BETWEEN:
and
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Appeal heard on May 5, 2005 at Toronto, Ontario
Before: The Honourable Justice Gerald J. Rip
Appearances:
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JUDGMENT
The appeal from assessment number 21623 dated April 10, 2002 made under the Income Tax Act is allowed and the assessment is vacated.
Signed at Ottawa, Canada this 20th day of June 2005.
BETWEEN:
GIUSEPPE FORGIONE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
[1] This is an appeal by Giuseppe Forgione from an assessment of tax issued by the Minister of National Revenue in accordance with subsection 227.1(1) of the Income Tax Act ("Act"): Mr. Forgione was a director of a corporation, Alumidor Incorporated ("Alumidor"), that failed to remit to the Receiver General for Canada income tax withheld from wages paid in 1997 and 1998 to its employees and as a director of the corporation he is jointly and severally liable, together with the corporation, to pay the amounts not remitted and any interest and penalties relating thereto.
[2] Mr. Forgione's claim is that he is not liable for the corporation's failure to remit since he exercised the degree, care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances: subsection 227.1(3).
[3] Mr. Forgione was born in an Italian village near Naplesin 1942. He received a grade 5 education in Italy. After school he helped his father work on a farm and when he was 17 years old he worked in Germany for nine months and then in Switzerland for about a year and a half. He immigrated to Canada in 1964 with his wife and son, settling in Toronto.
[4] His first job in Canadawas on a construction site which he left during the winter to work inside assembling windows out of cut material. After two years he was promoted to a window installer. Mr. Forgione changed employers after seven or eight years but his new employer became bankrupt nine months after he joined. Mr. Forgione then started his own business in 1971.
[5] At first the new business did not attract sufficient customers so Mr. Forgione worked for other companies measuring, ordering and installing windows. By 1977-78 he was getting more work and was making money; he rented space for his own shop where he cut materials according to each job and assembled the windows. He and an employee would then go to the site, take out the old windows and install the new windows.
[6] Mr. Forgione would take the necessary papers to his accountant at the end of the month to prepare cheques for suppliers, employees and tax. He always relied on his bookkeeper to maintain the books of account. He, himself, never prepared cheques, for example, or any forms.
[7] Mr. Forgione incorporated 489584 Ontario Ltd. ("Ontario"), operating as F. G. Aluminium & Glass, in 1979, on the advice of the accountant to carry on the business. Mr. Forgione was the sole director of Ontario. Ontario had five, six and sometimes seven employees in 1979.
[8] Mr. Forgione's skill and expertise, he said, was to get jobs for Ontarioand Alumidor and look after installation. Any paperwork was done by the accountant. There were never any problems with Revenue Canada, he declared.
[9] By 1980 the business was "slowly growing" and Ontariomoved to larger premises. The corporation retained the same bookkeeper and accountant. Originally the bookkeeper would visit the premises once a month and later once a week. In 1983 or 1984, a full-time bookkeeper was hired.
[10]The bookkeeper prepared invoices and cheques. At the end of the year the material was given to an accountant. Mr. Forgione signed all cheques, although he did not prepare the cheques.
[11]In October 1988 the business moved to larger premises in Concord, Ontario. By now, Ontarioemployed 15 or 16 people and its business was growing. The bookkeeper still prepared the cheques for Mr. Forgione's signature.
[12]Mr. Forgione's son, Angelo, was 28 years old in 1995 and had been working for Ontario since completing grade 12 ten years earlier. Angelo first worked as an installer for about a year, later as a foreman in the shop for a short time. He then worked in the office as an estimator and "running the office". Angelo also "reviewed things" with the bookkeeper and account.
[13]Alumidor was incorporated in 1995. The shareholders were Mr. Forgione and Angelo Forgione; both gentlemen were the directors of Alumidor. Angelo's duties did not change once Alumidor was incorporated to carry on the business of window fabrication.
