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Dockets: 2001-4533(IT)G 2001-4534(GST)G |
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BETWEEN: |
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SANDRO (ALEX) SCAVUZZO, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
Appeals heard together with the appeals of Jack Scavuzzo (2001-4535(IT)G) and (2001-4536(GST)G)), on April 27 and 28, 2004; November 22, 2004; July 11 to 13, 2005; August 3, 4, 5, 10, 11 and 12, 2005
at Toronto, Ontario
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Before: The Honourable D.G.H. Bowman, Chief Justice |
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Appearances: |
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Counsel for the Appellant: |
Stevan Novoselac |
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Counsel for the Respondent: |
Marie-Thérèse Boris |
JUDGMENT
The appeals from the assessments made under the Income Tax Act and the Excise Tax Act, are allowed and the assessments vacated. Counsel are requested to communicate with the Court to determine how the matter of costs can best be dealt with.
Signed at Ottawa, Canada, this xxx day of December 2005.
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"D.G.H. Bowman" |
Bowman, C.J.
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Dockets: 2001-4535(IT)G 2001-4536(GST)G |
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BETWEEN: |
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JACK SCAVUZZO, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
Appeals heard together with the appeals of Sandro Alex Scavuzzo (2001-4533(IT)G) and (2001-4534(GST)G)), on April 27 and 28, 2004; November 22, 2004; July 11 to 13, 2005; August 3, 4, 5, 10, 11 and 12, 2005
at Toronto, Ontario.
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Before: The Honourable D.G.H. Bowman, Chief Justice |
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Appearances: |
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Counsel for the Appellant: |
Stevan Novoselac |
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Counsel for the Respondent: |
Marie-Thérèse Boris |
JUDGMENT
The appeals from the assessments made under the Income Tax Act and the Excise Tax Act, are allowed and the assessments vacated. Counsel are requested to communicate with the Court to determine how the matter of costs can best be dealt with.
Signed at Ottawa, Canada, this xxx day of December 2005.
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"D.G.H. Bowman" |
Bowman, C.J.
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Citation: 2005TCC772 |
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Date: 20051221 |
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Dockets: 2001-4533(IT)G 2001-4534(GST)G |
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BETWEEN: |
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SANDRO (ALEX) SCAVUZZO, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent,
AND
Dockets: 2001-4535(IT)G 2001-4536(GST)G BETWEEN: |
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JACK SCAVUZZO, 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
Bowman, C.J.
[1] These appeals are from four assessments; two against Jack Scavuzzo and two against his son, Sandro (Alex) Scavuzzo. I shall throughout these reasons refer to the father as "Jack" and the son as "Sandro". Each of Jack and Sandro were assessed under section 227.1 of the Income Tax Act ("ITA") and section 323 of the Excise Tax Act ("ETA") on the view that they were directors of a company, Resici Group Inc. ("Resici") and that they were responsible for the unremitted income tax deducted at source on wages paid to employees and unremitted goods and services tax ("GST").
[2] This case has been wending its leisurely way through the court for about one and one half years. The trial started on April 27, 2004. It was adjourned because counsel for the appellants believed that he was obliged to withdraw. When new counsel were appointed they sought an amendment to the notices of appeal. This was strenuously opposed. If anyone is interested, the reasons for my disposition of the motion are found at 2005 DTC 169 and 2004 G.S.T.C. 168. The matter finally came on for hearing again in August, 2005.
[3] The issues are as follows:
(1) In respect of the unremitted payroll deductions, did the Minister assess the wrong company? Two companies hired and paid the employees - 1212726 Ontario Ltd. ("121") and 1328156 Ontario Ltd. ("132"). Appellant's counsel referred to them as employer companies and I shall do the same.
(2) Can a director who is assessed under section 227.1 of the ITA or section 323 of the ETA challenge the underlying assessments made against a company of which he is alleged to be a director?
(3) Was Jack a de facto director of Resici, despite the fact that he submitted a formal resignation from Resici on July 3, 1997, more than two years before he was assessed?
(4) If Jack was a de facto director, did he exercise due diligence as required by section 227.1 of the ITA and section 323 of the ETA?
(5) Were 121 and 132 agents of Resici so that their obligation to remit payroll deductions and GST was, in law, the obligation of Resici entitling the Minister to assess Resici?
(6) Was Sandro only a nominal director of Resici, with no power and no ability to take steps to ensure that GST or payroll deductions were remitted?
(7) Should payments made to the Canada Revenue Agency ("CRA") on Resici's behalf have been applied to Resici's GST account?
(8) Assuming the appellants are entitled to challenge the underlying assessments against Resici, should the assessments against the appellants be vacated because the respondent is allegedly unable to locate certain underlying assessments?
[4] Before I deal with the facts I should dispose of the question of the right of a person who is assessed as a director under section 227.1 of the ITA or section 323 of the ETA to challenge the underlying assessment against the corporation.
[5] A convenient summary of the conflicting positions in this court is found in Mr. David Sherman's editorial comment in Zaborniak v. The Queen, [2004] G.S.T.C. 110, a judgment of Justice Bowie. It reads as follows:
EDITORIAL COMMENT
These were appeals of directors' liability assessments. The principal issue was whether the directors could challenge the corporation's underlying assessment.
Whether this can be done has become an issue of some dispute. The Federal Court of Appeal ruled in Gaucher, [2001] 1 C.T.C. 125, that a third party can contest an underlying assessment, but this ruling might apply only to transfer-of-property assessments and not directors' liability assessments.
At the Tax Court, both Chief Justice Garon (Schuster, [2001] G.S.T.C. 91) and Justice Tardif (Maillé, [2003] G.S.T.C. 103) have expressed the view that a director cannot challenge the underlying assessment if he neglected to cause the corporation do so. despite the Gaucher decision. Justices Mogan (Schafer, [1998] G.S.T.C. 7) and Bowie (Papa, [2000] G.S.T.C. 74) had earlier expressed the same view. (Justice Bowie repeated this view in Garland, [2004] G.S.T.C. 97, but that was a case where the company had unsuccessfully appealed to the Tax Court.)
On the other hand, Justices Bowman (Wiens, [2003] G.S.T.C. 121), Campbell (Cochran, [2002] G.S.T.C. 2), Archambault (Marceau, [2003] G.S.T.C. 51) and Lamarre (Parisien, [2004] G.S.T.C. 45) have permitted challenges to the underlying assessment. Some of these rulings have been explicitly based on Gaucher.
Justice Eric Bowie has now reiterated his view that the director should not be able to challenge the corporation's assessment. He explored the issue at some length, noting that s. 299 provides that an assessment is "valid and binding" subject only to objection and reassessment. From this he concluded that the director cannot contest the assessment.
With respect, s. 299 should not be determinative. That was the whole point of the Gaucher decision. Section 299 refers to an assessment process that is between the Minister and the corporation. It should not bind third parties.
In my view, the fact that "the director will normally have had the opportunity to influence the corporation's decision whether to appeal" is not conclusive. There may be many reasons for the corporation not to have objected and appealed, usually including a lack of resources. But the corporation and the director are different persons with different interests. This reason should not be a bar to applying the Gaucher principle to directors' liability assessments.
Clearly this question will have to be resolved in due course by the Federal Court of Appeal. For purposes of this appeal, the Tax Court ruled that the assessment of the corporation was binding.
