Antonio Bianco v. Minister of National Revenue, [1991] 2 CTC 2449, 91 DTC 1370

Dussault, T.CJ.:—This is an appeal from an assessment by the respondent pursuant to section 227.1 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and s. 68.1 of the Unemployment Insurance Act, 1971 (notice of assessment No. 537692, dated October 2, 1987).

The part of the appeal dealing with the assessment for unemployment insurance contributions and related interest is dismissed as the Court has no jurisdiction.

As regards the part of the assessment dealing with a director's liability for tax withholdings not remitted to the Receiver General as required by section 153 of the Act, the respondent based his assessment on the following facts:

(a) “Vitrerie Andre Solarium (1985) Inc.” is a business corporation created pursuant to the Canada Business Corporations Act;

(b) at the time the assessment on appeal was issued, "Vitrerie Andre Solarium (1985) Inc.” owed the Department of National Revenue a total of $38,979.86;

(c) this amount of $38,979.86 consisted of (i) tax withholdings and unemployment insurance contributions for August, September, October, November and December 1985, (ii) insufficient contributions for unemployment insurance in 1985, and

(iii) penalties and interest;

(d) "Vitrerie Andre Solarium (1985) Inc.” failed to remit the amount in question to the Receiver General of Canada;

(e) on or about August 17, 1987, a certificate regarding the amounts in question was filed in the Registry of the Federal Court;

(f) subsequently, the Federal Court issued a writ of fieri facias regarding these debts of "Vitrerie Andre Solarium (1985) Inc.”;

(g) there was no execution with regard to the amount which was the subject of the certificate and writ of fieri facias, and a bailiff’s report was obtained to this effect;

(h) the appellant was a director of “Vitrerie Andre Solarium (1985) Inc." at the time this corporation was required to deduct, withhold or pay the amounts in question;

(i) as a director of "Vitrerie Andre Solarium (1985) Inc.”, the appellant did not exercised the degree of care, diligence and skill to prevent the failures that a reasonably prudent person would have exercised in comparable circumstances;

(j) the appellant is accordingly jointly and severally liable with “Vitrerie Andre Solarium (1985) Inc.” for payment of the amount in question of $38,979.86.

The appellant disputed this assessment, first, with reference to the fact that during the period in which he was director from April 1985 to October 15, 1985, he always personally ensured that the source deductions were remitted to the Receiver General by preparing and signing the cheques which he then passed on to one of the other directors, Mr. Bertucci, for signature and dispatch. He accordingly contended that under subsection 227.1(3) of the Act, he “exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances".

Further, the appellant said he resigned on October 15, 1985. He thus claimed that he could not in any case be responsible under section 227.1 of the Act for any failure subsequent to his resignation.

Alternatively, and if the Court finds that the appellant is liable for the source deductions for any period, he indicated that the claim against him should be reduced by the amounts which the respondent has already received either from himself or Mr. Bertucci, another director of the corporation, by way of garnishment.

The evidence discloses that Mr. Antonio Bianco became a director and vice- president, finance, of the business corporation Vitrerie Andre Solarium (1985) Inc. in April 1985. Mr. Bianco, who had no financial involvement in this corporation, said he accepted the position at the request of a business acquaintance, Mr. Frank Bertucci, who had agreed to finance this new corporation. At this time, Vitrerie Andre Solarium (1985) Inc. was to some extent taking over the activities of another corporation which had worked in the same field and in which the person mainly concerned was someone called Andre Ouimet.

Mr. Bertucci, the principal shareholder who was financing the new business and who worked for another firm, was seldom there and seems to have more or less asked the appellant Mr. Bianco to ensure that the internal operations of the business were correct and also to take charge of marketing, while Mr. Ouimet, the other shareholder, was primarily concerned with installation work. According to Mr. Bianco's testimony, an accountant was in charge inter alia of preparing the forms and cheques dealing with source deductions and payments to the Receiver General. These forms and cheques were then given to him for verification and signature. Once he had signed the cheques, the appellant said that he handed everything over to Mr. Bertucci for signature and despatch to the authorities, since the persons authorized to sign the cheques at that point were himself and Mr. Bertucci, or Mr. Bertucci alone (see Exhibit I-3).

The appellant said that in this regard he always followed the same procedure and no problem arose regarding withholdings and payments to be made up to July inclusively, while matters were going well. It was from July or August onward that relations between the two shareholders Bertucci and Ouimet began deteriorating and matters were never quite the same after that.

