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Citation: 2007TCC737
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Date: 20071206
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Dockets: 2005-4486(IT)G
2005-4485(GST)G
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BETWEEN:
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ALFONSO PEREIRA,
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Appellant,
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And
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Campbell J.
[1] The Appellant was
assessed by the Minister of National Revenue (the “Minister”) pursuant to
section 323 of the Excise Tax Act, for the period July 1, 1999
to September 30, 2000, in respect to goods and services tax (GST), remittable
by United Growth Inc. (the “Company”) together with penalties and interest. He
was also assessed pursuant to subsection 227(10) and section 227.1 of the Income
Tax Act, in respect to the 2002 taxation year, for unremitted source
deductions, penalties and interest also relating to the Company. These
provisions contained in both Acts provide for the liability of directors
of a company where that company has failed to remit net tax.
[2] There are two
issues in these appeals:
(1)
Was
the Appellant a director of the Company during the relevant periods; and
(2)
If
the Appellant is a director did he exercise the degree of care, diligence and
skill that a reasonably prudent person would have exercised in comparable
circumstances within the meaning of subsection 227.1(3) of the Income Tax
Act and subsection 323(3) of the Excise Tax Act.
[3] The Appellant, his
brother, Jose Pereira, and Marjorie Mann, a bookkeeper, testified. The
Respondent called no witnesses.
[4] The Appellant left
school in grade 11 and since that time has worked as a bricklayer. In 1999 his
older brother, Jose, also a bricklayer, approached him about entering into a
business relationship and introduced him to an individual, Emanuel Bettencourt
DeMelo (“DeMelo”). DeMelo held himself out to be an experienced, successful
business person in the masonry industry who had previously operated a similar
business and who possessed the necessary contacts with a lawyer, an accountant,
a bank and potential clients. Consequently, the Company was incorporated on
February 23, 1999 to provide masonry services. It was agreed that DeMelo would
deal with administrative matters relating to the business with the assistance
of his accountant. The Appellant testified that his duties in the Company
related to the actual bricklaying. He was not involved in the management of the
business nor had he ever been involved in management duties in any capacity in
any other companies. He stated that he was to be a partner and a shareholder in
the Company. He did not recall any discussions concerning directors of the Company
when the minute book was signed at the lawyer’s office. The Company maintained
no head office. There was no equipment as the main contractor supplied the
necessary equipment on the job site. The Appellant and his brother, together
with several other employees, were paid hourly union wages, with deductions
being made from their paycheques. He received no compensation over and above
his wages. He testified that he was not involved in any of the day‑to‑day
business operations involving paying bills and wages or making out the cheques.
He believed the accountant completed all of these duties. Two signatures were
required on the cheques, and although he had never been introduced to this
accountant, DeMelo would pick them up and then attend at the job site to obtain
the signature of either the Appellant or his brother. Some of the cheques were
payable to DeMelo for his wages but other cheques were also written to
reimburse him for the cost of supplies, for example diesel and gasoline, which
the main contractor did not supply. The Company was unable to obtain credit
with suppliers and it was required to pay cash. The cheques, payable to DeMelo,
ranged from one hundred dollars to several hundred dollars. He also recalled
signing cheques payable to Revenue Canada.
[5] In June 2000,
DeMelo attended at a job site, where the Appellant and his brother were working,
and advised them that the Company was losing money and that amounts were owed
to the government. This was the first time the Appellant had ever been informed
that some of the cheques that he had been signing to pay remittances to the
government had not been sent by DeMelo. Within a day or two, the Appellant
decided he would no longer continue to work with the Company and he and his
brother insisted that a meeting be held at the accountant’s office to review
the problems. DeMelo set up the appointment but never attended. The
accountant’s secretary advised the two brothers that the accountant was not in
the office but she provided them with copies of documentation. They then went
to the bank and obtained copies of bank statements. It was after perusing the
bank documents that they saw withdrawals of large amounts, in the range of
$5,000.00 to $15,000.00. That same day, both brothers went to see a lawyer,
that Jose Pereira knew, to discuss their options. Both the Appellant and his
brother confronted DeMelo the following day about the discrepancies. The Appellant
stated that DeMelo had all of the unremitted cheques for payroll deductions and
GST in a briefcase in his truck. He told the Appellant that he intended to
reimburse the Company for the missing amounts. Once informed that a lawyer was
involved, DeMelo disappeared with much of this documentation. The brothers
stopped further business activities within the Company and paid the other
employees their wages to date together with union dues. When the Appellant was
shown cheques in large amounts, payable to DeMelo, which contained the
Appellant’s signature, he testified that when he signed these cheques, the
amounts were for smaller sums and he believed these cheques were to be cashed
by DeMelo to pay suppliers. In retrospect he now believes if for example, a cheque
he signed was made out for $490.00 that DeMelo later tampered with the amount on
the face of the cheque by adding figures so that the cheque in the end was
cashed for an amount of $14,900.00.
