Date: 19971110
Dockets: 95-2971-IT-G; 95-2972-IT-G; 95-2973-IT-G;
95-2974-IT-G; 95-2975-IT-G; 95-2976-IT-G
BETWEEN:
DANIEL A. IANNUZZI, ELENA R. CAPRILE,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent,
Reasons for Judgment
Bowie, J.T.C.C.
[1] The Appellant Daniel A. Iannuzzi is an entrepreneur of
considerable experience and ability. Over a period of more than
40 years he has been very successfully involved in the fields of
publishing and television broadcasting. Through his wholly owned
company, Daisons Corporation (Daisons), he has, throughout the
time period material to these appeals, controlled three other
corporations, Corcan Publications Inc. (Corcan), Fotoset and
Budget Web Limited (Fotoset) and VitaSana Magazine Inc.
(VitaSana). Corcan’s business is the publication of
Corriere Canadese, an Italian language newspaper which is
aimed at the first generation Italian-Canadian population of the
Greater Toronto Area. Fotoset’s business is typesetting and
printing, both for Corcan and for other newspapers. VitaSana
publishes a magazine in the Italian language dealing with a
variety of health related topics. Most recently, Daisons has
exercised its control of the operating companies through
MultiMedia Capital Corporation (MultiMedia), which is a public
company traded across the counter. Daisons holds approximately
34% of its shares; it in turn holds 100% of the shares of the
three operating companies.
[2] The other Appellant, Elena R. Caprile, worked for Corcan
for many years. She held the position of managing editor of the
newspaper Corriere Canadese, and reported directly to Mr.
Iannuzzi. She and Mr. Iannuzzi have also shared a common-law
personal relationship since 1970.
[3] At all times material to these appeals Mr. Iannuzzi was,
in addition to being the controlling shareholder, a director of
each of Daisons, Corcan, Fotoset and VitaSana. Ms. Caprile was a
director of both Daisons and Corcan at one time. These appeals
are brought against assessments made by the Minister of National
Revenue (the Minister) under section 227.1 of the Income Tax
Act (the Act). The assessments impose upon the
Appellants the outstanding liability of the various companies for
source deductions made by the companies from their employees for
income tax, both federal and provincial, and for contributions
under the Unemployment Insurance Act (as it then was
called), and theCanada Pension Plan, together with
penalties and interest.[1] The assessments in question are as follows:
Company Assessment date Amount
for Daniel Iannuzzi
Daisons January 20, 1993 $175,245.15
Corcan January 20, 1993 $575,012.97
Fotoset January 20, 1993 $302,848.10
VitaSana January 20, 1993 $ 52,302.75
for Elena Caprile
Daisons January 20, 1993 $175,245.15
Corcan September 21, 1994 $657,093.51
[4] By agreement of the parties, the six appeals were heard
together on common evidence.
[5] There is no dispute as to the extent of the liability of
the various companies at the relevant dates. The only issues
raised by Mr. Iannuzzi are a claim that he is entitled to avail
himself of the so-called due diligence defence found in
subsection 227.1(3) of the Act, and a claim that the
liability of the companies for their unremitted source deductions
was satisfied, at least in part as the result of a Security
Deposit Agreement to which I shall refer in more detail later.
Ms. Caprile raises an additional issue. She contends that she was
no longer a director of Daisons on January 20, 1991, nor a
director of Corcan on September 21, 1992, and that she is
therefore entitled to have the assessments vacated by reason of
the two-year limitation period which is found in subsection
227.1(4).
[6] Subsections 227.1 (1), (3) and (4) are as follows:
227.1(1) 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.
...
(3) A director is not liable for a failure under subsection
(1) where he exercised the degree of care, diligence and skill to
prevent the failure that a reasonably prudent person would have
exercised in comparable circumstances.
(4) 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 he last ceased to be a
director of that corporation.