[6] In commenting on the reasons in the Scavuzzo motion, Mr. Sherman made the following observations:
EDITORIAL COMMENT
This was a motion by the appellants in two General Procedure appeals to amend the Notices of Appeal. The appellants were assessed under s. 323 as directors of a corporation which had gone out of business with unremitted GST.
In the motion, the directors sought to add a challenge of the underlying assessment of the corporation.
. . . . .
Associate Chief Justice Donald Bowman granted the motion, noting that the question of whether the underlying corporate assessment can be challenged by a director has not yet been resolved, and should be fully considered. Indeed, as the Court noted, there have been conflicting decisions from different Tax Court judges to date, as discussed in my editorial comment to Zaborniak, [2004] G.S.T.C. 110
It will be interesting to see this issue dealt with again. One hopes that it will eventually reach the Court of Appeal, and that that Court will reiterate the position it took in Gaucher, [2001] 1 C.T.C. 125, with respect to transfer-of-property assessments, so that directors are not precluded from challenging the underlying assessment. There may be many reasons for the corporation not to have objected and appealed, usually including a lack of resources -- after all, by definition the corporation is insolvent if the directors have been assessed. Since the corporation and the director are different persons with different interests, the director should not be estopped by the corporation's failure to act.
David Sherman
[7] In Gaucher v. The Queen, 2000 DTC 6678, the Federal Court of Appeal (Rothstein, Sexton and Evans JJA), reversing the Tax Court of Canada, held that a taxpayer who was assessed under section 160 of the ITA, which imposes a derivative liability on the non-arm's length transferee from a tax debtor, could challenge the underlying assessment made against the transferor, notwithstanding that the transferor's liability had been confirmed by the Tax Court of Canada. The Tax Court of Canada in Mrs. Gaucher's appeal had held that she could not challenge the correctness of her husband's assessment.
[8] Rothstein J.A., speaking for the unanimous court, after quoting the Tax Court judge's conclusion that Mrs. Gaucher could not challenge her husband's assessment, stated at page 6680:
[6] I am of the respectful view that the Tax Court Judge was in error in coming to this conclusion. It is a basic rule of natural justice that, barring a statutory provision to the contrary, a person who is not a party to litigation cannot be bound by a judgment between other parties. The appellant was not a party to the reassessment proceedings between the Minister and her former husband. Those proceedings did not purport to impose any liability on her. While she may have been a witness in those proceedings, she was not a party, and hence could not in those proceedings raise defences to her former husband's assessment.
[7] When the Minister issues a derivative assessment under subsection 160(1), a special statutory provision is invoked entitling the Minister to seek payment from a second person for the tax assessed against the primary tax payer. That second person must have a full right of defence to challenge the assessment made against her, including an attack on the primary assessment on which the second person's assessment is based.
[8] This view has been expressed by Judges of the Tax Court. See, for example, Actonv. The Queen (1994), 95 D.T.C. 107, at 108 per Bowman T.C.C.J.; Ramey v. The Queen (1993), 93 D.T.C. 791, at 792 per Bowman T.C.C.J.; Thorsteinsonv. M.N.R. (1980), 80 D.T.C. 1369, at 1372 per Taylor T.C.C.J. While the contrary view was expressed in Schafer (A.) v. Canada, [1998] G.S.T.C. 7-1, at 7-9 (appeal dismissed for delay (August 30, 1999), A-258-98 (F.C.A.)), I am of the respectful opinion that such view is in error. It seems to me that this approach fails to appreciate that what is at issue are two separate assessments between the Minister and two different taxpayers. Once the assessment against the primary taxpayer is finalized, either because the primary taxpayer does not appeal the assessment, or the assessment is confirmed by the Tax Court (or a higher court if further appealed), that assessment is final and binding between the primary taxpayer and the Minister. An assessment issued under subsection 160(1) against a secondary taxpayer cannot affect the assessment between the Minister and the primary taxpayer.
[9] By the same token, since the secondary taxpayer was not a party in the proceedings between the Minister and the primary taxpayer, she is not bound by the assessment against the primary taxpayer. The secondary taxpayer is entitled to raise any defence that the primary taxpayer could have raised against the primary assessment. The result may be that the assessment against the secondary taxpayer is quashed or is found to be for a lesser amount than the assessment against the primary taxpayer. That, of course, will have no effect on the assessment against the primary tax payer against whom the primary assessment was final and binding.
[9] Bowie J. in Zaborniak, which dealt with an assessment under section 323 of the ETA, stated at pages 110-6 to 110-8:
If there were no authority on the subject, I would have had no hesitation in finding that the statutory language is clear, and that it leaves no room for a collateral attack on the judgment debt in the course of an appeal from an assessment under section 323. This is true of both the French and the English versions of the statute.[7] I would therefore feel constrained by the judgment of the Supreme Court of Canada in Shell Canada Ltd. v. Canada.[8] The present Chief Justice said there:
... Where the provision at issue is clear and unambiguous, its terms must simply be applied: ... [9]
There have, however, been conflicting decisions of this Court on the point since the decision of the Federal Court of Appeal in Gaucher v Canada[10]. That case dealt with an assessment made under section 160 of the Income Tax Act, which renders a non-arm's length recipient of a gratuitous transfer of property from a delinquent taxpayer liable, jointly and severally with the transferor, for the transferor's tax liability, up to a limit defined as the lesser of the extent to which the value of the property transferred exceeds the value of any consideration that may have been given for it, and the total of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year.[11] It was the latter expression that applied in that case. The Federal Court of Appeal held that this Court had erred in finding that the Appellant in an appeal from a derivative assessment made under section 160 could not dispute the amount of the tax liability of the principal debtor for the year in question, notwithstanding that the principal debtor had objected to the assessment and then pursued his right of appeal from it to this Court, all without success. The reasoning of the Court, as I understand it, is that the initial assessment against the primary taxpayer does not "bind" the secondary taxpayer, but only the primary taxpayer, for reasons arising out of the rules of natural justice. Since then there have been at least six decisions of this Court in cases where directors assessed under section 323 have sought to make a collateral attack on the primary assessment. In most of those cases,[12] it was not necessary to decide whether section 323 suffers from ambiguity. Only the decisions of Garon C.J. in Schuster v. Canada[13] and Tardif J. in Maillé v. Canada[14] have discussed the issue whether Gaucher applies to section 323. They both concluded that it does not, primarily because a director will normally have had the opportunity to influence the corporation's decision whether to appeal. That was certainly true in this case, where the Appellants are two of the three directors and shareholders of a small family business.
Whatever ambiguity may be found in section 160 of the Income Tax Act, I am not able to identify one in section 323, and that is a prerequisite to any departure from the plain words: see Bell ExpressVu Limited Partnership v. Rex[15] at paragraphs 28 to 30. Iacobucci J. said there:
... ambiguity cannot reside in the mere fact that several courts - or for that matter several doctrinal writers - have come to differing conclusions on the interpretation of a given provision...
To find that the Appellants in this case have a right to dispute the quantum of the judgment debt would require that I add to subsection 323(1), by implication, the words "or such lesser amount as the corporation might have been found liable to remit following a successful appeal of its assessment". I simply have no mandate to do that. I am in agreement with the conclusions reached by Garon C.J. and Tardif J. I note that these decisions have been criticized and described as "not ... good law".[16] I disagree. The policy is certainly a legitimate subject for criticism, but that criticism should be directed to Parliament, for it is there and not in the Court that policy is formulated: see Shell Canada Ltd., supra, at paragraphs 43 to 48; the Queen v. Ray,[17] at paragraph 14.
