[OFFICIAL ENGLISH TRANSLATION]
Date: 19980113
Docket: 97-600(IT)I
BETWEEN:
SALVATORE TIZZONI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] This appeal concerns the liability
of directors under section 227.1 of the Income Tax Act
(the "Act").
[2] The issue is whether the appellant
exercised the diligence required under subsection 227.1(3)
of the Act.
[3] Joseph Petraccione and the
appellant testified at the request of the appellant's
counsel. Nicole Bélanger testified at the request of
the agent for the respondent.
[4] At the outset of the hearing, the
agent for the respondent sought leave to make a few corrections
to the Reply to the Notice of Appeal ("the Reply"). As
counsel for the appellant did not object to the request, leave
was granted.
[5] The facts assumed by the Minister
in assessing the appellant are set out as follows in paragraphs 6
and 7 of the Reply (as corrected):
6. By Notice
of Assessment No. 09037 dated July 23rd, 1996, the Minister
of National Revenue (the "Minister") assessed the
Appellant for federal income tax deducted at source but not
remitted by Da Vinci Marble and Granit Inc. (the
"Corporation") and penalty and interest relating
thereto as follows:
FEDERAL
TAX
$7,124.91
PENALTY AND
INTEREST
1,814.45
ADDITIONAL
INTEREST
161.90
$9,101.26
7. In so
assessing the Appellant, the Minister made the following
assumptions of fact:
a. the
Corporation ceased its operation in December 1994;
b. a
certificate for the amount of the corporation's liability has
been registered in the Federal Court of Canada under
section 223 and execution for such amount has been returned
unsatisfied in whole;
c. the
Appellant was, at all material times, a director of the
Corporation;
d. the
Corporation failed to remit to the Receiver General federal
income tax withheld from the wages paid to its employees for the
balance of the 1994-T4 amounting to $7,124.91;
e. the
Corporation failed to pay penalties and interest relating to the
unremitted federal tax in the amounts of $1,883.68;
f.
additional interest, in the amount of $92.67, on unpaid amounts
mentioned in sub-paragraphs d and e, was payable by the
Appellant;
g. the
Appellant did not exercise the degree of care, diligence and
skill to prevent the failure to remit the said amount by the
Corporation that a reasonably prudent person would have exercised
in comparable circumstances.
[6] The facts relied on by the
appellant are set out in his Notice of Appeal as follows:
1. The
appellant, SALVATORE TIZZONI, is an investment partner in Da
Vinci Marble and Granit Inc. The appellant did not participate in
the everyday administration of the company, nor did he exercise
direct control over the bookkeeping or other daily accounting
affairs of the company.
2. As a
prudent and diligent businessman, the appellant required that a
bookkeeping system be put in place and that a chartered
accountant be mandated to overlook the affairs of the company as
well as to insure that all taxes were punctually and fully
paid.
3. Having been
assured that such systems had been in place, the appellant relied
on the competence and administrative capacities of the involved
and active directors of the company to ensure that the company
would meet all its liabilities, specifically any tax liabilities
as they became due.
4. The
appellant regularly asked his co-directors about the
financial situation of the company.
5. The
co-directors mentioned that the company was experiencing rough
times but that it was going to survive. They never mentioned
problems relating to the payment of their creditors in particular
Revenue Canada. The appellant relied on those financial officers
and had no reason to question their information.
6. The
appellant was not aware that there were any problems concerning
the payments to Revenue Canada. The appellant never expressly or
implicitly authorized the decision not to remit the funds to
Revenue Canada.
7. The
appellant was misled by his co-directors as to the financial
situation of the company.
8. The
appellant has never committed any fraudulent, illegal or wilful
acts with regards to the liabilities of the debtor company. The
termination of the company's activities was brought on by
difficult times in the industry as well as by a loss of
confidence by the company's bankers subsequent to a seizure
before judgment practiced by the landlord for unpaid rentals.
9. The
combination of all these factors were overwhelming and beyond the
appellant's control. The appellant should not be made to
assume the financial burdens of this corporation to
respondent's claim.
10. The appellant whom his
an investment partner in Da Vinci Marble and Granit Inc. is
without fault, having acted in good faith and as a prudent
businessman would have in the circumstances. The facts presented
here are sufficient and support this due diligence defence in
favour of the appellant.