[7] I shall deal first with the question whether or not the
assessments in respect of Ms. Caprile must be vacated by reason
of subsection 227.1(4). Her evidence was that she was a director
of Daisons at the time of its incorporation on April 30, 1986,
and a director of Corcan at the time of its incorporation in May
1987. This is confirmed by Mr. Iannuzzi. She went on to testify
that her mother, who lived in Rome, was seriously ill in the
latter part of 1989, and that she and her son went to Italy in
October of that year for an extended period to be with her. They
lived in her mother’s apartment in Rome, and her son
attended school there, while she worked as a correspondent,
filing stories for use in the Corriere Canadese. Except
for one short visit, she did not return to Canada until June
1993, after the death of her mother. She was adamant in her
evidence that she resigned as a director of the two companies
before she went to Rome, but she was unable to recall the date of
those resignations. In fact, throughout her evidence her
recollection of some important events was remarkably poor,
particularly as to matters crucial to the determination of the
issues in these appeals. I would have expected that a witness
with her background as a journalist, and her obvious
intelligence, would have been better able to recall the dates of
events, and would have spent some time prior to the trial in
reconstructing the chronology in her mind. I do not find her
evidence to be reliable on this issue, or indeed on any issue
where it is in conflict with other evidence.
[8] The other testimony bearing on this issue is that of Mr.
Iannuzzi, who said that Ms. Caprile had ceased to be a director
by the time MultiMedia was incorporated. However, he was unable
to explain why a resolution of the directors of Corcan had to be
faxed to Ms. Caprile in Rome to be signed by her in September
1990, more than a year after MultiMedia’s incorporation.
His personal relationship with Ms. Caprile gives him an interest
in the outcome of her appeals. In view of the unexplained absence
of the best evidence, to which I shall refer, I do not accept the
unsupported statements of either Appellant on this issue.
[9] Counsel sought to corroborate the evidence as to Ms.
Caprile ceasing to be a director of Daisons and of Corcan with
several uncertified photocopies of the filings of these
corporations under the Corporations Information Act[2] of Ontario. I do
not regard these photocopies as satisfactory evidence. That
statute requires notice of changes in the officers or directors
of a corporation, certified by a director, an officer, or a
knowledgeable person, to be filed with the Companies Branch of
the Ministry of Consumer and Commercial Relations within 15 days
following any change.
[10] Among the photocopies which were made exhibits at the
trial, without objection, were two in respect of Corcan. One of
these purports to record that Ms. Caprile ceased to be a
director on December 21, 1989, and the other indicates that she
ceased to be a director on October 1, 1991. There is no
suggestion in the documents, or in the testimony, that she was
named a director a second time between these two dates, nor was a
copy of a filing to that effect produced. Both of these notices
are signed for the company by Erwin Sui. Mr. Sui was not
himself an officer or a director of Corcan. He signed as a
“knowledgeable person”; his claim to be a
knowledgeable person arises by virtue of his being a member of
the law firm, Eversley and Sui, who, at the relevant time, were
solicitors for this group of companies. On November 30, 1990, Mr.
Eversley certified to a bank, from which the corporate group
sought to raise money, that Ms. Caprile was then a director of
Corcan. Exhibit R-3 at the trial is a copy of a resolution of the
directors of Corcan which is dated September 26, 1990, and signed
by Daniel A. Iannuzzi and Elena Caprile, who state
therein that they are all the directors of Corcan. This document
was prepared by Messrs. Eversley and Sui, and faxed to Ms.
Caprile in Italy, where she executed it and returned it by
fax.
[11] In the face of this conflicting evidence, I do not accept
the evidence of Ms. Caprile or that of Mr. Iannuzzi on this
point. Counsel for the Appellants submitted that, notwithstanding
all the inconsistencies, I should accept the photocopy of the
filing by Mr. Sui which showed Ms. Caprile as having ceased to be
a director of Corcan as at October 1, 1991 as being correct, even
if the earlier one was not. However, there is no reason to
believe that Mr. Sui’s certification was any more reliable
on that occasion than it was on the previous one.
[12] Of the various corporate filings under the
Corporations Information Act of which copies were put into
evidence, only one indicates that Ms. Caprile had ceased to be a
director of Daisons. That is the last filing, made on October 14,
1993, and it shows Daniel Iannuzzi to be the sole officer and
director of Daisons at that date. It is signed by Mr. Iannuzzi.
The previous filings indicate that Ms. Caprile was
vice-president and a director, and I conclude that she remained
so until September 1993, as the Notice of Change is required by
the statute to be filed within 15 days following the change.
