Citation: 2009 TCC 608
Date: 20091202
Dockets: 2006-3622(IT)G
2006-3621(GST)G
2006‑3638(IT)G
2006-3620(IT)G
BETWEEN:
ANTONIO PASCOAL and
NATALIE PASCOAL,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
McArthur J.
[1]
These appeals are from
assessments of the Minister of National Revenue (Minister) pursuant to the
directors liability provisions of section 227.1 of the Income Tax Act (ITA)
and of section 323 of the Excise Tax Act (ETA).
[2]
Although submissions
were made by the Appellants to the effect they were not directors during the
relevant period, they rely primarily on what is known as the due diligence
subsection 227.1(3) of the ITA and subsection 323(3) of the ETA.
They were represented by separate counsel. I will refer to the two Appellants
as Antonio and Natalie, commencing with Antonio’s three appeals.
[3]
Antonio immigrated to
Canada from Portugal as a young man who, for our purposes, was
illiterate. He worked most of his life in construction as a mason and
scaffolding expert. He had three children, Tony, Victor and Natalie. From 1989
to 2001, he worked for AJV which was controlled by his son Tony. He retired in
2001 when he was in his late 60s.
[4]
He was a de jure
(at law) director of two corporations AJV Construction Ltd. (AJV) and ANVIC
Construction Ltd (ANVIC). The Minister assessed him $446,115 in respect of
unpaid income tax deductions, interest and penalties payable by AJV, and
$205,254 in respect of unpaid income tax deductions, interest and penalties
payable by ANVIC. He was further assessed $191,379 for unremitted GST,
penalties and interest payable by AJV. The assumptions of fact by the Minister
are similar in all three Replies.
[5]
Antonio’s position
includes that he was not a director of AJV or ANVIC during the relevant period.
Alternatively, he exercised the degree of care, diligence and skill to prevent
the failure that a reasonably prudent person would have exercised in comparable
circumstances pursuant to subsection 227.1(3) of the ITA and
subsection 323(3) of the ETA.
Position of the Respondent
[6]
Counsel for the
Respondent presented a comprehensive argument which merits being included in
some detail as follows.
[7]
Section 227.1 of
the ITA and section 323 of ETA address a taxpayer’s position
to the effect “despite being a director, I did nothing and therefore am not
liable.”(the ostrich approach). When you have signed documents making you a
director, you cannot deny being director on the premise that you did not do
anything as a director. Section 19 of the Ontario Business Corporations
Act (OBCA) provides that once you are a de jure director,
saying that you are not a director in fact is not a defence. If you have not
resigned, you are a de jure director because you have taken on that
quality in law.
[8]
Counsel continued by quoting
Soper v. Canada,
where Robertson J. describes the due diligence defence as it relates to section 227:
A director is not obliged to give continuous attention to the
affairs of the company, nor is he or she even bound to attend all meetings of
the board. However when, in the circumstances, it is reasonably possible to
attend such meetings, a director ought to do so. It would be silly to pretend
that the common law would stand still and permit directors to adhere to a
standard of total passivity and responsibility. The law today can scarcely be
said to have raised the principle that the less a director does or knows or
cares, the less likely it is that he or she will be held liable.
At page 16, he sets out how a director could satisfy
the duty to prevent a failure to remit.
…a director may… take ‘positive action’ by setting up controls to
account for remittances, by asking for regular reports from the company’s
financial officers on the ongoing use of such controls, and by obtaining
confirmation at regular intervals that withholding and remittance has taken
place as required by the Act. See Information Circular 89-2, supra at paragraph
7.
…establishment and monitoring of a trust account from which both
employee wages and remittances owing to Her Majesty would be paid.
[9]
In referring to “due
diligence” he continued that the Appellants should have known that there was a
potential problem. They were aware that Tony and Victor had an argument,
resulting in a fight, in the company office over the finances. Had Antonio or
Natalie asked, Victor would have told them about the financial situation. The key
words in subsections 227.1(3) and 323(3) are to exercise diligence to
“prevent the failure.”
[10]
Antonio took out a
$150,000 mortgage on his home to provide seed capital to AJV, with $100,000
being advanced in 1989. The fact that the amount had never been repaid years
later serves as indicia that the company was in trouble. When the fight between
Tony and Victor occurred at the company office, Antonio and Natalie should have
known that there was clearly an issue with the company. He could have asked at
any point whether his sons were remitting tax and GST to the government.
