Vallozzi v. The Queen, docket 95-2527-IT-G

Date: 19971211

Dockets: 95-2527-IT-G; 95-2531-IT-G

BETWEEN:

ANNA VALLOZZI, ANTONELLA GISMONDI,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Beaubier, J.T.C.C.

[1] These appeals were heard together on common evidence by consent of the parties at Toronto, Ontario on November 17 and 18, 1997 pursuant to the General Procedure. The Appellants and their husbands testified on behalf of the Appellants. The Respondent called Lyle Faulkner, Tajinder Kooner and Donald Balanger, officers of Revenue Canada.

[2] The Appellants were assessed pursuant to section 227.1 of the Income Tax Act (the "Act") for their 1991 taxation years for liability as directors respecting unremitted withholdings by Art-Pac Marketing Communications Inc. ("A-P"). In paragraphs 4 and 5 of their Notices of Appeal, both Appellants admitted that they were directors of A-P.

[3] The Appellants' husbands were the sole shareholders in a company "Graph Line Graphics" which went into receivership in 1989. The two husbands then had A-P incorporated to carry on the graphic art business. Their lawyer, Rudy Bianchi, incorporated A-P on March 5, 1990. He was the incorporator and the sole director. On March 5, 1990 Mr. Bianchi signed the following Resolution and resignation which are part of Exhibit A-2.

RESOLUTION OF THE SOLE DIRECTOR OF

ART-PAC MARKETING COMMUNICATIONS INC.

(the "Corporation")

RESOLVED THAT:

a) ONE HUNDRED (100) Common Shares without par value of the Corporation (hereinafter called the "Common Shares") be and the same are hereby allotted as follows:

NAME	NUMBER OF SHARES	AGGREGATE AMOUNT TO BE RECEIVED
Anna Vallozzi	50 Common	$50.00
Antonella Gismondi	50 Common	$50.00

b) The Board of Directors hereby fixes the sum of $100.00 as the aggregate consideration for the issuance of the said One Hundred (100) Common Shares; and

c) Payment of the said One Hundred (100) Common Shares having been received by the Corporation, the said One Hundred (100) Common Shares be issued as fully paid and non-assessable, and a certificate therefore be issued to each of the aforesaid allottees.

THE FOREGOING RESOLUTION is hereby passed by the Sole Director of the Corporation as evidenced by his signature hereto, pursuant to the Business Corporations Act, 1982.

DATED the 5th day of March, 1990.

"Rudy A. Bianchi"

Rudy A. Bianchi

RESIGNATION

TO: ART-PAC MARKETING COMMUNICATIONS INC.

AND TO: THE BOARD OF DIRECTORS THEREOF

AND SHAREHOLDERS THEREOF

I hereby resign as a Director of the Corporation effective as of the date hereof.

DATED the 5th day of March, 1990.

"Rudy A. Bianchi"

Rudy A. Bianchi

These were inserted into the minute book. There is no evidence when that was done or that anyone else ever saw them until the hearing of this case. Rudy Bianchi also signed and filed Form 1,Corporations Information Act, filed on March 15, 1990, that he was no longer a director, that the Appellants were the officers and directors of A-P, and that A-P's corporate address was Mrs. Gismondi's home address (Exhibit A-1, Tab 5).

[4] No other directors' or shareholders' minutes were ever signed. No share certificates were signed or sealed. No by-laws were adopted or passed. The Appellants did not sign consents to act as directors. They never attended a shareholders' meeting. The Appellants never met Mr. Bianchi or any accountant about anything to do with A-P. Their husbands met with these professionals at all times. Their husbands testified that they treated and regarded A-P as their own corporation. The Appellants testified to the same effect.

[5] Both Appellants admitted that their husbands told them that A-P was in their names. However, they each deny that they knew that they were directors of A-P until they were told that by Mr. Kooner in March, 1993. The Appellants admitted that they signed bank documents which enabled them to sign A-P's cheques, but those documents are not in evidence. Any cheques which they signed were signed in blank at their husbands' requests. Their husbands managed A-P's business.

[6] The Appellants were paid salaries and dividends by A-P. They say that their cheques were deposited into each husband and wife's joint bank account by the respective husband. The Appellants both admit that they knew they were receiving salaries from A-P. They testified that they did not know that they received dividends. Mrs. Gismondi had worked at Graph Line Graphics and worked at A-P as a receptionist for two days a week until October, 1991 when she obtained a job elsewhere as a receptionist. Mrs. Vallozzi never worked at A-P; she is a cousin of Mr. Gismondi. Mrs. Vallozzi had worked part-time at Graph Line Graphics. After 1988 Mrs. Vallozzi stayed at home with her young children.

