Tax Court of Canada Judgments

Date: 20020605

Docket: 2000-946-GST-G

BETWEEN:

VITO PERRICELLI,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Judgment

Miller, J.

[1]            In the late 1980s the Appellant, Mr. Vito Perricelli, and two friends, Mr. Cuthbert and Mr. Lishman, owned and operated 642599 Ontario Limited (the Company) which carried on a small cleaning business. As the business could not support the three of them, Mr. Perricelli, in the summer of 1990, "left the business". In the following few years the Company was not able to meet its goods and services tax (GST) obligations, and in 1998 the Minister of National Revenue (the Minister) sought payment for unpaid GST remittances from Mr. Perricelli as a director of the Company. The issue is whether, in leaving the Company in 1990, Mr. Perricelli ceased to be a director. If not, did he in the ensuing years act with due diligence such that he can avail himself of the protection of subsection 323(4) of the Excise Tax Act (the Act)?

Facts

[2]            Mr. Cuthbert was the first of the three businessmen to be involved with the Company, having an ownership and management role as far back as the early 1980s. Mr. Lishman came on board in the mid-1980s as a salesman and in 1988 acquired shares from Mr. Perricelli and Mr. Cuthbert, resulting in a one-third ownership for each of them. Mr. Perricelli's involvement with the Company began in 1987: he indicated he invested $11,000 in total in the Company. Mr. Perricelli joined the Company as a result of his dealings with Mr. Cuthbert, while Mr. Perricelli worked at Niagara Credit Union as a loan manager. Mr. Perricelli had a number of years of experience in the finance industry, culminating with his job at Niagara Credit Union from 1981 until 1987, when he decided to join Mr. Cuthbert in the cleaning business.

[3]            Given Mr. Perricelli's background, his role with the Company was as an administrator and as the financial officer. He was appointed secretary-treasurer. Mr. Lishman described Mr. Perricelli as the "paper man". He was the primary contact with the Niagara Credit Union and likewise he dealt with the Company's accountant. This allowed Mr. Cuthbert and Mr. Lishman to concentrate on sales.

[4]            The three owners/employees of the small business signed a Shareholder's Agreement, dated October 1, 1989.[1] The relevant provisions are:

3.1            Agreement.           The parties agree to cause such meetings of the Corporation to be held, resolutions passed, by-laws enacted, agreements and other documents signed and things performed or done as may be required to provide for the following arrangements in connection with the affairs of the Corporation.

(a)            Number of Directors. — the affairs of the Corporation shall be managed by a Board of Directors which shall consist of three (3) directors. Each shareholder shall be entitled to elect one director and no more.

...

(d)            Directors' Votes — the by-laws of the Corporation shall further provide that each director shall have one (1) vote at any meeting of the Board of Directors and that the Chairman shall not have an additional or casting vote.

(e)            Directors' Meetings — the by-laws of the Corporation shall further provide that a quorum for a meeting of directors shall be three (3) directors and every question shall be determined by not less than two (2) of the votes cast on the question. There shall be no second or casting vote. The Corporation's by-laws shall permit a director to participate in a meeting of directors by means of such telephone or other communications facilities as permit all persons participating in the meeting to hear each other and a director participating in such a meeting by such means shall be deemed to be present at that meeting.

(f)             Shareholders' Meetings — the by-laws of the Corporation shall further provide that a quorum for a meeting for shareholders of the Corporation shall be three (3) shareholders represented in person or by proxy. At all meetings of the shareholders every question shall be determined by not less than any two shareholders represented at the meeting who are entitled to cast votes on the question.

...

9.14          Amendments This Agreement may be amended by the unanimous consent of the parties hereto which shall be binding on both parties to this Agreement.

[5]            According to both Mr. Lishman and Mr. Cuthbert, in June 1990 Mr. Perricelli met with them to indicate that as the business could not economically support the three of them, he would leave. This appeared to make sense to all three of them, as Mr. Perricelli had other interests he could pursue. He was involved in running a restaurant with his wife in 1990, though the restaurant, being in the Niagara area, was only open on a seasonal basis. He also had a dealer's licence, which allowed him to engage in a side hobby, as he called it, of selling cars. As well, he owned some property on which he grew grapes. Mr. Perricelli felt the economy was headed for a recession and the Company was top heavy with the three of them involved, all drawing from the Company's coffers.

