[OFFICIAL ENGLISH TRANSLATION]
97-600(IT)I
BETWEEN:
SALVATORE TIZZONI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on November 5, 1997, at Montréal, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Counsel for the Appellant: Philippe Canning
Agent for the Respondent: Claudie Senay (student-at-law)
JUDGMENT
The appeal from the assessment made under the Income Tax Act, the notice of which bears number 09037 and is dated July 23, 1996, is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 13th day of January 1998.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Date: 19980113
Docket: 97-600(IT)I
BETWEEN:
SALVATORE TIZZONI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lamarre Proulx, J.T.C.C.
[1] This appeal concerns the liability of directors under section 227.1 of the Income Tax Act (the "Act").
[2] The issue is whether the appellant exercised the diligence required under subsection 227.1(3) of the Act.
[3] Joseph Petraccione and the appellant testified at the request of the appellant's counsel. Nicole Bélanger testified at the request of the agent for the respondent.
[4] At the outset of the hearing, the agent for the respondent sought leave to make a few corrections to the Reply to the Notice of Appeal ("the Reply"). As counsel for the appellant did not object to the request, leave was granted.
[5] The facts assumed by the Minister in assessing the appellant are set out as follows in paragraphs 6 and 7 of the Reply (as corrected):
6. By Notice of Assessment No. 09037 dated July 23rd, 1996, the Minister of National Revenue (the "Minister") assessed the Appellant for federal income tax deducted at source but not remitted by Da Vinci Marble and Granit Inc. (the "Corporation") and penalty and interest relating thereto as follows:
FEDERAL TAX $7,124.91
PENALTY AND INTEREST 1,814.45
ADDITIONAL INTEREST 161.90
$9,101.26
7. In so assessing the Appellant, the Minister made the following assumptions of fact:
a. the Corporation ceased its operation in December 1994;
b. a certificate for the amount of the corporation's liability has been registered in the Federal Court of Canada under section 223 and execution for such amount has been returned unsatisfied in whole;
c. the Appellant was, at all material times, a director of the Corporation;
d. the Corporation failed to remit to the Receiver General federal income tax withheld from the wages paid to its employees for the balance of the 1994-T4 amounting to $7,124.91;
e. the Corporation failed to pay penalties and interest relating to the unremitted federal tax in the amounts of $1,883.68;
f. additional interest, in the amount of $92.67, on unpaid amounts mentioned in sub-paragraphs d and e, was payable by the Appellant;
g. the Appellant did not exercise the degree of care, diligence and skill to prevent the failure to remit the said amount by the Corporation that a reasonably prudent person would have exercised in comparable circumstances.
[6] The facts relied on by the appellant are set out in his Notice of Appeal as follows:
1. The appellant, SALVATORE TIZZONI, is an investment partner in Da Vinci Marble and Granit Inc. The appellant did not participate in the everyday administration of the company, nor did he exercise direct control over the bookkeeping or other daily accounting affairs of the company.
2. As a prudent and diligent businessman, the appellant required that a bookkeeping system be put in place and that a chartered accountant be mandated to overlook the affairs of the company as well as to insure that all taxes were punctually and fully paid.
3. Having been assured that such systems had been in place, the appellant relied on the competence and administrative capacities of the involved and active directors of the company to ensure that the company would meet all its liabilities, specifically any tax liabilities as they became due.
4. The appellant regularly asked his co-directors about the financial situation of the company.
5. The co-directors mentioned that the company was experiencing rough times but that it was going to survive. They never mentioned problems relating to the payment of their creditors in particular Revenue Canada. The appellant relied on those financial officers and had no reason to question their information.
6. The appellant was not aware that there were any problems concerning the payments to Revenue Canada. The appellant never expressly or implicitly authorized the decision not to remit the funds to Revenue Canada.
7. The appellant was misled by his co-directors as to the financial situation of the company.
8. The appellant has never committed any fraudulent, illegal or wilful acts with regards to the liabilities of the debtor company. The termination of the company's activities was brought on by difficult times in the industry as well as by a loss of confidence by the company's bankers subsequent to a seizure before judgment practiced by the landlord for unpaid rentals.
