Date: 20001130
Dockets: 98-2304-GST-I; 98-2305-GST-I
BETWEEN:
VITO CIRIELLO, ROSA CIRIELLO,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Rip, J.T.C.C.
[1]
During the periods between May 1, 1991 and October 31, 1991 and
between February 1, 1992 and April 30, 1994, R. & V.
Insulating Glass Co. Ltd. ("R & V") failed to remit
to the Receiver General for Canada net tax aggregating $69,295.28
as required by subsection 228(1) of the Excise Tax Act
("Act"). R & V was also assessed interest
and penalties. On or about June 25, 1994 R & V made an
assignment under the Bankruptcy and Insolvency Act and the
Crown's claim for the net tax, interest and penalties was
proved.
[2]
At the times R & V failed to remit the net tax to the Receiver
General, Vito Ciriello and Rosa Ciriello, his wife, were
directors of R & V and the Minister of National Revenue
("Minister") by notices of assessment dated February
27, 1997 assessed each of Mr. and Mrs. Ciriello under subsection
323(1) of the Act. Mr. Ciriello appeals the assessment on
the basis he exercised the degree of care, diligence and skill to
prevent the failure of R & V to remit the tax that a reasonably
prudent person would have exercised in comparable circumstances
as required by subsection 323(3) of the Act.
[3]
Mr. Ciriello also claims that the Minister did not give credit to
R & V for bad debts. No evidence was led by the appellant with
respect to the bad debts. For R & V to receive a refund or
adjustment of tax subsection 231(1) of the Act requires
that not only must the taxpayer have made a taxable supply in the
course of a commercial activity and for consideration, but also
that the taxpayer have filed a return accounting for and
remitting tax under Division II in respect of that supply;
finally, the consideration and tax must have become a bad debt.
There is no evidence to satisfy the requirements of the statute
for an adjustment of tax.
[4]
Mr. Ciriello also argues that R & V "ceased to carry on
business as at June 25, 1994 . . ." [and]
"to the knowledge of the Minister, the Appellant ceased to
be a director or understood that he was no longer a director as
at the date of June 25, 1994". Since the notice
of assessment against Mr. Ciriello was issued, more than two
years after he ceased to be a director, the assessment is statute
barred: subsection 323(4).
[5]
Mrs. Ciriello claims she is not liable for the failure by R & V
to remit tax since, amongst other things, she was only a nominal
and passive director of R & V who did not participate in any
decisions and had no knowledge of the financial status of the
corporation. Mrs. Ciriello claims she exercised the due diligence
required by subsection 323(3) of the Act to prevent
R & V's failure to remit the tax and also states she
ceased to be a director of R & V more than two years before the
assessment against her was issued.
[6]
The appeals of Mr. and Mrs. Ciriello were heard together on
common evidence.
[7]
Mr. Ciriello has a grade 6 education. He immigrated to Canada
from Italy. He incorporated R & V in 1982. From about 1960 to
1982 he was employed as a plant foreman for an insulating glass
company. R & V assembled and installed thermopane windows.
[8]
The only person to make business decisions for R & V was
himself, Mr. Ciriello asserted. He stated that Mrs.
Ciriello's name was used as a director and secretary of
R & V because when the corporation was incorporated he was told
the corporation required a president and secretary. Mr. Ciriello
explained that he had been informed by his lawyer when R & V
was incorporated that the company required two officers. As
president he was responsible for all business and financial
decisions. He appears to have had sole cheque-signing
authority. He insisted he was not advised nor informed by anyone,
including his lawyer at the time, of the responsibilities of an
officer or director. Mr. Ciriello had no previous formal
training on how to run a business. There were no meetings of
directors of R & V.
[9]
Mr. Ciriello had never been an officer or director of a
corporation before. He had always been an employee. He readily
admitted that he made all decisions concerning which creditors
would get paid and which creditors would not get paid.
[10] R & V
employed a secretary and bookkeeper to record the company's
accounts. An accountant attended at R & V to "verify the
system". Since 1988 R & V had a computerized accounting
system. Mr. Ciriello said he did not interfere in the security
process and let "the employees do their jobs".