[6]            At this point, Mr. Perricelli believed the Company to be in pretty good shape, all remittances having been made up to date; it was a matter of the business being too small. No written resignation was tendered by Mr. Perricelli as either a director or an officer, though Mr. Perricelli recalled specifically having advised the others of his resignation in August 1990.

[7]            After the summer of 1990, Mr. Perricelli did not continue to play an active daily role in the business. He no longer drew any funds from the Company, other than the occasional $100 per day for working on the equipment. As well as the "paper man", he had a greater mechanical aptitude than the other two and was thus called upon for such repair type work. This was infrequent.

[8]            Mr. Perricelli admitted that he would occasionally sign a cheque if he happened to be in the office doing repair work. He further acknowledged that he would have the occasional casual chat about how the business was doing. The three businessmen did not let Niagara Credit Union know of the withdrawal from the business by Mr. Perricelli, as he was the strong link between the business and the Credit Union. In 1993, the debts of the Company with Niagara Credit Union were consolidated. The following documents dated November 22, 1993[2] were produced:

—             Niagara Credit Union Business Account Information Sheet showing just Mr. Cuthbert and Mr. Lishman's names;

—             Waiver of Protest to Niagara Credit Union signed by Mr. Lishman and Mr. Perricelli;

—             Borrowing By-law signed by Mr. Perricelli as secretary, and Messrs. Perricelli, Cuthbert and Lishman as directors and as shareholders, with the additional signature of Barbara Croft as a shareholder (in fact she was never a shareholder but was the office secretary);

—             Certificate of Corporate Authority to Niagara Credit Union signed by Mr. Perricelli as secretary;

—             Resolution of Directors, RE: Trade Name, unsigned by any director but certified a true copy by Mr. Lishman as president and Mr. Perricelli as secretary.

[9]            Mr. Perricelli was forthright as to why he let his name and signature appear on these documents, and that was because he did not want the Credit Union to know he was no longer involved, as they might call in his guarantee. The loan was ultimately paid off by the Company in 1996. As well as the above documents, a copy of a Resolution of directors[3] with respect to the banking arrangements at Niagara Credit Union was produced, dated September 26, 1994, showing Mr. Lishman as president, Mr. Cuthbert as vice-president and Mr. Perricelli as secretary, and further indicating they all had signing authority.

[10]          Finally, a Certificate of Incumbency[4] to Niagara Credit Union, dated November 29, 1994, was produced showing Mr. Perricelli as secretary-treasurer, but only Mr. Lishman and Mr. Cuthbert as directors.

[11]          The Appellant's evidence was that as of the summer of 1990, he believed he ceased to be a director. Mr. Cuthbert and Mr. Lishman handled his duties after he left, though both acknowledged they were not prone to paying much attention to details. Mr. Terry Waud, a chartered accountant, who started handling the Company's statements in 1991, testified that he never dealt with Mr. Perricelli, had not met him until the day of trial and had always presumed only Mr. Cuthbert and Mr. Lishman were involved in the operation of the business. Mr. Waud could not explain why Mr. Perricelli's name showed up as a contact person on the Company's 1994 tax return, other than as an oversight. He stated he had no reason to believe, in any of his dealings with the Company, that anyone other than Mr. Cuthbert and Mr. Lishman were directors.

[12]          Mr. Waud also testified that he attended Revenue Canada's offices in Hamilton with Messrs. Cuthbert and Lishman to discuss the GST liability. There was no discussion from officials at Revenue Canada at that time regarding director's liability, though Mr. Waud did raise that separately with Mr. Cuthbert and Mr. Lishman. Mr. Lishman also met officials of Revenue Canada without Mr. Waud and was advised of the possibility of director's liability. He never passed this information on to Mr. Perricelli as he did not believe it was relevant to him. Mr. Perricelli stated that he did not have any knowledge of a GST problem until late 1994, in casual conversation with Mr. Cuthbert. When asked why he did not take any action, he responded that he did not feel he had any authority to deal with it.