[11]
Upon incorporation on December
21, 1994, Antonio, Natalie, and Victor were the only shareholders of ANVIC. Tony
had signed union papers so he could not be a director of ANVIC, a non-union corporation
set up to operate in the event of a union strike at AJV, a union corporation. Tony
believed a third director was needed, and Natalie was recruited. A non-union
shop, ANVIC, could bid on smaller jobs and bid lower than the union shop AJV. Natalie,
Antonio and Victor transferred their shares to Tony in 2001. At the outset,
ANVIC was controlled by Tony and Victor until their falling out. Natalie was a de
jure director throughout until it ceased operation on March 31, 2005.
[12]
Her primary argument is
one of due diligence. I have no difficulty accepting that Natalie was de
jure or legal director during the relevant periods and subject to being
liable under section 227.1 of the ITA. I accept her evidence that
she agreed to be a director upon Tony’s undertaking that he would notify her
before ANVIC became active. He breached that promise without her knowledge. She
was not aware that ANVIC was carrying on business. She had no signing
authority, never attended to business, never asked her brother Tony if ANVIC
was active. She was a full time hospital worker with no business experience.
She relied absolutely on her brother’s undertakings. The question is: was this
sufficient to establish due diligence. Counsel for the Respondent answers - no.
The arguments of Antonio and Natalie are deserving of consideration and the
Respondent’s arguments should be scrutinized in light of the established
jurisprudence.
[13]
Antonio submitted that
he resigned as a director on February 28, 2001 as evidenced by Exhibit A-1, Tab
3. This document states he resigned as a shareholder. His counsel did not
actively pursue this argument. There is an October 2004 resignation by
Antonio from AJV, but much of the indebtedness had already accrued.
[14]
The amounts are not
disputed, nor is the liability of the company. The requisite conditions to
assessing the Appellants, such as the filing of a certificate in the Federal
Court of Canada and the unsatisfied return of the execution have also been
satisfied.
[15]
Again, the Appellants’ primary
defence is that they exercised the degree of care, diligence and skill to
prevent the failure of the corporation to make the remittances that a
reasonably prudent person would have exercised in comparable circumstances. The
words appear in both subsection 323(3) of the ETA and subsection
227.1(3) of the ITA.
[16]
Antonio became a
director of AJV in 1989 and of ANVIC on December 21, 1994. Both corporations
ceased operations on March 31, 2005. Antonio ceased working for AJV in February
2001 when he resigned as a shareholder thinking he had resigned from all its
functions including employment. It is not clear when if ever, he was employed
by ANVIC. When it came to office work, directorship and paper work of any kind,
he relied without qualification, on his comparatively highly educated son Tony
who ruled the corporate management. I have no doubt that he was proud of Tony’s
educational achievements. He did not understand the clerical work and did not
have the background to understand the working of remittances. Antonio was not
aware of default until he was advised by Canada Revenue Agency that he was
being held liable. Both Natalie and Tony corroborated his evidence that, for
the most part, he was no longer involved in either corporation after February
2001.
[17]
Antonio relied on Tony
for the banking, bookkeeping, signing authorities, remittances and related
office duties. He never attended a corporate meeting. He was solely a
construction worker. It can be inferred that his efforts to prevent the failure
to remit was by way of facilitating $100,000 to $150,000 in financing to AJV
and to applying his years of experience in construction to AJV as an employee
at least up to 2001.
[18]
Antonio and Natalie
were outside directors and Tony was an inside director as those expressions are
used in Soper. Natalie did not have signing authority with ANVIC and was
a full time hospital worker during the relevant period. She was entitled to
rely on her brother’s undertakings that he would not commence business under
ANVIC without consulting her. She and her father were in no position to
influence the events and in particular to ensure that the GST and payroll
remittances be paid.
[19]
Consideration must be
focused on whether the Appellants have exercised the degree of care, diligence
and skill that a reasonably prudent person would have exercised in comparable
circumstances. In Clouthier v. MNR,
Bowman J. set out a reasonable approach that is as relevant now as it was in
1993 and is consistent with cases in the Federal Court of Appeal which have modified
more stringent standards. He stated the following:
The question therefore becomes one of fact and the court
must to the extent possible attempt to determine what a reasonably prudent
person ought to have done and could have done at the time in comparable
circumstances. Attempts by courts to conjure up the hypothetical reasonable
person have not always been an unqualified success. Tests have been developed,
refined and repeated in order to give the process the appearance of rationality
and objectivity but ultimately the judge deciding the matter must apply his own
concepts of common sense and fairness.
... It is easy to be wise in retrospect and the court must
endeavour to avoid asking the question 'What would I have done, knowing what I
know now?' It is not that sort of ex post facto judgment that is required here.
Many judgment calls that turn out in retrospect to have been wrong would not
have been made if the person making them had the benefit of hindsight at the
time.