[13] There is a requirement in the Corporations Act[3] of Ontario that
corporations maintain certain records, among them a register of
directors, and a corporate minute book. No corporate records were
produced at the trial, and no copy of a written resignation of
Ms. Caprile as a director of either company was produced. Neither
Mr. Sui nor Mr. Eversley was called to give evidence which might
shed light on these inconsistencies. Nor was any evidence
produced to explain these omissions. The only explanation offered
came from counsel when I raised the question during argument, and
it was a statement to the effect that there had been some
difficulties with respect to the corporate records, without any
hint as to what the nature of those difficulties might be.
[14] In these circumstances, when a party fails to adduce the
best evidence, or to give a satisfactory explanation as to why
that evidence is not available, I see no alternative but to draw
the inference that the best evidence, if it were produced, would
be unhelpful to that party’s cause[4]. I conclude that the Appellant,
Elena Caprile, has not discharged the onus upon her to
displace the Minister’s assumptions that she was a director
of each of Daisons and Corcan “at all material
times”, and that subsection 227.1(4) is not available to
her.
[15] Ms. Caprile has raised as a defence that she was not
concerned with the financial side of the business, but left that
entirely to Mr. Iannuzzi. She said that he looked after the
finances and did not seek her input. Indeed, it appears that she
attended only one meeting of a board of directors, and she had no
recollection of what was discussed at it. She knew nothing of the
duties and responsibilities of a director, nor, it would seem,
did she ask about them. When asked by Mr. Iannuzzi to be a
member of these boards, she viewed it as an honorary position. It
is argued that these are circumstances which must be taken into
account in assessing the standard of care to which she should be
held, and that in those circumstances little or nothing would be
expected of a reasonably prudent person.
[16] There is no doubt that Ms. Caprile’s duties
throughout were in the field of creative content rather than
business management. At Corcan, she was an editor responsible for
what was published, and from time to time she was a writer as
well. Others looked after the revenues and the paying of bills.
It is not clear to me that she had any duties as an employee of
Daisons, although she was vice-president throughout the
material time period. Certainly she did not in her evidence give
any indication that she had any particular function as
vice-president. These facts alone, however, do not lead to the
conclusion that she was without responsibility as a director.
[17] There are a great many decided cases which deal with the
standard which must be met by directors in respect of their
potential liability for the unremitted source deductions of
companies in various circumstances. The principles applicable
were recently extracted by the Federal Court of Appeal in its
judgment in Soper v. The Queen.[5] In that case Robertson J.A.,
writing for himself and Linden J.A., pointed out that inside
directors, those who are involved in the affairs of the company
from day to day, will have a difficult time arguing that they did
not know, or should not be expected to have known, about the
requirement to remit source deductions, and about the
company’s problems in that regard. In the context of that
general statement of principle, he gives specific approval to the
judgment of Bonner J. in Fraser v. M.N.R.[6] Although both counsel
referred me to a number of decisions of this Court dealing with
the standard to be applied, I find none of them to be more
instructive than Fraser. In that case the Appellant was a
director and the vice-president in charge of manufacturing of a
company which ultimately found itself in serious default in
respect of its obligation to remit source deductions. After he
found out about the fact that the company was in arrears, he did
nothing other than rely on the assurances of his fellow
directors, who were more concerned with finances than he. Judge
Bonner rejected the proposition that subsection 227.1(3) of
the Act provides a defence to a director who simply
asserts that there were others on the board whose responsibility
it was to see to the financial obligations.
[18] That is essentially the position which the Appellant
Caprile is taking in this case. She was the production person;
Mr. Iannuzzi looked after the financial aspects. There is no
doubt that Ms. Caprile became aware of the problems of
unremitted deductions in respect of both Daisons and Corcan as
early as September 1, 1988. On that date she and
Mr. Iannuzzi both executed, for each company, a document
which set out, in the most specific terms possible, the liability
of the company for unremitted source deductions under the
legislation, as well as their potential personal liability under
section 227.1. The purpose of that document was to induce Revenue
Canada to lift its demand for payment of the balance of the
company’s bank accounts, and to give to Revenue Canada the
assurance it required that the lifting of this demand would not
be used by the Appellants as a defence in any future proceedings
which it might take. No one of average intelligence could
conceivably read those documents without immediately becoming
aware of the exact nature of the problems of these companies
relating to their failure to remit, and of the Appellants’
potential personal liability under section 227.1 of the
Act. The sums involved, $97,116.17 for Daisons and
$283,074.52 for Corcan, appear on the third line of each
document. The Appellant Caprile in her evidence professed no
particular recollection of the document, or of the occasion of
its execution. Her counsel accepted in the course of his
argument, quite correctly, that Ms. Caprile was an inside
director. In my view, she properly fits the description applied
by Robertson J.A. to the Appellant in Fraser, whom he
calls “a good example of an inattentive inside director
upon whom liability was justifiably visited”.[7]
[19] Mr. Harris argued that this is a case in which Ms.
