Date: 20020605
Docket:
2000-946-GST-G
BETWEEN:
VITO
PERRICELLI,
Appellant,
and
HER MAJESTY THE
QUEEN,
Respondent.
Reasonsfor
Judgment
Miller, J.
[1]
In the late 1980s the Appellant, Mr. Vito Perricelli,
and two friends, Mr. Cuthbert and Mr. Lishman, owned
and operated 642599 Ontario Limited (the Company) which
carried on a small cleaning business. As the business could not
support the three of them, Mr. Perricelli, in the summer of
1990, "left the business". In the following few years
the Company was not able to meet its goods and services tax (GST)
obligations, and in 1998 the Minister of National Revenue
(the Minister) sought payment for unpaid GST remittances
from Mr. Perricelli as a director of the Company. The issue
is whether, in leaving the Company in 1990, Mr. Perricelli
ceased to be a director. If not, did he in the ensuing years act
with due diligence such that he can avail himself of the
protection of subsection 323(4) of the Excise Tax Act
(the Act)?
Facts
[2]
Mr. Cuthbert was the first of the three businessmen to be
involved with the Company, having an ownership and management
role as far back as the early 1980s. Mr. Lishman came on
board in the mid-1980s as a salesman and in 1988 acquired
shares from Mr. Perricelli and Mr. Cuthbert, resulting
in a one-third ownership for each of them.
Mr. Perricelli's involvement with the Company began in
1987: he indicated he invested $11,000 in total in the Company.
Mr. Perricelli joined the Company as a result of his
dealings with Mr. Cuthbert, while Mr. Perricelli worked
at Niagara Credit Union as a loan manager. Mr. Perricelli
had a number of years of experience in the finance industry,
culminating with his job at Niagara Credit Union from 1981 until
1987, when he decided to join Mr. Cuthbert in the cleaning
business.
[3]
Given Mr. Perricelli's background, his role with the
Company was as an administrator and as the financial officer. He
was appointed secretary-treasurer. Mr. Lishman described
Mr. Perricelli as the "paper man". He was the
primary contact with the Niagara Credit Union and likewise he
dealt with the Company's accountant. This allowed
Mr. Cuthbert and Mr. Lishman to concentrate on
sales.
[4]
The three owners/employees of the small business signed a
Shareholder's Agreement, dated October 1, 1989.
The relevant provisions are:
3.1
Agreement.
The
parties agree to cause such meetings of the Corporation to be
held, resolutions passed, by-laws enacted, agreements and other
documents signed and things performed or done as may be required
to provide for the following arrangements in connection with the
affairs of the Corporation.
(a)
Number of Directors. — the affairs of the
Corporation shall be managed by a Board of Directors which shall
consist of three (3) directors. Each shareholder shall be
entitled to elect one director and no more.
...
(d)
Directors' Votes — the by-laws of the
Corporation shall further provide that each director shall have
one (1) vote at any meeting of the Board of Directors and that
the Chairman shall not have an additional or casting
vote.
(e)
Directors' Meetings — the by-laws of the
Corporation shall further provide that a quorum for a meeting of
directors shall be three (3) directors and every question shall
be determined by not less than two (2) of the votes cast on the
question. There shall be no second or casting vote. The
Corporation's by-laws shall permit a director to participate
in a meeting of directors by means of such telephone or other
communications facilities as permit all persons participating in
the meeting to hear each other and a director participating in
such a meeting by such means shall be deemed to be present at
that meeting.
(f)
Shareholders' Meetings — the by-laws of
the Corporation shall further provide that a quorum for a meeting
for shareholders of the Corporation shall be three (3)
shareholders represented in person or by proxy. At all meetings
of the shareholders every question shall be determined by not
less than any two shareholders represented at the meeting who are
entitled to cast votes on the question.
...
9.14
Amendments This Agreement may be amended by the
unanimous consent of the parties hereto which shall be binding on
both parties to this Agreement.
[5]
According to both Mr. Lishman and Mr. Cuthbert, in June
1990 Mr. Perricelli met with them to indicate that as the
business could not economically support the three of them, he
would leave. This appeared to make sense to all three of them, as
Mr. Perricelli had other interests he could pursue. He was
involved in running a restaurant with his wife in 1990, though
the restaurant, being in the Niagara area, was only open on a
seasonal basis. He also had a dealer's licence, which allowed
him to engage in a side hobby, as he called it, of selling cars.