[7] The testimony, both Mr.
Petraccione's and the appellant's, was not really
consistent with the reasons set out in the Notice of Appeal.
[8] Joseph Petraccione told the Court
that from 1971 to 1982 he worked as a labourer or as a foreman.
In 1982, he started up his own marble and granite business. In
1992, with a view to expanding the business, he wanted to
purchase, for $300,000, the equipment, including the machinery
and inventory, of a marble, granite and ceramic tile business by
the name of European Marble located on Jarry Street in
Montréal.
[9] Mr. Petraccione did not have the
necessary capital and talked about his planned purchase to the
appellant, whom he had known for approximately two years. Among
other businesses, the appellant had a kitchen cupboard
manufacturing concern and, from time to time, he required Mr.
Petraccione's services for marble or stone kitchen counters.
The appellant agreed to participate in the purchase. In fact,
according to his testimony, he took an active role in putting
together the capital needed by Marbre et Granit Da Vinci Inc.
("Da Vinci") to purchase European Marble's
business. Mr. Petraccione and the appellant each invested $60,000
and obtained the difference by means of a loan from the National
Bank under the government's assistance to small enterprise
program. Da Vinci occupied the same premises as the business that
was purchased. The owner of the building agreed to give six
months rent-free, after which $14,000 per month rental would be
charged.
[10] The business included a shop where
stone was cut and a showroom for wholesale and retail sales. The
business employed from seven to nine people. The area of the
premises was approximately 25,000 square feet.
[11] Mr. Petraccione handled the management
of the business, which involved both the operational aspect and
office administration. Mr. Petraccione declared personal
bankruptcy in October 1995.
[12] Mr. Petraccione testified that he
reported to the appellant several times a month and that he told
the appellant on those occasions that everything was going well
because, in fact, he thought that everything would be fine and
that he would secure contracts, but these never came. The
appellant did not often go to the business's premises. It was
Mr. Petraccione who went to see him twice a month at his office
to have him sign the cheques.
[13] Da Vinci had a secretary who did the
bookkeeping, and an accountant came two or three times a year to
do some auditing.
[14] In June 1994 this accountant apparently
prepared an initial financial statement for the fiscal year
ending in December 1993. That statement was not filed. Mr.
Petraccione said that the income statement did not show a loss in
the first year of operations but that this was probably due to
the fact that the company had paid no rent for the first six
months. Da Vinci did not file a tax return.
[15] From July 1994 on, the rent was no
longer being paid. In December 1994, the owner of the building
had the company's equipment and inventory seized and had the
business shut down. A letter from the National Bank of Canada
addressed to Revenue Canada, dated December 28, 1995, and
produced in evidence as Exhibit I-6, explains the events as
follows:
[TRANSLATION]
. . .
At the end of 1994, the lessor of the premises on which was
located the inventory that had been given as security and
assigned to the Bank had it seized. That was when the Bank
demanded immediate payment of the balance owing. The Bank, which
held the inventory as security under section 427 of the Bank
Act,obtained the release of the inventory and then requested
that it be given possession thereof so that it could dispose of
it. The Bank disposed of the inventory for an amount of
$115,000 in payment of the advances owing.
We attach a copy of the security provided by our client under
section 427 of the Bank Act.
[16] The appellant is a businessman. He is
vice-president of GIT Aluminium, a door-and-window-manufacturing
company that employs approximately 70 persons. He is president of
Canac Cellini Québec Inc., a company that manufactures
kitchen cupboards. He devotes 80 per cent of his time to the
first company and 20 per cent to the second. He also has an
interest, but as an investor, in a company by the name of
Thermalite.
[17] As a director of other companies, the
appellant was very familiar with a director's obligations and
he testified that he asked the usual questions asked by a
director in making sure that a company is being run properly.
However, Mr. Petraccione told him that everything was fine.
Moreover, the accountant was his own accountant, a man whom he
trusted.