7 Paragraph 323(2)(b) and (c).
8 The French version of section 323 is annexed to these Reasons.
9 [1999] 3 S.C.R. 622 (S.C.C.).
10Ibid @ para. 40. See also the cases there cited.
11 2000 D.T.C. 6678 (Fed. C.A.).
12Income Tax Act, subparagraph 160(1)(e)(ii).
13 e.g. Wiens v. R., [2003] G.S.T.C. 121 (T.C.C. [Informal Procedure]) @ para. 5 and Lau v. R. (2002), [2003] G.S.T.C. 1 (T.C.C. [General Procedure]) @ para. 36, where Bowman, A.C.J. assumed, obiter, that the decision of the Federal Court of Appeal in Gaucher applied equally to section 323 of the Excise Tax Act.
14 [2001] G.S.T.C. 91 (T.C.C. [Informal Procedure]).
15 [2003] G.S.T.C. 103 (T.C.C. [Informal Procedure]).
16 [2002] 2 S.C.R. 559 (S.C.C.).
17 See the Comment [by David Sherman -- ed.] following Cochran v. R. (2001), [2002] G.S.T.C. 2 (T.C.C. [General Procedure]), and the Comments following Schuster and Maillé.
[10] With respect, I think that what was stated in Gaucher is a principle of broad application and ordinary fairness and it applies equally to assessments of director's liability under section 227.1 of the ITA and section 323 of the ETA.
[11] The distinction drawn in Schuster and Maillé, supra, between section 160 of the ITA assessment and section 227.1 of the ITA or section 323 of the ETA assessments does not, in my view, withstand scrutiny. It is based on the argument that a director who does not cause the company to file an objection cannot subsequently contest the corporate assessment when he or she is assessed as a director. This is in my view an erroneous rationalization of a refusal to follow the Federal Court of Appeal's judgment in Gaucher.
[12] There are, as Mr. Sherman notes in his editorial comment, many reasons why the company might not have filed an objection - lack of funds, insolvency or disagreement among the directors come to mind. Also, the directors may not have been permitted to object if the company was bankrupt. I note for example that Garon C.J. (as he then was) in Schuster relied on a transfer of property case, Schafer v. The Queen, [1998] G.S.T.C. 7. Schafer had been explicitly overruled by Gaucher. More recently, Miller J. held that a director who was assessed derivatively under section 323 of the ETA could challenge the underlying corporate assessment in Kern v. R., [2005] G.S.T.C. 101. As Miller J. noted in Kern, a company headed for bankruptcy or insolvency is not likely to object to an assessment.
[13] It is also noteworthy that Justice Bowie in Zaborniak did not base his conclusion on the distinction drawn in Schuster and Maillé. He based it solely on his interpretation of the words in section 323 of the ETA.
[14] I do not think that the reasoning in Gaucher can be distinguished in a director's liability case. The principle established in Gaucher is that a person who is not a party to an assessment and who is derivatively assessed is not bound by the failure of the primary obligor to contest its assessment. This principle is consistent with common sense and ordinary fairness. I do not think that the salutary rule stated in Gaucher should be eroded or whittled away by flawed distinctions. To extrapolate into the Gaucher principle a requirement that in every case we enquire into why the primary assessment was not challenged, or whether the derivatively assessed directors should have or could have influenced the primary taxpayer to contest its assessment would so dilute the principle as to make it meaningless and unworkable. Once we eliminate the fallacious distinction drawn in Schuster and Maillé between directors' liability cases and property transfer cases we are left with the full force of the Gaucher authority applying to all derivative assessment cases.
[15] I have, therefore, concluded that the appellants, in disputing their derivative assessments, may challenge the underlying assessments against Resici.
[16] Resici was incorporated in 1996 and carried on the business of concrete forming in the construction industry. Three other companies were incorporated, two of which, 121 and 132, are relevant to this case. Their function was to employ the persons who worked in the contract forming business of the appellant. It is not suggested that the employer companies or the legal relationships with them were shams. The employer companies paid the employees and invoiced Resici.
[17] The Minister issued assessments against Resici as well as 121 and 132. The internal documents of the CRA described these assessments as "joint" assessments or "joint and several". The use of these terms in the circumstances of these cases is inappropriate. The concept of joint and several liability is found in the ITA only in other circumstances. Persons assessed derivatively under section 160 or 227.1 of the ITA or section 323 of the ETA are said to be jointly and severally liable with the principal debtor but that is not what is meant here. Either Resici or the employer companies were obliged to remit the payroll deductions but not both. Indeed Mr. Brannen, the official of CRA, agreed on cross-examination that "a joint assessment in these circumstances is not supportable under the Income Tax Act".
[18] At all events, the Crown's position is that the employer companies were agents of Resici and the failure of the employer companies to remit was the failure of Resici. I have concluded that the employer companies were not agents of Resici and I do so for several reasons. As a general principle to establish that one corporation is an agent of another person or an agent of its shareholders is a difficult undertaking. In general, the separate identity of corporations is respected as is the separateness of their businesses. See for example Odhams Press v. Cook, [1938] 4 All E.R. 545 at 551; Richardson v. M.N.R., 2 DTC 531, [1941] Ex. C.R. 136.
[19] In Denison Mines Ltd. v. Minister of National Revenue [1971] F.C. 295; aff'd on a different point [1972] F.C. 1324, aff'd [1976] S.C.R., Cattanach J. dealt with an allegation that a subsidiary was an agent of the parent company at pages 320 - 322:
Briefly the appellant's position is that the business of Con-Ell was in reality the business of the appellant and in contradistinction thereof the position of the Minister rests on the case of Salomon v. Salomon, [1897] A.C. 22, that there are two separate legal entities and the losses of one are not the losses of the other.
It is well settled that the mere fact that a person holds all the shares in a company does not make the business carried out by that company the shareholder's business, nor does it make that company the shareholder's agent for carrying on the business. However it is conceivable that there may be an arrangement between the shareholder and the company which will constitute the company the shareholder's agent for the purpose of carrying on the business and so make the business that of the shareholder. It is immaterial that the shareholder is itself a limited company.
The question therefore is whether in the circumstances of the present appeal such an arrangement exists. The basis of agency is a contractual relationship either express or implied. There was no express arrangement here and whether one may be implied is a question of fact based on the circumstances of each particular case.
Counsel for the appellant relied strongly on Smith Stone and Knight Ltd. v. Birmingham Corporation, [1939] 4 All E.R. 116. In this case the plaintiff company was the sole shareholder of a subsidiary company. The premises occupied by the subsidiary were expropriated by the defendant. The parent company sought compensation for business disturbance on the ground that the subsidiary's business was the parent's business. The claim was contested on the ground that the proper claimant was the subsidiary, that being a separate entity.
Atkinson, J. reviewed the authorities and found six points that were relevant for the determination of the question: Who was really carrying on the business? Those points were:
1. Were the profits treated as the profits of the parent company? Here there were no profits but losses.
2. Were the persons conducting the business appointed by the parent company?
3. Was the parent company the head and brain of the trading venture?
4. Did the parent company govern the adventure, decide what should be done and what capital should be embarked on the venture?