As well, he owned some property on which he grew grapes.
Mr. Perricelli felt the economy was headed for a recession
and the Company was top heavy with the three of them involved,
all drawing from the Company's coffers.
[6]
At this point, Mr. Perricelli believed the Company to be in
pretty good shape, all remittances having been made up to date;
it was a matter of the business being too small. No written
resignation was tendered by Mr. Perricelli as either a
director or an officer, though Mr. Perricelli recalled
specifically having advised the others of his resignation in
August 1990.
[7]
After the summer of 1990, Mr. Perricelli did not continue to
play an active daily role in the business. He no longer drew any
funds from the Company, other than the occasional $100 per day
for working on the equipment. As well as the "paper
man", he had a greater mechanical aptitude than the other
two and was thus called upon for such repair type work. This was
infrequent.
[8]
Mr. Perricelli admitted that he would occasionally sign a
cheque if he happened to be in the office doing repair work. He
further acknowledged that he would have the occasional casual
chat about how the business was doing. The three businessmen
did not let Niagara Credit Union know of the withdrawal from the
business by Mr. Perricelli, as he was the strong link
between the business and the Credit Union. In 1993, the debts of
the Company with Niagara Credit Union were consolidated. The
following documents dated November 22, 1993
were produced:
—
Niagara Credit Union Business Account Information Sheet showing
just Mr. Cuthbert and Mr. Lishman's
names;
—
Waiver of Protest to Niagara Credit Union signed by
Mr. Lishman and Mr. Perricelli;
—
Borrowing By-law signed by Mr. Perricelli as secretary, and
Messrs. Perricelli, Cuthbert and Lishman as directors and as
shareholders, with the additional signature of Barbara Croft as a
shareholder (in fact she was never a shareholder but was the
office secretary);
—
Certificate of Corporate Authority to Niagara Credit Union signed
by Mr. Perricelli as secretary;
—
Resolution of Directors, RE: Trade Name, unsigned by any director
but certified a true copy by Mr. Lishman as president and
Mr. Perricelli as secretary.
[9]
Mr. Perricelli was forthright as to why he let his name and
signature appear on these documents, and that was because he did
not want the Credit Union to know he was no longer involved, as
they might call in his guarantee. The loan was ultimately paid
off by the Company in 1996. As well as the above documents, a
copy of a Resolution of directors
with respect to the banking arrangements at Niagara Credit Union
was produced, dated September 26, 1994, showing
Mr. Lishman as president, Mr. Cuthbert as
vice-president and Mr. Perricelli as secretary, and
further indicating they all had signing authority.
[10]
Finally, a Certificate of Incumbency
to Niagara Credit Union, dated November 29, 1994, was
produced showing Mr. Perricelli as secretary-treasurer, but
only Mr. Lishman and Mr. Cuthbert as
directors.
[11]
The Appellant's evidence was that as of the summer of 1990,
he believed he ceased to be a director. Mr. Cuthbert and
Mr. Lishman handled his duties after he left, though both
acknowledged they were not prone to paying much attention to
details. Mr. Terry Waud, a chartered accountant, who started
handling the Company's statements in 1991, testified that he
never dealt with Mr. Perricelli, had not met him until the
day of trial and had always presumed only Mr. Cuthbert and
Mr. Lishman were involved in the operation of the business.
Mr. Waud could not explain why Mr. Perricelli's
name showed up as a contact person on the Company's 1994 tax
return, other than as an oversight. He stated he had no reason to
believe, in any of his dealings with the Company, that anyone
other than Mr. Cuthbert and Mr. Lishman were
directors.
[12]
Mr. Waud also testified that he attended Revenue
Canada's offices in Hamilton with Messrs. Cuthbert and
Lishman to discuss the GST liability. There was no discussion
from officials at Revenue Canada at that time regarding
director's liability, though Mr. Waud did raise that
separately with Mr. Cuthbert and Mr. Lishman.
Mr. Lishman also met officials of Revenue Canada without
Mr. Waud and was advised of the possibility of
director's liability. He never passed this information on to
Mr. Perricelli as he did not believe it was relevant to him.