[7] Mrs. Vallozzi's education consists of grade thirteen (Ontario) and a cosmetics course. Mrs. Gismondi has grade twelve (Ontario). They are both young women with children below teen age. Neither has experience as an accountant or bookkeeper. Mrs. Vallozzi's previous employment experience was as a beautician sales person and as a part-time receptionist at Graph Line Graphics. Mrs. Gismondi's previous employment experience was as a receptionist. While at work at A-P she also delivered its bank deposits to the bank. The deposit forms were prepared by Mr. Gismondi.

[8] Mr. Gismondi was the inside man who kept A-P 's records and books. Mr. Vallozzi dealt with A-P's customers. Both husbands testified that they did not discuss A-P's business with their wives and the Appellants confirmed this. Mr. Gismondi instructed A-P's accountants and had those accountants prepare all of the individuals' income tax returns which the Appellants signed. Mrs. Gismondi testified that she verified her employment income on her income tax return and signed it. Mrs. Vallozzi said that she merely signed her income tax return. Mr. Gismondi mailed all of their income tax returns. Both women said that the bank documents the Appellants signed to enable them to sign A-P's cheques were taken to them by their husbands for signature. The Appellants said that they merely signed them for their husbands.

[9] Lyle Faulkner testified from his memory respecting his audit of A-P for unpaid withholdings. He believes that the audit occurred at the Gismondi home. The date of this audit was October 15, 1991. Mr. Faulkner remembered that Mrs. Gismondi was present. Mr. Faulkner testified that he believes that he asked Mrs. Gismondi who A-P's directors were. He learned from Mrs. Gismondi that the directors were Mrs. Gismondi and Mrs. Vallozzi. He stated that once he learned that arrears were owed, he warned Mrs. Gismondi about directors' liability. Mr. Faulkner's notes respecting the October 15, 1991 audit were shredded some time ago. Mr. Faulkner testified that he told Mrs. Gismondi of her liability as a director because that is what he is required to do it once he learned that she is a director.

[10] Mr. Kooner is also an income tax auditor. His only memory of any contact with the Appellants consists of computer entries which he made on March 22, 1991 of a meeting for collection purposes that he had with the Appellants and Mr. Gismondi. He did not describe any note stating that the Appellants actually admitted to him that they were directors of A-P. The phraseology of the notes quoted by Mr. Kooner indicates that he assumed that they were directors, not that they admitted to him that they were directors or that they acted as directors of A-P.

[11] In 1990 Mrs. Gismondi's income tax return and T-4 slips state that her salary from A-P was $4,612 and her dividends from A-P were $15,062.50 (Exhibit R-1, Tab 17). Mrs. Gismondi hand wrote her own 1990 T-4 from A-P. In 1991 her salary from A-P was $10,416 (Exhibit R-1, Tab 18).

[12] Mrs. Gismondi did not recall meeting Mr. Faulkner in 1991. She stated that it was not possible that she discussed these matters with Mr. Faulkner in 1991. Mr. Faulkner not only testified to meeting Mrs. Gismondi, he also filed Exhibit R-3 which he states that he received from Mrs. Gismondi on October 15, 1991 and which details A-P's receivables at that time.

[13] Mrs. Gismondi testified that she did not know that Graph Line Graphics went into receivership or that A-P laid off all of its employees at the end of December 1991 and sold its furnishings to pay its employees. She left her two days per week part-time job at A-P in October, 1991. She also testified that she never opened any of the Revenue Canada mail addressed to her at her home. She states that Mr. Gismondi handled that mail.

[14] Mrs. Gismondi is bright and alert. She testified that she was told that A-P was in her name for the purpose of signing cheques. She stated that Mr. Gismondi was told by his lawyer and accountant to put A-P in the wives' names when Graph Line Graphics went out of business. She has worked in the corporate world for her entire working life. Her testimony as to her ignorance of A-P, and its affairs, that her husband dealt with the Revenue Canada mail and that she was ignorant of everything at A-P is not credible. Mr. Faulkner's evidence respecting his meeting with her and receiving the list of A-P's receivables from her is accepted as true. Mr. Faulkner also testified that Mrs. Gismondi told him that A-P had poor cash flow so that it could not pay its September, 1991 source deductions and that the penalties were too high. Mr. Faulkner stated that Mrs. Gismondi told him that Mrs. Vallozzi and Mrs. Gismondi were each 50 percent shareholders in A-P, and that they were officers and directors of A-P. The Court believes Mr. Faulkner. He had no interest in the outcome of these appeals. He received the list of receivables filed in evidence which verifies the meeting with Mrs. Gismondi. No other witness stated that he or she gave the list of A-P's receivables to Mr. Faulkner. Where Mr. Faulkner's testimony conflicts with Mrs. Gismondi's, Mr. Faulkner's testimony is accepted.

[15] Mrs. Vallozzi testified that she was told A-P was in her name and Mrs. Gismondi's name because their husbands' previous business Graph Line Graphics had not done well. Therefore the two women had to sign for A-P. She testified that she did not know A-P was in financial trouble until she had to borrow $5,000 from her parents to support her family. She was at home with her children, but she denied receiving any Revenue Canada mail addressed to her. She stated that her husband gets the mail. She testified that she never was told that she was a director of A-P or that A-P owed source deductions until her husband told her that she had to meet Mr. Kooner in 1993.

