Date: 20000211
Docket: 98-395-IT-G
BETWEEN:
JOSEPH ALFANO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
O'Connor, J.T.C.C.
[1] This appeal was heard at Toronto, Ontario on January 11 and 12, 2000 pursuant to the General Procedure of this Court. Testimony was given by the Appellant himself ("Joseph"), by the Appellant's uncle, Ultimo Alfano ("Ultimo"), by Sergio Ferrazzutti ("Sergio") and by Christopher Piersanti ("Piersanti"), the solicitor involved in incorporating and advising Ontario Paving Inc. ("OPI").
Issue
[2] The issue is whether the Appellant is liable under subsection 227.1(1) of the Income Tax Act ("Act") in his purported capacity as a director of OPI for failure to remit source deductions. The amount of unremitted federal tax was $270,527.39.
Facts
[3] I find the basic facts to be as follows:
1. Ontario Paving Company Limited ("OPCL") was founded in the 1950's principally by Guissippe Alfano and his son Carmen Alfano ("Carmen"). By 1990 the shareholders were four brothers, namely, Italo Alfano ("Italo"), Ultimo, Frank Alfano ("Frank") and Carmen. The Appellant, Joseph, is the son of Carmen. Carmen passed away in 1996.
2. OPCL was, for many years, a large paving company. Its operations expanded throughout the sixties, seventies and eighties. At the height of its activities it had over 400 employees and gross annual revenues of approximately $100,000,000. From 1987 on Joseph was a manager of Maple Paving, a wholly owned subsidiary of OPCL. The business of Maple Paving was essentially the supply to OPCL of materials used in the paving business, including asphalt, sand, crushed gravel and aggregates used in the formation of the final paving material.
3. The Bank of Nova Scotia ("Bank") had been the principal lender to OPCL. In the early 1990's OPCL began to lose business, principally because of the recession, and the resultant poor business conditions. Its operations continued to decline and in January of 1993 the Bank called its loan. On February 12, 1993 OPCL filed an assignment in bankruptcy. The Bank called on the personal guarantees of the four Alfano brothers and they in turn all went bankrupt in 1994.
4. On February 3, 1993, OPI was incorporated. Its incorporator and first director was Joseph. Joseph explained that the reason he was the incorporator and director was that as a favour to his father, Joseph was to be a front for Carmen and Carmen's brothers, thus initially avoiding their personal loan problems related to OPCL affecting the assets and operations of OPI. The principal reason for setting up OPI was to provide a vehicle for the four brothers, who were employees of OPI, to earn a living. The name was chosen in an effort to extend the good will established previously by OPCL which had a similar name. The initial operations of OPI consisted of completing jobs started by OPCL. The functions of the four brothers in OPI were as follows: Carmen was the administrator of all office matters. Frank was the equipment manager. Italo and Ultimo were the "outside" men attempting to get contracts and supervising the workers on the jobs. Joseph was peripherally involved as described below.
5. By a resignation dated February 3, 1993 Joseph resigned as director of OPI. On February 26, 1993, Piersanti, the solicitor for OPI filed an initial notice (Exhibit A-1, Blue Tab 2) under the Corporations Information Act with the Companies Branch of the Ontario Ministry of Consumer and Commercial Relations (the "Ministry") showing Joseph Alfano as the sole director. A notice of change (Exhibit A-1, Blue Tab 3) filed with the Ministry showing Carmen as the sole director of OPI was only received and processed by the Ministry in May of 1995. Piersanti explained that although the initial notice showing the sole director as Joseph was filed by Piersanti in February of 1993 the notice of change, although prepared by Piersanti in February of 1993 was sent to OPI with the reporting letter of Piersanti's firm with instructions to file the notice with the Ministry. Piersanti explained that probably Carmen did not get around to filing the notice of change until May, 1995. Notwithstanding the 1995 date, Piersanti stated that the resignation occurred on February 3, 1993 or within thirty days thereafter. By resolution dated February 3, 1993, Joseph, as sole director resolved that 120 shares of OPI be issued to Carmen. By a further resolution of the same date Carmen, as director, appointed himself as President and Secretary. By Shareholder Resolution of the same date, Carmen, as the sole shareholder of OPI, resolved that OPI have only one director.