[13]          The Appellant presented a copy of an Application for Cash Surrender Value[5] submitted to London Life, dated October 12, 1991 for the removal of Mr. Perricelli as an insured. Mr. Lishman indicated that Mr. Perricelli's insurance was no longer required as he was no longer a director. Mr. Cuthbert stated that insurance was not required as Mr. Perricelli was no longer a partner.

[14]          In November 1991, the Company borrowed $12,000 from a company controlled by Mr. Lishman's in-laws. A promissory note for the $12,000 was produced.[6] Both Mr. Cuthbert and Mr. Lishman guaranteed the note. Mr. Perricelli did not. Mr. Perricelli's financial involvement was restricted to his connection with Niagara Credit Union, including a guarantee of the Company's indebtedness. Without Mr. Perricelli's support, Mr. Lishman and Mr. Cuthbert would have been unable to continue to rely upon Niagara Credit Union.

[15]          Mr. Perricelli, Mr. Lishman and Mr. Cuthbert all were adamant in their understanding that after the summer of 1990, Mr. Perricelli had no authority to manage the business, supervise employees, determine who got paid, how cheques were made out or for how much, or have any say whatsoever in how the business was conducted. When the Shareholder's Agreement was reviewed with them, they could only acknowledge what the document stated. No written amendment was ever made to the October 1, 1989 Shareholder's Agreement.

[16]          The Respondent produced annual return forms for the Company filed with the Ontario's Companies Branch in May 1993 and January 1994. These forms showed Mr. Perricelli as a director. Mr. Cuthbert signed one form and Mr. Lishman signed the other. Mr. Lishman simply explained it as a mistake. Mr. Cuthbert acknowledged they had never advised the law firm, who prepared the annual returns, of Mr. Perricelli's withdrawal from the business. Mr. Cuthbert would go into the lawyer's office when called and sign the documents left at the receptionist's desk and leave. It was just not that important to him. Mr. Perricelli had no idea documents were continuing to be filed at the Ontario's Companies Branch showing him as a director.

[17]          In 1996, both Messrs. Cuthbert and Lishman declared bankruptcy.

[18]          The Minister assessed the Appellant on September 9, 1998 for the unremitted GST for the period of July 31, 1991 to January 31, 1996.

Appellant's Argument

[19]          The Appellant's position is that he ceased to be a director in the summer of 1990 and, therefore, was not a director at the relevant time for the purposes of any possible director's liability. If I find he was a director, then the Appellant maintains he escapes liability as he acted with due diligence.

[20]          The Appellant's counsel, Mr. McCann, argued that Mr. Perricelli was neither a de facto nor de jure director at any time after the summer of 1990. With respect to the de jure position, Mr. McCann claimed it was not necessary for a director to resign to cease to be a director; in effect, neither section 121 nor section 122 of the Ontario Business Corporations Act[7] applies. Those sections read:

121(1)      A director of a corporation ceases to hold office when he or she,

(a)            dies or, subject to subsection 119(2), resigns;

(b)            is removed in accordance with section 122; or

(c)            becomes disqualified under subsection 118(1).

121(2)      A resignation of a director becomes effective at the time a written resignation is received by the corporation or at the time specified in the resignation, whichever is later.

122(1)      Subject to clause 120(f) the shareholders of a corporation may by ordinary resolution at an annual or special meeting remove any director or directors from office.

122(2)      Where the holders of any class or series of shares of a corporation have an exclusive right to elect one or more directors, a director so elected may only be removed by an ordinary resolution at a meeting of the shareholders of that class or series.

122(3)      Subject to clause 120(a) to (d), a vacancy created by the removal of a director may be filled at the meeting of the shareholders at which the director is removed or, if not so filled, may be filled under section 124.

[21]          Mr. McCann argued that Mr. Perricelli was not a director because the shareholders never appointed him as such at any time after the summer of 1990, and the appointment of directors is the responsibility of shareholders. Neither did Mr. Perricelli ever consent after the summer of 1990 to act as a director. With respect to the Shareholder's Agreement that apparently still contemplated the directorship of the Appellant, Mr. McCann urged me to find that the unanimous Shareholder's Agreement was verbally unanimously amended to reflect the removal of Mr. Perricelli as a director.

