Cheryl L. Daniel J.
Charges
The corporations Salt &; Pepper Mexican Restaurant Ltd., and 370259 Alberta Ltd. (sometimes operating as The Red Iguana Mexican Restaurant) herein called the "Companies", and Silvio Solano in his capacity as Director of those Companies are charged with failing to file completed Corporation Income Tax Returns on Form T-2, for the years 1990, 1991 and 1992 pursuant to Notices served on November 2, 1993 requiring the respective filings on or before January 31, 1994, all contrary to subsection 238(1) of the Income Tax Act (the "Act"). Contrary to the same section, and in his personal capacity, Silvio Solano is charged with failing to file a completed Individual Income Tax Return on Form T-l for the 1991 year, pursuant to a notice served on November 2nd, 1993, requiring the filing on or before January 31, 1994.
Issues
The issues relate to the guilt or innocence of the companies and Silvio Solano in his individual capacity and as director of the companies.
(A) Charges Against The Companies:
(i) Facts
Counsel for the companies admitted the companies, through their officers, did not exercise due diligence in the maintenance of their books and records. It is clear they did not comply with subsection 230(1) of the Act, which reads as follows:
Books and Records
Every person carrying on business and every person who is required, by or pursuant to this Act, to pay or collect taxes or other amounts shall keep records and books of account (including an annual inventory kept in prescribed manner) at his place of business or residence in Canada or at such other place as may be designated by the Minister, in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined.
To support a conviction for this offence against the companies, the Crown need merely prove the actus reus, while the companies may exculpate themselves by proof of reasonable care on the part of persons in control of the operations of the companies whose acts may be regarded as the acts of the companies.
(ii) Conclusion
It has been proven beyond a reasonable doubt Revenue Canada was engaged in a genuine and ongoing investigation into the tax liabilities of the companies and the enforcement of the Act against the companies. The notices to file the requisite tax returns were in order and properly served. The time for compliance was reasonable. In this case, the Crown has proven the actus reus, being the failure to file the requisite tax returns within the required 90-day period.
It has also been proven beyond a reasonable doubt the books and records of both companies were not kept as required by subsection 230(1) above cited, and that reasonable care and due diligence were not exercised by the officers and directors of the companies. The evidence before the Court falls far short of establishing a defence of reasonable care and due diligence. The burden of proof is upon the companies to prove such defence upon a balance of probabilities and this burden has not been discharged. The companies are, therefore, found guilty as charged in Information numbers #40338667P1 and 40338642P1 respectively.
(B) Charges Against Silvio Solano:
(i) Defence
Silvio Solano’s defence revolved around his delegation of corporate administrative tasks such as bookkeeping and accounting to the purview of his son, Alex Solano, who was to maintain the ordinary books and records of the companies and secure the services of accountants to complete the requisite accounting necessary to file the required returns.
His counsel submitted his client faced strict liability offenses and that Silvio Solano exercised due diligence in taking all reasonable steps to comply with the Revenue Canada demands. He submitted that for a corporate director to be found a guilty party to such an offence, section 242 of the Act required that he be shown to have "directed, authorized, assented to, acquiesced in, or participated in" the commission of an offence.
(ii) Onus of Proof
The onus of proof is upon the Crown to prove all the ingredients of the offenses beyond a reasonable doubt, including the elements of active or passive participation in the substantive offenses within the meaning of those key words. Passive participation would require proof that Silvio Solano, having knowledge of the circumstances surrounding the default of the companies and being in a position to influence the conduct of the companies, stood by and allowed the infraction to occur without taking any reasonable steps to prevent it, all as stated in the case of R v. Rogo Forming Ltd. (1980) 56 C.C.C. (2d) 31 (Ont. Prov. Ct.).
(iii) Definitions
The Act introduces five concepts of conduct by which a person other than the taxpayer involved may be guilty of an offence as a party: assent, acquiescence, participation, direction and authorization. In Webster’s Third New International Dictionary (New York: 1985), the terms are defined as follows:
acquiesce ... to accept or comply tacitly or passively; accept as inevitable or indisputable-often used with "in", sometimes used with "to", and formerly with
"with"...
assent...to give or express one’s concurrence, acquiescence, or compliance: consent...
authorize...to endorse, empower, justify, or permit by or as if by some recognized or proper authority (as custom, evidence, personal right, or regulating power) a new version: sanction...
direct...to regulate the activities or course of; to guide and supervise; to administer, conduct...
participate...to take part in something (as an enterprise or activity) usually in common with others...
