Mariani v. The Queen, docket 2001-3102(GST)I (Informal Procedure)

Date: 20020530

Docket: 2001-3102-GST-I

BETWEEN:

SERGIO MARIANI,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

(Delivered orally at Toronto, Ontario on March 14, 2002

and subsequently edited as to form)

Bonner, T.C.J.

[1]      The appellant was, at the relevant times, a director of Vaughan Iron Works Ltd. He has been assessed under section 323 of the Excise Tax Act which imposes liability for the unpaid taxes of a corporation on the directors of the corporation.

[2]      Subsection 323(1) reads:

Where a corporation fails to remit an amount of net tax as required under subsection 228(2) or (2.3), the directors of the corporation at the time the corporation was required to remit the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest thereon or penalties relating thereto.

[3]      The appellant relies on the due diligence defence available under subsection 323(3) which reads:

A director of a corporation is not liable for a failure under subsection (1) where the director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

[4]      The appellant's formal education ended with grade 12. After that he started working in his uncle's welding business. In 1987 he took over his uncle's business which he operated as a proprietorship under the name North York Welding.

[5]      In 1993 the appellant and Aldo Ricciuti incorporated Vaughan Iron Works Ltd.

[6]      The two individuals became sole shareholders and directors of Vaughan. Vaughan commenced to carry on the business of fabricating and installing iron and steel components required in the construction trades.

[7]      The responsibility for the management of the business of Vaughan was divided between the two directors. The appellant's primary responsibility involved the fabrication and installation of iron and steel products such as stairs and railings. He also drafted sketches of parts to be made in the course of Vaughan's business. The appellant's work was performed for the most part in the field. In the course of a typical day the appellant visited the company shop first thing in the morning, signed cheques, and dealt with any papers left on his desk by Mr. Ricciuti or the bookkeeper. He then changed his clothing and went out into the field. He returned to the company office at the end of the day, dealt with any further paperwork left on his desk by the others and then went home.

[8]      Mr. Ricciuti's work involved the preparation of estimates plus sales and the administration of the company business. His work was performed largely at Vaughan's office, particularly after 1994 when he was injured in an automobile accident.

[9]      Vaughan employed a small number of workers engaged in the shop and in the field. It also employed a part-time bookkeeper. The signature of both directors were required on Vaughan company cheques.

[10]     The years 1993, 1994 and most of 1995 appear to have been uneventful in relation to the collection and remittance of GST. So far as I can tell, from the somewhat unfocused evidence adduced, the first problem arose with respect to the period ending December 31, 1995. The assessment now under appeal stems from Vaughan's failure to remit net tax for the periods ending December 31, 1995, March 31, 1996 and September 30, 1996. The assessment also relates to the period ending December 31, 1996, but the respondent conceded at the hearing that nothing should have been assessed against Vaughan in respect of that period.

[11]     During the months of April or May of 1996 the appellant became aware for the first time that Vaughan was not paying its creditors in a timely fashion. He started to receive calls from suppliers demanding payment of overdue accounts. The appellant says that he approached Ricciuti who told him that while there was a cash flow problem because customers were slow in paying their debts, the company was profitable and had more than enough receivables to enable it to pay what it owed.

[12]     The evidence does not indicate that the appellant specifically addressed Vaughan's obligations with respect to GST at that or at any time.

[13]     I note in passing that there is no suggestion that there was ever any problem relating to Vaughan's employee source deductions. It seems that the corporation contracted the services of a professional payroll administrator and that was the reason why the company was able to stay out of trouble on that front.

[14]     It is the position of the appellant that he was the victim of deliberate deception on the part of Aldo Ricciuti. He has concluded that Ricciuti, at the very least, overstated Vaughan's receivables when responding to the appellant's enquiries regarding the ability to pay Vaughan's creditors.

[15]     The accountant who represented the appellant at the hearing attempted to show that Mr. Ricciuti acted improperly and that dishonesty was the cause of Vaughan's ultimate downfall.

[16]     The evidence regarding the true state of Vaughan's financial affairs and the causes of its financial problems which led to the failure to pay GST is much too foggy and imprecise to permit any conclusion. Moreover, that evidence was far off target for the relevant question is whether the appellant exercised the requisite degree of care, diligence and skill to prevent the failure. It is my opinion, with great respect to those who disagree, that one cannot prevent a failure after that failure has taken place. Section 323 addresses the failure to pay tax when due. It does not address attempts to remedy failures which have already occurred.

[17]     The appellant's efforts to carry out Vaughan's contracts in order to enable Vaughan to collect receivables and raise the money to pay overdue taxes cannot constitute the exercise of care to prevent the failure contemplated by subsection 323(3) of the Excise Tax Act.

[18]     The respondent argues that the appellant was an inside director and was therefore under an obligation to take positive steps to prevent any failure. Counsel for the respondent argues that the appellant took no such steps. She relies on the decision of the Federal Court of Appeal in Soper v. The Queen, 97 D.T.C. 5407 and says that because the appellant was an inside director and was passive in relation to GST he was not duly diligent.

[19]     I cannot agree with the respondent's position. The segregation of directors into inside and outside categories is not undertaken as part of a mechanical process of classification into rigidly defined categories of winners and losers. Rather it is a recognition of the self-evident. Some directors are better situated than others, usually by reason of participation in day-to-day management, to detect the potential for failure and to deal with it and that situation is a relevant circumstance.

[20]     It is true that the appellant was part of management but his responsibilities within the company did not require him to address the payment of GST on a routine basis, at least initially. The internal divisions of responsibility within a corporation are circumstances which must be taken into account in cases such as this. Where, as here, there was no suggestion of any irregularity in dealing with GST between the time Vaughan commenced the business and April or May of 1996, the appellant's failure to address GST before the spring of 1996 is not inconsistent with the exercise of the requisite degree of care.

[21]     As Robertson J.A., noted in Soper:

...in the absence of grounds for suspicion, it is not improper for a director to rely on company officials to perform honestly duties that have been properly delegated to them.

This statement applies equally in my view to reliance on fellow directors to whom duties have been delegated.

[22]     The events of April or May of 1996 are however grounds for suspicion which require any director, even one not previously responsible for attending to the remittance of GST, to move decisively to ascertain whether taxes are being remitted in accordance with the statute and to ensure that it is so remitted. Anything short of such decisive action will, where grounds of suspicion are present, fall below the statutory standard of care.

[23]     I have concluded that the appellant is not liable by virtue of subsection 323(3) in respect of the failures which occurred in the periods before that which ended on September 30, 1996. The complaints came to the attention of the appellant in April or May of that year and the first failure which the appellant was in a position to prevent was later, namely, that of the September 30th quarter. The rather foggy evidence in this case does not suggest that there was a failure to remit for the April, May and June quarter.

[24]     The appeal will therefore be allowed and the assessment referred back to the Minister for reassessment deleting all liability except in relation to the period ending September 30, 1996.

Signed at Toronto, Ontario, this 30th day of May 2002.

T.C.J.