Mr. Perricelli stated that he did not have any knowledge of
a GST problem until late 1994, in casual conversation with
Mr. Cuthbert. When asked why he did not take any action, he
responded that he did not feel he had any authority to deal with
it.
[13]
The Appellant presented a copy of an Application for Cash
Surrender Value
submitted to London Life, dated October 12, 1991 for the removal
of Mr. Perricelli as an insured. Mr. Lishman indicated
that Mr. Perricelli's insurance was no longer required
as he was no longer a director. Mr. Cuthbert stated that
insurance was not required as Mr. Perricelli was no longer a
partner.
[14]
In November 1991, the Company borrowed $12,000 from a company
controlled by Mr. Lishman's in-laws. A promissory
note for the $12,000 was produced.
Both Mr. Cuthbert and Mr. Lishman guaranteed the note.
Mr. Perricelli did not. Mr. Perricelli's financial
involvement was restricted to his connection with Niagara Credit
Union, including a guarantee of the Company's indebtedness.
Without Mr. Perricelli's support, Mr. Lishman and
Mr. Cuthbert would have been unable to continue to rely upon
Niagara Credit Union.
[15]
Mr. Perricelli, Mr. Lishman and Mr. Cuthbert all
were adamant in their understanding that after the summer of
1990, Mr. Perricelli had no authority to manage the
business, supervise employees, determine who got paid, how
cheques were made out or for how much, or have any say whatsoever
in how the business was conducted. When the Shareholder's
Agreement was reviewed with them, they could only acknowledge
what the document stated. No written amendment was ever made to
the October 1, 1989 Shareholder's Agreement.
[16]
The Respondent produced annual return forms for the Company filed
with the Ontario's Companies Branch in May 1993 and January
1994. These forms showed Mr. Perricelli as a director.
Mr. Cuthbert signed one form and Mr. Lishman signed the
other. Mr. Lishman simply explained it as a mistake.
Mr. Cuthbert acknowledged they had never advised the law
firm, who prepared the annual returns, of
Mr. Perricelli's withdrawal from the business.
Mr. Cuthbert would go into the lawyer's office when
called and sign the documents left at the receptionist's desk
and leave. It was just not that important to him.
Mr. Perricelli had no idea documents were continuing to be
filed at the Ontario's Companies Branch showing him as a
director.
[17]
In 1996, both Messrs. Cuthbert and Lishman declared
bankruptcy.
[18]
The Minister assessed the Appellant on September 9, 1998 for
the unremitted GST for the period of July 31, 1991 to
January 31, 1996.
Appellant's
Argument
[19]
The Appellant's position is that he ceased to be a director
in the summer of 1990 and, therefore, was not a director at the
relevant time for the purposes of any possible director's
liability. If I find he was a director, then the Appellant
maintains he escapes liability as he acted with due
diligence.
[20]
The Appellant's counsel, Mr. McCann, argued that
Mr. Perricelli was neither a de facto nor
de jure director at any time after the summer of
1990. With respect to the de jure position,
Mr. McCann claimed it was not necessary for a director to
resign to cease to be a director; in effect, neither
section 121 nor section 122 of the Ontario Business
Corporations Act
applies. Those sections read:
121(1) A director of a
corporation ceases to hold office when he or she,
(a)
dies or, subject to subsection 119(2), resigns;
(b)
is removed in accordance with section 122; or
(c)
becomes disqualified under subsection 118(1).
121(2) A resignation
of a director becomes effective at the time a written resignation
is received by the corporation or at the time specified in the
resignation, whichever is later.
122(1) Subject to
clause 120(f) the shareholders of a corporation may
by ordinary resolution at an annual or special meeting remove any
director or directors from office.
122(2) Where the
holders of any class or series of shares of a corporation have an
exclusive right to elect one or more directors, a director so
elected may only be removed by an ordinary resolution at a
meeting of the shareholders of that class or series.
122(3) Subject to
clause 120(a) to (d), a vacancy created by the
removal of a director may be filled at the meeting of the
shareholders at which the director is removed or, if not so
filled, may be filled under section 124.
[21]
Mr. McCann argued that Mr. Perricelli was not a
director because the shareholders never appointed him as such at
any time after the summer of 1990, and the appointment of
directors is the responsibility of shareholders. Neither did
Mr. Perricelli ever consent after the summer of 1990 to act
as a director. With respect to the Shareholder's Agreement
that apparently still contemplated the directorship of the
Appellant, Mr. McCann urged me to find that the unanimous
Shareholder's Agreement was verbally unanimously amended to
reflect the removal of Mr. Perricelli as a
director.