5. Did the parent company make the profits by its skill and direction? In the present appeal were the losses incurred by the appellant's direction? and
6. Was the parent company in effectual and constant control.
On the evidence in the present appeal each of the six questions so posed must be answered in the affirmative but in my opinion this is not conclusive. The points outlined by Atkinson, J. are but indicia helpful in determining the question. Other factors may be present which point to a different conclusion.
Later Atkinson, J. said at page 121:
... Indeed, if ever one company can be said to be the agent or employee, or tool ... of another, I think the (subsidiary) company was in this case a legal entity, because that is all it was. There was nothing to prevent the claimants at any moment saying: "We will carry on this business in our own name".
(Brackets are mine.)
Here the very reason for the incorporation of Con-Ell was predicated on the legal advice that the appellant would be in breach of the conditions of the trust deed if it conducted the housing operation on its own account. It is a principle of agency that a person cannot do by an agent what he cannot do himself.
Here Con-Ell acted as principal. It contracted with the building contractor. It obtained bank loans. Because the subsidiary was without a backlog of security the bank insisted upon a guarantee of the subsidiary's indebtedness by the appellant, but it was Con-Ell that contracted the debt as principal and the appellant acted as guarantor only and the appellant also acted as guarantor of Con-Ell to Central Mortgage and Housing Corporation with which corporation Con-Ell contracted directly. Therefore the appellant did not hold out Con-Ell as its agent, nor did Con-Ell purport to act on behalf of a principal undisclosed or otherwise.
Con-Ell was carrying on business and it is important to bear in mind that limited companies that carry on businesses are separate taxable persons and the profits of their respective businesses are separate taxable profits whether or not one be the subsidiary of the other. Any attempt to erode this principle must be based upon clear and unequivocable facts leading to the irrebuttable conclusion that one legal entity is acting as the agent of another and that legal entity is really doing the business of the other and not its own at all.
In my view the facts in the present appeal do not justify such a conclusion for the reasons I have expressed.
[20] It should be noted that the sole shareholder of 121 and 132 was Lisa Piccin, not Resici. Lisa Piccin was also the sole director. None of the six conditions mentioned by Atkinson J. are present in this case. In Denison, Cattanach J. held that despite the presence of all six of the conditions set out by Atkinson J. Con-Ell was not an agent of Denison Mines Ltd. As stated by both Mr. Irving, Resici's lawyer, and Mr. Resnick, Resici's chartered accountant, it was common in the construction industry to incorporate separate payroll companies. There were several business reasons for doing so. One was to insulate the construction company and its assets from claims by workers who had accidents on the job. The other had to do with obligations under the Workers Compensation Act. It appears that if an employer has a certain number of accidents, the employer's obligations under the Workers' Compensation Act increase. Therefore the practice was to incorporate a separate payroll company when the limit was approaching. This was probably the reason for incorporating 132 in a subsequent year.
[21] Mr. Resnick, Resici's chartered accountant, testified that the payroll companies were treated separately for accounting purposes. I do not think it is necessary to set out in detail the way in which the accounts were kept. 121 or 132 billed Resici for the labour services it provided. This was treated as a labour cost by Resici. 121 and 132 were carrying on separate businesses of supplying labour to Resici. It would require far more compelling evidence than I have seen to hold that 121 and 132 were agents of Resici. It is, I think, sufficient on this aspect of the case to say that there is simply no evidentiary basis upon which I can find that they were agents of Resici. It follows that the obligation to withhold and remit payroll deductions was that of 121 and 132 and not of Resici. This case is very similar to Elias v. The Queen, 2002 DTC 1293. The facts are:
[11] It is of course open to the appellant to challenge the assessments of Gold Corp., in light of Gaucher v. R., [2001] 1 C.T.C. 125, and that is what he has done.
[12] The assessments against Gold Corp. and hence the derivative assessment against the appellant are premised on the assumption that Gold Corp. was paying salary, wages or remuneration to the employees of GSR within the meaning of section 153 of the Income Tax Act. That assumption is wrong. Gold Corp. advanced funds to GSR who paid GSR's employees. No principle of interpretation permits or requires that I extend the meaning of the words of subsection 153(1)
Every person paying at any time in a taxation year
(a) salary, wages or other remuneration
...
to a person who advances funds to the true payor. The evidence is clear that the person paying the salary wages or remuneration to GSR employees was GSR not Gold Corp. even though it received the funds from Gold Corp.
[13] Some point was made of the fact that Gold Corp. when the remittances were made to Revenue Canada paid them directly. I do not think this makes Gold Corp. the person who pays the salary, wages or remuneration. It was merely satisfying, on behalf of GSR, GSR's obligation to Revenue Canada. GSR was a viable operating company. It was not a sham, nor was it an agent of Gold Corp. nor was Gold Corp. an agent of GSR. They were separate corporate entities, with separate legal existences.
[14] I conclude therefore that Gold Corp. never had an obligation to pay the remittances to Revenue Canada under subsection 153(1). Accordingly subsections 227(9), (9.1), (9.2), (9.4) and (10.1) referred to by counsel for the respondent have no application to Gold Corp.
[15] It follows therefore that the assessments against Gold Corp. are wrong and must fall insofar as they form the basis of the assessment against the appellant. The appellant's assessment must as a consequence fall as well. As between Gold Corp. and the Minister of National Revenue, Gold Corp.'s assessments may well be conclusive if it has not objected. I make no finding on this point. Gold Corp. is not a party to this action. There was no failure on the part of Gold Corp. as envisaged by subsection 227.1(1) and so the foundation of the appellant's liability under that subsection disappears.
[22] Therefore, the assessments against Jack and Sandro under s. 227.1 of the ITA for the amounts assessed against Resici for unremitted payroll deductions must be vacated because the underlying assessments against Resici were wrong.
[23] The next issue is whether Jack was a director of Resici. He submitted a written resignation on July 3, 1997, two years before he was assessed and the resignation was accepted. There is no question of the authenticity of the resignation or of its legal effect. Jack was not a de jure director after July 3, 1997. The assessments against him are premised on the view that he was a director. The Crown argues that he was a de facto director.
[24] In Dirienzo v. The Queen, 2000 DTC 2230, I used the expression de facto director in connection with the sole owner and controller of a construction company. In that judgment I held that a 20 year old nephew of the owner of the company was not liable as a director under section 227.1 of the ITA because he exercised no responsibilities as director and was powerless to do anything. I referred to a decision of the Federal Court of Appeal in Wheeliker v. R. [1999] 2 C.T.C. 395. The majority decision was rendered by Noël J. on behalf of himself and Desjardins J. There was a dissent by Létourneau J.. Noël J. referred at length to the Nova Scotia Companies Act. Paragraphs 7 to 9 of his judgment read:
7 The ITA does not define "director" either for the purposes of the ITA as a whole or for the purposes of section 227.1. As this Court held in Kalef , it is therefore appropriate to look to the Corporation's incorporating legislation for guidance as to who is a "director" for the purposes of section 227.1. Under paragraph 2(1)(f) of the Act,
"director" includes any person occupying the position of director by whatever name called; [emphasis added]
I agree with the conclusion of the Tax Court judge that the words "occupying the position of director by whatever name called" brings within the definition a director irrespective of how this position may be designated. This is consistent with the approach of the Chancery Division in Lo-Line Electric Motors Ltd., Re6 where the Court interpreted the identical definition under the U.K. Companies Act, 1985. According to the Court:7
...the words "by whatever named called" show that the subsection is dealing with nomenclature; for example where the company's articles provide that the conduct of the company is committed to "governors" or "managers."