I adopt the interpretations of these words as set out in Tax Evasion in
Canada by William I. Innes, Carswell, 1987 at page 79:
The concept of participation in an offence seems reasonably clear, in that it would involve actively joining in the conduct of a person committing an offence under the Act. The concept of assent seems to imply something less than active participation, that is, the expression of concurrence without the necessity of taking an active role in the perpetration of the offence. Acquiescence would seem to be even further removed from the action, involving a tacit consent or perhaps a wilful blindness.
In the case of offenses by corporations, the concepts of a direction and authorization would seem to be quite closely related. The former concept appears to be closer to the day-to-day administration of the operations of the corporation; the latter appears to involve the formal authorization of conduct (for example by a Board of Directors).
(iv) Case Law
Reference was made to a number of cases respecting the requistes which must be present to find Director’s liability: R. v. Whissell-McLeod Ventures Ltd., [1994] 1 C.T.C. 141, 140 A.R. 286 (Alta. Q.B.) (appeal dismissed on October 31, 1994 and memorandum or Reasons not yet available); R. v. Slupek, (Wilson, J.), (Alta. Q.B.), January 13, 1992, Alta C.A. (unreported); The Queen v. Swendson, [1987] 2 C.T.C. 199, 87 D.T.C. 5335 (Alta. Q.B.) and R. v. Gill, [1990] 2 C.T.C. 318, 40 B.C.L.R. (2d) 360 (B.C. Co. Ct.) Of particular interest from the Gill decision is the quotation at page 8 of Harris, C.C.J.:
I have noted the evidence of Mr. Leonard McIntosh, C.A. for the defence to the effect that the books of the various companies at the time the demands were served were in a mess and would have required four to six months of professional work and a cost of between $25,000 and $40,000 to do a proper full return situation. That in my view does not constitute a valid defence to any of the charges: The operator of any business (whether an individual or limited company) is under a duty to maintain such proper books of account and financial records as to enable that person to comply with his or its statutory reporting duties to the Revenue authorities: If a taxpayer fails regularly to maintain its records, and allows them to get in such a state that his or its income tax obligations can only be fulfilled through a lengthly and costly investigation which the taxpayer may have difficulty in affording, the taxpayer does so at his peril.
This view of the law was accepted by the Court in the Whissell-McLeod case.
(v) Facts
After hearing and considering all the evidence, I find the following facts. 370159 Alberta Ltd., sometimes operating as The Red Iguana Mexican Restaurant, was incorporated August 10, 1987 and is a valid and subsisting company currently in bankruptcy. Salt and Pepper Mexican Restaurant Ltd. was incorporated on August 9, 1987 and was as of November 2, 1993, a valid and subsisting corporation, however, action had been initiated to strike the corporation from the register and it was struck off the register and deemed to have ceased to carry on business in the Province of Alberta on January 3, 1994. A certificate of dissolution issued March 1, 1994.
The companies carried on active businesses as Mexican Restaurants during the periods in question and had substantial monthly sales. The GST investigators assessed $1 million in sales and $70,000 in GST owing, which latter sum was seized from the companies’ bank accounts in the early fall of 1993. All requisite tax filings for 1989 were completed. Completed corporate tax returns for the corporations in Form T-2 were not filed for the years 1990, 1991 and 1992, nor did Silvio Solano file his Individual Tax Return in Form T-l for 1991.
Silvio Solano had worked as a chef in various Mexican Restaurants since coming to Canada in 1970. From 1989 to its dissolution, Silvio Solano was the sole Director of Salt &; Pepper Mexican Restaurant Ltd. From 1989 to the date of trial, Silvio Solano and his son Alex Solano were the only Directors of 370259 Alberta Ltd. On November 2, 1993, both Alex Solano and Silvio Solano were properly served with Notices pursuant to the provisions of paragraph 231.2(l)(a) of the Income Tax Act to file completed Corporate Income Tax Returns (T-2) for the companies for the 1990, 1991 and 1992 taxation years within 90 days. Silvio Solano was served with a similar Notice with respect to his Individual Return (T-l) for the 1991 year. No such corporation or individual returns were filed by the requisite date (being January 31, 1994), nor have any been filed to the date of trial.
