Ignazio Scaletta v. Her Majesty the Queen, [1994] 1 CTC 2719

Beaubier, J.T.C.C.:—This appeal was heard in Winnipeg, Manitoba on December 6 and 7, 1993, pursuant to the General Procedure of this Court.

The appellant testified Stefannia Lynn Bell, Constance Navitka and Paul Landry, C.G.A. The Crown did not call any witnesses.

The appellant was assessed pursuant to section 227.1 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") as a director of Boccaccio for Hair Ltd. (Boccaccio) and Scoops Desserts Ltd. (Scoops) for their failure to make deductions and remit withholdings pursuant to the Income Tax Act (both federal and provincial), the Canada Pension Plan Act, R.S.C. 1985, c. C-8 and the Unemployment Insurance Act, R.S.C. 1985, c. U-1. He appealed pursuant to subsection 227.1(3) on the grounds that he exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances to prevent the corporation's failure to deduct and remit payroll remittances.

Assumption 7(b) of the Crown was not refuted. It states:

In so assessing the appellant, the Minister made the following assumptions of fact:

(b) Both Scoops and Boccaccio failed to remit to the Receiver General federal income tax withheld from the wages paid to its employees as follows:

(i) in respect of Scoops Desserts Ltd.

	Unremitted Amount
Month	of Federal Tax
Jan. to June 1988	$	71.28
August 1988		418.13
Sept. and Oct. 1988	1,004.62
Total	$1,494.03
(ii) in respect of Boccaccio for Hair Ltd.
	Unremitted Amount
Month	of Federal Tax
1987	$ 6,116.70
Jan. to Mar. 1988		1,343.00
Apr. to July 1988		1,309.53
August 1988		413.79
1988		2,454.10
Total	$11,637.12

The appellant is 51 years old. He moved to Canada in 1962. He received a grade 8 education in Italy. He graduated in hairstyling in Canada, worked in the business and formed Ignazio’s Coiffures Ltd. in 1971. He married and he and his wife had two children and then she died in the fall of 1983.

In 1980 the appellant and two of his employees incorporated Boccaccio. After the location of Ignazio's Coiffures Ltd. was expropriated in 1984, the appellant began working as a hairdresser at Boccaccio. Boccaccio's hired a bookkeeper and eventually had five locations in Winnipeg and two in Edmonton. At Boccaccio’s he met Marie Vlassie who was selling hair products and, with her husband, had interests in two Dairy Queen outlets in Winnipeg.

In the spring of 1984, the appellant, through Ignazio’s Coiffures Ltd. and the Vlassies, through Sargent Dairy Products Ltd. became shareholders in Pembina Dairy Products Ltd. and opened a Swenson's ice cream parlour in Winnipeg. In the fall of 1984, the appellant and Marie Vlassie each became a shareholder in Kenaston Dairy Products Ltd.; each was a director and owned one common share. It opened a Dairy Queen outlet at the former Swenson's location. In the fall of 1985 Ignazio’s Coiffures Ltd. acquired a one-third shareholder interest in Osborne Dairy Products Ltd. with Sargent Dairy Products Ltd. and Paul Trueman. The appellant, Marie and Paul were all directors. Osborne Dairy Products Ltd. went into the ice cream business.

On September 10, 1985 the appellant and Marie Vlassie incorporated Scoops Desserts Ltd. in which they were each directors and owned 50 per cent of the shares (see Exhibit A-9). It made, retailed and wholesaled ice cream desserts.

In 1986, Marie Vlassie bought out another shareholder's interest in Boccaccio. It appears that later on her husband also bought an interest in Boccaccio (see Exhibit A-2).

In October 1986, Stefannia Lynn Bell was hired to do the in-house accounting as an employee of Boccaccio, at which time the Royal Bank of Canada did the payroll and employee remittances. Lynn Bell testified that at that time Boccaccio’s records were chaotic. In particular, $15,000 was missing and there was no cash to transfer to the Edmonton branches. This surprised the appellant, but it did not surprise Marie Vlassie. In November, Mr. and Mrs. Vlassie went to Mexico.

Lynn Bell had nothing to do with Scoops or the ice cream business.

When Marie left for Mexico she told Lynn that various cheques had been issued to suppliers and everything was fine. Soon suppliers were calling for payment and cheques were being returned as "NSF". The appellant testified that ne discussed payment with each supplier at this time.

