Citation: 2007TCC119
Date: 200703222
Docket: 2006-2222(GST)I
BETWEEN:
ESTHER OUAHIDI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Favreau J.
[1] For the remittance
period from July 31, 1998, to January 31, 2004
(the period in issue), Climatisation G.R. Inc. (G.R.) a corporation
incorporated on January 30, 1995, under Part 1A of the Companies
Act, R.S.Q. c. C‑38, failed to pay the Minister of Revenue
of Quebec (the Minister) net tax of $1,479,560.97 as required by
subsection 228(1) of the Excise Tax Act (the Act). G.R. was
also assessed for $205,995.42 in interest and $721,802.77 in penalties.
On or about June 3, 2004, G.R. made an assignment of its
property under the Bankruptcy and Insolvency Act, and the Crown
submitted its proof of claim in respect of the net tax, the interest and the
penalties.
[2] During the part of
the period in issue which commenced on July 31, 1998, and ended on
December 31, 2000, the Appellant was employed by G.R., and was in
charge of the corporation's telemarketing of heat pump sales and installation,
and its sales of long-term maintenance contracts. She had the authority to
co-sign the corporation's cheques along with Ralph Abergel, the sole
director and shareholder of G.R. during that period.
[3] During the part of
the period in issue which commenced on January 1, 2001, and ended on
January 31, 2004, the Appellant was director and vice-president of G.R.
and was a shareholder of G.R. following the purchase for $5,000, on
January 1, 2001, of 5,000 Class A shares (50% of the issued and
outstanding shares) then held by Ralph Abergel.
[4] On June 1, 2004,
the Appellant resigned from her position as director of G.R. According to
the letter of resignation, the resolution of G.R.'s board giving effect to the
letter, and the General By‑Law of G.R., this resignation was to be
effective December 15, 2003. On June 1, 2004,
Ralph Abergel signed an amending declaration with the Registraire des
entreprises du Québec seeking to remove the Appellant's name as director and
vice-president in G.R.'s 2003 annual declaration.
[5] The Minister
assessed the Appellant pursuant to subsection 323(1) of the Act by notice
of assessment dated June 4, 2004, claiming the sum of $2,407,359.16
from her. The Appellant appealed from the assessment on the ground that she
exercised the degree of care, diligence and skill to prevent the failure that a
reasonably prudent person would have exercised in comparable circumstances, as
required by subsection 323(3) of the Act.
[6] The Appellant
submits that she is not responsible for G.R.'s failure to remit the tax
because, among other things, she was only a nominal or passive director of
G.R., did not participate in the corporation's administrative decisions, did
not know the true financial situation of the corporation, and was herself a
victim of her ex‑husband's fraud. The Appellant submits that by
reinvesting a significant portion of the income that she derived from G.R. in
order to keep it afloat, she has demonstrated the due diligence that
subsection 323(3) of the Act required her to exercise with a view to
preventing G.R.'s failure to pay the tax.
[7] The Appellant is
not an experienced businessperson. She undertook work on a bachelor's degree in
psychology at the Université de Montréal but did not complete those studies.
Before joining G.R., she was a waitress at a restaurant, and she learned
telemarketing at Brouillard Lepage Inc., a corporation all of whose shares were
initially held by Ralph Abergel and the Appellant on an equal basis.
[8] The Appellant
became Ralph Abergel's common-law spouse in 1989 and married him on
December 19, 1998, under the matrimonial regime of the partnership of
acquests. There are no children of the marriage. The Appellant and
Ralph Abergel separated in January 2004, and later divorced.
[9] Since its creation
on or about January 30, 1995, G.R. was under the exclusive control of
Ralph Abergel, who looked after its general management at all times, while
the Appellant looked after its telemarketing department. As the director of the
telemarketing department, the Appellant worked evenings, while
Ralph Abergel managed G.R.'s business during the daytime. The Appellant
was paid a base salary for her services, plus a sales commission.
[10] During the period in
issue, G.R. had a solid structure and had several departments: telemarketing,
sales, installation and maintenance services, accounting and information technology.
All the department heads reported directly to Ralph Abergel. The Appellant
hired solicitors and interacted with the salespeople and installation
technicians. She did not look after any other aspect of the business.
She did not look after its accounting and was not involved in preparing
the financial statements or the income or other tax returns. For all the
administrative aspects of the business, the Appellant relied entirely on
Ralph Abergel, whom she trusted unquestioningly.
