Citation: 2010 TCC 136
Date: 20100305
Docket: 2008-1554(GST)G
BETWEEN:
SOHEIL MANOLI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Hogan
J.
Introduction
[1]
Soheil Manoli (the “Appellant”)
was assessed under subsection 323(1) of the Excise Tax Act (the “ETA”)
for unpaid goods and services tax, interest and penalties owed by 9007-5227
Québec Inc. (the “Company”). The assessment was issued against the Appellant on
June 29, 2006. The Appellant resigned as a director of the Company on
January 15, 2004, more than two years before the assessment was issued.
Notwithstanding the Appellant’s resignation, the Respondent alleges that the
Appellant continued to act as a de facto director of the Company right
up to the date that the assessment was issued against him.
[2]
The sole issue in this appeal is
whether the assessment against the Appellant for the period from January 1,
2000 to June 30, 2003 was made more than two years after the Appellant ceased
to be a director of the Company.
[3]
The Appellant testified that he
became a shareholder of the Company in 1995. At that time, the Company operated
a small restaurant and bar in the town of Hudson under the name of Patzz Classique
Italien (“Patzz”). Patrick O’Grady was the majority shareholder of the Company
and was responsible for the day-to-day operations of Patzz. The Appellant lived
in the Québec City area at that time and held a part-time teaching position at
St. Lawrence College. The Appellant testified that both he and his father
loaned money to the Company to finance its operations. The Company also borrowed
approximately $100,000 from a local bank to finance the purchase of the
building in which Patzz operated.
[4]
The evidence shows that Patzz was
losing money under the stewardship of Mr. O’Grady. The Appellant explained
that he asked Mr. O’Grady, his co‑shareholder, to either buy him out
or allow him to find a new co‑shareholder and manager for the business.
[5]
In January 1998, the Appellant
succeeded in restructuring the share ownership of the Company. He became the
Company’s new majority shareholder with 51% of its shares. Dean Laflamme became
his new co-shareholder with 49% of the shares. Mr. Laflamme, who had
experience in the restaurant and bar business, became the manager and operator
of the new restaurant, which operated under the business name Mia Resto-Pub.
[6]
The Appellant testified that he was
offered a full-time teaching position at St. Lawrence College in early
1999. In light of his new duties, the Appellant entrusted the full management
and operation of the business to Mr. Laflamme. He was hopeful that Mr. Laflamme
would be able to return the business to profitability so that he (the
Appellant) and his father could recover some of the money they had loaned to
the business. While business did pick up, the Company did not generate any
significant positive cash flow and it continued to struggle to pay its
creditors. In late 2003 or early 2004, the Company was experiencing renewed
financial difficulties. It was the object of a GST audit undertaken by the Québec
taxation authorities on May 22, 2003.
[7]
The Appellant and Dean Laflamme
resigned as directors of the Company on January 15, 2004. They were replaced by
Caroline Coulombe, who worked as a waitress and assistant manager for Mia Resto-Pub.
Ms. Coulombe, called as a witness by the Respondent, confirmed that she
was asked by Mr. Laflamme to become the sole director of the Company. It is
obvious that Ms. Coulombe was unaware of the Company’s financial
difficulties and did not have a good understanding of the path she was embarking
on in agreeing to act as a director. Ms. Coulombe corroborated the
Appellant’s testimony that he spent very little time at the restaurant. She recalled
seeing the Appellant on the premises no more than two or three times a
year.
[8]
The Appellant testified that in
early 2004 Mr. Laflamme was tasked with finding a new purchaser for the
business. In January 2004, Patrick Olliver, acting on behalf of 6198236 Canada
Inc. (“Olliver Inc.”) made an offer to purchase the business.
[9]
The evidence shows that
Olliver Inc. did not proceed with the purchase at that time because a legal hypothec
had been registered against the property for unpaid Québec taxes in the amount
of approximately $31,000.
[10]
On April 14, 2004, the Company
sold its property to 4192095 Canada Inc. (“Canada Inc.”). Canada Inc. had the
same shareholders as the Company. As a result, the two companies were not
dealing with each other at arm’s length. The purchase price for the property
was $300,000, consisting of an assumption of indebtedness of approximately
$240,000 with the balance being paid through the issuance of 60,000 Class A
preferred shares.