[11] The GST
returns were signed by a Mrs. Thompson who was the secretary and
bookkeeper of R & V. Mr. Ciriello did not review the returns.
Mr. Ciriello said that the company's accountant would
look over the Goods and Services Tax ("GST") returns
and "there was no need for me to do so". Mr. Ciriello
also stated that at the end of each month he was given a general
ledger sheet with R & V's receivables and payables.
[12] From the
time R & V started in business to about 1990 the business was
holding its own, according to Mr. Ciriello. R & V constructed a
building in 1987 in which to carry on its business. However, Mr.
Ciriello complained that the economic recession in 1990 severely
affected the business. R & V's business was seasonal and
if there was no construction taking place, there was no business
going to R & V. By 1990 it was becoming more difficult for
R & V to collect its receivables. At the same time R & V
started to get behind in paying provincial sales tax to the
Ontario government and started to default in remitting source
deductions and GST to the Receiver General, although
Mr. Ciriello said R & V did make some GST payments.
[13] In 1990
or 1991 - the exact date is not clear from the evidence
- R & V's banker demanded payment on the credit it
had advanced to the company.
[14] R & V
was also facing threats from the Municipality of Etobicoke that
its building would be sold due to tax arrears. In 1992 R & V
sold one-half interest in the building it had acquired in
1987 for less than its cost. The proceeds of sale were applied to
outstanding real estate taxes. Earlier, the bailiff had
repossessed one of R & V's trucks which, Mr. Ciriello
said, was required for business. He was also being threatened
with the seizure of another truck.
[15] In 1991,
the appellants secured a loan from Shoppers Trust Company on the
security of a mortgage on their home. The amount advanced was
$250,000, less an interest adjustment of $770.55. R & V made
payments on the mortgage.[1] It appears from Mr. Ciriello's evidence on
cross-examination that the mortgage funds were used to repay the
bank loan and then he was able to obtain a $50,000 line of credit
from another branch of the same bank.
[16] R & V
arranged for a factoring company for the collection of its
receivables for the consideration of $50,000.
[17] Mr.
Ciriello could not recall if any money he received from the
mortgage of his home, the bank or the factor was remitted for
GST, even though R & V was paying its suppliers. The factoring
company was used because the mortgagee of R & V's
building required a $50,000 security deposit to renew the
mortgage. R & V had been late with payments in the past. This
was before R & V sold one-half of its interest in the
building.
[18]
Unfortunately, the efforts to finance the company were not
successful and in May 1994 the Treasurer of Ontario commenced to
garnish amounts owing to R & V for failure to remit Ontario
Retail Sales Tax. This, Mr. Ciriello stated, was the "last
straw". Suppliers no longer wished to supply R & V. At
the same time R & V had used up its line of credit with the
bank. In June 1994 the company made an assignment under the
Bankruptcy and Insolvency Act.
[19] The
trustees in bankruptcy made attempts to collect R & V's
receivables which, at time of the bankruptcy, was $189,049. The
trustee collected $55,176 of receivables. I do not know if the
trustee made any payments to the Receiver General from the
amounts he collected.
[20] At its
peak R & V employed 16 people during its high season from June
to December. Mr. Ciriello would lay off employees during the slow
season although he did keep approximately 8 to 10 key employees,
including himself, Mrs. Ciriello, the foreman, a truck
driver and the secretary. He and Mrs. Ciriello were the only
family members in the employ of R & V.
[21] In
cross-examination Mr. Ciriello acknowledged that before
1992 receivables were slow in coming in but at any given time the
payables and the receivables were "not a
problem".
[22] In 1992,
R & V first received its notice of GST arrears.
Mr. Ciriello acknowledged that he knew the company was in
arrears since there was a recession. He did not know of the
statutory requirement that GST funds were to be kept in an
account separate from other funds of the company. He did say that
whenever R & V collected money from its creditors, GST was
paid.
[23] It was
Mr. Ciriello's position that it was "between the
bookkeeper and the accountant" to pay or not to pay GST.
