in debts that are in process of being discharged. In the result, Ted’s credit rating is terrible and he can’t get any new financing for the next project. However, Melvina believes in Ted and she is willing to act as a personal guarantor for a new numbered corporation (666999 Alberta Ltd.). Ted, as an undischarged bankrupt, is disqualified from being a Director of the numbered corporation but Melvina’s spotless credit history means she not only can be a Director but all the banks are willing to lend money to the numbered corporation IF Melvina acts as a personal guarantor.Melvina becomes Director and 50% shareholder (the other 50% are held by Ted) of the numbered corporation. She signs a personal guarantee in favour of the Bank of Undeveloped Mercie that advances $2M in funds. The new project, under Ted’s direction, proceeds to development and construction (Tumble Towers, consisting of 20 strata or “condo” units).Before the project even breaks ground, Melvina pre-sells 15 of the 20 units and takes substantial deposits of 25% on each. If she sells the final five units the numbered corporation will net a profit of $1M to be split between the two shareholders. For Melvina this profit is in addition to her standard realtor’s commission on all of the units she has pre-sold. Melvina then devoted all of her efforts to make the final five sales, leaving the construction management to Ted.Halfway through the construction, Ted ran into problems with the various building trades. Some trades such as the carpenters had better-paying jobs and did not show up to complete the work, delaying the building process. Ted had to offer higher rates to replacement contractors. Costs were also increasing for most of the materials. Then a health crisis struck, causing the site to shut down for 10 weeks. Financingcosts were increasing because the bank raised its interest rate, given the higher risks after the crisis. All the same, Ted, using heroic efforts, was able to complete the 15 pre-sold units and the new owners moved in after paying the full purchase priceon each pre-sold unit. Ted made sure that the Bank was paid on time from those proceeds to get them off his back and to stop the higher interest charges. However, without telling Melvina, he failed to remit the GST on the completed purchases to the Canada Revenue Agency.

Ted's Bankruptcy and Melvina's Proposal

LEGL 320 Law of Business OrganizationsAssignment Final paper7Meanwhile, because of the pandemic, Melvina could not sell any of the five remaining units in Tumble Towers. At about this time she received the first of many calls from CRA demanding remittance of the GST on the 15 units that had been sold. She told CRA that the numbered company had no cash, she was unaware that GST had not been remitted , even though she knew as a realtor that the seller was under a legal obligation to remit GST on the sale of new units such as the 15 pre-sold unitsin Tumble Towers. She told CRA that she was going to abandon the project because it was unlikely that she could sell the remaining units as a result of the pandemic.She suggested that CRA sue the numbered corporation.CRA commenced an action in Tax Court suing her personally as a director of the numbered corporation for her personal liability for unremitted GST citing Section 323 of the Excise Tax Act (the “ETA”). That section states:Liability of directors323. (1) If a corporation fails to remit an amount of net tax as required under subsection 228(2) or (2.3) or to pay an amount as required under section 230.1 that was paid to, or was applied to the liability of, the corporation as a net tax refund, the directors of the corporation at the time the corporation was required to remit or pay, as the case may be, the amount are jointly and severally, or solidarily, liable, together with the corporation, to pay the amount and any interest on, or penalties relating to, the amount.Since the corporation has no money, that leaves Melvina on the hook. Fortunately, Ted made sure the Bank has been paid off from the funds that were received for the purchase price (including GST) received from the 15 units that were pre-sold so Melvina has no liability on her personal guarantee to the bank. Melvina invokes the due diligence defence that is available under subsection 323(3)of the ETA to a director who has been assessed on the basis of liability for a corporation’s unremitted tax. Subsection 323(3) states the following:Diligence323. (3) 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.Prepare a 3-6 pages memo to be submitted individually on Blackboard citing the statutory authority and case law that makes directors liable for corporate taxes.Include a discussion about the case in Federal Court of Appeal in Buckingham v. Canada. 2011 FCA 142 .You should also review Kaur v. The Queen, 2013 TCC 227