[11] According to the testimony,
Ralph Abergel was a very good salesperson, had a very agreeable
personality, was manipulative in the sense that he knew how to obtain things,
and was held in high regard by his employees, whom he treated well.
[12] Few explanations
were provided as to why the Appellant agreed to become a director and
shareholder of G.R. on January 1, 2001. Based on the credit documents
from the National Bank of Canada, which were signed by the Appellant in
February 2001 and were produced together as Exhibit I‑5, this might
have been a condition precedent to the bank granting G.R. up to $1,100,000 in
operating credit. In fact, the Appellant and Ralph Abergel had
to provide a $400,000 surety in order to guarantee the performance of G.R.'s
obligations to the bank; these guarantees were secured by guarantees on
deposits and by a hypothec on an index‑linked GIC with the Natcan Trust
Company.
[13] The Appellant's 50%
holdings of the issued and outstanding share capital of G.R. appear to be
consistent with the way in which the Appellant and Ralph Abergel operated.
Indeed, upon reading the divorce settlement of November 14, 2006, between
the Appellant and Ralph Abergel, which can be found at tab 6 of Exhibit
A-1, it can be seen that
(a) initially,
the Appellant owned 50% of the issued and outstanding share capital of Estéral
Inc., and the other 50% was held by Ralph Abergel;
(b) initially,
Appellant held 50% of the issued and outstanding share capital of Brouillard
Lepage Inc., and the other 50% was held by Ralph Abergel;
(c) on
September 25, 2005, the Appellant and Ralph Abergel purchased, as equal
co-owners, three vacant lots in the city of Longueuil known as lots 2588664,
2588665 and 2588666, in the Quebec cadastre, Chambly registration division (the
Du Cerf properties);
(d) the
Appellant and Ralph Abergel also purchased a commercial building, located at
2220 Marie‑Victorin Boulevard in Longueuil, as equal co-owners;
(e) on
July 29, 1998, Ralph Abergel granted the Appellant a second hypothec on a
commercial building located at 2174 Marie‑Victorin Boulevard in
Longueuil.
[14] In the Notice of
Appeal, the Appellant claims that, at Ralph Abergel's repeated insistence, and
because G.R. had an insufficient cash flow, she reinvested in G.R., by means of
advances or debt repayments, a significant portion of the amounts that
G.R. was paying her for her services. In Exhibit I‑1, the affidavit
that the Appellant submitted on May 7, 2004, in support of her
requisition for a writ of seizure before judgment in third‑party hands, she
alleges that Ralph Abergel asked her to invest considerable amounts in
G.R. from her personal savings, and that she was unaware, at the time, of the
extent of G.R.'s troubles; she estimates that she invested $2,700,000 from 2001
to 2003 in order to hold on to the employees and ensure the corporation's
survival.
[15] In or about late
2002, the Appellant found out from her cleaning lady that her husband
Ralph Abergel had been having an extra-marital affair since 2000. She then
hired private investigators and detectives to shed light on
Ralph Abergel's professional and personal activities.
[16] Based on the
investigation reports and on information obtained from G.R. employees, the
Appellant discovered the following things, among others:
(a) Significant
sums of money belonging to G.R. were missing, and the person responsible was
Ralph Abergel, who had embezzled money for personal use.
(b) A
brilliantly orchestrated scheme was implemented by Ralph Abergel in 2000,
and G.R. was managed fraudulently.
(c) Ralph Abergel
forged the Appellant's signature on G.R. cheques on several occasions when both
directors' signatures were needed, and these forgeries enabled him to draw
cheques on G.R.'s account for his personal benefit and for other uses. In fact,
an expert report showing the false signatures was tendered as Exhibit A-2.
(d) Ralph Abergel
paid phenomenally high salaries, granted undeclared cash amounts and gave [Translation]
"lavish presents" to certain key employees of G.R. in order to
buy their cooperation and silence in keeping his fraudulent conduct from the
Appellant. Once alerted to these facts, the Appellant noticed that when she
asked G.R. employees for certain information, they often replied that they were
not allowed to provide information of various kinds without
Ralph Abergel's prior authorization.
[17] It has been proven
that the scheme consisted of getting current or former GR employees to cash
cheques payable to "Cash" or to the bearer from customers who
purchased goods or services from G.R., and then having those employees remit
the proceeds to Ralph Abergel or deposit them into bank accounts
designated by him.