[22]          Regarding the tax returns and annual returns which indicated Mr. Perricelli was a director as late as 1994, Mr. McCann discounted them as mistakes, and in any event the filing of corporate returns is not determinative of whether someone is a director. Mr. Cuthbert and Mr. Lishman both acknowledged they were poor record keepers and this fits with their less than diligent efforts in that regard.

[23]          Mr. McCann also argued that Mr. Perricelli was not a de facto director. The role of a director is to manage or supervise the management of the business and affairs of a company. According to Mr. McCann, Mr. Perricelli exhibited no signs of such behaviour after the summer of 1990. More importantly, he never believed he had any such authority. This was corroborated by both Mr. Cuthbert and Mr. Lishman. The only glitch in that argument relates to the ongoing involvement of Mr. Perricelli with Niagara Credit Union. Mr. McCann went through all the documents produced in evidence relating to Niagara Credit Union and suggested only the one passing the by-law clearly identified Mr. Perricelli as a director, but that document itself was flawed by showing incorrect shareholders.

[24]          Further, in connection with the representations to the Niagara Credit Union generally, Mr. McCann argued that maybe Niagara Credit Union could impose the doctrine of promissory estoppel as against the Company and Mr. Perricelli, vis-à-vis Mr. Perricelli's position as a director, but it was not open to a third party such as Canada Customs and Revenue Agency to taint Mr. Perricelli with that brush. Mr. McCann went through each of the November 22, 1993 Niagara Credit Union documents and pointed out that a number of them were ambiguous.

[25]          With respect to the due diligence argument, Mr. McCann did not rely on the inside versus outside distinction, as propounded by Justice Robertson in Soper v. Canada.[8] He maintained that Mr. Perricelli simply acted as a reasonably prudent person, not believing himself to be a director, would have acted. The steps he took while he believed himself to be a director were indeed positive in that he left the Company, decreasing significantly the Company's salary expense.

[26]          The Appellant's counsel relied on Judge Christie's comments in Cybulski v. M.N.R.,[9] as follows:

... In enacting subsection 227.1(3) Parliament established an exonerating standard of conduct the presence of which is to be determined in particular cases by the actual relevant facts and not by fixing to a taxpayer knowledge of a somewhat esoteric point of corporation law that in reality is probably not within the actual knowledge of a good number of legal practitioners. While at first blush subsection 227.1(3) suggests a requirement for positive assertion on the part of a taxpayer in order to bring himself within its ambit, this is not necessarily so in all situations. It may well be that a taxpayer would not take positive steps in some circumstances and still be correctly regarded as having "exercised" that degree of care, diligence and skill expected of a reasonably prudent person that creates the protection from liability afforded by the subsection. That obtains in respect of this appeal. I am satisfied that reasonable grounds existed for the appellant's belief that he had severed his connection with the Company as director and secretary-treasurer and concomitantly his responsibility for it when he placed his resignation in the hands of the Company's president and it was accepted by him. This relieves him of vicarious liability for the Company's default in remitting the deductions at source and this is so a fortiori where, as here, the appellant was effectively barred from exercising influence over the management of the company by the person in de facto control of its affairs after the resignation was submitted.

[27]          I was also referred to Judge Hamlyn's comments in Ferguson v. Canada,[10] in which he found there was insufficient documentary or significant viva voce evidence to rebut the assumption the appellants were directors. However, Judge Hamlyn accepted that the appellants did consider themselves directors and indicated:

                In this case, I find that the Appellants, given their personal view that they were not directors, did not exercise nor were expected from the corporation's point of view to exercise power or control over the actions of the corporation. Moreover, there is little or no evidence other than exhibit R-1, tab 7, to lead to a conclusion the Appellants were wilfully blind as to their role, obligations or duties. Thus, I conclude they cannot be held liable for the failure of the corporation to remit GST.