[22]
Regarding the tax returns and annual returns which indicated
Mr. Perricelli was a director as late as 1994,
Mr. McCann discounted them as mistakes, and in any event the
filing of corporate returns is not determinative of whether
someone is a director. Mr. Cuthbert and Mr. Lishman
both acknowledged they were poor record keepers and this fits
with their less than diligent efforts in that regard.
[23]
Mr. McCann also argued that Mr. Perricelli was not a
de facto director. The role of a director is to
manage or supervise the management of the business and affairs of
a company. According to Mr. McCann, Mr. Perricelli
exhibited no signs of such behaviour after the summer of 1990.
More importantly, he never believed he had any such authority.
This was corroborated by both Mr. Cuthbert and
Mr. Lishman. The only glitch in that argument relates to the
ongoing involvement of Mr. Perricelli with Niagara Credit
Union. Mr. McCann went through all the documents produced in
evidence relating to Niagara Credit Union and suggested only the
one passing the by-law clearly identified
Mr. Perricelli as a director, but that document itself was
flawed by showing incorrect shareholders.
[24]
Further, in connection with the representations to the Niagara
Credit Union generally, Mr. McCann argued that maybe Niagara
Credit Union could impose the doctrine of promissory estoppel as
against the Company and Mr. Perricelli,
vis-à-vis Mr. Perricelli's position
as a director, but it was not open to a third party such as
Canada Customs and Revenue Agency to taint Mr. Perricelli
with that brush. Mr. McCann went through each of the
November 22, 1993 Niagara Credit Union documents and pointed
out that a number of them were ambiguous.
[25]
With respect to the due diligence argument, Mr. McCann did
not rely on the inside versus outside distinction, as propounded
by Justice Robertson in Soper v. Canada.
He maintained that Mr. Perricelli simply acted as a
reasonably prudent person, not believing himself to be a
director, would have acted. The steps he took while he believed
himself to be a director were indeed positive in that he left the
Company, decreasing significantly the Company's salary
expense.
[26]
The Appellant's counsel relied on Judge Christie's
comments in Cybulski v. M.N.R.,
as follows:
... In enacting subsection
227.1(3) Parliament established an exonerating standard of
conduct the presence of which is to be determined in particular
cases by the actual relevant facts and not by fixing to a
taxpayer knowledge of a somewhat esoteric point of corporation
law that in reality is probably not within the actual knowledge
of a good number of legal practitioners. While at first blush
subsection 227.1(3) suggests a requirement for positive assertion
on the part of a taxpayer in order to bring himself within its
ambit, this is not necessarily so in all situations. It may well
be that a taxpayer would not take positive steps in some
circumstances and still be correctly regarded as having
"exercised" that degree of care, diligence and skill
expected of a reasonably prudent person that creates the
protection from liability afforded by the subsection. That
obtains in respect of this appeal. I am satisfied that reasonable
grounds existed for the appellant's belief that he had
severed his connection with the Company as director and
secretary-treasurer and concomitantly his responsibility for it
when he placed his resignation in the hands of the Company's
president and it was accepted by him. This relieves him of
vicarious liability for the Company's default in remitting
the deductions at source and this is so a fortiori where,
as here, the appellant was effectively barred from exercising
influence over the management of the company by the person in
de facto control of its affairs after the resignation was
submitted.
[27]
I was also referred to Judge Hamlyn's comments in
Ferguson v. Canada,
in which he found there was insufficient documentary or
significant viva voce evidence to rebut the
assumption the appellants were directors. However,
Judge Hamlyn accepted that the appellants did consider
themselves directors and indicated:
In this case, I find that the Appellants, given their personal
view that they were not directors, did not exercise nor were
expected from the corporation's point of view to exercise
power or control over the actions of the corporation. Moreover,
there is little or no evidence other than exhibit R-1, tab 7, to
lead to a conclusion the Appellants were wilfully blind as to
their role, obligations or duties. Thus, I conclude they cannot
be held liable for the failure of the corporation to remit
GST.