[16] Mrs. Vallozzi received $10,000 in salary from A-P in 1990 and $4,000 in salary from A-P in 1991. She also received dividends in 1990.

[17] Both Mr. and Mrs. Vallozzi testified. In the Court's view, Mrs. Vallozzi is more alert and aware than Mr. Vallozzi. The Court does not believe that Mrs. Vallozzi did not open her own mail and relied completely on Mr. Vallozzi. Nor does the Court believe that Mrs. Vallozzi merely accepted a statement that A-P was in her name or that she signed A-P banking documents or cheques without knowing what they were for and the capacity in which she was acting.

[18] Rudy Bianchi did not testify. No explanation was given respecting this failure. He was a lawyer. The Court does not find it credible that a lawyer would incorporate A-P and file Form 1 describing the Appellants as directors and officers of A-P without obtaining their authorization to do so.

[19] A-P was incorporated under the Ontario Business Corporations Act. It defines "director" as follows:

1.(1) "director" means a person occupying the position of a director of a corporation by whatever name called and "directors" and "board of directors" include a single director".

S.O. 1982, c. 4

In The Queen v. Harvey Kalef, 96 DTC 6132 at 6134, McDonald, J.A., speaking for the entire Federal Court of Appeal, described this definition as follows:

Pursuant to subsection 1(1) of that statute, if a person is "occupying the position of director of a corporation" he or she is a director. The definition is quite passive. There is no requirement that the person exercise the power of a director or exert direct control over the company's assets in order to be a "director".

[20] Both Appellants knew that A-P was in their names. They signed banking documents. They signed cheques regularly. Each has stated that she felt she could not look into A-P's records or business affairs. But Mrs. Gismondi was signing cheques and delivering deposits to the bank. Despite this, she testified that she did not deposit her own pay cheques. Corporate mailings were addressed to her home. Mrs. Vallozzi signed cheques regularly. Mrs. Vallozzi had worked in the business world. Both knew that they exercised control over A-P by means of their cheque signing power. Both knew that A-P was theirs. Both knew that their husbands had, together, failed in business before. Both had received salary cheques and knew what withholdings from them were. Both received salaries from A-P and knew that their husbands received salaries from A-P with cheques that they signed. Both received substantial dividends from A-P in 1990. The joint husband-wife salaries from A-P in 1990 and 1991 were small by the standards of those years. As a result it is natural that each wife would discuss with her husband what the situation in A-P was. They say that they did not. Yet Mrs. Gismondi took a job elsewhere in 1991 and things were so difficult that Mrs. Vallozzi had to go to her parents for support. In these circumstances, their statements of ignorance and compliant acceptance of their husbands' operation of A-P is not credible. Neither woman has a compliant demeanour.

[21] It was obvious to the Court from an examination of the witnesses that Mrs. Vallozzi has a stronger personality than Mr. Vallozzi and appears to be the more dominant of that couple. Mr. and Mrs. Gismondi appeared to have equal personalities. Mr. Gismondi appears to be quite sure of himself. Both Mrs. Vallozzi and Mrs. Gismondi have obvious business sense and practicality. Both Appellants are sensible, intelligent people and appear to be well above the average Canadian in business awareness.

[22] In the Court's view, their knowledge that A-P was in their names was equivalent to knowledge that they owned A-P. Their knowledge that A-P was in their names, coupled in this case with their cheque signing powers and actions, was sufficient to make them knowledgeable that they were directors of A-P within the definition in the Ontario Business Corporations Act.

[23] The Appellants were not misled or deceived as to A-P's affairs. They say that they were not told of its affairs. But Mrs. Gismondi was in the office two days each week until October, 1991. Both families received incomes from A-P. Yet they say that they did not inquire into A-P's business or finances even though they knew that their husbands had already failed in business and they knew what their family incomes from A-P were.

[24] In the Court's view, on the evidence as a whole, both Appellants ought to have known that A-P could be experiencing remittance problems from the time A-P started in business. They both knew of their husbands' previous business failure. Their husbands were conducting A-P's day to day business affairs and they knew that A-P was in their names.

[25] The evidence is that the Appellants did nothing about A-P's business affairs. They did not inquire. They did not act. By doing nothing the Appellants failed to meet their duty under section 227.1 despite the fact that A-P being in the Appellants' names constituted a clear warning to them that care would be required of them in the conduct of all of A-P's business affairs including particularly the remittance of withholdings.

[26] The appeals are dismissed.

[27] The Respondent is awarded party and party costs in respect to each appeal. Only one set of costs is to be taxed respecting the hearing itself, but the parties are to be jointly and severally liable for the hearing costs.

Signed at Vancouver, British Columbia, this 11th day of December, 1997.

"D.W. Beaubier"

J.T.C.C.