Respondent's Argument

[28]          On the issue of whether Mr. Perricelli was a director, the Respondent rejected the application of section 119 or section 122 of the Ontario Business Corporations Act, as this was not a matter of election to the board or removal from the board, but was simply a case of whether or not Mr. Perricelli resigned in accordance with section 121. As there was no written resignation, there was no effective resignation; consequently, Mr. Perricelli continued as a de jure director.

[29]          Further, by his actions in holding himself out to the Niagara Credit Union as a director in 1993, and by not notifying the Company's lawyers of his resignation, Mr. Perricelli continued as a de facto director. This is supported further, the Respondent contends, by the fact Mr. Perricelli continued to sign cheques and did nothing to extricate himself from the Shareholder's Agreement. The Respondent went further and maintained Mr. Perricelli was an inside director as that term was used in the Soper case. In support of this contention, the Respondent cited the Tax Court of Canada judgment in Stein v. Canada,[11] affirmed on appeal, and specifically the following passage:

The Federal Court of Appeal explained in Soper that the directors of a corporation do not all have the same liability. It drew a distinction between inside and outside directors and stated that, in each of these two categories, a director's personal experience and role within the corporation must be considered. The Federal Court of Appeal did not define what it meant by "outside director" but did define what it meant by "inside director". An inside director is one who is involved in day-to-day management and influences the conduct of its business affairs (paragraph 33 of Soper, supra). I can accept that the appellant was not involved in the day-to-day management of the business. However, as she guaranteed the business's line of credit, was the only other shareholder and was authorized to sign cheques, it would be more difficult to accept that she did not influence the conduct of the company's business affairs. In the circumstances, she could be considered an inside director. ...

[30]          Mr. Perricelli, according to the Respondent, could influence the financial management of the Company by the hammer he held in retaining the connection with Niagara Credit Union. This vested interest in the well-being of the Company was sufficient to give him influence, which he determined not to exercise. The thrust of the Respondent's argument with respect to due diligence, was that Mr. Perricelli knew or ought to have known of the Company's financial woes, especially as they pertained to the GST remittances, yet he did nothing. This was distinguishable from the Cybulski case where the director was barred from doing anything by the others.

Analysis

De jureDirector

[31]          In addressing Mr. Perricelli's liability pursuant to section 323 of the Act it is first necessary to determine if he was a director at the relevant time. I will review first his status as a de jure director. This requires looking to the provisions of the Ontario Business Corporations Act. The Respondent maintains that the only way to resign is in accordance with subsection 121(2) of that Act. This reads as follows:

121(2)      A resignation of a director becomes effective at the time a written resignation is received by the corporation or at the time specified in the resignation, whichever is later.

[32]          I am satisfied Mr. Perricelli resigned in the summer of 1990. He did so when the three directors and shareholders were all together. It is a matter of whether this resignation was effective in accordance with the laws of Ontario. Did any one of the three men utter the words: "Notice of this meeting is waived"? Unlikely. Did Mr. Cuthbert and Mr. Lishman say: "We accept Mr. Perricelli's resignation and hereby elect the two of us as ongoing directors"? Again, unlikely. But did all three leave the meeting with an understanding that Mr. Perricelli would no longer serve in his capacity as a director? Absolutely.

[33]          The effect of that meeting can be viewed in a couple of ways. First, that there was an immediate verbal resignation. Respondent's counsel advises me that subsection 121(2) should be read as a strict requirement that resignations must be in writing to be effective. She refers me to Mastromonaco v. The Queen,[12] though the Federal Court of Appeal, I do not believe went that far. Justice Stone stated:

                The learned Tax Court Judge found that the appellant did become a director of the corporation from August 1, 1992 and remained so during the assessment periods. In making that finding, he was obviously impressed by the lack of any documentary evidence to support the appellant's claim that he had ceased to be a director in March 1993. In our view, that conclusion was open to the Tax Court Judge on the evidence before him. Moreover, it appears to have turned in large measure of his appreciation of the appellant's credibility as a witness.                                                                                                          (Emphasis added)

[34]          To rely on the comment that Judge Beaubier was impressed by the lack of documentary evidence, does not strike me as a weighty endorsement of a strict requirement of a written resignation. As the Court indicated, credibility was clearly a factor. In the case before me, I have absolutely no reason to doubt Mr. Cuthbert, Mr. Lishman and Mr. Perricelli's testimony that Mr. Perricelli ceased to be a director effective the summer of 1990.