6. It is the contention of the Respondent that the resignation of Joseph as director was ineffective or never took place or only took place at a point in time subsequent to February, 1993. Six reasons for this contention are:
(i) the 1995 date the notice of change was received by the Ministry discussed above;
(ii) the Corporation Profile report dated November 4, 1996 (Exhibit A-1, Blue Tab 4) on pages 2 and 3 indicated the administrator as being Joseph Alfano. Piersanti stated that this was an error and pointed out that pages 4 and 5 of the same report showed Carmen as the sole administrator. The same observation was made with respect to the Corporation Profile report dated February 26, 1998 (Exhibit A-1, Blue Tab 5) where certain pages indicate Joseph as administrator and other pages show Carmen as administrator;
(iii) the joint venture agreement dated July 22, 1993 with Phillip Environmental Inc., more fully discussed below, (Exhibit A-1, Red Tab 1) shows Joseph as "the shareholder" of OPI and Joseph signs the agreement on behalf of OPI. The Respondent infers from this that Joseph never resigned as a director. On the other hand, the agreement is only signed by Joseph as shareholder not as director nor as part of management (the four brothers) who were also parties to the agreement. Moreover, Joseph did not sign the guarantee attached to the agreement although there is a space for his signature. Joseph testified that he was simply accommodating his father, Carmen, in an effort to get the new business of OPI going;
(iv) a letter dated August 30, 1993 of John Emery Geotechnical Engineering Limited recommending certain mix proportions for pavement is addressed to Phillip Paving, Attention, Joe Alfano ( Exhibit A-1, Red Tab 15). Ultimo testified that Joseph dealt with many engineering firms and had numerous letters from them on similar subjects and that the firms were accustomed to writing to Joseph;
(v) several business cards were prepared (Exhibit A-1, Tab 9) showing representatives of Philip Paving. These cards show the four brothers and Joseph as representatives. Joseph stated he had nothing to do with the cards and did not use them; and
(vi) Joseph continued to be involved with OPI. He prepared an OPI Company Profile 3 Year Forecast dated March 3, 1993 (Exhibit A-1, Yellow Tab 1). He advised Carmen from time to time on the best and proper mixes for forming pavement and assisted in the negotiations leading to the joint venture agreement. On the other hand, he had no office at OPI's headquarters and never received any remuneration from OPI. His involvement was to help the closely knit family. He always believed he resigned as director of OPI in 1993.
7. On July 22, 1993, an Agreement (Exhibit A-1 – Red Tab 1) was entered into between OPI and Phillip Environmental Inc. ("Environmental"). It provides essentially as follows:
TO: Joseph Alfano
(the "Shareholder")
TO: Carmen Alfano
Italo Alfano
Frank Alfano
Ultimino Alfano
(collectively, the "Management")
AND TO: Ontario Paving Inc.
("Paving")
Dear Sirs:
We understand that the Shareholder owns 100% of Paving which is engaged in the construction and paving business in Ontario. The Shareholder and Paving have requested Philip Environmental Inc. ("Philip") to provide certain financial assistance to Paving and Philip has agreed to do so on the following terms.
1. For a period of one year from the date hereof Philip may supply to Paving, as and when requested to do so, and Paving agrees not to acquire from any other party except Philip without Philip's prior consent, any supplies and services including, but not restricted to, working capital loans, liquid asphalt, fuel, aggregate, sands and any recycled products which can be utilized in the production of asphalt, all as may be required by Paving, or any subsidiary or affiliate thereof, in its business. Paving shall reimburse Philip for all monies expended by Philip to supply such materials and services within 60 days of the rendering of an invoice by Philip.
...
5. During the term of this agreement the parties hereto agree that Paving and the Management will not, but Philip will, submit all bids and enter into all contracts for paving work or paving jobs. The Shareholder, the Management and Paving shall be responsible for preparing on Philip's behalf all such bids and contract quotations. In the event Philip obtains such work it agrees to subcontract it to Paving at the same price as Philip was awarded the bid or contract and Paving agrees to act as Philip's subcontractor and complete the subcontracted work.
6. Without the prior written approval of Philip, which may be unreasonably withheld, for a period of one years from the date hereof:
a. the Shareholder shall not transfer, sell or encumber the shares of Paving;
b. neither the Shareholder nor Paving shall transfer, sell or encumber the assets of Paving;
c. neither the shareholder, Paving, nor the Management shall conduct or carry on a paving business or provide paving services other than through Paving;
...
7. Paving and the Shareholder agree to grant Philip the following security:
a. a first charge over all of the assets and undertaking of Paving; and
b. a pledge of all of the shares of Paving.
Until such security is provided to Philip the Shareholder and the Management shall provide personal guarantees of the obligations of Paving to Philip in the form attached hereto as Exhibit "A".
...
The Agreement is signed by Environmental, by the four brothers and by OPI, per Joseph. Philip Paving is a division of Philip Enterprises Inc., in turn a wholly owned subsidiary of Philip Environmental Inc. The activities of the joint venture were carried on under the name of "Philip Paving".