9. The combination of all these factors were overwhelming and beyond the appellant's control. The appellant should not be made to assume the financial burdens of this corporation to respondent's claim.
10. The appellant whom his an investment partner in Da Vinci Marble and Granit Inc. is without fault, having acted in good faith and as a prudent businessman would have in the circumstances. The facts presented here are sufficient and support this due diligence defence in favour of the appellant.
[7] The testimony, both Mr. Petraccione's and the appellant's, was not really consistent with the reasons set out in the Notice of Appeal.
[8] Joseph Petraccione told the Court that from 1971 to 1982 he worked as a labourer or as a foreman. In 1982, he started up his own marble and granite business. In 1992, with a view to expanding the business, he wanted to purchase, for $300,000, the equipment, including the machinery and inventory, of a marble, granite and ceramic tile business by the name of European Marble located on Jarry Street in Montréal.
[9] Mr. Petraccione did not have the necessary capital and talked about his planned purchase to the appellant, whom he had known for approximately two years. Among other businesses, the appellant had a kitchen cupboard manufacturing concern and, from time to time, he required Mr. Petraccione's services for marble or stone kitchen counters. The appellant agreed to participate in the purchase. In fact, according to his testimony, he took an active role in putting together the capital needed by Marbre et Granit Da Vinci Inc. ("Da Vinci") to purchase European Marble's business. Mr. Petraccione and the appellant each invested $60,000 and obtained the difference by means of a loan from the National Bank under the government's assistance to small enterprise program. Da Vinci occupied the same premises as the business that was purchased. The owner of the building agreed to give six months rent-free, after which $14,000 per month rental would be charged.
[10] The business included a shop where stone was cut and a showroom for wholesale and retail sales. The business employed from seven to nine people. The area of the premises was approximately 25,000 square feet.
[11] Mr. Petraccione handled the management of the business, which involved both the operational aspect and office administration. Mr. Petraccione declared personal bankruptcy in October 1995.
[12] Mr. Petraccione testified that he reported to the appellant several times a month and that he told the appellant on those occasions that everything was going well because, in fact, he thought that everything would be fine and that he would secure contracts, but these never came. The appellant did not often go to the business's premises. It was Mr. Petraccione who went to see him twice a month at his office to have him sign the cheques.
[13] Da Vinci had a secretary who did the bookkeeping, and an accountant came two or three times a year to do some auditing.
[14] In June 1994 this accountant apparently prepared an initial financial statement for the fiscal year ending in December 1993. That statement was not filed. Mr. Petraccione said that the income statement did not show a loss in the first year of operations but that this was probably due to the fact that the company had paid no rent for the first six months. Da Vinci did not file a tax return.
[15] From July 1994 on, the rent was no longer being paid. In December 1994, the owner of the building had the company's equipment and inventory seized and had the business shut down. A letter from the National Bank of Canada addressed to Revenue Canada, dated December 28, 1995, and produced in evidence as Exhibit I-6, explains the events as follows:
[TRANSLATION]
. . .
At the end of 1994, the lessor of the premises on which was located the inventory that had been given as security and assigned to the Bank had it seized. That was when the Bank demanded immediate payment of the balance owing. The Bank, which held the inventory as security under section 427 of the Bank Act,obtained the release of the inventory and then requested that it be given possession thereof so that it could dispose of it. The Bank disposed of the inventory for an amount of $115,000 in payment of the advances owing.
We attach a copy of the security provided by our client under section 427 of the Bank Act.
[16] The appellant is a businessman. He is vice-president of GIT Aluminium, a door-and-window-manufacturing company that employs approximately 70 persons. He is president of Canac Cellini Québec Inc., a company that manufactures kitchen cupboards. He devotes 80 per cent of his time to the first company and 20 per cent to the second. He also has an interest, but as an investor, in a company by the name of Thermalite.
[17] As a director of other companies, the appellant was very familiar with a director's obligations and he testified that he asked the usual questions asked by a director in making sure that a company is being run properly. However, Mr. Petraccione told him that everything was fine. Moreover, the accountant was his own accountant, a man whom he trusted.
