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Citation: 2004TCC186
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Date: 20040408
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Docket: 2000-5089(GST)G
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BETWEEN:
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VINCENZO POLSINELLI,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent,
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Docket: 2000-5087(GST)G
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AND BETWEEN:
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ENZO POLSINELLI
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Sheridan, J.
[1] Mr. Vincenzo Polsinelli and Mr.
Enzo Polsinelli are father and son, respectively, and were
directors of a family-run construction company known as Visa
Construction Co. Ltd. They are appealing the Minister's
assessments against them as directors of Visa for GST that the
company failed to pay for the years 1992 to 1995. Their appeals
were heard on common evidence. For the sake of clarity, Mr.
Polsinelli, the father, will be referred to as Vincenzo; Mr.
Polsinelli, the son, as Enzo.
[2] The parties filed an Agreed
Statement of Issues setting out four issues for determination. In
my view, this case can be determined on one of those issues,
specifically, whether Vincenzo and Enzo, in their capacity as
directors of Visa, failed to exercise due diligence to prevent
Visa's failure to remit the GST collected and collectible by
Visa for the quarterly reporting periods in 1992-1995. Having
found that Vincenzo and Enzo did exercise due diligence and can
therefore avail themselves of the defence set out in s. 323(3) of
the Act, it is not necessary for me to consider the other
three issues raised.
FACTS
[3] Visa was a family-run corporation,
engaged primarily in heavy construction doing road work and
laying sewer lines and water mains in municipalities and on
Indian reserves throughout Ontario.
[4] Vincenzo came to Canada in 1958.
He was then 21 years old. He worked in construction and, although
he had only three years of formal education, he built up, over
the years, his own construction company. As his family grew, they
joined the business which ultimately developed into three
separate family-run corporations. By 1992, Vincenzo had turned
over his regular duties to his sons but he continued to have an
unofficial presence in the business office and on the job sites.
As Enzo put it, "Dad was always cruising around in and
out". In 1994, Vincenzo replaced his son Tony as a director
of Visa.
[5] Enzo did not complete high school
and, like his brothers and sisters, became actively involved in
the family businesses at an early age. He began working in the
family construction business in 1976. In 1980, he and his brother
Tony bought Visa from a family friend. As Visa's site
supervisor, Enzo worked long hours, often at remote locations for
weeks or months at a time. Because of the day-to-day demands of
this role, only rarely was he in the Visa office. His presence
was required on the job sites to supervise the work crews, to
verify delivery of the equipment and materials used in the
construction, and to authorize their payment by signing the
payment certificates and faxing them from the site back to the
Visa business office for payment.
[6] Paying these bills was the domain
of Enzo's sisters. In 1992, the first year of the period in
question, his sister Linda was responsible for Visa's
day-to-day management and bookkeeping. When she unexpectedly left
Visa in the spring of 1994, the family reacted quickly, bringing
in her sister Maria to take over her duties. Maria had been
working out of the same office space but for another of the
family companies as a marketing director. She picked up where
Linda had left off and, at the same time, began the search for a
new employee. A non-family member was eventually hired and after
training her, Maria returned to her former position.
[7] The more complicated aspects of
Visa's financial management were left to Mr. Joe Lanno, a
chartered accountant, who had looked after the Polsinelli family
businesses for over 20 years. He handled the preparation of
Visa's yearly financial statements, the income tax returns
for the company and for the individual Polsinelli family members
as well as any specialized financial tasks that were needed from
time to time.
[8] Throughout the years 1992 to 1995,
although its revenues were declining, Visa remained a viable
business. In 1996, Canada Customs Revenue Agency conducted an
audit of Visa's books. The auditor determined that mistakes
had been made resulting in Visa's failure to remit the net tax as
required between October 1, 1992 and December 31, 1995.
On November 7, 1996, the Minister assessed Visa for this
amount.
[9] Some three years later, on
November 18, 1999, Vincenzo and Enzo were assessed under s. 323
of the Excise Tax Act for Visa's unpaid GST together
with interest and penalties in respect of the corporate
assessment. By this time, Visa had ceased operations. Vincenzo
and Enzo were assessed as directors of the company: Enzo for the
full period under review October 1, 1992 to December 31, 1995;
Vincenzo, only for the period October 27, 1994 to December 31,
1995.