Mr. Ciriello stated that he had nothing to do with this
decision.
[24] During
the time of financial difficulty R & V paid no salary to
Mr. Ciriello and paid to Mrs. Ciriello only her normal
salary of $600 a week.
[25] In
re-examination Mr. Ciriello advised that he made arrangements in
February of 1994 to pay GST arrears by forwarding the
post-dated cheques to Revenue Canada. He believes one
cheque may have been cashed and another one may have been
returned for insufficient funds. He testified that once the
provincial government garnished R & V's receivables
"it made no difference to me who got paid".
[26] Mrs.
Ciriello testified that she immigrated to Canada in 1966 and
after raising her three children, started to work at R & V. She
received a grade 5 education in Italy. When R & V was
incorporated she and her husband attended at the offices of a
lawyer and the lawyer told them that she should be included as a
director of the company "in case something happened to my
husband". In fact, she has never acted as a director and
she has never participated in the operations of the
company's business except as an unskilled employee. She has
never seen financial records of the company and has never
discussed the corporation's affairs with
Mr. Ciriello.
[27] Mrs.
Ciriello was alert enough to realize that once the recession took
hold the company's business was not as busy as before.
Consequently, she agreed to mortgage their home for the line of
credit because "if we lose business, we lose
everything". She recalled that when R & V started in
business she and her husband obtained a $30,000 loan on the
security of their home in order to finance R & V's
business. She hoped the new financing would help R & V.
[28] I will
deal with Mrs. Ciriello first. Mrs. Ciriello has a limited
education in Italy. She testified she had absolutely nothing to
do with the management and administration of R & V and that she
was named a director at the suggestion of the corporation's
lawyer when R & V was incorporated. She was a director in name
only. There was no evidence to contradict
Mrs. Ciriello's testimony and her evidence coincided
with that of her husband: it was Mr. Ciriello who ran
R & V.
[29] Mrs.
Ciriello consented to the mortgage of the family home to keep the
business. The home was mortgaged to help finance R & V when it
first started in business and she believed that additional
financing would assist it in overcoming its financial problems in
1991. However, she had no knowledge of R & V's failure to
remit GST and was not in a position to do anything about it even
if she had known since her husband had total control. In
Robitaille v. The Queen,[2] the taxpayer was made a director to comply with
a statutory requirement that a corporation had to have at least
three directors. She played no active role in the company and
learned of its financial difficulties after the bank assumed
de facto control of the company's affairs. In
Robitaille, the trial judge was greatly influenced by the
fact the bank exercised control of the company.
[30] In
Soper v. The Queen,[3] Robertson J.A., set forth the
"objective-subjective" test in determining whether a
director exercised the "due diligence" required by
subsection 227.1(3) of the Income Tax Act, which is
similar to subsection 323(3) of the Act. In Worrell v.
Canada,[4]
Evans J.A. explained that the court must take into account the
characteristics of the director whose conduct is in question,
including her level of relevant skill, experience and knowledge.
The court must then ask whether, if faced with similar
circumstances, a reasonably prudent director, with comparable
levels of skill, experience and qualifications would have acted
in the same way as the director in question.
[31] To my
mind Mrs. Ciriello lacked the skill and experience to recognize
any default by R & V in failing to remit GST to the Receiver
General and any person with her level of skill, experience and
qualifications, or lack of them, would have acted, or more
precisely, not acted, in the manner as did Mrs. Ciriello. On the
basis of the "objective-subjective" test,
Mrs. Ciriello exercised the required "due
diligence" and her appeal ought to be allowed.[5]
[32] Mr.
Ciriello is in a different set of circumstances than his wife.
He, too, has a public school education but over the years he
gained experience by managing R & V's business. Before
1991, R & V had remitted source deductions to the Receiver
General and Mr. Ciriello was aware, once Part IX of the
Act came into force in 1991, that R & V had to remit GST
as well.