In December 1986, the appellant called in his accountant, Mr. Stoller, and a reconciliation was done at Boccaccio. At the same time proper cash and inventory controls were installed in the ice cream businesses and at Scoops.

In March 1987, Marie Vlassie returned from Mexico and in the appellant's words “She went nuts". She shouted and yelled and removed all of Mr. Stoller's accounting systems and returned to the old ways. The appellant testified that by that time he did not trust Marie. One of her ways required the ice cream managers to deliver each day's receipts to her apartment each evening.

Lynn Bell was sick and off for ten weeks in the summer of 1987. When Lynn returned she and Marie discussed installing a computer to try and control finances. Sargent Dairy Products Ltd. bought a computer which was installed in October 1987. The payroll was removed from the Royal Bank and put into the computer for payment, but Marie did not program it for payroll remittances. Lynn Bell does not know if this was discussed with Mr. Scaletta. Lynn did not discuss this with Mr. Scaletta.

In November 1987, Mr. and Mrs. Vlassie again went to Mexico. The appellant continued to dress hair, to work behind the counter at Scoops and to work in a cappuccino shop.

In January 1988, Revenue Canada demanded remittances, but Lynn did not tell the appellant of this. Marie returned from Mexico and Revenue Canada was satisfied.

From about December 1987, until February 1988, Marie Vlassie arranged with three employees, Constance Navitka, Kim Barrett and Irwin Koehn (whom Marie called “the kids”) that she would buy into the ice cream business, and told them she was buying the appellant out. They signed agreements to buy the business interests from Sargent Dairy Products Ltd. and gave Marie deposits. Constance and Kim gave $20,000 each. It is believed that Irwin gave $30,000 or, perhaps, more. Constance paid her deposit when she signed her agreement to purchase.

In a similar fashion in November 1988, Paul Landry, C.G.A., entered into a form of lease-option to buy the equipment, fixtures and leasehold improvements of Osborne Dairy Products Ltd. Marie persuaded Paul to release his $20,000 deposit from his lawyer's trust account to assist in buying the appellant out. Paul is 53 years old and has an extensive accounting background and a commerce education.

None of these sales agreements were ever carried out and all of the deposits were lost.

It should be noted that Marie indicated to Paul that she was personally taking between $40,000 and $60,000 per year in unreported income from Osborne Dairy Products Ltd.'s business operations.

When Marie returned from Mexico in January 1988, she came back on the appellant's threat to shut down the businesses. In January, Marie and the appellant valued each business in which they or their companies were shareholders together and arrived at a price. In February 1988, the appellant’s mother died in Italy and the appellant went to Italy. In February Marie wrote him a letter, Exhibit A-10, in which sne refers to Revenue Canada on page 3. She said,

Second: Revenue Canada and Hydro threatened to cut off all power and issue an immediate demand to our banks unless we arranged immediate payments in full by Friday before 3:30 p.m. Most of the deposits I received from the kids had to be used to avoid having them literally close our doors.

On April 5, 1988, Ignazio Coiffures Ltd. obtained agreements, signed by Mr. and Mrs. Vlassie as officers of Sargent Dairy Products Ltd., buying Ignazio's Coiffures Ltd.’s interests in Osborne Dairy Products Ltd. (Exhibit A-11), Scoops Desserts Ltd. (Exhibit A-12) and Pembina Dairy Products Ltd. (Exhibit A-13 ). The appellant gave his keys to these premises to Marie. But he didn't sign the agreements because the vendor did not get any money then. Paragraph 8 of Exhibits A-12 and A-13 reads,

8. It is understood and agreed that during the period that any part of the purchase price shall remain unpaid, the board of directors shall consist of:

Marie Vlassie

Emmanuel Vlassie

and such other person that may be nominated by Marie Vlassie. A quorum for board meetings shall be two board members personally present, and all decisions of the board shall be by simple majority, provided however that the purchaser must at all times be one of the said majority. This provision shall in force only during the lifetime of the vendor, Ignazio's Coiffures Ltd. during such time as he is unpaid and part of the purchase price hereunder, and all of the parties hereto agree to vote their shares in the company, and act as directors or officers (with the exception of the vendor, who shall resign as an officer and director of the company on the completion of the execution of this agreement and on receipt of the sum of $25,000 as per the terms of repayment) thereof, and conduct themselves in such a manner as to fully carry out the intention of this agreement and the company enters herein for the purposes of, to the fullest extent of its corporate capacity, carrying out and observing all of the terms and conditions of this agreement; and the company does hereby agree to enact such necessary by-laws and resolutions and do all such other corporate matters and things as may be required to carry out the intention hereto.

