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Citation: 2003TCC109
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Date: 20030324
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Docket: 2000-389(IT)G
2000-1136(IT)G
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BETWEEN:
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DENISE BOUSQUET,
MICHEL TESSIER,
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
[OFFICIAL ENGLISH TRANSLATION]
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REASONS FOR JUDGMENT
Angers, J.T.C.C.
[1] These two appeals were heard on common evidence. The Minister of National Revenue (the "Minister") assessed the two appellants on July 12, 1999, for an amount of $30,426.34, pursuant to section 227.1 of the Income Tax Act (the "Act"), the Unemployment Insurance Act and the Employment Insurance Act. The amount of $30,426.34 represents the sum of the source deductions relating to the 1996 and 1997 taxation years that the corporation 9041-0895 Québec Inc. (hereinafter "9041"), carrying on business as the "Auberge du Grand Quai", did not remit to the Receiver General for Canada as well as the related interest and penalties. The amount of the assessment is not in issue.
[2] At the beginning of the hearing, the appellant Paulin Plamondon abandoned his appeal. However, he gave testimony in which he admitted to being the sole director and responsible for the activities of 9041 and said that the other two appellants, namely, Michel Tessier and Denise Bousquet, had nothing to do with the affairs of 9041. If they participated in any way whatsoever, it was under his authority. Michel Tessier acted as a "figurehead". Denise Bousquet, for her part, did what Paulin Plamondon asked her to do, that is, sign documents. She has been Mr. Plamondon's spouse for seven years.
[3] The case began in 1995 when Paulin Plamondon purchased a property that included an inn and a bar. He operated this establishment himself on behalf of the corporation 9016-6182 Québec Inc., beginning in May 1995. Subsequently, he made changes to the establishment by building a new bar with terrace on the lower floor. Paulin Plamondon experienced difficulties that caused him to repurchase the same property after the mortgage creditor had sold it. He then decided to incorporate another company to which he could lease the establishment. It was at that time that he asked his spouse, Denise Bousquet, to incorporate the company 9041, which she did on September 11, 1996. He then asked the appellant Michel Tessier to help him out by operating the inn under a lease.
[4] The appellant Michel Tessier began to work for Paulin Plamondon in June 1996. He was the manager of the bar on the upper floor. During renovations, Mr. Tessier told Mr. Plamondon that he wanted to rent the bar on the lower floor once the renovations were completed. Mr. Plamondon agreed to this. The discussions about renting the bar on the lower floor took place at the same time that Mr. Plamondon had Denise Bousquet incorporate the company 9041. To operate the bar on the lower floor, Mr. Plamondon offered to sell the said company to Michel Tessier for the sum of $1. On September 16, 1996, according to the records of 9041, the sole issued share of Denise Bousquet was transferred to Michel Tessier. On the same day, Denise Bousquet signed an amending declaration indicating the addition of Michel Tessier and the withdrawal of Denise Bousquet as director of 9041. The declaration, however, was not sent to the Inspecteur général des institutions financières du Québec until April 17, 1998, and was never entered as such in the register because of a lack of information.
[5] According to the appellant Michel Tessier, he purchased 9041 in order to operate the new bar once the work had been done, that is, approximately in December 1996. The parties never reached an agreement on the terms of the lease and on May 3, 1997, Michel Tessier quit his job. According to Michel Tessier, 9041 was never operated. He did not know that Paulin Plamondon, through Denise Bousquet, had used the company to rent the establishment and operate the Auberge du Grand Quai. He stated that at all times he had received a weekly salary and a percentage of the net profits. He said he never acquiesced directly or indirectly in the operation of the company by Paulin Plamondon. In fact, he stated that he was never made aware of the fact that Mr. Plamondon was operating the company until he met with the Revenue Canada auditor in 1997. He then informed the auditor that he was only the manager and not the operator. Michel Tessier did not do any bookkeeping and never made a tax return on behalf of 9041. Moreover, he never operated the company. The minutes book and company records were kept in his office at the inn. When he was asked to explain the meeting he had had with representatives of Hydro-Québec in May 1997 for the opening of a new account, Michel Tessier denied the allegation. He stated that Paulin Plamondon must have passed himself off as him. Michel Tessier testified that, at the examination for discovery, Denise Bousquet was no more aware of these facts than he was.