[18] With respect to the acquisition of Da Vinci, as stated above, the appellant had put a great deal of effort into obtaining the necessary capital. He left the management of the business to Mr. Petraccione, however, because he had no experience in granite and marble. He received no remuneration from Da Vinci. He merely hoped for a good return on his investment. One of the benefits he anticipated, apart from an increase in his equity, was getting better prices for kitchen counters. According to the appellant, that was the extent of his interest in Da Vinci: it was an investment.
[19] However, to be valid, Da Vinci's cheques required two signatures, the appellant's and Mr. Petraccione's. Exhibit I-1 is a resolution of the corporation's board of directors. This was a resolution relating to banking and dated January 11, 1993. It can be seen that the corporation's president and its secretary both have to sign. The appellant signed this resolution as secretary. The appellant did not deny that he was required to sign all of the cheques issued by Da Vinci. The reason he gave for this was that he had to keep an eye on expenses since he had invested a great deal of money in the business.
[20] Exhibit I-2 consists of three cheques to the order of the Receiver General of Canada, made respectively on December 1, 1994, December 5, 1994, and December 23, 1994. The first cheque indicates that it is for the October 1994 deductions, and the second, that it is for the September 1994 deductions, while on the third, there is no indication. The cheques are in the amounts of $3,475, $2,556.48 and $1,210 respectively. They were tendered to show that the appellant signed all of the company's cheques and was therefore aware of the payments not being made to the Receiver General. Another cheque, dated March 28, 1995, in the amount of $2,000, was tendered as Exhibit I-3. The appellant did not acknowledge his signature on that cheque.
[21] Exhibit I-4 is a credit application and an undertaking to provide security under section 427 of the Bank Act. It is signed by the two directors.
[22] Nicole Bélanger is a collection officer for Revenue Canada. She confirmed that Da Vinci had not filed any tax returns. She also stated that, throughout its existence, Da Vinci had been late almost every month of the year in paying source deductions and had incurred penalties for late remittance.
Arguments and conclusions
[23] Counsel for the appellant submitted that the appellant had, by providing for the day-to-day presence of a person to handle the bookkeeping and for the occasional presence of his accountant, put in place a reliable administrative system to ensure the remittance of the source deductions taken from the employees' salaries.
[24] He also submitted that the appellant had no reason to doubt the reassurances of Mr. Petraccione, who was an honest man and a good director, and that also to be taken into consideration is the fact that the appellant's only participation in Da Vinci's business was as an investor and he was not involved in the operational administration of the business.
[25] The agent for the respondent submitted that the appellant was heavily involved in the business, that he had invested as much money as Mr. Petraccione and that he signed all of the company's cheques and endorsed those made out to the company. The cheques filed as Exhibit I-2 show that the appellant could not but be aware of the delay in remitting the source deductions. The company did not file a tax return, which can only mean that the accountant had not been instructed to prepare one. There were repeated problems with delays in remittances of source deductions.
[26] I am of the opinion that the evidence has shown that the appellant was just as involved in the financial management of Da Vinci as Mr. Petraccione was. He had invested the same amount of money as Mr. Petraccione and co-signed all of the cheques issued by the corporation. The appellant did not file in evidence Da Vinci's books, which would have proved that Mr. Petraccione had him sign cheques that accorded with the accounts entered in the books but that those entries were incorrect and were intended to mislead him.
[27] The appellant submits that he took the steps required to pay the source deductions by seeing to it that a bookkeeper was hired and that recourse was had to the services of an accountant. It is not enough to say that one has put everything in place to prevent the failure; it must also be proved. On the one hand, the aforementioned persons were not called to testify and, on the other, and even more significantly, the appellant produced no documentary evidence. That evidence would be the signed cheques that accord with the company's books. The appellant is a director of other companies; he has the necessary experience with respect to the various debts that must be paid and surely did not sign cheques to suppliers, employees and government authorities without seeing the books pertaining thereto. The only documents tendered were the cheques. These were produced by the respondent and were all dated in the final month of the company's existence. In conclusion, there is no evidence that the appellant was misled or that he met the requirements of the Act during the existence of the company.
[28] The appeal is dismissed.
Signed at Ottawa, Canada, this 13th day of January 1998.
|
"Louise Lamarre Proulx" |
J.T.C.C.