[35]          Certainly if there is a written resignation, the time of its effectiveness is governed by subsection 121(2). I do not interpret that provision as precluding the possibility of a valid resignation in circumstances such as this where all the shareholders, who also happened to constitute all the directors, meet and agree that one of their number is no longer to continue as a director. The wording of subsection 121(2) is sufficiently ambiguous. I was not referred to any case in which the provision has been interpreted to read that the only legally effective way to resign is in writing, and that consequently, an oral resignation in the presence of all the directors and shareholders is ineffective.

[36]          There is a case, however, which was not addressed by the parties that I must raise. That is the decision of Rip J. of this Court in Giglio v. Canada,[13] in which he stated:

... Mr. Giglio never put his resignation in writing and never delivered anything in writing to an officer of Nu-West indicating his intention to resign, if not his act of resigning, as director of Nu-West. Nu-West never received notice of Mr. Giglio's actual resignation, although it may well be that Mr. Giglio had informed Mr. Decaria, Nu-West's president, that he intended to resign. All that took place was that Mr. Giglio instructed his solicitor to prepare documentation to resign; there is no evidence that such documentation was prepared. There is evidence that Mr. Giglio never signed a letter or notice of resignation. At the same time Mr. Giglio was a knowledgeable person who realized that for his resignation to take effect, it had to be in writing. (It also had to be delivered to Nu-West.) That is the reason he instructed Mr. Magerman to prepare the necessary documents.                                                                                               (Emphasis added)

I do not read this as an unrestricted interpretation of subsection 121(2) of the Ontario Business Corporations Act that requires in all cases a written resignation for a resignation to be effective. This was more an acknowledgement that Mr. Giglio appreciated that in his situation a written notice was required. This was not a circumstance of Mr. Giglio attending a meeting of all directors and shareholders and announcing his departure. Rip J. did not comment on such a circumstance, as it was not before him.

[37]          The second view to take of what happened in the summer of 1990 when the three shareholders/directors met is that an election took place in which the three shareholders elected only two directors. Subsections 119(6) and (7) of the Ontario Business Corporations Act pertain to such an election and they read:

119(6)      A director not elected for an expressly stated term ceases to hold office at the close of the first annual meeting of shareholders following his or her election.

119(7)      Despite this section, if directors are not elected at a meeting of shareholders the incumbent directors continue in office until their successors are elected.

[38]          I cannot find that the three shareholders actually called for nominations and had a show of hands, but I can and do find that the effect of their meeting was that the three directors/shareholders all believed that Messrs. Cuthbert and Lishman continued to serve as directors and Mr. Perricelli did not. For their belief to be supported in law requires a finding that the meeting was an annual meeting of shareholders at which an election of directors took place. Only as such, could Mr. Perricelli rely on subsection 119(6) as having ceased to hold the office of director. I am satisfied that the three shareholders had a meeting and by their presence waived any requisite notice. I am also convinced that the three of them agreed Mr. Perricelli would step out of any ongoing involvement of a governance or management nature, other than continuing to be the front man, for economic reasons, for the Credit Union.

[39]          In summary on the de jure director issue, Mr. Perricelli did not provide any written resignation or any evidence of an actual show of hands election. What he did provide was his evidence, corroborated by both the other directors/shareholders, that in a meeting with them in the summer of 1990, it was determined he was no longer to continue as a director. Whether this is interpreted as Mr. Perricelli's resignation or as an election of the remaining two directors, I am satisfied that under the circumstances nothing further is required to prove a cessation of Mr. Perricelli's directorship. If the underlying principle of an effective cessation of a directorship is one of meaningful communication with the Company, certainly that principle has been met in this case, notwithstanding the lack of documentation.