There is no similar paragraph in Exhibit A-11.

No money was ever received on these agreements and the appellant never resigned his directorships. In May 1989, on his lawyer's instructions and for litigation purposes, the appellant signed the agreements.

In the spring of 1988 the appellant was also called by the Polo Park branch of the Canadian Imperial Bank of Commerce respecting an unpaid corporate Visa account incurred by the Vlassies. He and his wife, Leslie, closed this account.

Lynn Bell testified that by January 1988, the appellant was, in her understanding at that time, out of the business and that Revenue Canada audited the payroll at Boccaccio's while the appellant was in Italy, she thought that he never knew about that payroll problem. Lynn's testimony is that the appellant knew that things were disastrous after Marie returned in March 1987, but ne never asked to look at the books and never asked Lynn about them.

In about June 1988, Lynn Bell called the appellant and said that Revenue Canada wanted unpaid remittances of about $16,000. The appellant and Marie attended upon Revenue Canada and there they agreed that he would pay one-half immediately and Marie would pay the remainder at $1,000 per month. She never did.

At that time the appellant arranged that his wife, Leslie, would take over Boccaccio's books. Scoops' books remained with Marie.

There followed extensive correspondence between the appellant's and Marie’s lawyers concerning à buy or sell of some of the ice cream businesses by either party. As part of this correspondence, on August 9, 1988, (Exhibit A-26) the appellant’s lawyer enclosed a draft originating motion under Manitoba’s Corporations Act, R.S.M. 1987, c. C-225, to liquidate and dissolve Scoops Desserts Ltd. and Osborne Dairy Products Ltd. There is no evidence that this action ever proceeded.

The appellant states that he took "court proceedings" eventually, but they were going nowhere, so he changed lawyers and there is no evidence that any "court proceedings" were completed. The appellant changed his lawyers in the fall of 1988.

The extensive evidence in this case is essentially that the appellant knew that the financial proceedings of Scoops and Boccaccio's were in chaos after March 1987 and yet he did not check on the remittances of employee withholdings to Revenue Canada. After his threats to Marie in January 1988, and her letter (Exhibit A-10) he picked up the agreements in April 1988, and virtually ignored the financial side of Scoops ana Boccaccio until his meeting with Marie and Revenue Canada in June 1988. Even then all he did was to have his wife, Leslie, take over the books of Boccaccio.

On many occasions in this Court, the appellant ignored the questions put to him in cross-examination and repeated to him several times. In response to these repeated questions, the appellant spoke only of his own concerns and views. It appears to the Court, on the evidence before it, that the appellant adopted a similar attitude in the face of the financial chaos evident in both Boccaccio and Scoops and ignored everything but his own concern to recover his investments.

The evidence leads the Court to believe that the appellant was trying to recover his investments in the businesses. But there is no evidence that he undertook any act to prevent Scoops' or Boccaccio’s failure to deduct payroll remittances. Despite constant problems with corporate payables, the appellant offered no evidence that he ever personally checked on payroll remittances or even cared about them. His testimony is that he knew nothing about his liability under section 227.1 of the Income Tax Act. That is not an excuse. He had been an employer for years and so knew about payroll deductions. He also knew that Marie was not paying bills and after March 1987, he continued, despite this knowledge, to give her a free hand with the books and moneys of Boccaccio and Scoops until he took over Boccaccio’s books in June 1988. Even then, there is no evidence that Boccaccio's remittances were paid or that the appellant did anything to prevent their non-payment.

From the evidence before the Court it is clear that the appellant was waiting and dealing and threatening in an effort to recover his investments, but there is no evidence of any effort by him to prevent either corporation's failure to deduct and remit employee withholdings despite the fact that after receiving Exhibit A-10 in about February 1988, he had ample cause to inquire into the corporations' dealings with Revenue Canada.

Indeed it is the Court's view that after the accounting events of the winter of 1986 and 1987, and Marie "going nuts" on her return in March 1987, the appellant should have been taking every possible step respecting the subject matter of this action and Boccaccio and Scoops.

On the evidence presented to the Court, the appellant did not care about remission of employee withholdings and exercised no diligence or skill to prevent the failure of either Scoops or Boccaccio to remit the withholdings.

The appeal is dismissed with costs.

Appeal dismissed.