[6] What really happened in this case is found in the documentation submitted in evidence by the respondent. Despite the transfer of the share to the appellant Michel Tessier and the resignation on September 16, 1996, of Denise Bousquet as director, on January 3, 1997, 9041 signed a ten-year lease with Paulin Plamondon for the lease of his building, with the exception of the basement bar. The lease was signed by Denise Bousquet as chair and sole shareholder of 9041. On the same date, 9041 purchased from Paulin Plamondon a number of goods used for the activities of the inn, restaurant and bar, for the amount of $25,000. This agreement was also signed by Denise Bousquet as chair and sole shareholder of 9041. On January 13, 1997, when 9041 opened an account with the Desjardins Credit Union, Denise Bousquet was still chair. In that capacity, a series of documents, including a resolution, an application for admission to the credit union, a loan application, a loan contract, a mortgage and a surety by Paulin Plamondon and Denise Bousquet guaranteeing the advance to 9041, were all signed by the appellant Denise Bousquet.
[7] On April 29, 1997, Paulin Plamondon signed a lease with 9041 for the rental of the bar located in the basement. Denise Bousquet even signed the Record of Employment identifying the employer as the Auberge du Grand Quai Enr.
[8] According to Denise Bousquet, her responsibilities during the period at issue consisted of acting as secretary-bookkeeper for her spouse's business activities. She accordingly did this work for three numbered companies: 9016-6182 Québec Inc.; 9041; and 9050-9951 Québec Inc. A certain Jean Godbout was the chair and sole shareholder of this last company. Denise Bousquet said that she did what her spouse asked her to do. She really thought she had transferred her share to Mr. Tessier in 1996. She said she went to see a notary a year later to ensure that this was the case. Another application for an amendment was apparently sent at that time to the Inspecteur général des institutions financières. According to the evidence submitted, the application was sent on April 17, 1998. Despite the fact that she had transferred her share to Michel Tessier and had resigned from her position as interim director of 9041 on September 16, 1996, she continued to sign documents and act as if she were the shareholder and director of 9041. She did not remember the reasons that led her to sign the documents or apply for a loan of $50,000 from the Desjardins Credit Union. She acknowledged that she had signed some cheques and Michel Tessier's Record of Employment. After Michel Tessier's departure in May 1997, the building was leased to 9050-9951 Québec Inc. on July 7, 1997. Denise Bousquet acted as witness when Paulin Plamondon and Jean Godbout, chair of 9050-9951 Québec Inc., signed the lease and also an agreement amending the said lease. Finally, on September 27, 1997, the building in question was destroyed by fire as a result of a conspiracy in which Paulin Plamondon took part and for which he was convicted.
[9] Mario Simard is an auditor of source deductions with the respondent. He met with the appellant Paulin Plamondon on October 30, 1996. It was during that meeting that Mr. Simard learned of the change affecting the inn's activities beginning on September 14, 1996, namely, the incorporation of 9041. Accordingly, after September 14, 1996, he audited the activities of 9041 and the company that it replaced. It was also during that meeting that he took notice of the contents of the minutes of 9041 and became aware that Michel Tessier was the company's director.
[10] Counsel for the appellant Denise Bousquet argued that his client was not the director in fact or in law of 9041. The agreement with Michel Tessier and the resignation of Denise Bousquet on September 16, 1996, released her from all liability. In fact, although she had acted as a director in concrete terms, the admission by Paulin Plamondon showed that Denise Bousquet had done so to accommodate him and had merely obeyed her spouse. Paulin Plamondon was clever and was the directing mind in this affair. In addition, counsel contended that the assessment was statute-barred under subsection 227.1(4) of the Act because it had been made on July 12, 1999, whereas the corporation had ceased its activities on May 31, 1997, that is, almost three years after the director had ceased to act since she had resigned on September 16, 1996.