[6] The bookkeeper,
Marjorie Mann, confirmed that she did not recall ever meeting the Appellant and
his brother and believed that DeMelo was the sole owner of the Company. She
also confirmed that she calculated remittances and GST and then prepared the
cheques but released them to DeMelo for signature and remittance.
[7] The Appellant’s
brother confirmed that he did not recall any discussions concerning appointment
of directors other than the business was to be a partnership. He stated that
DeMelo picked the lawyer and bookkeeper to complete the business. He recalled
seeing and signing cheques for source deductions and remittances, which he
believed the bookkeeper prepared. He also testified that he believed DeMelo
presented incomplete cheques for signature and then later altered the amounts.
Analysis
[8] A number of
exhibits were entered which related to the corporate set up. The Articles of
Incorporation (Exhibit A-1, Tab 8) dated February 23, 1999 named DeMelo alone
as the first and only director of the Company. By‑Law No. 1,
relating to the conduct of the business of the Company (Exhibit A-1, Tab
9) was signed by DeMelo. In that By-Law (Article 2.01) the appropriate
deletions that establish the number of directors on the Board of the Company
have not been properly completed. Article 2.04 specifies that the directors are
to be elected at the first meeting of the shareholders of the Company. Article
5.01 of this same By-Law specifies that, except for the Chairman of the Board
and its managing director, no other officers of the Company are required to be
a director.
[9] The first directors’
meeting (Exhibit A-1, Tab 10), held on March 23, 1999, in which DeMelo acted as
Chairman and sole director, orders that if all of the shareholders attend a
meeting, either personally or by proxy, they will elect a Board of Directors
and appoint accountants. At a later hour on March 23, 1999, another directors’
meeting occurs in which DeMelo alone was in attendance, appointed himself as
President and Secretary/Treasurer of the Company and dealt with banking
resolutions (Exhibit A-1, Tab 11). The remaining and final meeting of
directors, contained in the minute book (also Exhibit A-1, Tab 12) is dated
March 31, 1999. It is signed by DeMelo as Chairman of the meeting and by the
Appellant and his brother. They are referred to as being all of the directors
of the Company. The two relevant paragraphs in these minutes are as follows:
The
Chairman stated that this meeting of the Board of Directors was being called
for the purpose of introducing Jose Santos Pereira as
Secretary/Treasurer and Alfonso Pereira as Vice President of the
Corporation. They would be appointed as a Director of the Corporation and one
(1) share of stock would be issued to Jose Santos Pereira and
one (1) share of stock would be issued to Alfonso Pereira, forthwith, for
the issuing price of one (1) dollar.
On
Motion duly made, seconded and carried unanimously it was Resolved that the
following person be, and he is hereby elected or appointed officers of the
Corporation, to hold office referred to opposite his respective names for the
ensuing year, or until his successors are elected or appointed.
Jose
Santos Pereira-Secretary/Treasurer
Alfonso Pereira-Vice
President
[10] The only
shareholders’ meeting was held on March 23, 1999. At that meeting DeMelo, as the
sole shareholder, attended and acted as Chairperson. By‑Laws 1 and 2 were
approved, accountants were appointed and the Company (United Growth Inc.) was
elected as director until the first annual meeting or until successors are
appointed or elected.
[11] Clearly these
corporate exhibits establish that it is the shareholders who must elect the
directors of the Company and in fact the first meeting of the provisional
director on March 23, 1999 states
that it is the shareholders who must meet to elect a Board of Directors and
appoint an accounting firm. Yet there is no record of a shareholders’ meeting
where the Appellant is appointed as a director. The only meeting of
shareholders appoints the Company itself as a director. Although this is not
appropriate without going on to appoint a nominee of the Company to the Board,
it is all that is contained in the minute book. According to subsection 119(4)
of the Ontario Business Corporations Act (the “OBCA”), the directors of a
corporation shall be elected by the shareholders. That subsection
states:
Subject to clause
120(a), shareholders of a corporation shall elect, at the first meeting of
shareholders and at each succeeding annual meeting at which an election of
directors is required, directors to hold office for a term expiring not later
than the close of the third annual meeting of shareholders following the
election.