The demands for filing the requested returns resulted from an ongoing investigation by Revenue Canada and followed an investigation commenced in May of 1993 by the Revenue Canada GST branch with respect to GST infractions. Revenue Canada was conducting a genuine and ongoing investigation into the tax liabilities of the accused personally as well as the companies. The 90 days given for response was reasonable, notwithstanding the state of Silvio Solano’s personal records and the companies’ books and records.
Upon undertaking his responsibilities as a Director, Silvio Solano received legal and accounting advice as to the legal and accounting responsibilities which accrued to him as a Director of a corporation. He knew he had the responsibility to ensure a corporation of which he was a Director complied with Canadian laws. He was well aware he was required to file personal and corporate income tax returns and fully expected to owe taxes as he and his sons had been taking personal income from the companies and the Companies had been turning a profit. As its sole Director, he was the only directing mind of Salt &; Pepper Mexican Restaurant Ltd.
While he delegated to Alex the primary responsibilities for accounting and legal matters (while he focussed on food preparation), and presumed Alex was complying with those duties, it is clear Silvio Solano also met with the accountants and lawyer on a substantial number of occasions and at least knew the companies’ general state of affairs. Clearly he would have realized he had not submitted his personal T-1 for 1991 and should have been vigilant on a frequent basis as to its progress towards completion.
He knew he was required to keep business records and he knew there were cash tapes, cheque stubs and receipts. Six months before Revenue Canada demanded tax returns (being May of 1993, when demands for information were made respecting GST accounting), his lawyer specifically told him to get all the paperwork done or ’’something serious may happen". He knew there would be grave consequences if he failed to comply. Until the GST funds owing were seized by Revenue Canada in the fall of 1993, there was at least $70,000 that could have been applied for accounting work.
Silvio Solano had known the companies’ records were in a mess for over 1 1/2 years prior to the demands from Revenue Canada Taxation and for over one year prior to demands made respecting amounts owed for GST. He had known since April 30, 1992 that his personal income tax return (T-l) for 1991 was not filed. He knew since at least that time, the companies’ books and records were not in a condition to provide the information necessary to accurately prepare his T-1 for 1991. He also knew that Alex had not properly overseen the accountants and notwithstanding this he allowed Alex to continue to manage the financial end of the companies.
Silvio Solano knew the accounts were in too much of a mess for one accountant to fix. He knew in November 1993, that the accountant, Daphne Wadlin, could not do the requisite accounting within the 90 day time period specified. In November 1993, he knew she did not even have the basics to complete the accounting: original books of entry, bank statements, general ledgers, journals, source tapes, receipts, cancelled cheques and cheque stubs.
He actually met with the accountant, Daphne Wadlin, twice in November 1993 after he had received the notices to file the income tax returns and did not mention their receipt. Although he did instruct her to get the accounts done as soon as possible, he left her with the impression the only corporate concern was satisfying the GST requirements and securing FBDB financing. He did not instruct her to prepare his personal 1991 T-1 or the requisite T-2’s for the companies, either before or immediately upon receiving those notices.
He did not ask either of the two accountants who had been hired (one for current processing and one for past years processing), to focus their dual efforts on completing the 1990 Corporate T-2 and on his 1991 T-l, notwithstanding there was some suggestion there was enough information in the files to complete same as the first accountant thought he had done the 1991 T-l but simply could not find it in the messy records. Daphne Wadlin (the accountant for past accounting due) only found out about the T-l and T-2 requirements in late December, 1993 or early January of 1994.
Had Silvio Solano made the T-l requirement immediately known to her, Daphne Wadlin postulated she could have completed it in the required time, and if absolutely necessary, could have advised him to file an estimated return.
Daphne Wadlin was missing so much information and the books and records were in such a mess, that she indicated she could not have had everything done by the deadline. Had she had all the information and had the books and records been in appropriate form, she thought she could have at least properly completed 2 of the T-2 returns. Indeed, with additional help and had she known of the absolute time restraints, she may even have been able to complete estimated corporate returns for all the years required.
