Date: 19990622
Docket: 97-1180-GST-G
BETWEEN:
SANDRA STEIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] The appellant appeals from an assessment dated
July 12, 1996 made under section 323 of the Excise
Tax Act (the Act), which establishes the liability of
the directors of a corporation which fails to remit the amount of
net tax which it owes. The periods at issue are those ending on
October 31, 1994, January 31, 1995 and July 31,
1995. The total amount of the assessment of July 12, 1996 is
$15,138.40.
[2] The Notice of Appeal states, inter alia, the
following:
[TRANSLATION]
4. THAT Revenu Québec wrongly claims that the appellant
was a director of 2843935 Canada Inc.;
. . .
6. THAT the appellant, at all times relevant to the instant
case, was not a director of 2843935 Canada Inc. At all times
relevant to the instant case, Anthony Sanzone was the
director of 2843935 Canada Inc.;
. . .
10. THAT, in the instant case, the appellant exercised the
degree of care, diligence and skill that a reasonably prudent
person would have exercised in comparable circumstances, in view
of the fact that the actual director was Anthony Sanzone and
that the appellant was always kept out of the company's
business . . . .
[3] The Reply to the Notice of Appeal (the Reply) sets out,
inter alia, the following facts:
[TRANSLATION]
8. That the appellant was a director of 2843935 Canada Inc.
(hereinafter "the company") during 1994 and 1995;
9. That the following documentation issued by the company is
conclusive on this point:
- Minutes of a meeting of the company's directors dated
August 12, 1992; the appellant is described therein as a
director and she signed the said minutes;
- Minutes of a special meeting of the company's directors
dated October 31, 1993; the appellant is described therein
as a director and she signed the said minutes;
- Minutes of a meeting of the company's directors dated
March 1, 1994; the appellant is described therein as a
director and she signed the said minutes;
- Document pertaining to the company, which is dated
November 15, 1993 and entitled "List of Directors and
Officers"; it describes the appellant as a director of the
company and bears her signature;
- Minutes of the first meeting of the company's directors;
the appellant was elected a director of the company and signed
the said minutes;
- Minutes of a meeting of the directors dated April 30,
1994; the appellant is described therein as a director of the
company and she signed the said minutes;
- Minutes of a meeting of shareholders dated April 30,
1994, signed by the appellant;
...
15. That, furthermore, with respect to the amounts of net tax
(hereinafter "GST") which the company failed to remit
to the Receiver General, the appellant did not exercise the
degree of care, diligence and skill to prevent the company's
failure that a reasonably prudent person would have exercised in
comparable circumstances;
16. That the appellant took an active part in the company, the
whole as can be seen from documents issued by the company;
17. That the appellant was a member of the boards of directors
of a number of companies;
18. That the appellant or her representatives did not attempt
to show the officers of Revenu Québec that she had
exercised care, diligence and skill with respect to the
company's failures;
19. That the appellant and/or her representatives did not in
any way attempt to show the officers of Revenu Québec that
she had taken positive action to avoid or prevent the
company's failures; in fact, all the appellant's
representatives did was to say her role had been a passive one
(which, it should be added, the respondent denies). ...
[4] At the hearing, the statement made in the Notice of Appeal
that the appellant was not a director of the corporation was not
repeated. What was argued was the passive nature of the
appellant's role in the management of the corporation. In the
Reply to the Notice of Appeal, the respondent denied that the
appellant was passive and noted that she had attended the
meetings of the corporation's board of directors and signed
its documents. Furthermore, the appellant was a member of the
boards of directors of a number of corporations.
[5] Mary Sanzone, Martin Saxner, David Stein
and the appellant testified at the request of counsel for the
appellant. Louise Gadouas and François Bernier
testified at counsel for the respondent's request.
[6] Mrs. Sanzone explained that 2843935 Canada Inc.
began doing business in 1992 as Altima Designs, which is the
name by which the corporation will be subsequently referred to.
The corporation manufactured sheets, draperies, mattress covers
and comforters. According to Mrs. Sanzone, her husband
Anthony Sanzone was the corporation's senior director.
He took care of the business's general management, while she
oversaw production. Mrs. Sanzone had experience in this kind
of business. She took care of hiring and trained employees to cut
material and use the machines. She said she was not really aware
of the business's financial problems. Her husband told her a
few times that the business was having growth problems but said
that the company was financially stable. During the period in
issue, the business was located in a building owned by a
corporation of which the appellant was a director.
[7] Mrs. Sanzone explained that another person,
Martin Saxner, took part in the business's management.
Mr. Saxner had previously been employed by the Stein family.
