Date: 19991118
Docket: 1998-9-IT-G; 1998-8-GST-I
BETWEEN:
LINO MASTROMONACO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Beaubier, J.T.C.C.
[1] These appeals were heard jointly on common evidence at Ottawa, Ontario on November 15, 1999. The Appellant testified and the Respondent called John Cole, the collections officer on the income tax file.
[2] The Appellant has appealed assessments for director's liability on account of unpaid remissions due of income tax, Canada Pension Plan and Employment Insurance instalments, interest and penalties from 969045 Ontario Ltd. ("45") totalling $48,896.81 from March 2, 1992 until March 11, 1994. He was assessed, and appealed, respecting director's liability for unremitted GST due from 45, together with interest and penalties from 30 June, 1992 until 30 June 1994 in the total amount of $25,504.51.
[3] The Appellant appears to be about 50 years old. He has a Master of Business Administration degree and has been a very active businessman for 28 years. He has owned and operated a number of corporations in various financial and restaurant businesses during those years. He testified for about two hours and is a forceful, knowledgeable man who has a formidable, determined, presence.
[4] In January 1992 the Appellant was the managing general partner of a partnership that had 27 limited partners who operated a building in Ottawa under a corporate name. It seized the assets of "Tycoon Restaurant" in its building for arrears of rent. On January 31, 1992 the Appellant agreed with Leslie Attwooll to lease the restaurant premises. Leslie Attwooll incorporated 45 on February 5, 1992 to operate the restaurant under the name Razorback Rib Co. The Appellant testified that on February 18, 1992 the Appellant personally paid her $30,000 and received an agreement that 66 2/3% of the issued shares of 45 would be placed in trust for him if the $30,000 was not repaid. He stated that he was appointed Secretary Treasurer of 45. He also agreed to advance a further $75,000 to enable 45 to operate. The $75,000 was advanced in the next few months.
[5] The Razorback Rib Co. had its first function with a temporary liquor licence on February 14, 1992 after receiving sale of the restaurant premises. (The Appellant later back-dated the Bill of Sale). 45 received its permanent liquor licence on February 19, 1992.
[6] In about June or July, 1992 Leslie Attwooll abandoned 45. The Appellant, acting for the landlord, entered the premises and found that no records were kept, stock was gone and creditors, including Ontario government sales tax, were unpaid. He took his 66 2/3% shares and executed a number of documents that were back-dated to April, 1992, as president of 45. The Appellant pleaded that he acquired 45 from Leslie Attwooll at that time, implying that he acquired all of its outstanding shares; the Court finds that to be the fact. The evidence is that after this happened in June or July, 1992 the Appellant became a director of 45.
[7] The Respondent argued that the Appellant became a de facto director of 45 on February 18, 1992 when he paid the $30,000. The Court does not find that to be so. The document which the Appellant admitted dealt with that was drawn by his lawyer and specifically states that he is to be Secretary Treasurer. If he was to be a director then, that document would have said so. Furthermore, there is no evidence that he acted like a director until after Leslie Attwooll left.
[8] The earliest date upon which the Appellant admitted that he signed 45 documents, whether or not they were back-dated, is August of 1992.
[9] The Appellant testified that he back-dated one 45 lease on the premises until February 14, 1992 and a second until May 14, 1992. He signed both for the landlord and the tenant. The first gave 2 ½ months free rent. (This term is confirmed by Exhibit A-1.) The second gave 4 ½ months free rent with a first payment due July 1, 1992. In September, 1992 the Appellant resigned from the general partnership and took the restaurant as his interest in the partnership. At about the same time Royal Trust seized the building on account of arrears on its mortgage.
