Date: 19990622
Docket: 97-1180-GST-G
BETWEEN:
SANDRA STEIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] The appellant appeals from an assessment dated July 12, 1996 made under section 323 of the Excise Tax Act (the Act), which establishes the liability of the directors of a corporation which fails to remit the amount of net tax which it owes. The periods at issue are those ending on October 31, 1994, January 31, 1995 and July 31, 1995. The total amount of the assessment of July 12, 1996 is $15,138.40.
[2] The Notice of Appeal states, inter alia, the following:
[TRANSLATION]
4. THAT Revenu Québec wrongly claims that the appellant was a director of 2843935 Canada Inc.;
. . .
6. THAT the appellant, at all times relevant to the instant case, was not a director of 2843935 Canada Inc. At all times relevant to the instant case, Anthony Sanzone was the director of 2843935 Canada Inc.;
. . .
10. THAT, in the instant case, the appellant exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances, in view of the fact that the actual director was Anthony Sanzone and that the appellant was always kept out of the company's business . . . .
[3] The Reply to the Notice of Appeal (the Reply) sets out, inter alia, the following facts:
[TRANSLATION]
8. That the appellant was a director of 2843935 Canada Inc. (hereinafter "the company") during 1994 and 1995;
9. That the following documentation issued by the company is conclusive on this point:
- Minutes of a meeting of the company's directors dated August 12, 1992; the appellant is described therein as a director and she signed the said minutes;
- Minutes of a special meeting of the company's directors dated October 31, 1993; the appellant is described therein as a director and she signed the said minutes;
- Minutes of a meeting of the company's directors dated March 1, 1994; the appellant is described therein as a director and she signed the said minutes;
- Document pertaining to the company, which is dated November 15, 1993 and entitled "List of Directors and Officers"; it describes the appellant as a director of the company and bears her signature;
- Minutes of the first meeting of the company's directors; the appellant was elected a director of the company and signed the said minutes;
- Minutes of a meeting of the directors dated April 30, 1994; the appellant is described therein as a director of the company and she signed the said minutes;
- Minutes of a meeting of shareholders dated April 30, 1994, signed by the appellant;
...
15. That, furthermore, with respect to the amounts of net tax (hereinafter "GST") which the company failed to remit to the Receiver General, the appellant did not exercise the degree of care, diligence and skill to prevent the company's failure that a reasonably prudent person would have exercised in comparable circumstances;
16. That the appellant took an active part in the company, the whole as can be seen from documents issued by the company;
17. That the appellant was a member of the boards of directors of a number of companies;
18. That the appellant or her representatives did not attempt to show the officers of Revenu Québec that she had exercised care, diligence and skill with respect to the company's failures;
19. That the appellant and/or her representatives did not in any way attempt to show the officers of Revenu Québec that she had taken positive action to avoid or prevent the company's failures; in fact, all the appellant's representatives did was to say her role had been a passive one (which, it should be added, the respondent denies). ...
[4] At the hearing, the statement made in the Notice of Appeal that the appellant was not a director of the corporation was not repeated. What was argued was the passive nature of the appellant's role in the management of the corporation. In the Reply to the Notice of Appeal, the respondent denied that the appellant was passive and noted that she had attended the meetings of the corporation's board of directors and signed its documents. Furthermore, the appellant was a member of the boards of directors of a number of corporations.
[5] Mary Sanzone, Martin Saxner, David Stein and the appellant testified at the request of counsel for the appellant. Louise Gadouas and François Bernier testified at counsel for the respondent's request.
[6] Mrs. Sanzone explained that 2843935 Canada Inc. began doing business in 1992 as Altima Designs, which is the name by which the corporation will be subsequently referred to. The corporation manufactured sheets, draperies, mattress covers and comforters. According to Mrs. Sanzone, her husband Anthony Sanzone was the corporation's senior director. He took care of the business's general management, while she oversaw production. Mrs. Sanzone had experience in this kind of business. She took care of hiring and trained employees to cut material and use the machines. She said she was not really aware of the business's financial problems. Her husband told her a few times that the business was having growth problems but said that the company was financially stable. During the period in issue, the business was located in a building owned by a corporation of which the appellant was a director.
[7] Mrs. Sanzone explained that another person, Martin Saxner, took part in the business's management. Mr. Saxner had previously been employed by the Stein family. Mrs. Sanzone expressed the opinion that Mr. Saxner was probably involved in Altima Designs' business to protect the Stein family's interests. She said the appellant's husband, David Stein, came a few times, with the appellant, to confer with Mr. Sanzone. However, Mrs. Sanzone said that she rarely saw the appellant, perhaps two or three times. When she came, she asked whether everything was going well and Mrs. Sanzone answered that it was.
[8] Mr. Sanzone died suddenly on September 5, 1995. Shortly after her husband's death, Mrs. Sanzone said she completely abandoned the business. Exhibit A-2, which consists of cheques, shows that she nevertheless signed pay cheques until October 6, 1995. She and Mr. Saxner signed the cheques in question. Mr. Sanzone, the appellant and David Stein were also authorized to sign cheques.