[18] The Appellant showed
that Ralph Abergel embezzled G.R.'s funds in order to purchase, among
other things, the Manoir Laval seniors' residence, a condominium in
Brossard for his mistress, and the Porsche that he drove.
[19] Paragraph 47 of the
motion to institute proceedings, which the Appellant filed on
July 24, 2004, and which can be found at tab 5 of Exhibit A‑1,
states as follows:
[Translation]
Moreover, in the
"motion for leave for a receiving order", which constitutes
Exhibit R‑8 and will be produced at the hearing, the Deputy Minister
of Revenue of Quebec submits, at paragraphs 10 and 11 (reproduced below), that
the respondent Mr. Abergel did indeed manage Climatisation G.R. and
that his accounting activities were known only to Ralph Abergel and his
outside accountant Mr. Haïm:
10. The debtor uses three different
accounting systems that are separate from each other so that it can generate
confusion to prevent those responsible for day‑to‑day management
from understanding the true nature of transactions, monitoring those
transactions and recording them accurately. In fact, the debtor has no internal
comptroller.
11. Thanks to this approach, the people
who have true control over the debtor — notably Ralph Abergel, who, along with his
external accountant Haïm Pinto, truly manages the debtor's accounting
activities — were
the only ones who were aware of the true transactions. By doing this, they
ensured that the debtor showed the applicant a reality that was completely
different from the company's true state of affairs.
[20] In the affidavit
referred to above at paragraph 14, the Appellant alleges that
Ralph Abergel spread rumours that she was crazy and did not know what she
was doing with respect to the management of G.R. He allegedly did this in front
of G.R.'s bankers and employees in order to undermine the Appellant's
credibility and ridicule her.
[21] In late 2002, the relationship
between Appellant and Ralph Abergel was rather stormy, and, following an
altercation in G.R.'s office, the police intervened and expelled
Ralph Abergel. From that date onward, he continued to operate G.R. from
his home. The Appellant tried to manage G.R., and trusted the employees.
Since she was not experienced enough, the employees continued to report to
Ralph Abergel, and, consequently, he continued to exert influence on the
management of the business even though he no longer went to the office.
[22] The Appellant lived
separate and apart from Ralph Abergel starting in October 2002, but
resumed cohabitation on or about September 15, 2003, after
Ralph Abergel promised to save the company and improve their personal and
professional relationship. It was in this context that the Appellant dropped
her claims for damages and released Mr. Abergel from the seizures before
judgment. But life together became unbearable for the couple, which separated
again in January 2004.
Application of the due diligence standard
[23] In the instant case,
the Appellant had no involvement in the failure to withhold and remit amounts
payable to Her Majesty.
[24] The Appellant was
systematically excluded from the management of G.R.'s affairs in every
circumstance, so she could not have known about the omission that gave rise to
the assessment in issue.
[25] The Appellant was
the victim of her ex-spouse's intentionally fraudulent conduct and invested
considerable amounts in G.R. in order to enable it to remunerate its employees
and pay its suppliers and creditors.
[26] Although the
Appellant can be considered an internal manager, her limited experience and her
restricted influence (to say the least) on the management of the affairs of the
business meant that she could neither prevent nor remedy the violation.
[27] Like Ms. Cirello in Ciriello
v. Canada, [2000] T.C.J. No. 829, the Appellant was not aware of
G.R.'s failure to remit GST, and even if she had been, she would not have been
in any position to do anything about it because her spouse had total control
over the management of G.R.'s affairs.
[28] There is no evidence
that the Appellant was a de facto director during the period prior to
January 1, 2001. She had no more influence on the management of the
business than she had from January 1, 2001, onward. The fact that one
is an authorized signatory on a company's bank accounts is not, in and of
itself, sufficient for the signatory to be considered a director.
[29] For all these
reasons, it is my opinion that the Appellant has discharged her burden of proof
and has shown, to the Court's satisfaction, that she exercised the requisite
degree of care, diligence and skill to prevent the failure that gave rise to
the assessment under appeal.
[30] Consequently,
Ms. Ouahidi's appeal is allowed with costs (with the exception of the
expert fees, because they were incurred in connection with other court
proceedings) and the assessment is vacated.
[31] Given the
disposition of this appeal, the Court need not make a determination with
respect to the effective date of Ouahidi's resignation from her position as a
director of G.R.
Signed at Montréal, Quebec, this 22nd day of March
2007.
"Réal Favreau"
Translation
certified true
on this 25th day
of September 2007
Monica F.
Chamberlain, Reviser
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