[18] With respect to the acquisition of Da
Vinci, as stated above, the appellant had put a great deal of
effort into obtaining the necessary capital. He left the
management of the business to Mr. Petraccione, however, because
he had no experience in granite and marble. He received no
remuneration from Da Vinci. He merely hoped for a good return on
his investment. One of the benefits he anticipated, apart from an
increase in his equity, was getting better prices for kitchen
counters. According to the appellant, that was the extent of his
interest in Da Vinci: it was an investment.
[19] However, to be valid, Da Vinci's
cheques required two signatures, the appellant's and Mr.
Petraccione's. Exhibit I-1 is a resolution of the
corporation's board of directors. This was a resolution
relating to banking and dated January 11, 1993. It can be seen
that the corporation's president and its secretary both have
to sign. The appellant signed this resolution as secretary. The
appellant did not deny that he was required to sign all of the
cheques issued by Da Vinci. The reason he gave for this was
that he had to keep an eye on expenses since he had invested a
great deal of money in the business.
[20] Exhibit I-2 consists of
three cheques to the order of the Receiver General of Canada,
made respectively on December 1, 1994, December 5, 1994, and
December 23, 1994. The first cheque indicates that it is for the
October 1994 deductions, and the second, that it is for the
September 1994 deductions, while on the third, there is no
indication. The cheques are in the amounts of $3,475, $2,556.48
and $1,210 respectively. They were tendered to show that the
appellant signed all of the company's cheques and was
therefore aware of the payments not being made to the Receiver
General. Another cheque, dated March 28, 1995, in the amount of
$2,000, was tendered as Exhibit I-3. The appellant did not
acknowledge his signature on that cheque.
[21] Exhibit I-4 is a credit
application and an undertaking to provide security under section
427 of the Bank Act. It is signed by the two
directors.
[22] Nicole Bélanger is a
collection officer for Revenue Canada. She confirmed that Da
Vinci had not filed any tax returns. She also stated that,
throughout its existence, Da Vinci had been late almost every
month of the year in paying source deductions and had incurred
penalties for late remittance.
Arguments and conclusions
[23] Counsel for the appellant submitted
that the appellant had, by providing for the day-to-day presence
of a person to handle the bookkeeping and for the occasional
presence of his accountant, put in place a reliable
administrative system to ensure the remittance of the source
deductions taken from the employees' salaries.
[24] He also submitted that the appellant
had no reason to doubt the reassurances of Mr. Petraccione, who
was an honest man and a good director, and that also to be taken
into consideration is the fact that the appellant's only
participation in Da Vinci's business was as an investor and
he was not involved in the operational administration of the
business.
[25] The agent for the respondent submitted
that the appellant was heavily involved in the business, that he
had invested as much money as Mr. Petraccione and that he signed
all of the company's cheques and endorsed those made out to
the company. The cheques filed as Exhibit I-2 show
that the appellant could not but be aware of the delay in
remitting the source deductions. The company did not file a tax
return, which can only mean that the accountant had not been
instructed to prepare one. There were repeated problems with
delays in remittances of source deductions.
[26] I am of the opinion that the evidence
has shown that the appellant was just as involved in the
financial management of Da Vinci as Mr. Petraccione was. He had
invested the same amount of money as Mr. Petraccione and
co-signed all of the cheques issued by the corporation. The
appellant did not file in evidence Da Vinci's books, which
would have proved that Mr. Petraccione had him sign cheques that
accorded with the accounts entered in the books but that those
entries were incorrect and were intended to mislead him.
[27] The appellant submits that he took the
steps required to pay the source deductions by seeing to it that
a bookkeeper was hired and that recourse was had to the services
of an accountant. It is not enough to say that one has put
everything in place to prevent the failure; it must also be
proved. On the one hand, the aforementioned persons were not
called to testify and, on the other, and even more significantly,
the appellant produced no documentary evidence. That evidence
would be the signed cheques that accord with the company's
books. The appellant is a director of other companies; he has the
necessary experience with respect to the various debts that must
be paid and surely did not sign cheques to suppliers, employees
and government authorities without seeing the books pertaining
thereto. The only documents tendered were the cheques. These were
produced by the respondent and were all dated in the final month
of the company's existence. In conclusion, there is no
evidence that the appellant was misled or that he met the
requirements of the Act during the existence of the
company.
[28] The appeal is dismissed.
Signed at Ottawa, Canada, this 13th day of January 1998.
J.T.C.C.
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