Mrs. Sanzone expressed the opinion that Mr. Saxner was probably
involved in Altima Designs' business to protect the Stein
family's interests. She said the appellant's husband,
David Stein, came a few times, with the appellant, to confer
with Mr. Sanzone. However, Mrs. Sanzone said that she
rarely saw the appellant, perhaps two or three times. When she
came, she asked whether everything was going well and
Mrs. Sanzone answered that it was.
[8] Mr. Sanzone died suddenly on September 5, 1995.
Shortly after her husband's death, Mrs. Sanzone said she
completely abandoned the business. Exhibit A-2, which
consists of cheques, shows that she nevertheless signed pay
cheques until October 6, 1995. She and Mr. Saxner
signed the cheques in question. Mr. Sanzone, the appellant
and David Stein were also authorized to sign cheques.
[9] Martin Saxner stated that he began to work for the
Stein family after receiving a commerce degree from McGill
University. He started working for Altima Designs in
mid-1993 and stayed there until the business closed in
1995. Mr. Saxner explained that Mr. Sanzone was the
business's guiding mind, that there was a clerk who made
entries in the books and that he himself filled out the necessary
forms. Mr. Saxner mentioned that he may have made
arrangements with Revenu Québec officers to pay the
GST.
[10] Mr. Saxner said that the business had no real
difficulty paying employees and that it had taken out a number of
loans, from the National Bank, the Federal Business Development
Bank and the Stein family. He said the appellant came a few times
to pick up comforters and ask how things were going, nothing
more.
[11] David Stein stated that the investment he and his
wife, the appellant, made in Altima Designs' business was
their first manufacturing venture. Ninety-five percent of their
business is in real estate. A partner, Alex Weinberger, had
put him in contact with Mr. Sanzone. Mr. Stein did not
know whether Mr. Sanzone had previously been in business or
whether he was an employee. He said that he had asked some people
about Mr. Sanzone and had been told that he was an honest and
competent man.
[12] The appellant invested $50,000 in the business and signed
a guarantee for a $75,000 line of credit. Mr. Stein said
that he saw Mr. Sanzone once or twice a month, either as his
landlord or for the purpose of protecting his wife's
investment. They briefly discussed business. Mr. Sanzone
told him that the bills were paid and everything was up to date.
It was the banks that seized the business's assets. He may
have seen the financial statements but did not remember doing so.
He confirmed that he was one of the five people who were
authorized to sign Altima Designs' cheques.
[13] The appellant introduced herself and gave her occupation
as "housewife". She is a retired elementary school
teacher, and she suggested that she knows little about the
business world and nothing at all about manufacturing production.
However, the evidence revealed that she was a director of a
number of corporations involved in the real estate business and,
in one case, a laboratory. All these businesses have
employees.
[14] The appellant said that someone approached her husband in
1992 concerning an investment in Altima Designs. As the real
estate business was slow at that time, the appellant thought that
investing in a manufacturing business would be a good
alternative.
[15] She explained that her husband had health problems
11 years ago. He was unable to drive and had suffered a
partial hearing loss. It was for this reason that she began to
take an interest in the real estate business. She had an office
at the head office of the Stein family's business. However,
she said that she had only a desk in her husband's office and
that she answered the telephone, did some filing and made the
coffee. This office is located at 1010 Ste-Catherine
Street West.
[16] The appellant contended that she did not ask to see the
financial statements or to sit on the board of directors. Her
only discussions with Mr. Sanzone were to determine whether
everything was going well, and he answered that they were. She
trusted Mr. Sanzone implicitly and did not discuss GST
remittances with him. Although she became the sole shareholder
following Mr. Sanzone's death, she claimed not to have
been informed about the manner in which the business was wound
up.
[17] Ms. Gadouas is a tax collection officer for Revenu
Québec. She stated that the case was assigned to her
because an NSF cheque was received by the Receiver General on
August 16, 1995. On November 9, 1995, she went to the
premises of Altima Designs and inquired with the tenant upstairs,
who told her that the business had been closed for a month.
[18] Counsel for the appellant pointed out that the appellant
is a housewife and has no experience in the manufacturing
industry. If there is one field where the appellant has a little
experience, it is real estate. Thus it was normal for
Mrs. Stein to give Mr. Sanzone considerable latitude.
Counsel argued that an outside director has a lesser duty of care
than an inside director. The appellant had no reason to suspect
there were problems.
[19] Counsel for the appellant referred to the decision of the
Federal Court of Appeal in Soper v. R., [1997]
3 C.T.C. 242, and the following passages in
particular:
(Page 255, paragraph 16)
The second proposition that I wish to discuss is the
following: a director need not exhibit in the performance of his
or her duties a greater degree of skill and care than may
reasonably be expected from a person of his or her knowledge and
experience. Thus, the standard of care is partly objective (the
standard of the reasonable person), and partly subjective in that
the reasonable person is judged on the basis that he or she has
the knowledge and experience of the particular individual. It is
a hybrid “objective subjective standard”. . . .