Respondent's
Argument
[28]
On the issue of whether Mr. Perricelli was a director, the
Respondent rejected the application of section 119 or
section 122 of the Ontario Business Corporations Act,
as this was not a matter of election to the board or removal from
the board, but was simply a case of whether or not
Mr. Perricelli resigned in accordance with section 121.
As there was no written resignation, there was no effective
resignation; consequently, Mr. Perricelli continued as a
de jure director.
[29]
Further, by his actions in holding himself out to the Niagara
Credit Union as a director in 1993, and by not notifying the
Company's lawyers of his resignation, Mr. Perricelli
continued as a de facto director. This is supported
further, the Respondent contends, by the fact Mr. Perricelli
continued to sign cheques and did nothing to extricate himself
from the Shareholder's Agreement. The Respondent went further
and maintained Mr. Perricelli was an inside director as that
term was used in the Soper case. In support of this
contention, the Respondent cited the Tax Court of Canada judgment
in Stein v. Canada,
affirmed on appeal, and specifically the following
passage:
The Federal Court of
Appeal explained in Soper that the directors of a
corporation do not all have the same liability. It drew a
distinction between inside and outside directors and stated that,
in each of these two categories, a director's personal
experience and role within the corporation must be considered.
The Federal Court of Appeal did not define what it meant by
"outside director" but did define what it meant by
"inside director". An inside director is one who is
involved in day-to-day management and influences the conduct of
its business affairs (paragraph 33 of Soper,
supra). I can accept that the appellant was not involved
in the day-to-day management of the business. However, as she
guaranteed the business's line of credit, was the only other
shareholder and was authorized to sign cheques, it would be more
difficult to accept that she did not influence the conduct of the
company's business affairs. In the circumstances, she could
be considered an inside director. ...
[30]
Mr. Perricelli, according to the Respondent, could influence
the financial management of the Company by the hammer he held in
retaining the connection with Niagara Credit Union. This vested
interest in the well-being of the Company was sufficient to give
him influence, which he determined not to exercise. The thrust of
the Respondent's argument with respect to due diligence, was
that Mr. Perricelli knew or ought to have known of the
Company's financial woes, especially as they pertained to the
GST remittances, yet he did nothing. This was distinguishable
from the Cybulski case where the director was barred from
doing anything by the others.
Analysis
De
jureDirector
[31]
In addressing Mr. Perricelli's liability pursuant to section
323 of the Act it is first necessary to determine if he
was a director at the relevant time. I will review first his
status as a de jure director. This requires looking to the
provisions of the Ontario Business Corporations Act. The
Respondent maintains that the only way to resign is in accordance
with subsection 121(2) of that Act. This reads as
follows:
121(2)
A resignation of a director becomes effective at the time a
written resignation is received by the corporation or at the time
specified in the resignation, whichever is later.
[32]
I am satisfied Mr. Perricelli resigned in the summer of
1990. He did so when the three directors and shareholders were
all together. It is a matter of whether this resignation was
effective in accordance with the laws of Ontario. Did any one of
the three men utter the words: "Notice of this meeting is
waived"? Unlikely. Did Mr. Cuthbert and
Mr. Lishman say: "We accept Mr. Perricelli's
resignation and hereby elect the two of us as ongoing
directors"? Again, unlikely. But did all three leave the
meeting with an understanding that Mr. Perricelli would no
longer serve in his capacity as a director?
Absolutely.
[33]
The effect of that meeting can be viewed in a couple of ways.
First, that there was an immediate verbal resignation.
Respondent's counsel advises me that subsection 121(2)
should be read as a strict requirement that resignations must be
in writing to be effective. She refers me to Mastromonaco v.
The Queen,
though the Federal Court of Appeal, I do not believe went that
far. Justice Stone stated:
The learned Tax Court Judge found that the appellant did become a
director of the corporation from August 1, 1992 and remained
so during the assessment periods. In making that finding,
he was obviously impressed by the lack of any documentary
evidence to support the appellant's claim that he had ceased
to be a director in March 1993. In our view, that
conclusion was open to the Tax Court Judge on the evidence before
him. Moreover, it appears to have turned in large measure of his
appreciation of the appellant's credibility as a
witness.