[11] Counsel for the respondent for his part submitted that the appellant Denise Bousquet took specific and meaningful steps in relation to the activities of 9041 and that, consequently, she was the director in fact of 9041 and liable in that capacity for remitting the amount of the source deductions and premiums to the Employment Insurance plan that 9041 was required to remit. Concerning the appellant Michel Tessier, counsel for the respondent submitted that the evidence was conflicting on the issue of whether he had really been a "figurehead". The way this issue is to be settled largely depends on the weight to be given to the testimony of Paulin Plamondon.
[12] For his part, Michel Tessier, supported by the admission of Paulin Plamondon, contended that he was not liable having had nothing to do with the activities of 9041.
[13] It was admitted that on June 8, 1999, pursuant to section 223 of the Act, the Minister had filed a certificate with the Registry of the Federal Court to the effect that a debt of $30,090.34 was payable by 9041. On the same date, a writ of execution was issued; this did not turn up anything.
[14] The appellants were assessed under subsection 227.1(1) of the Act, which reads as follows:
227.1(1) Liability of directors for failure to deduct - Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or section 153 or 215, has failed to remit such an amount or has failed to pay an amount of tax for a taxation year as required under Part VII or VIII, the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest or penalties relating thereto.
[15] The defence of prescription raised by the appellant Denise Bousquet is found at subsection 227.1(4) and reads as follows:
227.1(4) Limitation period - No action or proceedings to recover any amount payable by a director of a corporation under subsection (1) shall be commenced more than two years after the director last ceased to be a director of that corporation.
[16] The first point at issue is to determine whether the appellants, Michel Tessier and Denise Bousquet, were the directors of 9041 during the period at issue. If the answer in the case of Denise Bousquet is affirmative, can she avail herself of the provisions of subsection 227.1(4) of the Act?
Michel Tessier
[17] The testimony of the appellant Michel Tessier at the examination for discovery (the transcript was produced in evidence) and at trial clearly shows that on September 16, 1996, he purchased the only issued share of 9041 for the sole purpose of renting the new bar that had been built on the lower level of Paulin Plamondon's building. He never operated 9041 and was not aware of the company's commercial activities after his purchase or of the transactions in which 9041 was involved with Paulin Plamondon. In fact, he did not sign any document that would have disclosed the activities of 9041 to him. He was the manager of the bar on the upper floor and acted in this capacity until his departure in May 1997 when he realized that he would never reach an agreement with Paulin Plamondon on the terms of a lease. Michel Tessier's credibility was not in issue at trial and I accept his version of the facts. He did not appear to understand the nature of the role of "figurehead" that he had apparently been assigned. The admission by Paulin Plamondon, even though he is not credible, seems to confirm the fact that the appellant Michel Tessier was not a director within the meaning of subsection 227.1(1) and, consequently, he cannot be held liable for the payment of the deductions that the company 9041 failed to make during its operation. Although generally speaking, one should refer to the companies act that applies to 9041 to determine whether a person does or does not have director status, I find in the case at bar that Michel Tessier in fact did not take part in the activities of 9041 so as to engage his liability within the meaning of subsection 227.1(1) of the Act. His appeal is therefore allowed, with costs.
Denise Bousquet
[18] The transcript of Denise Bousquet's testimony at the examination for discovery was filed with the Court. On reading her version of the facts it is obvious that she never questioned the purpose of all of the documents that she had to sign, beginning with the incorporation of 9041. She acknowledged her signature but not the nature of the documents that she had signed. In fact, she did not remember why all those documents were signed.
[19] Even after signing her resignation as director in September 1996, she signed a series of documents shortly thereafter and obtained loans on behalf of the company without asking questions. It is hard to think that a person could commit such blatant and contradictory acts.
[20] The company 9041 did not file an amending declaration regarding the composition of the board of directors, notwithstanding that section 123.81 of the Companies Act of Quebec requires it. According to section 62 of the Act respecting the legal publicity of sole proprietorships, partnerships and legal persons of Quebec (the "LPA") the information relating to each registrant is proof of its contents in favour of third persons in good faith from the date on which it is entered in the statement of information. The third person (in this case, the appellant Denise Bousquet) may submit any proof to refute the information contained in a declaration. In the case at bar, the presumption was not refuted and the information recorded is proof of its contents. In any case, because of her conduct after her resignation, it would have been difficult for Denise Bousquet to refute the presumption.