[10] Despite his testimony that 45's stock and cash was gone, that it had no books of record or financial records and that it owed creditors when he took 45 over, the Appellant kept 45's former employees. These included Steven Meabry who became 45's food services manager. He then hired Howard Greenberg as financial manager and Tim Johnson and Terri van der Velden as operational managers. Part of the amounts assessed in both appeals were outstanding and new amounts became due after the Appellant took over. He testified that the $75,000 was advanced to pay wages. The Appellant also testified that the Government of Ontario required him to reconstruct the entire 1992 sales for sales tax purposes (Exhibit A-4). Howard Greenberg did this.
[11] The effect of this is that the Appellant had a clear warning in August of 1992 that 45 had not paid any taxes or withholdings under appeal before August of 1992 and retained the old staff that did not pay these. The detail of Mr. Greenberg's accounting is such that the Appellant must have known throughout 1992 that nothing was paid in that year respecting these assessments. He admits that he was a director after July. But he did nothing about the old failures to pay and he did nothing to prevent subsequent failures to pay in 1992. Nor did he cause 45 to pay anything respecting these assessments in 1992. This continued in 1993 and in 1994.
[12] The Appellant testified that he was ill in 1993 and that on March 16, 1993 he was operated on and had several inches of bowel removed. He stated that on March 15, 1993 he attended in the Royal Bank and gave any 2 of 3 managers (Johnson, Meabry and Greenberg) signing authority over the bank account and at the same time he signed a guarantee and postponement claim to the bank for a $10,000 loan to 45. At times he said he appointed them as directors and at other times he referred to them as de facto directors. The Court finds that they were not appointed as directors. No documents such as minutes, Corporation Branch notices, bank resolutions, lawyer's records or anything signed by any of them in support of this were filed in evidence. Nor does the Court find any of them to be a de facto director. No one else testified to indicate this and no evidence except the Appellant's self-serving testimony indicated this. The Appellant was 45's only director from August, 1992 until the end of all assessment periods.
[13] As a result, the question to be answered after 1992 is whether the Appellant was too ill to be responsible for the remittances in question. He suffered two illnesses and operations:
1. The bowel problem and operation on March 16, 1993.
2. A spinal injury and operation on October 3, 1994.
Both had serious symptoms before the operations and recovery periods following the operations.
[14] There is no evidence that either affected his mind. Nor is there any evidence that he did anything during or before either illness, operation or recovery period to insure that the payments in question were made. On the contrary, the defalcations simply continued as they had before without any interruption. He did not even testify that he did anything to prevent them. Rather, he referred to the appointments described in paragraph [12] as his excuse. But he never testified that he told these appointees to pay the remittances in question or to bring the arrears up to date. Nor did he ever testify that he tried to have 45 pay the remittances at any time. It is apparent that he deliberately used the money to operate the restaurant with full knowledge that he was doing so.
[15] The Court has no doubt that the Appellant knew and understood his duties as a director under the Excise Tax Act and the Income Tax Act. He never said that he didn't. He also understood all of the concepts of duty and of trust and the fact that the money in question was not 45's. Rather, it was payable as employee remittances or as trust money. He deliberately chose that 45 would not remit any funds. On the evidence the Court finds that the Appellant was a legal director of 45 commencing August 1, 1992. It also finds that he was not a director of 45 either de facto or in law before that date.
[16] The Court finds that from and after August 1, 1992 the Appellant, as the sole director of 45, did not exercise the degree of care, diligence and skill to prevent the failure to remit the amounts by 45 that a reasonably prudent person would have exercised in comparable circumstances in respect to remittances due on account of both appeals. The Appellant deliberately and with forethought caused 45 not to pay those remittances. The assessments are referred to the Minister of National Revenue for reconsideration and reassessment accordingly.
[17] The Respondent is awarded party and party costs on account of the income tax appeal. As a part of those costs the Respondent is specifically awarded costs for preparation for hearing and a day's cost of hearing respecting the income tax hearing proceedings and status hearing order of July 28, 1999, which are fixed at $1,400.
Signed at Ottawa, Canada this 18th day of November 1999.
"D.W. Beaubier"
J.T.C.C.