8 As section 2(1)(f) speaks simply to nomenclature and is inclusive, it is therefore necessary look to the provisions of the Act to determine the legislative intent with respect to those who have under the law the status of "director."
9 Before turning to the relevant provisions, I note that the Act nowhere speaks of de facto or de jure directors. Rather it uses the term director in various contexts, some of which suggest a reference to a director who is qualified to act as such under the Act, and others which refer to a person who in fact acts as such without being so qualified. The question to be answered is whether the word director only connotes a person qualified to act as such under the Act.
Paragraphs 16 to 20 read:
16 It is therefore apparent that the Act recognizes that persons will act as directors without being qualified to do so, and that the legislator has, despite this absence of qualification, chosen to validate those acts in the circumstances that we have seen. The question then becomes whether this statutory recognition of specified acts by persons who act as directors despite their lack of qualification also has the effect of making them directors under the Act.
17 In my view, section 95 of the Act and the relevant sections of the Articles would be rendered meaningless if the Act was construed as granting the status of director to those who are not qualified. A director is one who meets the requirements imposed under the Act including those prescribed by section 95. Indeed, a penalty is imposed on those who act as director without meeting those requirements. It would be odd if those who breach the Act by acting as directors while not qualified thereunder would nevertheless have the status of director under the Act. As a matter of legislative intent, it seems unavoidable that only those who meet the requirements prescribed by the Act, are directors under the Act.
18 In my view, the Act cannot be construed as giving those acting as directors without the requisite qualifications the status of director, nor can it be said that the common law has provided such individuals this status. What the courts have done over the years, however, is devise remedies to assist third parties who deal with persons who act as directors or who are held out by the company as directors although they lack the required qualification or authority.
19 As I understand it, one principle underlying these common law remedies is that a person who has not obtained the requisite qualifications, is prevented from pleading this failure in order to escape liability attaching to a director. As held by Richards J.A. in MacDonald v. Drake,
I cannot assent to the contention that a director, who, with his consent, has been elected and has acted as a director, should, merely because he was not qualified to hold the office, escape liability that he would have incurred if he had been qualified. The true principle seems to be that a man cannot take advantage of his own wrong.12
It being recognized in this instance that the respondents acted as directors, in conformity with the will of the shareholders, I see no reason why they should be allowed to assert their lack of qualification to escape the liability cast upon directors by virtue of section 227.1 of the ITA.
20 Thus, while I would agree with the conclusion of the Tax Court judge that those acting as directors without having the requisite qualifications are not directors under the Act, I do not believe that the respondents can raise this lack of qualification as a defence to their liability under subsection 227.1(1) of the ITA.
[25] I think the same conclusion could be reached in the case of a corporation formed under the Ontario Business Corporations Act, ("OBCA") as was Resici. I do not, however, think the facts here justify the same conclusion. After Jack resigned as director he never held himself out as a director nor did he exercise the sort of control over the corporation's affairs that one would expect of a director. Jack signed many contracts as General Manager but never as director. In Canada Revenue Agency directive RCD-95-12 relating to director's liability the CRA makes the following statement:
(1) Caution should be exercised prior to assessing an alleged "de facto" director. It is not sufficient that a person be signing cheques for the corporation for him or her to be considered a "de facto" director. The general rule is that it is not appropriate to assess an alleged "de facto" director if there are legally appointed directors in office at the relevant times. The assessment of a de facto director should be considered only in cases where a person is representing himself or herself as a director. There should be written evidence of such behavior available.
[26] Such statements are not binding but they represent what I believe to be an administrative approach that is consistent with the law. I have concluded that Jack was not a director of Resici, either de facto or de jure.
[27] I think it will be apparent that one must be careful about the use of the expression de facto director. It does not cover as broad a field as is sometimes ascribed to it. It does not, for example, at least for the purposes of the derivative liability of directors under the ITA and the ETA cover everyone who exercises authority in the corporation. It may cover persons who although elected as directors may not be because of some technical requirement. It may also include persons who hold themselves out as directors so that third parties rely upon their authority as directors. That is essentially the principle upon which Noël J.A. based his conclusion in paragraph 20 of the Wheeliker judgment.
[28] As Noël J.A. noted in Wheeliker, the Nova ScotiaCompanies Actdoes not speak of de jure or de facto directors. It speaks only of directors. The OBCA is the same. The OBCA defines "director" as follows:
"director" means a person occupying the position of director of a corporation by whatever name called and "directors" and "board of directors" include a single director;
Section 128 of the OBCA validates acts of directors despite subsequently discovered defects on their appointment, election or qualification. It reads:
128. An act done by a director or by an officer is not invalid by reason only of any defect that is thereafter discovered in his appointment, election or qualification.
Section 19 codifies essentially the indoor management rule sometimes known as the rule in Royal British Bank v. Turquand.
INDOOR MANAGEMENT RULE
19. A corporation or a guarantor of an obligation of a corporation may not assert against a person dealing with the corporation or with any person who has acquired rights from the corporation that,
(a) the articles, by-laws, or any unanimous shareholder agreement have not been complied with;
(b) the persons named in the most recent notice filed under the Corporations Information Act, or named in the articles, whichever is more current, are not the directors of the corporation;
(c) the location named in the most recent notice filed under subsection 14(3) or named in the articles, whichever is more current, is not the registered office of the corporation;
(d) a person held out by a corporation as a director, an officer or an agent of the corporation has not been duly appointed or does not have authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for such director, officer or agent;
(e) a document issued by any director, officer or agent of a corporation with actual or usual authority to issue the document is not valid or not genuine; or
(f) financial assistance referred to in section 20 or a sale, lease or exchange of property referred to in subsection 183(3) was not authorized,
except where the person has or ought to have, by virtue of his position with or relationship to the corporation, knowledge to that effect.
[29] There is a considerable body of jurisprudence involving de facto directors. The venerable text Wegenast, Canadian Companies, draws what I believe is a very sensible albeit difficult distinction between the concept of de facto directors and the "indoor management rule" (discussed below). This distinction is mentioned in the second and third paragraphs of the passage from Wegenast cited below:
De Facto Directors.
If a person not duly elected nevertheless acts as a director he may under certain circumstances be regarded as a de facto director. Persons assuming to act as directors of a company without having been properly elected, or a board not duly constituted, because too many or too few were elected or remained in office, or consisting of directors who, or some of whom have held on after the expiry of their term of office, have been held to be incompetent to act for the company, in such matters as the allotment of stock, the making of calls or the declaration of a forfeiture of stock. And the same rule has been applied in cases where directors have not acted at a properly constituted meeting; thought it has been held that the mere presence of some unqualified directors at a meeting will not invalidate the transactions thereat if there is a sufficient number of qualified directors in attendance.
But this line of cases is cut across by the line of cases in which it is laid down that outsiders, at all events, are entitled to assume that the internal proceedings of a company have been regular and that those who purport to speak and act for the company have been duly authorized.