In determining whether that standard has been met one must
ask whether, in light of the facts that existed at the time that were known or
ought to have been known by the director, and in light of the alternatives that
were open to that director, did he or she choose an alternative that a
reasonably prudent person would, in the circumstances, have chosen and which it
was reasonable to expect would have resulted in the satisfaction of the tax
liability. That the alternative chosen was the wrong one is not determinative.
In cases of this sort [the failure] usually results either from the making of a
wrong choice in good faith, or from deliberate default or willful blindness on
the part of the director.
[20]
In Soper,
Robertson J. found that more is expected of individuals with superior qualifications
and added that whether a director has met the standard of care is a question of
fact to be resolved in light of the personal knowledge and experience of the
director.
[21]
This case resembles Fitzgerald
et al. v. MNR,
wherein the father dominated his family, as Tony did in these appeals. The
following by Mogan J. in Fitzgerald applies equally to the present
appeals.
It appears to me that the Appellants were directors in law (i.e.,
their names appear in the Company’s minute book as directors) but they were not
in fact directors. They never met as directors. They never acted alone or in
concert as directors. They had no knowledge of the management or administration
of the Company’s business. They had no equity in the Company. They had no way
of compelling the fifth director (Eugene Fitzgerald, the sole shareholder) to
disclose any information concerning the Company’s financial affairs. They were
directors in law only because of their family connection to Eugene Fitzgerald.
Although any one of them could have resigned as a director if he or she had
thought of it, such resignation would have been a source of family friction
and, from the viewpoint of the male Appellants (the three sons), the idea of
resigning as a director would not have occurred to them before the idea of
quitting their employment.
[22]
Tony was the educated
one highly respected and trusted wholly by his father and Natalie. They appear
to have been bullied by Tony to do as he directed. The facts in Dirienzo v.
The Queen
above also resembles this case. The Appellant Dirienzo totally trusted his
uncle, as did the Appellants with Tony. Bowman J. found that the appropriate
degree of care, skill and diligence required for a successful due diligence
defence is much lower when the directors are family members. I adopt the
following paragraph in Dirienzo as my own.
Do the
conclusions stated above absolve the appellant of his responsibilities under
section 227.1? On one view of the matter, it could be said that he did not
exercise the degree of care, diligence and skill contemplated by subsection
227.1(3) because he exercised none at all. On the other hand, he was a mere
nominal director with no powers, no responsibilities and no say in the way the
corporation was run. It is all very well to adopt a hectoring, moralizing tone
and say that if people take on the responsibility of corporate directorships
they should be expected to assume all the consequences of such a position. I am
not however concerned with what the situation would be in a perfect world. I
have to make a determination of the facts as they exist in a highly imperfect
world where malleable young family members are bullied by domineering
patriarchs.
[23]
The Soper case
indicates that subsection 227.3(1) standard of care is objective because
it looks at the reasonable person, but subjective because it takes into account
individual considerations, like skill and the idea of comparable circumstances.
Natalie did not ask questions regarding ANVIC because she did not know it was active.
She trusted her brother to volunteer information. Trust in families is why we
do not apply same standards among family members. Natalie was prudent and
reasonable in relying on an undertaking given by her brother that if ANVIC was
activated, she would get out of it as a director.
[24]
The Respondent
submitted that the argument and physical fight in the office should have
signalled financial troubles. The fact that a fight took place at the company
office does not necessarily mean it had to do with company affairs, specifically
financial affairs.
[25]
The Respondent added
that the visit to the lawyer regarding cheque signing authority was an
opportunity to ask questions. I accept the Appellant’s submission that the
meeting was merely to maintain family harmony, not to examine the financial
circumstances of the corporations.
[26]
The Respondent is
grasping at straws to conclude that the mortgage not being paid off was a sign
of financial trouble.
[27]
The Respondent gave
examples of how a director can satisfy the due diligence requirement, like
setting up a control system and a reporting system such that the directors can
find out whether remittances to the government are occurring. ANVIC and AJV
were too small to have financial officers and an established system of
governance.
[28]
To conclude, Antonio
with his limited abilities and business knowledge, was reasonable to rely on
his son to apprise him of his duties and obligations as a director when they
arose. Natalie who had nothing to do with ANVIC other than being a director on
paper, was reasonable and prudent in relying on an undertaking given by her
brother that if the corporations were activated, she would get out as a
director.
[29]
The appeals are allowed,
with costs, and the assessments are vacated.
Signed at Ottawa, Canada, this 2nd day of December 2009.
“C.H. McArthur”
Email this Content