[14]Ontariocontinued to exist when Alumidor was incorporated. Both corporations carried on their respective businesses from the same premises. Ontariocontinued to operate as an installer of windows.
[15]Mr. Forgione liked working outside where he could work with his hands. He did not like working in the office attending to administrative matters. He left that to Angelo. Angelo was in charge of the administrative work: invoices, collections, estimating "big jobs", banking and government matters. Angelo dealt with the bookkeeper; no longer did Mr. Forgione get involved with the bookkeeper.
[16]The accounting for each of the companies was computerized in about 1994. Mr. Forgione testified that he does not know how to operate a computer.
[17]Alumidor's business operations stopped in 1999. The company apparently continues to exist, albeit as a shell, I assume. Mr. Forgione insisted that between 1995 and 1999 he was never involved with any Alumidor corporate documents or cheques; he only signed one cheque and that was in 1997 for $117.70. All other cheques during this period were signed by Angelo. Mr. Forgione looked after fabrication, the company's trucks and machinery, "my original experience". He did what he enjoyed doing; he did not enjoy office work.
[18]He trusted Angelo, Mr. Forgione testified, and had no concern with his work. Angelo had cheque signing authority for both Ontarioand Alumidor. Once Angelo took over, annual sales reached approximately $3,000,000.
[19]Angelo signed most, if not all, corporate documents such as standard construction documents and statutory declarations.
[20]Once in a while Mr. Forgione "would talk business" with Angelo, sometimes in the office during the evening. Mr. Forgione said he had a lot of work and believed "everything [was] fine".
[21]Mr. Forgione first became aware of problems at Alumidor when the business closed. In 1999 long time employees started to leave and they did not tell him why. He asked Angelo the reason for the departures and Angelo told him "things [are] going bad". Mr. Forgione said he could not check the computer to see Alumidor's financial situation because he did not know how to operate a computer and earlier, when he asked Angelo how things were going, he was assured that everything was fine.
[22]Nobody from the Canada Customs and Revenue Agency ("CCRA") had contacted him, Mr. Forgione complained. He was proud of what he had accomplished, starting with nothing, and "would have done anything to save the company".
[23]Angelo testified that Alumidor was incorporated on the accountant's advice in order to separate the manufacturing of the windows from the installation of the windows. He corroborated his father's evidence that he was responsible for operating the office.
[24]The premises of Alumidor (and Ontario) were divided into two main sections, one for administration and a shop for manufacturing. A cinder brick wall (with a door) divided the two sections. Employees working in the shop had no need to go into the administrative area.
[25]Angelo also stated that his father worked away from the premises, most often outside the Greater Toronto Area. Angelo recalled that his father spent five months in 1995 at a job at the Universityof Western Ontario and in 1996 was away for two periods of three months and two to three months working at a retirement home in Collingwood. During 1997 and 1998 Mr. Forgione was at job sites in Niagara-on-the-Lake, Barrieand Whitby, for example. Mr. Forgione would be at the job site during the day and return home or to the corporations' premises in the evening. Angelo, in the meantime, tried to make sure accounts receivable were collected and payables were paid. When Mr. Forgione would ask how the business was progressing Angelo would tell him "Things are OK ... We're surviving". Angelo did not want to tell his father of the problems.
[26]Angelo confirmed that a full-time bookkeeper took care of preparing cheques and paying taxes. "We went through two or three bookkeepers at the time." A chartered accountant prepared the remuneration and year-end tax returns. Every three or four months, Angelo recalled, the accountant would attend at the office and speak to Angelo, not his father.
[27]Angelo testified that in 1997 Alumidor was experiencing cash flow problems. The corporation had some large projects and the bigger the project, "the higher were the holdbacks on each draw". Money was not being turned over to finance the next project because of the holdbacks, Angelo stated. However, Angelo did not tell his father. Angelo "felt I could handle the problem". The 1997 and 1998 years were "busy years", Angelo recalled, and the shop was actually very busy. His father had no clue of the company's true financial situation.