De factoDirector

[40]          The Federal Court of Appeal in Canada v. Wheeliker,[14] has settled the law that:

... by using the word "directors" without qualifications in subsection 227.1(1), Parliament intended the word to cover all types of directors known to the law in company law, including, amongst others, de jure and de facto directors.

[41]          The hurdle facing Mr. Perricelli, even if I accept that in the summer of 1990, he ceased to be a de jure director, is that his and the two other's subsequent actions are not entirely corroborative of his cessation as a de facto director. The evidence goes both ways in this regard. The following facts (after the summer of 1990) support his cessation as a director:

—             he seldom came to work, and when he did it was only on a contract basis to do repairs;

—             he drew no income or other form of remuneration other than the $100 per day for the repair work;

—             he took no supervisory or management role;

—             he gave up all his duties of administration, including no contact with the accountants or Revenue Canada;

—             he did not sign the guarantee of the subsequent Company loan as did the other two;

—             he was removed as an insured in the Company's life insurance policy; and

—             he did not believe himself to be a director, due to his withdrawal in the summer of 1990.

[42]          The following signs point, however, to some ongoing involvement:

—             he would occasionally sign cheques if he happened to be in the office;

—             he did not remove himself as the contact with Niagara Credit Union and indeed signed documents in 1993, one of which showed him as a director (although another did not);

—             his name was not removed from the documents filed with the Ontario Companies Branch; and

—             no written amendment was made to the unanimous Shareholders Agreement removing him.

[43]          The Respondent argues that the Appellant cannot have it both ways, meaning he cannot lead the Company's bankers and lawyers to believe he is still a director and yet deny such to Canada Customs and Revenue Agency. There are, however, plausible explanations for the actions of Messrs. Perricelli, Cuthbert and Lishman in connection with these matters. Firstly, Mr. Perricelli admitted that he did not want the Niagara Credit Union to think he was no longer involved with the Company, as he feared they might pull the plug on the Company, which would inevitably lead to a call on his guarantee. There are two lines of evidence which indicate that the bank might reasonably suspect Mr. Perricelli was still involved: the occasional signing of cheques and the execution of the November 1993 documents. Mr. Perricelli may have retained some signing authority, without being a director. The November 1993 documents are contradictory at best, as in only one place is he outright shown as a director. This sole indication in the period subsequent to the summer of 1990 is not sufficient to find that he was a de facto director.

[44]          I further find that the lack of attention to the legal paperwork in the form of annual returns and the unanimous Shareholder's Agreement is just that - a lack of attention. Mr. Cuthbert and Mr. Lishman were small businessmen attempting to ensure the survival of their business. They were oblivious to the necessity of crossing t's and dotting i's to ensure the legalities of Mr. Perricelli's removal were finalized. To have suggested to them that they need incur legal expenses for a written amendment to their unanimous Shareholder's Agreement would no doubt have been met with some considerable scoffing. They were legal matters which were simply not on anyone's radar screen. While I do not condone such a disregard for the proper paperwork, I do not find it was intended to be deceptive.

[45]          I am satisfied that the explanations offered by Mr. Perricelli, Mr. Cuthbert and Mr. Lishman in connection with the Niagara Credit Union and the Company's annual returns diminish the weight of those factors as determinative of Mr. Perricelli's position as a director. On balance, there is insufficient evidence to support a finding that Mr. Perricelli was a de facto director. Most telling was his credible evidence that after the summer of 1990, he did not believe he was director and he never thought he had any authority to advise, influence or control the management or direction of the Company. I conclude that Mr. Perricelli was not a director after the summer of 1990.

Due Diligence

[46]          Had I found that Mr. Perricelli was a director, then he would have been able to rely on the due diligence defence found in subsection 323(3) of the Act which reads:

323(3)      A director of a corporation is not liable for a failure under subsection (1) where the director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