(Emphasis added)
[34]
To rely on the comment that Judge Beaubier was impressed by
the lack of documentary evidence, does not strike me as a weighty
endorsement of a strict requirement of a written resignation. As
the Court indicated, credibility was clearly a factor. In the
case before me, I have absolutely no reason to doubt
Mr. Cuthbert, Mr. Lishman and Mr. Perricelli's
testimony that Mr. Perricelli ceased to be a director
effective the summer of 1990.
[35]
Certainly if there is a written resignation, the time of its
effectiveness is governed by subsection 121(2). I do not
interpret that provision as precluding the possibility of a valid
resignation in circumstances such as this where all the
shareholders, who also happened to constitute all the directors,
meet and agree that one of their number is no longer to continue
as a director. The wording of subsection 121(2) is
sufficiently ambiguous. I was not referred to any case in which
the provision has been interpreted to read that the only legally
effective way to resign is in writing, and that consequently, an
oral resignation in the presence of all the directors and
shareholders is ineffective.
[36]
There is a case, however, which was not addressed by the parties
that I must raise. That is the decision of Rip J. of this Court
in Giglio v. Canada,
in which he stated:
... Mr. Giglio never put
his resignation in writing and never delivered anything in
writing to an officer of Nu-West indicating his intention to
resign, if not his act of resigning, as director of Nu-West.
Nu-West never received notice of Mr. Giglio's actual
resignation, although it may well be that Mr. Giglio had informed
Mr. Decaria, Nu-West's president, that he intended to resign.
All that took place was that Mr. Giglio instructed his solicitor
to prepare documentation to resign; there is no evidence that
such documentation was prepared. There is evidence that Mr.
Giglio never signed a letter or notice of resignation. At
the same time Mr. Giglio was a knowledgeable person who realized
that for his resignation to take effect, it had to be in
writing. (It also had to be delivered to Nu-West.) That
is the reason he instructed Mr. Magerman to prepare the necessary
documents.
(Emphasis added)
I do not read this
as an unrestricted interpretation of subsection 121(2) of the
Ontario Business Corporations Act that requires in all
cases a written resignation for a resignation to be effective.
This was more an acknowledgement that Mr. Giglio appreciated
that in his situation a written notice was
required. This was not a circumstance of Mr. Giglio attending a
meeting of all directors and shareholders and announcing his
departure. Rip J. did not comment on such a circumstance, as it
was not before him.
[37]
The second view to take of what happened in the summer of 1990
when the three shareholders/directors met is that an election
took place in which the three shareholders elected only two
directors. Subsections 119(6) and (7) of the Ontario Business
Corporations Act pertain to such an election and they
read:
119(6)
A director not elected for an expressly stated term ceases to
hold office at the close of the first annual meeting of
shareholders following his or her election.
119(7)
Despite this section, if directors are not elected at a meeting
of shareholders the incumbent directors continue in office until
their successors are elected.
[38]
I cannot find that the three shareholders actually called for
nominations and had a show of hands, but I can and do find that
the effect of their meeting was that the three
directors/shareholders all believed that Messrs. Cuthbert
and Lishman continued to serve as directors and
Mr. Perricelli did not. For their belief to be supported in
law requires a finding that the meeting was an annual meeting of
shareholders at which an election of directors took place. Only
as such, could Mr. Perricelli rely on subsection 119(6) as having
ceased to hold the office of director. I am satisfied that the
three shareholders had a meeting and by their presence waived any
requisite notice. I am also convinced that the three of them
agreed Mr. Perricelli would step out of any ongoing involvement
of a governance or management nature, other than continuing to be
the front man, for economic reasons, for the Credit
Union.
[39]
In summary on the de jure director issue, Mr. Perricelli
did not provide any written resignation or any evidence of an
actual show of hands election. What he did provide was his
evidence, corroborated by both the other directors/shareholders,
that in a meeting with them in the summer of 1990, it was
determined he was no longer to continue as a director. Whether
this is interpreted as Mr. Perricelli's resignation or as an
election of the remaining two directors, I am satisfied that
under the circumstances nothing further is required to prove a
cessation of Mr. Perricelli's directorship. If the underlying
principle of an effective cessation of a directorship is one of
meaningful communication with the Company, certainly that
principle has been met in this case, notwithstanding the lack of
documentation.