ANALYSIS
[10] The Minister's position is that
Enzo and Vincenzo, as directors of Visa at the relevant time, are
liable to pay the unremitted GST under s. 323(1) of the Excise
Tax Act[1]. He
argues that they failed to exercise due diligence to prevent
Visa's failure to remit the GST as required by the statute.
The Court does not accept the Minister's contention. There is
ample evidence to show that Vincenzo and Enzo took all reasonable
measures to ensure that Visa complied with the provisions of the
Excise Tax Act.
[11] Both the Minister and the Polsinellis
cited Soper v. Canada (C.A.)[2] as applied in Drover[3] in support
of their respective arguments for and against the finding of
directors' liability. The Minister also referred the Court to
the interpretation and application of Soper in a more
recent decision of the Federal Court of Appeal, McKinnon et
al v. R., [2001] 2 F.C. 203. In McKinnon,
Evans, J.A. identified six principles to guide the Court through
the "wilderness of single instances"[4] in its determination of whether,
on any particular set of facts, directors exercised due diligence
in preventing a company's failure to remit GST.
[12] The starting point in McKinnon
is to determine whether the conduct of the directors constitutes
such "patent abuse and mismanagement" as to be the kind
of mischief against which s. 323 is directed. In McKinnon,
the directors made a conscious decision to defer the payment of
the company's GST until its fiscal situation could be stabilized.
There is no suggestion that Vincenzo and Enzo chose not to have
Visa pay the unremitted GST. Nor was there any evidence that Visa
was facing the kind of financial turmoil that, in cases like
these, may tempt directors to divert GST funds to other purposes.
On the contrary, their uncontradicted evidence is that in
conducting their business, their guiding principle was to make
sure "everything [including the GST] was paid". At all
times during the relevant period Visa reported the net tax as
required; the problem was that errors were made in its
calculation. Accordingly, the actions of the directors Vincenzo
and Enzo do not come within the meaning of "patent abuse and
mismanagement".
[13] Under the second principle, the Court
must look to the "due diligence" test set out in
Soper. This test has both an objective and subjective
component and requires the Court to take into account the
characteristics of the directors in question including their
levels of skill, experience and knowledge. Directors involved in
the day-to-day management of the business, known as "inside
directors", will be held to a higher standard. The Minister
argues that Vincenzo and Enzo were inside directors. While it is
true they were the driving force in the construction work of the
family-run company, they were not actively involved in the
administrative side of the business. Acknowledging that they had
neither the time or training to look after Visa's books, (as
Enzo said, he "didn't have the head for it"), they
delegated this task to others qualified to do the job. The
Polsinelli daughters, Linda and Maria, had bookkeeping and
administrative skills acquired through a combination of formal
training and on-the-job experience. Mr. Joe Lanno, an experienced
chartered accountant familiar with the Polsinelli businesses,
made himself available as needed to handle the more complex
matters. For example, when the GST was first introduced, Mr.
Lanno was brought in to train the staff in the workings of the
(then) new and (still) complicated legislation.
[14] Vincenzo and Enzo took very seriously
their responsibility for ensuring Visa met all of its financial
obligations. They both testified to their belief in the
importance of having good administrative help they could
"trust" to do things right. They had every reason to
have confidence in the ability of Linda, Maria and Joe Lanno
to do the job. Counsel for the Polsinellis referred the Court to
the words of Sharlow, J.A. in the Federal Court of Appeal
decision Smith v. Canada, [2001] F.C.J. No. 448:
In assessing the objective reasonableness of the conduct of a
director, the factors to be taken into account may include the
size, nature and complexity of the business carried on by the
corporation, and its customs and its practices. The larger and
more complex the business, the more reasonable it may be for
directors to ... leave certain matters to corporate staff
and outside advisors, and to rely on them.
[15] The difficulties inherent in GST
calculation and administration were dramatically demonstrated by
the Minister's own witnesses. All are experienced and
dedicated GST officials with extensive training and a range of
technical assistance and support staff available to assist
them. Notwithstanding such resources, from the time of the
initial corporate assessment, up to and including the hearing of
this matter, serious errors were made, not only in calculating
the amounts for which Vincenzo and Enzo were said to be liable,
but also in determining how that calculation should be
made. Clearly, the Minister is not bound by his officials'
mistakes. That such mistakes could be made by experienced GST
officials, however, certainly calls into question the
reasonableness of expecting perfection from Vincenzo and Enzo.