[21] In fact, the appellant Denise Bousquet continued to act as director of 9041. Her participation in all of the commercial operations of 9041 after her resignation reflects at first blush her role as chair of 9041, even though the books indicate that she was secretary. Even if her resignation in September 1996 is acknowledged, her actions after that date could lead her to be considered as director in fact.
[22] The principle of director in fact and a director's liability under subsection 227.1(1) of the Act was recognized in a decision of the Federal Court of Appeal in Canada v. Corsano, [1999] F.C.J. No. 401 (Q.L.). In the case at bar, it must be determined whether the appellant Denise Bousquet acted as director. Since this is a question of fact, the issue must be decided on the basis of the specific facts adduced in the case at bar.
[23] Although Denise Bousquet signed various documents relating to the affairs of 9041, her passive participation in the commercial activities of 9041 and the fact that she did not invest any money in this business do not make her the directing mind that is usually sought when such a determination is made. Denise Bousquet exerted no influence on the course of events or the operation of the business (see Silcoff, [1998] R.D.F.Q. 159). For these reasons, I find that she was not director in fact.
[24] Was the appellant Denise Bousquet, as director in law, liable to pay the amounts of money that 9041 was required to remit to the tax authorities?
[25] As I said above, Denise Bousquet did not question her spouse's instructions. It is clear that the acts that she performed in the case at bar on behalf of 9041 were planned by her spouse. The fact that she does not appear to have understood everything that she was asked to do was confirmed by the testimony of Michel Tessier. Neither he nor Denise Bousquet appeared to be aware of all the dealings of Paulin Plamondon. Paulin Plamondon apparently used his spouse and Michel Tessier to achieve his ends. It is obvious that Denise Bousquet made no decisions. She did not seem to be able to assert herself or to demand anything at all. Her spouse directed the fate of 9041. Denise Bousquet did not invest money in 9041 and had no interest in the company.
[26] Associate Chief Justice Bowman of this Court dealt with this issue in Émilio Dirienzo v. Canada, [2000] T.C.J. No. 287 (Q.L.). At paragraph 11, he states:
[11] It is clear on the evidence not only that did the appellant do nothing but also that he was powerless to do anything. The uncle dominated the family and all aspects of the business. The case bears a strong resemblance to Fitzgerald et al. v. M.N.R., 92 D.T.C. 1019. In that case Mogan J. stated at page 1021:
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.
I would not hold as a general rule that a passive or inactive director is free from liability under subsection 227.1(1) of the Income Tax Act. For example, a person who consents to being a director of a corporation in order to accommodate a friend or client and then fails to participate as a director in the affairs of the corporation is still very much at risk under subsection 227.1(1). The passive or inactive director is not, per se, free from liability under subsection 227.1(1). But when the passive or inactive director has become a director in the context of a family business operated by a corporation which is dominated by an uncompromising patriarch, the domestic responsibility for maintaining harmony within the family becomes interwoven with the legal responsibility to third parties and, in these circumstances, I think that it is not reasonable to impose the same standard of care, diligence and skill on the passive "family director" as on the person who is truly free to become a director and does so outside a family context.
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[27] Applying the same reasoning to the case at bar, I am satisfied that the appellant met the requirements established in subsection 227.1(3) and that she acted in the circumstances with the degree of care, diligence and skill that a reasonable person would have exercised in a context and in circumstances that were comparable. A reasonable person would therefore have agreed to act as a director in name and left the management to her spouse. In view of these Reasons, it is not necessary to deal with the issue of prescription under subsection 227.1(4) of the Act.
[28] The appeals of Michel Tessier and Denise Bousquet are allowed, with costs, and the assessments are therefore vacated.
Signed at Ottawa, Canada, this 24th day of March 2003.
J.T.C.C.
Translation certified true
on this 4th day of May 2004.
Sophie Debbané, Revisor
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