The disjunctions between these two lines of cases are none too clear. What was for many years regarded as the proper line of distinction is contained the argument on behalf of the plaintiff in the case of Briton Medical etc. Assn. v. Jones, which is reported as follows: "Section 67 of the Act of 1862, which validates acts done by the directors, notwithstanding defects in their appointments, only applies to acts affecting the outside public, but not to acts affecting only the shareholders of the company; and rightly enough, for if a person deals with a company believing its directors to be properly appointed, the acts of the directors ought to be held valid, and the company bound; but as regards matters affecting the shareholders inter se, as for instance, forfeiture of shares, creation of capital, and making of calls, a different rule prevails. Between the company and persons having no notice to the contrary, directors de facto are as good as directors de jure, but in matters of internal administration, as making calls or forfeiting shares, acts done by persons purporting to act as directors, but who are not such in fact, are not binding on the shareholders." Though this argument was not successful on the facts of the case it would seem that it was subsequently regarded as a correct statement of the law until the decision in Dawson v. African ConsolidatedLand, etc. Co., where it was held that a clause in the articles providing that acts of directors should be valid notwithstanding "that it should be afterwards discovered that there was some defect in the appointment of such directors" did not operate only as between the company and outsiders but also as between the company and its members. It is obvious that unless some distinction is maintained the cases where calls, forfeitures, etc. by de facto directors have been held invalid must go by the board. These cases have not been overruled, but there is now a substantial number of cases in which shareholders have been precluded, like outsiders, from setting up irregularities in the constitution of the board of directors. True, the irregularities in these cases have been described as "small" and "trivial," but no suggestion has been made as to a method of distinguishing between irregularities that are small or trivial and those that are large or important. Perhaps the correct basis of distinction is that suggested earlier in this chapter as the basis of distinguishing between those cases where directors may delegate their functions and those in which they may not, viz., whether the matter has to do with the constitution of the company.
It is to be observed that the English cases turn for the most part on the application of provisions, in the statutes or the articles of companies, designed to relieve persons against defects or irregularities in the appointment of directors, - in other words, to avoid the application of such decisions as that in Howbeach Coal Co. v. Teague. There is no such provision in the Canadian Companies Act. Accordingly the reasoning in the cases where acts of the directors have been invalidated by defects in their election has unimpeded force in the case of Canadian companies unless, of course, there should be a relieving clause in the charter or by-laws. In other words, it may be that whereas in England outsiders are relieved in virtue of the statutory provision or the articles, as the case may be, and the question is as to the position of the members of the company, in Canada both outsiders and members are exposed to the danger,-subject of course to the principle of cases like Mahony v. East Holyford Mining Co.
As for outsiders, they are not only protected by the rule laid down in Mahony v. East Holyford Mining Co., and entitled to assume that those who are permitted by the shareholders to hold themselves out as directors have been duly authorized as such, but it would seem that they are bound to assume this and are not at liberty to raise any question as to the authority of those assuming to act for the company. And it is not clear to what extent an outsider is affected by notice of an irregularity in the election or appointment of directors in case the irregularity should be set up by the company.
There must, however, have been something more than a mere usurpation of office. There must have been something to justify outsiders in assuming that the person or persons in question had been duly elected or were acting with the concurrence of the shareholders, for the doctrine of de facto directors is merely an application of the doctrine of estoppel or "holding out."
The objection to de facto directors cannot, of course, be invoked by an unauthorized director himself, as for example to escape liability for payment of dividends out of capital, or for other misfeasance, or to escape a statutory liability for wages of workmen, or for failure to make government returns, or, it would seem, to claim remuneration or indemnity; for a de facto director is in the same position as an executor de son tort, being subject to all the burdens of his office without any of its benefits. And he cannot himself set up the invalidity of his election by way of objection to the making of a call or the declaration of a forfeiture in which he is interested.
(footnotes omitted)
[30] The distinction is less clear in the more recent text Fraser & Stewart, Company Law of Canada, 5th Edition, 581-583.
Directors de facto.
Although his election as a director may have been defective or irregular, a person may act in the capacity of director in which event he is said to be a director de facto.
Persons publicly exercising the functions of directors of companies have been held to be directors to the extent that their acts are deemed valid in respect of third persons who are not aware of their lack of status or are binding on the corporation so far as the rights of third parties who are unaware of the true position are concerned: R. v. Bedford Level (1805) 6 East 368; Re County Life Assoc. Co. (1870) L.R. 5 Ch. App. 288, Mahony v. East Holyford Mining Co. (1875) L.R. 7 H.L. 869; County of Gloucester Bank v. Rudry [1895] 1 Ch. 629 (C.A.); Macdonald v. Drake (1906) 16 Man. R. 220 (C.A.) 226.
Thus, a company cannot escape liability on an agreement under its corporate seal with an outsider on the ground that its directors were not regularly elected: Re. W. N. McEachren & Sons Ltd. [1933] O.R. 349 (C.A.) 361; Gray v. YellowknifeGold Mines Ltd. (No. 1) [1945] O.R. 688.
The rule is different as regards acts affecting only the shareholders of the company inter se, e.g., the making of calls and forfeiture of shares. See the notes to sections 41-44.
This Act contains no provisions similar to s. 180 of the English Act of 1948 to the effect that acts of directors are to be valid notwithstanding any defect that may afterwards be discovered in their appointment or qualification. The Ontario Act has since 1953 contained such a provision (s. 305). Such statutory provisions and similar provisions in the articles in common form have been held to be effective as between the company and its shareholders: Dawson v. African Consolidated Land & Trading Co. [1898] 1 Ch. 6 (calls); British Asbestos Co. Ltd. v. Boyd [1903] 2 Ch. 439 (validity of meeting of shareholders); Alberta Improvement Co. v. Peverett (1914) 7 W.W.R. 757 (calls). Such provisions protect acts both with regard to insiders and outsiders and are available to directors if there is good faith: Channel Collieries Trust, Ltd. v. Dover St. Margaret's & Martin Mill Light Ry. Co. [1914] 2 Ch. 506 (C.A.), 512, 515. The section is designed to avoid questions being raised as to the validity of transactions where there has been a slip in the appointment of a director and cannot be invoked to override the substantive provisions relating to such appointments: Morris v. Kanssen [1946] A.C. 459.
The election of new directors by de facto directors (they being improperly appointed) was held under the corresponding provision of the Alberta Act to be valid in Oliver et al. v. Elliott et al. (1960) 30 W.W.R. 641.
A director de facto is, like an executor de son tort, subject to the burdens of the office, but not entitled to any of its benefits: Macdonald v. Drake (1906) 16 Man. R. 220 (C.A.). When directors assume their fiduciary office they become liable in all respects as though rightly appointed and they cannot be heard to criticize the regularity of their appointment. Re Owen Sound Lumber Co. (1915) 34 O.L.R. 528, (1917) 38 O.L.R. 414 (C.A.).
The principle has also been applied to other agents of a company, and in any case where a person holds himself out as an agent or official of a corporation and the circumstances are such that in law the corporation could repudiate such person, or take proceedings to restrain him but has not done so, then his acts within his apparent authority will bind the corporation as regards persons ignorant of his true position, even though his assumption of authority is entirely unwarranted: Mahony v. East Holyford Mining Co., supra; and see Allen v. Ont. & Rainy River Ry. Co. (1898) 29 O.R. 510 (C.A.).
De facto directors not only have the power but the duty to convene a general meeting of shareholders for the purpose of properly constituting the board: Streit v. Swanson [1946] O.R. 565.