The Court finds that it would be unreasonable to have required
them to double-check the company books for errors they had no
reason to suspect were there, especially given their limited
education, their lack of knowledge or experience with GST
procedure, their delegation of the task to qualified others, and
their long hours of heavy construction work at remote locations.
It is the Court's view that, having recognized their own
shortcomings in this area and having delegated this task to
competent administrative staff and a chartered accountant, it was
entirely reasonable for Vincenzo and Enzo to rely on them to
ensure that proper GST remittances were being made.
[16] The third and fourth principles in
McKinnon pertain to the steps taken by the directors to
prevent the company's failure to remit once they became,
or ought to have become, aware of it. The section concerns itself
with preventative, not remedial, action. Vincenzo and Enzo did
not become aware of Visa's failure until well after it had
occurred. In Vincenzo's case, he first learned of it at the
time of the audit in 1996. Though not relevant to any
preventative action he might have taken, Vincenzo's reaction to
the news was consistent with the responsible approach he took to
Visa's management: upon being informed that the auditor required
additional information regarding the unremitted GST, he
immediately instructed Maria to have Mr. Lanno respond to his
request. This was done. As for Enzo, he did not become aware of
the problem until 2000 when CCRA withheld his personal income tax
refund to apply towards Visa's GST debt.
[17] The Minister argues that regardless of
when they actually became aware, Vincenzo and Enzo ought
to have been aware and acted to prevent the failure. What ought
to have tipped them off, according to the Minister, was the
decline in Visa's revenues between 1992 and 1995. This argument
cannot succeed. Unlike many of the companies whose directors have
run afoul of s. 323, Visa was not in dire fiscal straits.
Although sales were declining from 1992 to 1995, throughout this
period Visa continued to operate in the black. For each of the
years in question, the financial statements showed large reserves
of retained earnings. In each year, company revenues exceeded the
costs of sales which, Enzo testified, was what he kept an eye on
to have a sense of the company's financial well-being. Unlike
the corporation in McKinnon where the directors
deliberately chose to defer GST remittances until the company was
restored to good fiscal health, at all times during the relevant
period, Visa filed and remitted GST payments. Clerical error, not
declining revenues, caused the corporation's failure to remit. It
is significant that the greatest number of errors occurred in
1994, the time of bookkeeper Linda's sudden departure and the
subsequent staffing changes.
[18] On what basis, then, ought Vincenzo and
Enzo to have become aware of Visa's failure to remit the full
amounts collected and collectible? Counsel for the Polsinellis
cited Bowman, A.C.J. in Agatha Kit Chun Lau et al v. H.M.Q.[5] who
cautioned:
...Section 323 of the Excise Tax Act and section 227.1
of the Income Tax Act do not demand the impossible. They
do not require perfection. Directors are not insurers for the
fisc. All that is needed is that the directors "exercise the
degree of care, diligence and skill that a reasonably prudent
person would have exercised in comparable
circumstances."
[19] Vincenzo and Enzo found themselves in
the same situation as the directors in Lau. Patrick Lau, a
director of his family-run restaurant business, lacked the time
and skills necessary to look after the GST remittances himself.
Having satisfied himself that his wife Agatha had been adequately
trained in the procedure by an "outside advisor" KPMG
to file and remit GST, he relied on her to do the job for him.
Bowman, A.C.J. found that it would have been unreasonable to
require Patrick to go further and check Agatha's work,
"particularly when neither he nor Agatha were given any
indication that anything was wrong". The same conclusion can
be drawn in the present case.
[20] Under the fourth McKinnon
principle, to avoid liability, the directors must show that they
acted with due diligence to prevent the company's
failure to remit, not to remedy it. Again, the Court is
satisfied that by having put Visa's administrative needs in
the hands of competent bookkeepers and by providing the
expertise, as required, of a trusted and experienced chartered
accountant, the directors did all that was reasonably necessary
to prevent the failure from occurring.
[21] The fifth and sixth McKinnon
principles have no application to the present case.
[22] On the evidence presented, the Court
finds that Mr. Vincenzo Polsinelli and Mr. Enzo Polsinelli
exercised the degree of care, diligence and skill to prevent the
failure that a reasonably prudent person would have exercised in
similar circumstances. The appeals are allowed, with costs, and
the assessments made under section 323 of the Excise Tax
Act vacated.
Signed at Ottawa, Canada, this 8th day of April 2004.
Sheridan, J.
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