As to the appellant's status in the company, he said he resigned as a director on October 15, 1985 (see also Exhibits 1-1, p. 5, A-1, A-2 and A-7) and as a consequence of the fact that Mr. Bertucci had also resigned on October 3. It would appear that the situation was getting worse between the shareholders Bertucci and Ouimet and the latter was to buy back Bertucci's share as soon as he had the necessary money, which never happened. The appellant claimed that he remained with the company at Bertucci's request after his resignation as director and officer, and from November onward signed no more cheques. A bank document indicates, however, that he was still authorized to be a signatory of cheques (see Exhibit 1-6, p. 1). From that time on, he was referred to in certain documents as "controller" (see Exhibits 1-4 and 1-14, pp. 1 and 7).

According to the testimony of Mr. Pierre Arvisais, regional manager of the Royal Bank responsible for the company's account at the time, contacts between the Bank and the company were made almost exclusively with Mr. Bertucci, the shareholder who guaranteed the company's commitments.

The disagreement between the two shareholders Bertucci and Ouimet and the fraudulent schemes undertaken by the latter, according to the testimony of the appellant and of Mr. Bertucci, quickly led the company to insolvency. Since the shareholder Ouimet was also unable to buy back Bertucci’s share despite his promises, the Royal Bank finally seized the assets in January 1986 and it was Mr. Bertucci who had to honour the company's commitments.

The appellant stated regarding source deductions that towards the end of September he was told for the first time by an official of Revenue Canada that the cheque for source deductions for wages paid in August* 1985 had not been received and he told Mr. Bertucci this at once. The latter then apparently told the appellant that the cheque had in fact been sent to the authorities in question. The appellant said that he then passed on this information to the same official, who assured him that the necessary investigation would be done. Towards the end of October, the appellant learned from the same person that the cheque could still not be located, and also that the cheque for September withholdings had not been received. Mr. Bertucci was again told this by the appellant and again said that the cheques for August and September deductions had been sent. Later, in November, the appellant said he learned that the cheque for October deductions had been received. He was surprised at this and then, as suggested by the official, asked Mr. Bertucci to stop payment on the August and September cheques and issue new ones, which Mr. Bertucci refused to do, saying that the Department should do its job properly and find the cheques. Mr. Bianco further stated that he had no meetings with Revenue Canada officials. Mr. Bertucci's testimony on this whole matter is to say the least evasive; he remembered nothing about these incidents.

Counsel for the respondent questioned the fact that there were contacts between Mr. Bianco and a departmental official as early as late September 1985. Additionally, Mr. Andre Fournelle, a Revenue Canada auditor, said he was assigned to audit the wages of Vitrerie Andre Solarium (1985) Inc. on November 15, 1985, and did this audit on November 18. On that occasion, he said he met Mr. Bianco (whom he referred to in his report as "controller" (see Exhibit 1-14)), who told him that all the cheques for August, September and October had been made out and posted by the fifteenth of each month. Another audit was made by Mr. Fournelle on December 2, 1985 and at that time he said he met Mr. Andre Ouimet.

For his part Mr. Rejean Roberge, a collector for Revenue Canada, said he contacted Mr. Bianco by telephone between November 19 and December 4, 1985 to resolve the question of the payment of the amounts then due, but without success.

♦There was some confusion here as to the month concerned, as the notice of appeal initially mentioned July. As the deductions for July were paid, counsel for the appellant submitted an amendment to paragraph 11 so that it now refers to August, with the result that there is a gap of one month and the reference to August in paragraph 14 should read September, and that to September in the same paragraph should read October.

In conclusion, it should be noted that Mr. Bertucci was assessed for the unremitted source deductions for the period from April to July 1985 and for August 1985 (see Exhibit I-5 — notice of assessment No. 537691), while Mr. Bianco and Mr. Ouimet were assessed for the same periods and for the September to December 1985 period. According to the testimony of Mrs Landreville, a recovery agent employed by the respondent, the latter was able to recover $12,723.93 from Mr. Bertucci by garnishment at the Bank and issued a reassessment (notice of assessment No. 22255, replacing notice of assessment 537691, Exhibit 1-10) indicating that there was a nil balance owing. Additionally, the sum of $1,522.29 was also recovered from Mr. Bianco by garnishing his salary. Nothing was recovered from Mr. Ouimet, as no one knew where he was. Mrs Landreville set the amount owed by Vitrerie Andre Solarium (1985) Inc. for unremitted source deductions at the date of the hearing, with interest and penalties, at $38,361.97.

Looking at the testimony and documents submitted as a whole, one cannot help noticing a certain confusion and many contradictions. Moreover, the situation and affairs of Vitrerie Andre Solarium (1985) Inc. between August 1985 and January 1986 seem to have been in complete confusion, to say the least.

