Date: 20000515
Docket: 98-2052-IT-G
BETWEEN:
EMILIO DIRIENZO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1] This appeal is from an assessment under section 227.1 of the Income Tax Act against the appellant as a director and officer of Can-Am Windows & Doors Manufacturing Inc. (the "corporation"). The liability arises from the failure of the corporation to withhold and remit source deductions for income tax, provincial tax, employment insurance premiums and Canada Pension Plan premiums. The total amount assessed exceeds $30,000.
[2] The appellant was born in 1972. He started to work for the construction company of his uncle Ubaldo DiRienzo in 1991 or 1992.
[3] The corporation was formed in February 1993 under the laws of Ontario. It had two directors, the appellant and Luke DiGiovanni. The appellant totally trusted his uncle. He was told to sign the documents for the incorporation of the company and he did so without hesitation. He was never employed by the company and received no salary or wages. He was told by his uncle to sign a guarantee of a loan of $36,000 by the Royal Bank to the corporation and he did so. The bank sued him on the guarantee and obtained judgment which is still outstanding.
[4] He paid no attention to the financial affairs of the company. He stated that he took no steps "because I was not involved". He trusted his uncle because his father had trusted him. He exhibited an ingenuous blind faith in the family patriarch who, he believed, would stand behind him and see that he came to no harm as the result of signing anything his uncle put in front of him. This faith was misplaced. Ubaldo DiRienzo was, in fact, an unprincipled knave who had no compunction about inducing his naive and trusting 20-year old nephew to sign a guarantee and to become president or director of his corporation. Ubaldo DiRienzo was the true beneficial owner of the shares of the corporation and was a de facto director. The appellant was a mere puppet in the hands of his uncle. Ubaldo DiRienzo did not have the courage to take responsibility for his own actions. Rather he chose to hide behind a youth who trusted him and who could be intimidated or inveigled into doing his bidding. Ubaldo DiRienzo did not have the decency to stand behind his nephew, but was content to abandon him to the tender mercies of the bank and the tax collector.
[5] Two things are perfectly clear. First, whatever liability the appellant may have incurred or damage he may have suffered as the result of doing his uncle's bidding, he is entitled to recover from his uncle. Second, the Minister of National Revenue would be entitled to pursue the uncle, Ubaldo DiRienzo, as a de facto director.
[6] I find nothing in the decision of the Federal Court of Appeal in The Queen v. Corsano et al., 99 DTC 5658, which would prevent a de facto director from being liable under subsection 227.1. Under subsection 1(1) of the Ontario Business Corporations Act director is defined as
a person occupying the position of a director of a corporation by whatever name called.
[7] Under subsection 227.1(1) an action or proceeding to recover an amount payable by a director must be commenced within two years after the director last ceased to be a director. There is no evidence that Ubaldo DiRienzo ever ceased to be a director of the corporation, assuming it has not been wound up.
[8] Do the conclusions stated above absolve the appellant of his responsibilities under section 227.1? On one view of the matter, it could be said that he did not exercise the degree of care, diligence and skill contemplated by subsection 227.1(3) because he exercised none at all. On the other hand, he was a mere nominal director with no powers, no responsibilities and no say in the way the corporation was run. It is all very well to adopt a hectoring, moralizing tone and say that if people take on the responsibility of corporate directorships they should be expected to assume all the consequences of such a position. I am not however concerned with what the situation would be in a perfect world. I have to make a determination of the facts as they exist in a highly imperfect world where malleable young family members are bullied by domineering patriarchs.
[9] There have been a multitude of cases under section 227.1 of the Income Tax Act and the corresponding section of the Excise Tax Act, section 323. I reviewed some of them in Dale Holmes v. The Queen, file number 1999-2182(IT)I, 19 April 2000. The leading case is Soper v. R., [1997] 3 C.T.C. 242 (F.C.A.).
[10] There have, however, been a number of other cases since this such as Cadrin v. The Queen, 99 DTC 5079 (F.C.A.); The Queen v. Champeval et al., 99 DTC 5115 (F.C.T.D.).
[11] It is clear on the evidence not only that did the appellant do nothing but also that he was powerless to do anything. The uncle dominated the family and all aspects of the business. The case bears a strong resemblance to Fitzgerald et al. v. M.N.R., 92 DTC 1019. In that case Mogan J. stated at page 1021:
It appears to me that the Appellants were directors in law (i.e., their names appear in the Company's minute book as directors) but they were not in fact directors. They never met as directors. They never acted alone or in concert as directors. They had no knowledge of the management or administration of the Company's business. They had no equity in the Company. They had no way of compelling the fifth director (Eugene Fitzgerald, the sole shareholder) to disclose any information concerning the Company's financial affairs. They were directors in law only because of their family connection to Eugene Fitzgerald. Although any one of them could have resigned as a director if he or she had thought of it, such resignation would have been a source of family friction and, from the viewpoint of the male Appellants (the three sons), the idea of resigning as a director would not have occurred to them before the idea of quitting their employment.
I would not hold as a general rule that a passive or inactive director is free from liability under subsection 227.1(1) of the Income Tax Act. For example, a person who consents to being a director of a corporation in order to accommodate a friend or client and then fails to participate as a director in the affairs of the corporation is still very much at risk under subsection 227.1(1). The passive or inactive director is not, per se, free from liability under subsection 227.1(1). But when the passive or inactive director has become a director in the context of a family business operated by a corporation which is dominated by an uncompromising patriarch, the domestic responsibility for maintaining harmony within the family becomes interwoven with the legal responsibility to third parties and, in these circumstances, I think that it is not reasonable to impose the same standard of care, diligence and skill on the passive "family director" as on the person who is truly free to become a director and does so outside a family context.
Applying the above proposition to the facts of this case, I hold that the Appellants satisfy the test in subsection 227.1(3) because they exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances. I emphasize "in comparable circumstances" because a reasonably prudent person would, in this feudal family, maintain family harmony by serving as a director in name only and by leaving the management of the business in the hands of the strong-minded patriarch who had managed it successfully for 30 years.
[12] That is precisely the situation here.
[13] The appeal is allowed with costs and the assessment is vacated.
Signed at Ottawa, Canada, this 15th day of May 2000.
"D.G.H. Bowman"
A.C.J.