Lannuzzi v. R., [1998] 1 CTC 2671, 98 DTC 1278

Bowie 7.C.J.:

The Appellant Daniel A. lannuzzi 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.

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. lannuzzi. She and Mr. lannuzzi have also shared a common-law personal relationship since 1970.

At all times material to these appeals Mr. lannuzzi 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 the Canada Pension Plan, together with penalties and interest. [1] The assessments in question are as follows:

By agreement of the parties, the six appeals were heard together on common evidence.

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. lannuzzi 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).

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.

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. lannuzzi. 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.

The other testimony bearing on this issue is that of Mr. lannuzzi, 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.

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.

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. lannuzzi 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.

In the face of this conflicting evidence, I do not accept the evidence of Ms. Caprile or that of Mr. lannuzzi 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.

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 lannuzzi to be the sole officer and director of Daisons at that date. It is signed by Mr. lannuzzi. 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.

There is a requirement in the Corporations Acfi [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.

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.

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. lannuzzi. 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. lannuzzi 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.

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.

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. R.$ [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 (Trustee of) v. Minister of National Revenue [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 (Trustee of). 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.

That is essentially the position which the Appellant Caprile is taking in this case. She was the production person; Mr. lannuzzi 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. lannuzzi 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 (Trustee of), whom he calls “a good example of an inattentive inside director upon whom liability was justifiably visited”. [7]

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. lannuzzi was the one who called the corporate shots. He likened this case to that of Fitzgerald v. Minister of National Revenue^ [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. lannuzzi 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.

Mr. lannuzzi 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.

There remains the issue of the Security Deposit Agreement. In April, 1991 the Appellant lannuzzi 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.

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. lannuzzi 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.

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.

Appeal dismissed.