De
factoDirector
[40]
The Federal Court of Appeal in Canada v. Wheeliker,
has settled the law that:
... by using the word
"directors" without qualifications in subsection
227.1(1), Parliament intended the word to cover all types of
directors known to the law in company law, including, amongst
others, de jure and de facto directors.
[41]
The hurdle facing Mr. Perricelli, even if I accept that in
the summer of 1990, he ceased to be a de jure
director, is that his and the two other's subsequent actions
are not entirely corroborative of his cessation as a de
facto director. The evidence goes both ways in this regard.
The following facts (after the summer of 1990) support his
cessation as a director:
—
he seldom came to work, and when he did it was only on a contract
basis to do repairs;
—
he drew no income or other form of remuneration other than the
$100 per day for the repair work;
—
he took no supervisory or management role;
—
he gave up all his duties of administration, including no contact
with the accountants or Revenue Canada;
—
he did not sign the guarantee of the subsequent Company loan as
did the other two;
—
he was removed as an insured in the Company's life insurance
policy; and
—
he did not believe himself to be a director, due to his
withdrawal in the summer of 1990.
[42]
The following signs point, however, to some ongoing
involvement:
—
he would occasionally sign cheques if he happened to be in the
office;
—
he did not remove himself as the contact with Niagara Credit
Union and indeed signed documents in 1993, one of which showed
him as a director (although another did not);
—
his name was not removed from the documents filed with the
Ontario Companies Branch; and
—
no written amendment was made to the unanimous Shareholders
Agreement removing him.
[43]
The Respondent argues that the Appellant cannot have it both
ways, meaning he cannot lead the Company's bankers and
lawyers to believe he is still a director and yet deny such to
Canada Customs and Revenue Agency. There are, however, plausible
explanations for the actions of Messrs. Perricelli, Cuthbert
and Lishman in connection with these matters. Firstly,
Mr. Perricelli admitted that he did not want the Niagara
Credit Union to think he was no longer involved with the Company,
as he feared they might pull the plug on the Company, which would
inevitably lead to a call on his guarantee. There are two lines
of evidence which indicate that the bank might reasonably suspect
Mr. Perricelli was still involved: the occasional signing of
cheques and the execution of the November 1993 documents.
Mr. Perricelli may have retained some signing authority,
without being a director. The November 1993 documents are
contradictory at best, as in only one place is he outright shown
as a director. This sole indication in the period subsequent to
the summer of 1990 is not sufficient to find that he was a
de facto director.
[44]
I further find that the lack of attention to the legal paperwork
in the form of annual returns and the unanimous Shareholder's
Agreement is just that - a lack of attention.
Mr. Cuthbert and Mr. Lishman were small businessmen
attempting to ensure the survival of their business. They were
oblivious to the necessity of crossing t's and dotting
i's to ensure the legalities of Mr. Perricelli's
removal were finalized. To have suggested to them that they need
incur legal expenses for a written amendment to their unanimous
Shareholder's Agreement would no doubt have been met with
some considerable scoffing. They were legal matters which were
simply not on anyone's radar screen. While I do not condone
such a disregard for the proper paperwork, I do not find it was
intended to be deceptive.
[45]
I am satisfied that the explanations offered by
Mr. Perricelli, Mr. Cuthbert and Mr. Lishman in
connection with the Niagara Credit Union and the Company's
annual returns diminish the weight of those factors as
determinative of Mr. Perricelli's position as a
director. On balance, there is insufficient evidence to support a
finding that Mr. Perricelli was a de facto
director. Most telling was his credible evidence that after the
summer of 1990, he did not believe he was director and he never
thought he had any authority to advise, influence or control the
management or direction of the Company. I conclude that
Mr. Perricelli was not a director after the summer of
1990.
Due
Diligence
[46]
Had I found that Mr. Perricelli was a director, then he
would have been able to rely on the due diligence defence found
in subsection 323(3) of the Act which
reads:
323(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.
[47]
This has been referred to as the objective subjective test.