The evidence showed that the appellant was without doubt a director and officer of the company from April to October 15, 1985. Did he remain so thereafter? Despite some indication to the contrary, the balance of the evidence seems to be that he did not. The appellant was also an employee of the company during the period in question and subsequently, until January 1986. However, he was never a shareholder and never had any financial interest of any kind in it. I feel it is important to note this fact since, in situations such as the one being considered here, the question quickly arises as to who had an interest in not remitting, or not remitting on time, the source deductions for wages paid to the employees. One naturally tends to suspect that a person who invested large sums in a company would be the first that such a decision might benefit when things take a turn for the worse. Clearly, that is not always true. Having said that, it is somewhat difficult to understand why a person who is aware of his responsibilities and has no financial interest in a company would take such a risk. It seems all the more illogical as the appellant in the instant case never had authority to sign cheques by himself. At all times he had to forward them for signature to Mr. Bertucci, who either added his signature or signed alone. That fact is not in dispute. Did Mr. Bertucci sign the cheques and subsequently send them on to the government? We doubt it. The appellant said he always followed the same procedure, of verifying the forms and the cheques for source deductions, signing the cheques himself and forwarding everything to Mr. Bertucci for signature and dispatch to the authorities. When he was told that the cheque for August withholdings had not been received by the authorities, it was to Mr. Bertucci that he at once turned for an explanation. The latter was the principal shareholder and, as the evidence indicated, the company’s only financial backer, and he reassured the appellant by telling him that all the cheques had in fact been sent and it was undoubtedly the departmental officials who had mislaid them. After checking with the Department and confirming that the September cheque was also missing, the appellant again went to Mr. Bertucci for explanations. The same thing happened. According to the appellant, Mr. Bertucci refused to put stop payment orders on the earlier cheques and issue new ones. Mr. Bertucci's haste in resigning his position as director on October 3, 1985, after the appellant said he told him of the problem regarding source deductions and mentioned their joint liability in this regard, is very suspicious indeed. What could the appellant do on learning of such a decision by the person who was financing the company and guaranteeing its debts but quickly do the same thing and resign as a director himself, so as not to be eventually held liable for failure to remit the source deductions? As mentioned above, Mr. Bertucci stated in his testimony that he did not remember these incidents regarding the source deduction cheques. Once again, it seems strange that the only person who really had any financial involvement in the company and ultimately had the power to issue the cheques for source deductions did not even remember that there was a problem.

These observations on certain facts that I regard as material lead me to conclude that the appellant simply allowed himself to be fooled by the person mainly concerned in Vitrerie Andre Solarium (1985) Inc., namely Mr. Bertucci. What actions could be taken by the appellant, who I would describe in the circumstances as a subordinate, other than those mentioned above, since he. had no ultimate authority himself to correct the failure? As the appellant was barred from acting alone and depended on the word of Mr. Bertucci, who held the "purse strings" alone, he was eventually caught between two fires: he had no authority to do more than what he said he did. In the circumstances, he acted as a reasonably prudent person would have acted in comparable circumstances. He cannot be held liable for the decisions, actions or failures attributable to the person having the power to issue or withhold the source deductions cheques. Reference may be made in this regard to Stewart Gordon Edmondson v. M.N.R., [1988] 2 C.T.C. 2185; 88 D.T.C. 1542, illustrating a similar situation of dishonest behaviour by another person. On inability to act because of the presence or powers of a third party, there is also a certain parallel in Kenneth Merson v. M.N.R., [1989] 1 C.T.C. 2074; 89 D.T.C. 22, Jean-Pierre Champeval and Rose-Marie Champeval v. M.N.R., [1990] 1 C.T.C. 2385; 90 D.T.C. 1291 and Bernard Fancy and Dorothy Fancy v. M.N.R., [1988] 2 C.T.C. 2256; 88 D.T.C. 1641.

The worsening of relations between the principal shareholders, the problems which resulted for the company, the lack of ultimate authority to issue cheques and the statements made by the principal shareholder, Mr. Bertucci, left the appellant here with very little room to manoeuvre. On looking at the evidence as a whole, I feel that he did what he could in the circumstances.

In closing, I would note that counsel for the respondent argues that the appellant was still a director of the company after October 15, 1985, and in any case, he was a de facto director from that date and at least until late November 1985. I would simply say that the balance of the evidence does not support this conclusion.

For the foregoing reasons, the appeal is allowed with costs to the appellant.

Appeal allowed.