Knowing the accounting could not be done on time by Daphne Wadlin, and understanding the serious import of failure to file the returns, Silvio Solano did not instruct additional accountants or bookkeepers to be hired to complete the returns. As it transpired, in all the calls and meetings Alex had with the accountants, he never actually advised Daphne Wadlin of the service of the Notices to File received on November 2, 1993. Rather, he confirmed the requirements only after Daphne Wadlin had found out from the lawyer that there was a January 31, 1994 deadline for the filing of those returns.
By the time Revenue Canada filed its Notices to File, the Companies’ records had been badly mismanaged and were in a terrible state of affairs. Silvio Solano knew his legal obligations and the seriousness of them. Had he acted decisively either in 1991, 1992 or early 1993 to put the accounting in order, neither the problems with GST nor with Revenue Canada Taxation may have arisen. Had he ensured the books and records were kept up to date on a regular basis and confirmed the appropriate bookkeeping and journal entries were made to comply with subsection 230(1), the records would not have fallen so badly in arrears and essential records may not have gone missing. He delegated the accounting problems to others without the proper follow-up and control which he as sole Director in one case and as Co-Director in the other, had the legal obligation to maintain.
When the demands for the returns were made, he accepted the situation and acquiesced in, authorized, permitted and sanctioned his son’s plans for compliance, even though he knew the proposed course of action was not going to produce the requisite results in the time allotted. While he twice met with the accountant and participated in directing the accountants, he did not advise them of Revenue Canada’s requirements for filing the T-1 and T-2s.
Silvio Solano excused his ultimate responsibility by saying it was "hard to fit in ’production’ [meaning work in the kitchen] with an accountant and lawyer" and that he was "a little bit busy in November and December" with his role as chef in the restaurants. He said be "did not have a chance to follow up" with his son as to how the accounts were progressing. He did, however, have at least weekly meetings with his son Alex, at which time Alex would report to his father as to how business and accounting matters were progressing. On some of those occasions, Silvio Solano would give instructions to his son and his son would follow them, such as telling his son these were "very touchy matters" and instructing his son to "look after them".
He offered his limited education, his role as chef and handicap with the English language as an excuse. He also stated he delegated these duties to Alex and trusted his son to complete them properly. His son let him down and let the accounts get in such a disarray non-compliance with the notices was inevitable. Silvio Solano now wishes to exonerate himself from responsibility due to his misguided trust in his son. He blames all of this on his son and a lack of cash. He suggests he could have done nothing more than he did.
(vi) Director’s Duties
I find he cannot absolve himself from responsibility by hiding behind his son’s negligence. More than anything, it is Silvio Solano’s inattentiveness to accounting requirements and his failure to maintain control and take responsibility as was his legal duty, which initially caused the accounts to be in such a sorry state. His initial passive participation was not substantially changed once he received the notices to file in November 1993.
Directors must act honestly and in good faith. They must exercise the care, diligence and skill that a reasonably prudent person would exercise in the circumstances. A Director cannot delegate essential responsibilities without retaining ultimate accountability. Accountability for proper fiscal management lies with the companies’ Directors. A Director who assumes those responsibilities and subsequently ignores or abdicates those duties does so at his peril.
(vii) Conclusion
(A) Silvio Solano as Director
The essential elements of the charges against Silvio Solano in his capacity as Director of the companies have been proven beyond a reasonable doubt. I find it has also been proven beyond a reasonable doubt that Silvio Solano, in his capacity as Director of the companies, acquiesced, assented, authorized, directed and participated in the offenses referred to above against the Companies and for which they have been found guilty. Silvio Solano is thus found guilty as charged on Informations # 40346496P1 and 40338618P1.
(B) Silvio Solano in his Personal Capacity
With respect to Silvio Solano’s failure to file his 1991 personal T-l within the requisite time period as indicated on the validly served Notice to File. I find he did not take reasonable steps to ensure its filing, nor did he exercise due diligence in this regard. I find Revenue Canada was engaged in a serious, genuine and ongoing investigation and that the time allotted to him for completion of same was reasonable in the circumstances. He is
thus found guilty as charged in Information #40338675Pl.
Accused convicted.
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