[33] In
Worrell, supra, Evans J.A. opined that "it is
essential to keep in mind the relevant question in this appeal:
did the directors exercise due diligence to prevent the
company's failure to remit?"[6] He added that:
[I]n order to avail themselves of the defence provided by
subsection 227.1(3) directors must normally have taken positive
steps which, if successful, could have prevented the
company's failure to remit from occurring. The question is
whether what the directors did to prevent the failure meets the
standard of the care, diligence and skill that would have been
exercised by a reasonably prudent person in comparable
circumstances.
[34] Carrying
on the business knowing that the company will fail to remit on
time but hoping the company's fortunes would be revived
does not normally help the director's defence. The
director, in such circumstances, assumes the risk the company
subsequently will be able to make payments.
[35]
Appellants' counsel submitted that Mr. Ciriello could
not do more than he did since only by keeping R & V's
business in operation would R & V be in a position to pay the
GST. Unfortunately R & V (and the appellant, Mr. Ciriello) were
overtaken by events. Counsel relied on the reasons for judgment
in Soper, and in particular the
"objective-subjective" test.[7]
[36] R & V
had at least one day-to-day employee whose responsibilities
included the remission of GST to the Receiver General. However,
Mr. Ciriello knew the company had to remit, but did not remit,
GST and he appears not to have done much to solve the problem. He
knew the company was in financial difficulty. His energies were
focussed on ensuring his suppliers were satisfied. To ensure the
suppliers dealt with R & V, Mr. Ciriello mortgaged his home,
factored accounts receivable and borrowed money from the bank.
There is no evidence that any significant portion, if any, of the
funds received from these sources were applied to R & V's
debt to the Receiver General.
[37] There is
no evidence before me, as in Fancy v. The Queen,[8] for example, that
R & V's banker prevented Mr. Ciriello from causing
R & V to remit GST. In any event, there is no evidence Mr.
Ciriello did anything to prevent the defaults by R & V that
were clearly foreseeable as the business continued.
[38] Mr.
Ciriello claims he ceased to be a director of R & V once the
corporation made an assignment in bankruptcy on June 25, 1994 and
is therefore freed of the liability under subsection 323(1).
[39] This is
not the first occasion that a director of a bankrupt corporation
took the position that he ceased to hold the position for
purposes of subsection 227.1(4) of the Income Tax
Act, which is analogous to subsection 323(5) of the
Act, when a trustee in bankruptcy is appointed and is
therefore not vicariously liable for the default of the
corporation.[9]
[40] The
Federal Court of Appeal allowed the Crown's appeal from
this court in Kalef. The Court of Appeal reviewed the
domestic corporate statute under which the subject corporation
was incorporated. Subsection 121(1) of the Ontario Business
Corporations Act states that a director of a corporation
ceases to hold office on death or resignation, removal or
disqualification. The Income Tax Act, like the Excise
Tax Act, is silent as to when a person ceases to be a
director and therefore one must refer to the incorporating
statute. The Court of Appeal held that Mr. Kalef did not cease to
be a director by virtue of the appointment of a trustee in
bankruptcy and did not meet any of the requirements for ceasing
to be a director established by the Ontario Business
Corporations Act. Therefore, the time limit found in
subsection 227.1 of the Income Tax Act did not bar the
reassessment against Mr. Kalef.[10]
[41] In
Wheeliker v. The Queen,[11]the Federal Court of Canada relied on
Kalef and stated that there was no need to look at common
law because statutory law determined when a person ceased to be a
director.
[42] A
corporation continues to exist when it makes an assignment in
bankruptcy or is petitioned in bankruptcy and a trustee in
bankruptcy is appointed. The directors may no longer be operating
the bankrupt corporation but they are still directors.[12]
[43] I am
bound by the Federal Court of Appeal decision in Kalef.
Mr. Ciriello did not cease to be a director on or about June
25, 1994.
[44] Mr.
Ciriello's appeal will be allowed but only to refer the
assessment to the Minister of National Revenue for
reconsideration and reassessment to determine if the trustee in
bankruptcy made any payments for GST to the Receiver General and,
if so, to reduce the amount of the assessment accordingly. In all
other respects, the appeal is dismissed.
Signed at Ottawa, Canada, this 30th day of November
2000.
"Gerald J. Rip"
J.T.C.C.
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