8. In October, 1993: Environmental advised OPI that it intended to cancel the joint venture and that OPI should complete its existing contracts. OPI had experienced financial difficulties because Environmental had reduced or eliminated remittances to OPI for work done by OPI.
9. On April 27, 1994: Revenue Canada assessed OPI for payroll taxes not remitted. OPI failed to remit federal income tax withheld from the wages paid to its employees in the amount of $270,527. A certificate for the amount of OPI's liability for the federal income tax and interest was registered in the Federal Court of Canada under section 223 of the Act, on March 10, 1995 and execution for such amount was returned unsatisfied on May 26, 1995 by the Sheriff of the Regional Municipality of York.
Appellant's Submissions:
[4] Counsel for the Appellant submits that Joseph resigned as a director on February 3, 1993 or within thirty days thereafter. He submits that this position is consistent with the testimony of Joseph and Piersanti. He refers to Adams Annotated Ontario Business Corporations Act, release number 3, April 1992 and in particular to the commentary therein that a director's resignation is effective when the corporation receives the resignation or the time that is specified in the resignation, whichever is later. He refers to Exhibit A-1, Blue tab 6 and in particular to the minutes therein contained which include the resignation of Joseph as director and the other resolutions discussed above. Thus, the corporation received the resignation in writing and therefore it was valid in February of 1993. In the alternative counsel submits that even if for some reason the resignation dated February 3, 1993 is found to be ineffective or effective only at a later date he points to the evidence of Joseph that he never considered himself to be a director. Based upon certain decisions that is sufficient to remove him from the directors' liability provisions of the Act.
Submissions of the Respondent:
[5] Counsel for the Respondent submits that there are several indications, as discussed above which lead to the conclusion that Joseph remained a director, i.e. that his resignation never took effect or took effect at a much later date than February of 1993. He submits further that Joseph should not be allowed to benefit from misrepresenting himself particularly in relation to his involvement in the joint venture agreement and his signature thereto. He refers to Wheeliker v. R, a decision of the Federal Court of Appeal dated March 29, 1999 wherein the Court discussed the principle that a man cannot take advantage of his own wrong doing and that principle should be applied in this case. In other words, he held himself out in the joint venture agreement as being a director and as such cannot escape liability under the Act.
ANALYSIS AND DECISION:
[6] The relevant provision of the Act is section 227.1 which reads as follows:
(1) Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or section 153 or 215, has failed to remit such an amount or has failed to pay an amount of tax for a taxation year as required under part VII or VIII, the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amount are jointly and severally liable, together with the corporation, to pay that amount and any interest or penalties relating thereto.
(2) Limitations on liability. A director is not liable under subsection (1), unless
(a) a certificate for the amount of the corporation's liability referred to in that subsection ha been registered in the Federal Court under section 223 and execution for that amount has been returned unsatisfied in whole or in part;
(b) the corporation has commenced liquidation or dissolution proceedings or has been dissolved and a claim for the amount of the corporation's liability referred to in that subsection has been proved within six months after the earlier of the date of commencement of the proceedings and the date of dissolution; or
(c) the corporation has made an assignment or a receiving order has been made against it under the Bankruptcy and Insolvency Act and a claim for the amount of the corporation's liability referred to in that subsection has been proved within six months after the date of the assignment or receiving order.
(3) Idem. A director 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.
(4) Limitation period. No action or proceedings to recover any amount payable by a director of a corporation under subsection (1) shall be commenced more than two years after the director last ceased to be a director of that corporation.
[7] Thus, if Joseph's resignation as director was effective in 1993 he benefits from the limitation period provided in subsection 227.1(4) as the assessment of him as director was only made in 1996.
[8] I accept the credibility of the Appellant as well as the credibility of Ultimo and Piersanti and I find that the resignation of the Appellant as director took effect in February of 1993 or very shortly thereafter with the result that he is not liable for the corporation's unremitted source deductions. I acknowledge that the Respondent had reasons to suspect that the resignation did not occur in 1993, but the evidence of all witnesses and the corporate records indicate that it did.
[9] Further, even were I to have found that the resignation was ineffective or only became effective at a later date, in my opinion the evidence demonstrates that notwithstanding the contention of counsel for the Respondent, the Appellant actually believed that he was not a director from and after 1993 and consequently he can take advantage of the decisions in Cybulski v. M.N.R., 39 B.L.R. and Sheremeta v. M.N.R., 91 DTC 867 which appear to stand for the proposition that if a person actually believes he is not a director he escapes liability under section 227.1 of the Act. Cybulski was followed in Panz v. M.N.R. [1989] T.C.J. 815.
[10] Consequently the appeal is allowed, with costs, and the assessment is vacated.
Signed at Ottawa, Canada this 11th of February 2000.
"T.P. O'Connor"
J.T.C.C.