Determining the standard to apply requires a determination
whether the director is an inside or an outside director. The
Respondent argued, of course, that given his financial connection
and consequent ability to influence management, Mr. Perricelli
was an inside director. I find that it is unnecessary to go
through such an analysis as set down in Soper,
supra, as what is critical to whatever standard is applied
is the fact that Mr. Perricelli did not believe himself to
be a director. He was not consulted by Mr. Cuthbert or
Mr. Lishman about the GST problem and he never attended
Canada Customs and Revenue Agency's office. He had no
dealings with the Company's accountants during the relevant
period. More importantly, he was not aware of any problem with
respect to GST remittances until after the problem had already
developed into a matter of non-remittance. He was too late
for any positive steps. Mr. Perricelli did not believe he
had any ongoing role at all, let alone the authority of director,
and consequently acted accordingly. The Respondent argued that
given his influence over the banking arrangements,
Mr. Perricelli could sway the management and direction of
the Company, but simply chose not to. I do not accept this
interpretation. Indeed, Mr. Perricelli perhaps unwittingly
did take a positive step during the relevant period by ensuring
the Company continued to have a relationship with its banker.
This was not because he wanted to ensure GST was paid, as he had
no knowledge that was at issue, but because he wanted to protect
his own financial position.
[48]
Counsel presented a number of cases since Soper dealing
with the inside versus outside director issue. I do not find it
helpful to go through them. The more relevant question to pose is
whether a reasonably prudent person, believing himself not to be
a director, would have acted with any greater care, diligence and
skill than Mr. Perricelli. I cannot see how.
[49]
I would go further and suggest that a reasonably prudent person
would not have known he was a director. He was not involved in
the day-to-day affairs of the Company, he was not kept advised of
the Company's circumstances, he had verbally communicated his
resignation from the Company to the two other directors and
shareholders, and he was no longer in contact with the
accountants. Given that, on balance, I have found Mr. Perricelli
ceased to be a director in 1990, it is reasonable to accept
Mr. Perricelli's position as not believing he was a
director. Even if I had found Mr. Perricelli was a director,
there were still sufficient indicators upon which Mr. Perricelli,
unversed in the legalities of directorships, could rely in
reasonably concluding he was no longer a director.
[50]
To attach liability to a director who has shown he did not
believe he was such, is to hold such a person to the same
standard as a director who knew or ought to have known he should
and could take positive steps to prevent the failure to remit.
This is an unrealistic expectation of the unwitting director. If
you do not believe you are a director and there are reasonable
grounds for accepting that belief, then you should be relieved
from liability by subsection 323(3) of the Act. While
the circumstances in the Cybulski, supra case differ, the
principle enunciated by Judge Christie in the passage cited
earlier applies; that is, if reasonable grounds exist for an
appellant's belief he has severed his connection as a
director, he is relieved of vicarious liability for source
deductions. I find that describes Mr. Perricelli's
position.
[51]
I allow the appeal and refer the matter back to the Minister for
reconsideration and reassessment on the basis that
Mr. Perricelli is not liable pursuant to
subsection 323(1) of the Act. Costs to the
Appellant.
Signed at Ottawa, Canada, this 5th day of
June, 2002.
"Campbell J.
Miller"
J.T.C.C.
COURT FILE
NO.:
2000-946(GST)G
STYLE OF
CAUSE:
Vito Perricelli and The Queen
PLACE OF
HEARING:
Hamilton, Ontario
DATE OF
HEARING:
April 11, 2002
REASONS FOR JUDGMENT
BY: The Honourable Judge Campbell J.
Miller
DATE OF
JUDGMENT:
June 5, 2002
APPEARANCES:
Counsel for the Appellant: Glen W.
McCann
Counsel for the
Respondent:
Sherry Darvish
COUNSEL OF RECORD:
For the
Appellant:
Name:
Glen W. McCann
Firm:
Sullivan Mahoney
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2000-946(GST)G
BETWEEN:
VITO PERRICELLI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on April 11, 2002 at Hamilton,
Ontario, by
the Honourable Judge Campbell J.
Miller
Appearances
Counsel for the
Appellant:
Glen W. McCann
Counsel for the
Respondent:
Sherry Darvish
JUDGMENT
The
appeal from the assessment made under the Excise Tax Act,
notice of which is dated September 9, 1998 and bears
number 10932, for the period July 31, 1991 to January
31, 1996, is allowed, with costs, and the assessment is
referred back to the Minister of National Revenue for
reconsideration and reassessment on the basis that the Appellant
is not liable pursuant to subsection 323(1) of the
Act.
Signed at Ottawa, Canada,
this 5th day of June, 2002.
J.T.C.C.
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