Third, a director is not obliged to give continuous attention
to the affairs of the company, nor is he or she even bound to
attend all meetings of the board. . . .
Fourth, in the absence of grounds for suspicion, it is not
improper for a director to rely on company officials to perform
honestly duties that have been properly delegated to them. . .
.
(Page 263, paragraph 32)
. . . I intend to focus on the category of cases respecting
the distinction between inside and outside directors since that
line of authority is the most pertinent to this appeal.
(Page 263, paragraph 33)
. . . [I]t is difficult to deny that inside directors, meaning
those involved in the day-to-day management of the company and
who influence the conduct of its business affairs, will have the
most difficulty in establishing the due diligence defence. . .
.
(Page 268, paragraph 45)
. . . Whether the standard of care has been met, now that it
has been defined, is thus predominantly a question of fact to be
resolved in light of the personal knowledge and experience of the
director at issue.
[20] Counsel for the respondent pointed out that
Mrs. Stein had a university education and got genuinely
involved in the business when her husband became ill. Mrs. Stein
claimed that she did not know whether Mr. Sanzone was
originally an entrepreneur or an employee and therefore did not
inquire as to whether he was an experienced manager. Nor,
according to her testimony, did she ask to see the financial
statements. She had no idea of the company's indebtedness
year after year, although she lent it $50,000 and guaranteed the
$75,000 line of credit, and her investment dated back to 1992.
She was the only other director of the corporation and, according
to her testimony, she attended none of the shareholder meetings.
The fact that she sits on the boards of directors of many
companies is proof that she is an experienced businesswoman.
Despite her substantial investment in Altima Designs, she
contended that she did not know what happened to the
business's assets following Mr. Sanzone's death. Yet
it was she who had become the company's sole director. The
appellant claimed that she knew virtually nothing about what
happened. She was totally passive and entered the premises only
to ask how things were going, out of courtesy, and pick up a few
comforters. Counsel for the respondent argued that outside
directors do not escape liability if they choose not to inquire,
and he referred on this point to Soper, supra, at
page 266, paragraph 42:
In my view, the positive duty to act arises where a director
obtains information, or becomes aware of facts, which might lead
one to conclude that there is, or could reasonably be, a
potential problem with remittances. Put differently, it is indeed
incumbent upon an outside director to take positive steps if he
or she knew, or ought to have known, that the corporation could
be experiencing a remittance problem. The typical situation in
which a director is, or ought to have been, apprised of the
possibility of such a problem is where the company is having
financial difficulties. . . .
Conclusion
[21] The lack of transparency in this appeal ultimately does
the appellant a disservice. In the Notice of Appeal, the
appellant states that she was not a director of the corporation
and added that she was kept out of the corporation's business
by Mr. Sanzone, who was the company's real director. The
first statement was not repeated at the hearing since it was
obviously inconsistent with the facts. The second one was
repeated, although no clear evidence was adduced to support it.
The testimony of the appellant and the other witnesses was not
credible because it was not consistent with the facts. First of
all, the testimony of Mr. Saxner, a former employee of the
Stein family, was evasive. Mr. Saxner took an active part in
the management of the business and thus could have revealed
exactly what happened. He managed to avoid giving an accurate
description of the facts. The appellant and her husband said they
did not know whether Anthony Sanzone was a businessman
before the business started up or an ordinary employee. The
appellant thus did not know whether Mr. Sanzone was a
manager on whom she could rely to remit the source deductions.
The appellant sits on a number of corporate boards and is thus
experienced in the affairs of a business, but she claimed to have
no experience. It is implausible that she would have taken no
interest in the business's financial situation when she had
lent it $50,000 and guaranteed a $75,000 line of credit and was
the corporation's only other shareholder. Nor is it plausible
that she did not know what happened to the business's assets
after Mr. Sanzone's death. She wanted to present a
totally passive image of herself as a director, but such an image
is inconsistent with the evidence. She is a person with business
experience.
[22] 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. Even
if it were agreed that the appellant fell into the category of
outside directors, she nevertheless had a duty, once she had
become aware of the business's financial difficulties, to
ensure that source deductions were remitted. The appellant could
not help but know of the business's financial difficulties,
since she had lent it $50,000 and guaranteed the line of credit.
In view of her corporate experience, she had to ensure, as a
director of the corporation, that the source deductions were
remitted. In failing to do so, she did not exercise the diligence
required by subsection 323(3) of the Act.
[23] The appeal is accordingly dismissed with costs.
Signed at Ottawa, Canada, this 22nd day of June 1999.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Email this Content