[28]Mr. Forgione was first aware of the poor financial situation of Alumidor in the summer of 1999 when he received a letter from the CCRA. Angelo described his father as "shocked", upset and hurt when he found out but, at that point, Angelo testified, there was nothing really left.
[29]At the very outset of starting in business Mr. Forgione recognized his strengths and weaknesses and ran his businesses, including Ontarioand Alumidor, accordingly. He realized that his talents were in the actual manufacture of the windows and their installation and this is what he did.
[30]Mr. Forgione had no education, background experience nor interest in administration and he hired a bookkeeper and engaged the services of an accountant to ensure that cheques were properly prepared and issued and that taxes withheld from employees were sent to the government, among other things. For years he had no problems and when he incorporated Alumidor, he maintained the same sure practice. He had no reason to believe it would be otherwise so long as the same practices were followed.
[31]Because his duties required him to be at construction sites, Mr. Forgione was away from Alumidor's facility during the day. He would attend at the office during evenings, obviously when things were quiet. During these times he would not be in a position to recognize any potential problem in not remitting tax to the authorities.
[32]And even when Mr. Forgione was at Alumidor during the day, he worked in the fabrication section of the faculty. According to the evidence, the fabrication section was closed off from the administration section and he would not have been able to observe anything suggesting financial problems, if indeed any such thing could be observed. Also, according to Angelo, things were quite busy, notwithstanding Alumidor's financial problems, and there was nothing even hinting of a problem.
[33]Mr. Forgoine was not an administrator. When he immigrated to Canada, he worked hard and long and was successful. He did not understand accounting. He was not computer literate. He had to rely on other people for assistance in these matters, including filing forms and paying tax to government. His knowledge, experience and expertise were in the fabrication and installation of windows. As I previously stated, he relied on others for financial and administrative matters.
[34]One of the people he relied on was his son Angelo. Angelo was in charge of administration for Alumidor. From time to time Mr. Forgione would ask Angelo how things were going and Angelo was always positive, never allowing his father to know the true situation. Rothstein J.A. commented in Moriyama v. The Queen[1] that "it will always be possible to find that a director did not take some step to prevent a failure of a corporation to remit tax". However, I would be hard pressed to find that a parent was not duly diligent for the purposes of subsection 323(3) solely because he or she relied on an adult child who was responsible in the past but, due to pride, was not honest with the parent. Many reasonable prudent persons in circumstances comparable to Mr. Forgione would have exercised the same degree, care and diligence that Mr. Forgione did. His skill to have possibly prevented such failure was limited by his background.
[35]Many immigrants have come to Canadaand started businesses. Many of these businesses have been successful and the successes have been due in no small part to the long hours of hard work put in by these people. They work at what they know and may have no time to learn how to keep proper books or to file various government forms. Each case, of course, depends on its own particular facts. Mr. Fogione, as I have explained, recognized his problem, and hired and engaged the services of people who had the knowledge he lacked. He exercised prudence in operating Ontarioand Alumidor to the degree he was able. Mr. Forgione was duly diligent in doing so to prevent failure of Alumidor to remit tax to the Receiver General.
[36]The appeal is allowed and the assessment is vacated.
Signed at Ottawa, Canada, this 20th day of June 2005.
"Gerald J. Rip"
Rip J.
COURT FILE NO.: 2002-4868(IT)G
STYLE OF CAUSE: GIUSEPPE FORGIONE AND HER MAJESTY THE QUEEN
PLACE OF HEARING: Toronto, Ontario
REASONS FOR JUDGEMENT BY: The Honourable Justice Gerald J. Rip
DATE OF JUDGMENT: June 20, 2005
APPEARANCES:
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Agent for the Appellant: |
Mauro Marchioni
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Counsel for the Respondent: |
Shatru Ghan |
COUNSEL OF RECORD:
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Ontario