[11]
The transaction with Mr. Olliver
was completed on October 22, 2004. Mr. Olliver had incorporated Olliver Inc.
to acquire the restaurant business. The purchase price for the property was
$300,000 payable as follows:
|
a) Land:
|
$35,824.80
|
|
b) Building:
|
$96,175.20
|
|
c) Leasehold
improvements:
|
$90,000.00
|
|
d) Furniture
and equipment:
|
$77,999.00
|
|
e) Goodwill:
|
$1.00
|
[12]
The Québec tax department brought
an action in the Québec Superior Court to have both of the aforementioned sales
set aside on the grounds that they were structured, with the help of the
purchaser, to avoid the payment of federal and provincial taxes that were
otherwise due and payable. The Superior Court declared that the first sale could
not be set up against the Québec tax authorities as the parties were related
and had acted in concert to avoid the payment of taxes. In the case of the
second sale, the Superior Court held that Olliver Inc. was a third-party purchaser
acting in good faith.
[13]
In its reply to the notice of appeal,
the Respondent alleges that the Appellant continued as a de facto director
of the Company following his resignation as a director on January 15, 2004.
Analysis
[14]
The Appellant does not dispute the
fact that the Company was properly assessed GST, interest and penalties. Rather,
he suggests that the assessment was issued against him outside the two-year
limit prescribed in subsection 323(5) of the ETA, which reads as
follows:
323(5)
Liability of directors —
Time limit —
An assessment under subsection (4) of any amount payable by a person who is
a director of a corporation shall not be made more than two years after the
person last ceased to be a director of the corporation.
[15]
The Appellant was assessed on June
29, 2006 and he had resigned as a director on January 15, 2004, which means
that the assessment against him is valid only if he remained a de facto
director of the Company.
[16]
The Respondent alleges that the
Appellant did remain a de facto director of the Company following his
resignation on January 15, 2004 and continued to act in that capacity right up
to or beyond the sale to Olliver Inc. on October 22, 2004. This contention
appears to be rooted in the Respondent’s belief that Ms. Coulombe was a
director of convenience. The Respondent argues that Ms. Coulombe received
her instructions from both of the shareholders of the Company.
[17]
It is now well accepted by this
Court that a person may be found to be a director of a company if he or she
acts as a director without being legally qualified to do so. Generally speaking,
an adverse finding will be made if the evidence shows that a person holds himself
or herself out as a director such that a third party relies upon that person’s
implicit authority as a director. I would add that a person could be found to
be a director if the evidence demonstrates that the person who appears to be the
director of the corporation is only a director of convenience acting on the
instructions of the other person.
[18]
I do not believe that the
Appellant was a de facto director of the Company after he resigned on
January 15, 2004. If anything, Ms. Coulombe’s testimony corroborates the
Appellant’s assertion that the affairs of the Company were managed by Mr. Laflamme.
That witness admitted that the Appellant did not ask her to take on the role of
director. It was her superior, Mr. Laflamme, who convinced her to act as a
director.
[19]
She testified that she did not
speak to the Appellant during the period following his resignation as a
director. She also corroborated the Appellant’s testimony that he rarely visited
the restaurant. The Appellant lived in the Québec City area and had a full-time
teaching position at St. Lawrence College. He had little time to devote to
the affairs of the Company. There is not a shred of evidence that the Appellant
acted as a de facto director of the Company after he resigned from its board
of directors.
[20]
The evidence shows that Mr.
Laflamme convinced Ms. Coulombe to act as a director. He also convinced Mr.
Olliver to purchase the business. Mr. Laflamme may thus be in a more
precarious position than the Appellant with respect to an assessment under subsection
323(1) of the ETA. The Respondent had two years from January 15,
2004 to issue an assessment against the Appellant but waited until June 29,
2006 to issue the assessment. The Respondent could have acted sooner. It failed
to do so and, as a result, the assessment was issued outside the two-year
limitation period.
Conclusion
[21]
For these reasons, the appeal is
allowed and the assessment is vacated, with costs to the Appellant.
Signed
at Ottawa, Canada, this 5th day of March 2010.
"Robert J. Hogan"
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