Prima facie the company alone may bring an action to restrain a de facto director irregularly elected from acting as a director or representing himself as such. An individual shareholder has no such right: Foss v. Harbottle (1843) 2 Ha. 461; Kelly v. Electrical Construction Co. (1908) 16 O.L.R. 232. See further the cases in the notes under the heading "Attacking an election" at p. 579. Nor can the right of de facto directors to act as directors be questioned collaterally by a defendant in an action brought against him by the company: Austin Mining Co. v. Gemmell (1886) 10 O.R. 696 (C.A.).
In an action for an accounting brought by a company against its president the onus of proof is on the defendant who alleges that the company's board of directors is incomplete: Temiscouata Ry. Co. v. Macdonald (1900) 3 Que. P.R. 462.
As to the right of de facto directors to claim remuneration, see the notes under the heading "Remuneration" infra, at p. 621.
[31] Palmer's Company Law, Twenty-Third Edition, devotes several pages to the concept, at least under British law. The description in Palmer is instructive in that under similar legislation, the ambit of the term "de facto director" is restricted. Palmer at paragraphs 61-19 to 61-21 states:
Defective appointments and acting after disqualification
A person is only a director in the eyes of the law if, first, he has been duly appointed and, secondly, he has not ceased to fill the requirements of the company's articles for being a director by having become disqualified after his appointment. These matters have been dealt with earlier, and it is now necessary to consider the effect of an irregular appointment of a director and of a director acting after he has become disqualified.
De facto directors
A person who has not been duly appointed a director, or who has become disqualified from being a director, is not de jure a director,83 but since a person in such a position may actually act as a director, he may be a director de facto. Two sets of statutory provisions and the rule in Royal British Bank v. Turquand are relevant to this situation.
European Communities Act 1972, s.9 and Companies Act 1976, s.21
. . .
Companies Act 1948, s.18085a
Under this section "the acts of a director shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification." Thus a stranger to the company, or a member, is entitled to assume that a person who appears to be a duly appointed and qualified director is so in fact. In Dawsonv. African Consolidated Land and Trading Co.,86 a director had ceased to hold his qualification shares but had shortly afterwards reacquired them: the parting with his qualification technically caused him to vacate office, and he had not been formally reappointed, but had been accepted as a director by the other directors, who had power to reappoint him. The court held that an article in terms similar to section 180 validated the acts of the directors: Lindley M.R. said87:
"If that is not an irregularity in his appointment such as was intended to be cured by [the article], I cannot conceive what irregularities were aimed at by that article."
Accordingly a call made by the directors was held to be valid.88 Again, in British Asbestos Co. v. Boyd,89 the acts of a person who had, innocently, continued to act as director after he had vacated his directorship by becoming secretary to the company (under an article which provided for vacation where any other office was accepted under the company) were valid. When this case was decided no section in the terms of section 180 was in force, but the company's articles contained a similar provision, and the court was also influenced by the existence of a section in terms similar to section 145(3) of the 1948 Act, which provides, inter alia, that where minutes of a meeting have been duly made as required by the Act, the proceedings at the meeting and appointments of directors deemed, until the contrary is proved, to be valid. So, too, in Mahoney v. East Holyford Mining Co.,90acts by directors who had not been duly appointed nevertheless bound the company as against outsiders.
It will be seen from the above decisions that two propositions emerge -
(1) acts of de facto directors are effective both vis-à-vis outsiders and vis-à-vis members; and
(2) even if the public documents of the company, and the facts which are apparent, would make it clear that a director was not duly qualified to act, this will not oust the effect of the section. Farewell J. in British Asbestos Co. Ltd. v. Boyd91 said:
"In my opinion, the words 'notwithstanding that it shall afterwards be discovered that there is some defect,' and so on, do not mean . . . that the facts are afterwards discovered, but that the defect is afterwards discovered; the facts in a case like the present necessarily appear on the books of the company. . . . It is not, therefore, that the facts are not know, but that the knowledge of the defect is not present to the mind of any person to whom it is material at the time to know it."
The section has been held to validate the acts of a director appointed at a meeting of which insufficient notice had been given.92
The section will not protect a person who knows of the invalidity,93 as, for instance, a director making a mala fide transfer of his shares, accepted collusively by the other directors.94 Nor can a person take advantage of it if he is on notice of some probable defect or if he knows that the regularity of the appointment has been challenged and takes no steps to ascertain the facts.95 In Morris v. Kanssen96 the facts were as follows: Kanssen and Cromie were the two first directors of the company and held all the shares. Cromie alleged that Strelitz was appointed a director at a board meeting. This meeting never took place and the minute recording it was a forgery. At another meeting Cromie and Strelitz, without Kanssen's knowledge, purported to appoint Morris a director and allotted shares to Morris. Morris knew that Kanssen was contending that Strelitz was not a director and that the issue of shares was invalid; but he made no inquiries. The Court of Appeal held that Morris was put on inquiry and could not rely on the section. Lord Green M.R., in the Court of Appeal,97 laid down the following propositions as having been established by the authorities:
(1) A party to the transaction may be able to rely on the section, if he does not know of an irregularity, even though other parties know that the appointment was irregular.
(2) The section may apply though the parties concerned know the facts, if the defect is not present in their minds at the time.
(3) Where a person is put on inquiry and makes no inquiries, it is no answer for him to contend that, if he had made inquiries, he would have had false statements made to him.
(4) A person who takes an interest as transferee from one of the parties to the transaction is not protected by the section; and, if the transferor could not rely on the section, the transferee is in no better position.
When this case came before the House of Lords these proportions were neither affirmed nor rejected. The House of Lords held that the appointment of Strelitz and Morris and the allotment of shares to Morris were completely bad, and were not validated by the section. Lord Simonds said98:
"There is, as it appears to me, a vital distinction between (a) an appointment in which there is a defect or, in other words, a defective appointment, and (b) no appointment at all."
A de facto director is as much in a fiduciary position as a de jure director, and liable accordingly.99
It has further been held that what is now section 180 does not justify the claim of a person against a company for services as liquidator where, because he had not been validly appointed, he never had authority from the company to act as liquidator.1 It would seem that the principle of this decision would also apply to a director who had been invalidly appointed or who acted after becoming disqualified, but in Craven-Ellis v. Canons Ltd.,2 a director who acted after having ceased to be qualified as a director was entitled to be paid on a quantum meruit for his services of which the company had had the benefit. A person who has not been duly appointed does not give the company any right of action against him by purporting to act as a director unless it can show damage; but the company may bring an action to restrain a de facto director from acting as director or representing himself as such.
A director who takes part in irregular proceedings may be estopped from setting up the irregularity.3 For instance, a de facto director who was aware of his invalid appointment or was on notice of the facts which gave rise to that invalidity, and who as a director allotted shares to himself, was not able to avoid the allotment on the technical grounds that since he was aware of the defect in his appointment the allotment was not validated by a clause in terms similar to article 105.4
The rule in Royal British Bank v. Turquand
This is discussed above in paras. 28−10 to 28−16. The effect of the rule may be to make the company liable for a person's acts even if he has never been properly elected to the office of director, provided that the other requisites of the rule are satisfied.SchusterStatement of the rule
According to this rule, while persons dealing with a company are assumed to have read the public documents of the company20 and to have ascertained that the proposed transaction is not inconsistent therewith, they are not required to do more; they need not inquire into the regularity of the internal proceedings - what Lord Hatherley called21 "the indoor management" - and may assume that all is being done regularly (omnia praesumuntur rite ac solemniter esse acta).22
[32] I have cited extensively from Palmer because that text deals more fully with the concept of de facto director than any other I have seen. What emerges is the following:
(a) a person must have some semblance of qualification as director and must hold himself or herself out as a director.