[12] In addition, pursuant to subsection 119(9)
of the OBCA, it is clear that written consent must be given by
prospective directors before their appointment becomes effective. That
subsection states:
Subject to
subsection (10), the election or appointment of a director under this Act is
not effective unless the person elected or appointed consents in writing before
or within 10 days after the date of the election or appointment.
This presumably relates to the liability
issues which directors face in assuming such a role within a corporation and
establishes the requirement of personal knowledge by that director of his
election or nomination to that role. Therefore directors must not only be
elected by the shareholders but must also consent in writing to act. Neither
the documentation nor the evidence in these appeals suggests the presence of
either requirement.
[13] The Respondent argued that by virtue of the
Appellant signing the Minutes of the Directors’ meeting held on March 31, 1999
(Exhibit A-1, Tab 12) that consent was given. I conclude that the Respondent’s
interpretation of these Minutes is completely incorrect. The Respondent is
correct that there does not have to be a separate written agreement of consent
but at minimum there must be some form of acknowledgment by the individual
accepting the appointment. Although there is a reference to the Appellant
becoming a director, the only Motion that was passed at this meeting was the
appointment of the Appellant as Vice President. The By-Law No. 1 was clear that
to be an officer, one did not first have to be a director. In fact this meeting
itself is not properly constituted as the Appellant and his brother had never
been elected by the shareholders as directors. The only director at this point
in time was DeMelo. Even if there had been an attempt within this meeting to
appoint the Appellant as a director (which it did not do), I would not recognize
the appointment, as it was not legally effected by a shareholders’ meeting, as
required by both the Company’s By-Laws and by the OBCA. As there was no
election by the shareholders and no written consent, the Appellant cannot be a
director of the Company.
[14] Even if I were to conclude that the
Appellant was a director of this Company, I would not find him liable for the
amounts payable by the Company because I believe he meets the standard of care
referenced in subsection 227.1(3) of the Income Tax Act and subsection
323(3) of the Excise Tax Act. The Appellant has never completed high school;
he has worked all of his adult life as an employed bricklayer. He had no prior
involvement in operating a business and absolutely no bookkeeping background.
Given his complete lack of experience and sophistication in business, it was
reasonable for him to rely upon DeMelo, who had prior business experience in
masonry and had contacts for lawyers, accountants, banks and clients. After the
delegation of administrative duties to DeMelo, it was reasonable for the
Appellant to continue to place reliance upon him in the year that the business
operated. He signed cheques for source deductions and remittances and was given
no reason to believe these cheques were not being remitted. The first and only
time that the Appellant became aware of the problems was in June 2000 when
DeMelo advised him that there were cash flow problems. It was only then that
the Appellant had knowledge that in fact the cheques were still in DeMelo’s briefcase.
The Appellant believed that the Company was generating sufficient funds to pay
its bills and he had no reason to be suspicious of DeMelo until June 2000.
By signing cheques for the remittances, he was assured that these obligations
were being met. As soon as the problems became known, the Appellant and his
brother closed the Company’s operations, paid the remaining employees, sought
legal advice, met with the accountant and the bank to get copies of documents
in an attempt to piece together what had happened and tried to meet with DeMelo,
who had already fled.
[15] The personal education, experience and
sophistication of the Appellant must play a role here. From the outset he was
never involved in the daily management and administration of the Company. His
role was limited to actual bricklaying and signing cheques that DeMelo
delivered to the work site. There was no reason for him to suspect these
cheques were not reaching the destinations stated on the face of the cheques.
Once he did become aware of the problems, he took immediate and appropriate
steps to deal with these problems.
[16] In conclusion, I find that the Appellant
was not a director of the Company and even if I had concluded that he was a
director he would have exercised the degree of care, skill and diligence
required by the Acts.
[17] For these reasons, the appeals are allowed
with costs to the Appellant.
Signed at Ottawa, Canada, this 6th day of December
2007.
Campbell J.
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