Caprile had no power to influence the course of events in respect
of the companies’ affairs, as Mr. Iannuzzi was the one who
called the corporate shots. He likened this case to that of
Fitzgerald v. M.N.R.[8] The conclusion of Mogan J. in that case that the
subsection 227.1(3) defence was available to the Appellants
depended upon his finding of fact that the husband of one
Appellant, father of the others, ran the family business in a
tyrannical way, and as “a feudal arrangement with the
father as lord of the manor and the other family members as
serfs”, and that it was to avoid family strife that the
other directors yielded to his will. There is no evidence before
me that Mr. Iannuzzi operated in any such way, or that
Ms. Caprile could not have offered her input into the
financial side of the business, had she chosen to do so. Whether
or not she could have changed the course of events is something
that we cannot know, because the fact is that she never tried,
even in the slightest degree, to have the companies put their
houses in order. I find that the due diligence defence is not
available to the Appellant Caprile.
[20] Mr. Iannuzzi was the sole shareholder of Daisons, and
through it he controlled all of the other companies in the group.
There is no doubt that his was the sole directing mind as to
their affairs. He stated quite unequivocally in his evidence that
in 1989 his paper, like others in the industry, experienced a
decline in revenues which caused cash flow problems, and that
soon thereafter he became aware of the failure of his companies
to remit their withholdings as the law required. Like Ms.
Caprile, he signed the agreements of December 1, 1988, and he was
aware by then that he had a serious problem. There was not one
iota of evidence given by him as to steps taken prior to the
default to ensure that default did not take place. Nor did he
take any steps afterwards to remedy the default, other than to
keep the business afloat, using the money withheld under the
legislation as working capital, in the hope that future profits
would emerge to solve the problem. Certainly he did not place a
high priority on paying either current withholdings, or the
accumulated debt. He stated that, during this period, his first
priority was to pay the employees, the second was to pay the
suppliers of newsprint and ink, and the other creditors,
including Her Majesty, came after that. His attitude can only be
characterized as one of blatant disregard for his obligations
under the Act. I find that he showed no diligence
whatsoever, and that the 227.1(3) defence is not open to him.
[21] There remains the issue of the Security Deposit
Agreement. In April, 1991 the Appellant Iannuzzi signed this
agreement, which is in effect a collateral mortgage in favour of
the Crown of 1,000,000 common shares of MultiMedia, to secure the
combined indebtedness of Corcan, Daisons, Fotoset and VitaSana
for arrears of withholdings under the legislation, up to a total
of $552,786.50. This collateral mortgage was taken by Revenue
Canada to provide security for the then existing debt, in the
hope and expectation that the companies would in the future pay
their current withholdings, while paying off the arrears as funds
became available to do so. This expectation went unfulfilled;
within a few months the companies again failed to remit their
current withholdings, and Revenue Canada officials foreclosed on
the security and attempted to sell the shares. The shares,
although not listed, had in the past traded in the
across-the-counter market, but by the middle of 1991 there was no
market for them, and all attempts to sell them were unsuccessful.
On the evidence before me, I find that the shares were worthless
by the summer of 1991.
[22] Appellants’ counsel cited no authority for his
contention that these circumstances relieve the Appellants of
their liability under section 227.1, nor do I know of any. If the
shares at some future time recover in value and the Crown
succeeds in realizing on them, then the companies and the
Appellants will no doubt be entitled to have credit for the net
proceeds. Similarly, if they satisfy their liability for the
outstanding withholdings, and the interest and penalties, then
Mr. Iannuzzi will be entitled to the return of his security.
In the meantime, however, the liability of the Appellants under
section 227.1 is not affected by the fact that the Crown held
these worthless shares at the time the assessments were
issued.
[23] All the appeals herein are dismissed. The Respondent is
entitled to costs, but the counsel fee at trial will be limited
to that applicable to one appeal only.
Signed at Ottawa, Canada this 28th day of November 1997.
"E.A Bowie"
J.T.C.C.
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