(b) I have seen nothing in Canadian law that extends the concept of de facto director beyond the limits put on it by Palmer.
(c) Care must be exercised not to confuse the concept of de facto director with the position of a person to which the rule in Turquand applies. The two may not necessarily be conterminous.
[33] In other words, director means primarily a de jure director and its meaning can be extended to a de facto director only where the law recognizes the concept. If Parliament wants to widen the net it knows how to do so.
[34] On this basis Jack was not any kind of a director. Even if we seek to give the term de facto director a broader meaning such as anyone who looks as if he or she wields a fair bit of authority in the company, I do not think that Jack fits the description. He was a general manager with signing authority. He took no part in the decision to transfer the business of Resici to Forma-Con Construction. Unlike John Piccin, he never held himself out as a director. In such matters as setting the price of contract bids, corporate litigation, whether to bid on projects and disputes with general contractors, he exercised no authority.
[35] The respondent called Mr. Rocco DiPede presumably with a view of establishing that Jack exercised the function of a director. If Jack were exercising such functions Mr. DiPede would have been one of the best witnesses to give such evidence. Yet his evidence did not get close to showing that Jack acted as a de facto director. Mr. DiPede's evidence did not assist the Crown's case. He confirmed what has been accepted throughout that as general manager, Jack had responsibilities commensurate with that position. Yet the day to day running of the office was the job of Lisa Piccin. I do not think that whatever authority Jack may have had or exercised makes him a de facto director.
[36] Since Jack was not a director he had at least so far as the ITA and the ETA are concerned no obligation to ensure that the payments were made under the ITA or the ETA and in any event Resici was not the employer of the employees of 121 and 132, I do not need to consider the question of due diligence. I do find it of passing interest, however, that the person who was in charge of the accounting for Resici as well as 121 and 132, Lisa Piccin, was also assessed under section 227.1 of the ITA and section 323 of the ETA. She did not contest the assessments and filed for bankruptcy. I shall let this inconsistency on the part of the CRA remain where it lies without comment. It speaks for itself. The assessor stated that he now believes that the assessment against Lisa Piccin was wrong. I am sure this is of great comfort to Ms. Piccin.
[37] Finally, I turn to the position of Sandro. Nominally, he was a director of Resici. In fact, he was a mere cipher. He had no power, was given none and exercised none. He was very much like the young man in Dirienzo mentioned above. He was in no position to influence whether GST payments were made by Resici and, so far as payroll deductions by 121 and 132 were concerned, he was not a director. He did not have access to the books and records of Resici and was refused access to them. The real powers in the company were DiPede and Piccin.
[38] I should in conclusion mention a number of points that were referred to in the evidence and in argument.
[39] The first is Jack's health problems. In the 1990s he was diagnosed with cancer. The cancer was serious and life threatening. He embarked on an aggressive and courageous battle and seems to have won. Stacks of medical records were put in evidence. I have not based my judgment that Jack was not a director, de facto or de jure, on Jack's struggle with cancer, but I have not ignored it entirely. I find as a fact that throughout the period in question Jack was very much preoccupied with his health problems and this could not have failed to affect his work at the office. As stated above, however, I have concluded that with or without cancer he was not a director.
[40] Another point that was raised was whether the liability of Resici for GST should have been reduced to zero because Mr. Irving directed the CRA to apply all payments received from Resici to its liability for GST. I find as a fact that he did and that the payments were not applied to the GST liability. If they had been they might have eliminated the GST liability altogether. Since Resici had no liability for the payroll deductions that 121 and 132 should have made, the amounts received by the CRA from Resici should have been applied to its GST liability. I am aware that there is a great deal of law on the extent to which a debtor can direct that a payment be applied to a particular debt owing to a creditor. The jurisprudence goes all the way back to Clayton's Case (1816) 35 E.R. 781. The classic statement of the law on this subject is found in Lord Macnaghten's speech in Cory Bros. & Co. v. "The Mecca", [1897] A.C. 286 (H.L.). The cases in Canadaare, however, by no means clear or consistent, as will be obvious from the discussion in Dunlop, Creditor-Debtor Law in Canada (2nd Edition) pages 23-27. Although I have found as a fact that Mr. Irving, on behalf of Resici, did direct that payments go into Resici's GST account, I am not prepared to express any further conclusion on this point.
[41] I will say this, however: the officials of the CRA have displayed a remarkably confusing and inconsistent shotgun approach to the problem. They have
(a) issued assessments against Resici as well as 121 and 132;
(b) variously assessed Resici for the tax liability of 121 and 132 and they have issued "joint assessments";
(c) invented such interesting and novel concepts as "joint assessments" and "deemed employer". The law has thus far not caught up with such innovative approaches;
(d) issued third party demands while at the same time treating every corporate entity in sight as being either primarily or derivatively liable;
(e) assessed not only Jack and Alex Scavuzzo but also Lisa Piccin, Rocco DiPede and John Piccin for the alleged liabilities of either Resici or 121 and 132. They have, then, consented to the allowance of the appeals of Messrs. DiPede and Piccin and the vacating of the assessments against them;
(f) issued jeopardy assessments against Jack based on an affidavit that failed to disclose that he had resigned as a director of Resici; and
(g) let Lisa Piccin go bankrupt because of an assessment that they now say should never have been issued against her.
[42] Their conduct is reminiscent of Sir Ronald in Stephen Leacock's story. Gertrude the Governess, who "flung himself upon his horse and rode madly off in all directions."
[43] The appellant also alleged that since the respondent apparently cannot find the assessments against 121 and 132, it cannot assess the Scavuzzos. I will leave this interesting question to another day.
[44] The appeals are allowed and the assessments vacated. Counsel are requested to communicate with the Court to determine how the matter of costs can best be dealt with. I will defer signing formal judgments until January 16, 2006, pending receipt of representations on costs.
Signed at Ottawa, Canada, this 21st day of December 2005.
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"D.G.H. Bowman" |
Bowman, C.J.
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CITATION: |
2005TCC772 |
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COURT FILE NO.: |
2001-4533(IT)G & 2001-4534(GST)G 2001-4535(IT)G & 2001-4536(GST)G |
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STYLE OF CAUSE: |
Sandro (Alex) Scavuzzo & Jack Scavuzzo v. Her Majesty the Queen |
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PLACE OF HEARING: |
Toronto, Ontario |
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DATES OF HEARING: |
April 27 and 28, 2004; November 22, 2004; July 11 to 13, 2005; August 3, 4, 5, 10, 11 and 12, 2005. |
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REASONS FOR JUDGMENT BY: |
The Honourable D.G.H. Bowman Chief Justice |
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DATE OF JUDGMENT: |
December 21, 2005 |
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APPEARANCES: |
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Counsel for the Appellant: |
Stevan Novoselac |
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Counsel for the Respondent: |
Marie-Thérèse Boris |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
Stevan Novoselac |
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Firm: |
Cassels, Brock & Blackwell Barristers & Solicitors Scotia Plaza 40 King Street West Suite 2100 Toronto, Ontario M5H 3C2 |
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For the Respondent: |
John H. Sims, Q.C. Deputy Attorney General of Canada Ottawa, Canada |