[47]          This has been referred to as the objective subjective test. Determining the standard to apply requires a determination whether the director is an inside or an outside director. The Respondent argued, of course, that given his financial connection and consequent ability to influence management, Mr. Perricelli was an inside director. I find that it is unnecessary to go through such an analysis as set down in Soper, supra, as what is critical to whatever standard is applied is the fact that Mr. Perricelli did not believe himself to be a director. He was not consulted by Mr. Cuthbert or Mr. Lishman about the GST problem and he never attended Canada Customs and Revenue Agency's office. He had no dealings with the Company's accountants during the relevant period. More importantly, he was not aware of any problem with respect to GST remittances until after the problem had already developed into a matter of non-remittance. He was too late for any positive steps. Mr. Perricelli did not believe he had any ongoing role at all, let alone the authority of director, and consequently acted accordingly. The Respondent argued that given his influence over the banking arrangements, Mr. Perricelli could sway the management and direction of the Company, but simply chose not to. I do not accept this interpretation. Indeed, Mr. Perricelli perhaps unwittingly did take a positive step during the relevant period by ensuring the Company continued to have a relationship with its banker. This was not because he wanted to ensure GST was paid, as he had no knowledge that was at issue, but because he wanted to protect his own financial position.

[48]          Counsel presented a number of cases since Soper dealing with the inside versus outside director issue. I do not find it helpful to go through them. The more relevant question to pose is whether a reasonably prudent person, believing himself not to be a director, would have acted with any greater care, diligence and skill than Mr. Perricelli. I cannot see how.

[49]          I would go further and suggest that a reasonably prudent person would not have known he was a director. He was not involved in the day-to-day affairs of the Company, he was not kept advised of the Company's circumstances, he had verbally communicated his resignation from the Company to the two other directors and shareholders, and he was no longer in contact with the accountants. Given that, on balance, I have found Mr. Perricelli ceased to be a director in 1990, it is reasonable to accept Mr. Perricelli's position as not believing he was a director. Even if I had found Mr. Perricelli was a director, there were still sufficient indicators upon which Mr. Perricelli, unversed in the legalities of directorships, could rely in reasonably concluding he was no longer a director.

[50]          To attach liability to a director who has shown he did not believe he was such, is to hold such a person to the same standard as a director who knew or ought to have known he should and could take positive steps to prevent the failure to remit. This is an unrealistic expectation of the unwitting director. If you do not believe you are a director and there are reasonable grounds for accepting that belief, then you should be relieved from liability by subsection 323(3) of the Act. While the circumstances in the Cybulski, supra case differ, the principle enunciated by Judge Christie in the passage cited earlier applies; that is, if reasonable grounds exist for an appellant's belief he has severed his connection as a director, he is relieved of vicarious liability for source deductions. I find that describes Mr. Perricelli's position.

[51]          I allow the appeal and refer the matter back to the Minister for reconsideration and reassessment on the basis that Mr. Perricelli is not liable pursuant to subsection 323(1) of the Act. Costs to the Appellant.

Signed at Ottawa, Canada, this 5th day of June, 2002.

"Campbell J. Miller"

J.T.C.C.

COURT FILE NO.:                                                 2000-946(GST)G

STYLE OF CAUSE:                                               Vito Perricelli and The Queen

PLACE OF HEARING:                                         Hamilton, Ontario

DATE OF HEARING:                                           April 11, 2002

REASONS FOR JUDGMENT BY:      The Honourable Judge Campbell J. Miller

DATE OF JUDGMENT:                                       June 5, 2002

APPEARANCES:

Counsel for the Appellant: Glen W. McCann

Counsel for the Respondent:              Sherry Darvish

COUNSEL OF RECORD:

For the Appellant:                

Name:                                Glen W. McCann

Firm:                  Sullivan Mahoney

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

2000-946(GST)G

BETWEEN:

VITO PERRICELLI,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on April 11, 2002 at Hamilton, Ontario, by

the Honourable Judge Campbell J. Miller

Appearances

Counsel for the Appellant:                             Glen W. McCann

Counsel for the Respondent:                         Sherry Darvish

JUDGMENT

The appeal from the assessment made under the Excise Tax Act, notice of which is dated September 9, 1998 and bears number 10932, for the period July 31, 1991 to January 31, 1996, is allowed, with costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is not liable pursuant to subsection 323(1) of the Act.

Signed at Ottawa, Canada, this 5th day of June, 2002.

"Campbell J. Miller"

J.T.C.C.