[9] Martin Saxner stated that he began to work for the Stein family after receiving a commerce degree from McGill University. He started working for Altima Designs in mid-1993 and stayed there until the business closed in 1995. Mr. Saxner explained that Mr. Sanzone was the business's guiding mind, that there was a clerk who made entries in the books and that he himself filled out the necessary forms. Mr. Saxner mentioned that he may have made arrangements with Revenu Québec officers to pay the GST.
[10] Mr. Saxner said that the business had no real difficulty paying employees and that it had taken out a number of loans, from the National Bank, the Federal Business Development Bank and the Stein family. He said the appellant came a few times to pick up comforters and ask how things were going, nothing more.
[11] David Stein stated that the investment he and his wife, the appellant, made in Altima Designs' business was their first manufacturing venture. Ninety-five percent of their business is in real estate. A partner, Alex Weinberger, had put him in contact with Mr. Sanzone. Mr. Stein did not know whether Mr. Sanzone had previously been in business or whether he was an employee. He said that he had asked some people about Mr. Sanzone and had been told that he was an honest and competent man.
[12] The appellant invested $50,000 in the business and signed a guarantee for a $75,000 line of credit. Mr. Stein said that he saw Mr. Sanzone once or twice a month, either as his landlord or for the purpose of protecting his wife's investment. They briefly discussed business. Mr. Sanzone told him that the bills were paid and everything was up to date. It was the banks that seized the business's assets. He may have seen the financial statements but did not remember doing so. He confirmed that he was one of the five people who were authorized to sign Altima Designs' cheques.
[13] The appellant introduced herself and gave her occupation as "housewife". She is a retired elementary school teacher, and she suggested that she knows little about the business world and nothing at all about manufacturing production. However, the evidence revealed that she was a director of a number of corporations involved in the real estate business and, in one case, a laboratory. All these businesses have employees.
[14] The appellant said that someone approached her husband in 1992 concerning an investment in Altima Designs. As the real estate business was slow at that time, the appellant thought that investing in a manufacturing business would be a good alternative.
[15] She explained that her husband had health problems 11 years ago. He was unable to drive and had suffered a partial hearing loss. It was for this reason that she began to take an interest in the real estate business. She had an office at the head office of the Stein family's business. However, she said that she had only a desk in her husband's office and that she answered the telephone, did some filing and made the coffee. This office is located at 1010 Ste-Catherine Street West.
[16] The appellant contended that she did not ask to see the financial statements or to sit on the board of directors. Her only discussions with Mr. Sanzone were to determine whether everything was going well, and he answered that they were. She trusted Mr. Sanzone implicitly and did not discuss GST remittances with him. Although she became the sole shareholder following Mr. Sanzone's death, she claimed not to have been informed about the manner in which the business was wound up.
[17] Ms. Gadouas is a tax collection officer for Revenu Québec. She stated that the case was assigned to her because an NSF cheque was received by the Receiver General on August 16, 1995. On November 9, 1995, she went to the premises of Altima Designs and inquired with the tenant upstairs, who told her that the business had been closed for a month.
[18] Counsel for the appellant pointed out that the appellant is a housewife and has no experience in the manufacturing industry. If there is one field where the appellant has a little experience, it is real estate. Thus it was normal for Mrs. Stein to give Mr. Sanzone considerable latitude. Counsel argued that an outside director has a lesser duty of care than an inside director. The appellant had no reason to suspect there were problems.
[19] Counsel for the appellant referred to the decision of the Federal Court of Appeal in Soper v. R., [1997] 3 C.T.C. 242, and the following passages in particular:
(Page 255, paragraph 16)
The second proposition that I wish to discuss is the following: a director need not exhibit in the performance of his or her duties a greater degree of skill and care than may reasonably be expected from a person of his or her knowledge and experience. Thus, the standard of care is partly objective (the standard of the reasonable person), and partly subjective in that the reasonable person is judged on the basis that he or she has the knowledge and experience of the particular individual. It is a hybrid “objective subjective standard”. . . .
Third, a director is not obliged to give continuous attention to the affairs of the company, nor is he or she even bound to attend all meetings of the board. . . .
Fourth, in the absence of grounds for suspicion, it is not improper for a director to rely on company officials to perform honestly duties that have been properly delegated to them. . . .
(Page 263, paragraph 32)
. . . I intend to focus on the category of cases respecting the distinction between inside and outside directors since that line of authority is the most pertinent to this appeal.
(Page 263, paragraph 33)
. . . [I]t is difficult to deny that inside directors, meaning those involved in the day-to-day management of the company and who influence the conduct of its business affairs, will have the most difficulty in establishing the due diligence defence. . . .
(Page 268, paragraph 45)
. . . Whether the standard of care has been met, now that it has been defined, is thus predominantly a question of fact to be resolved in light of the personal knowledge and experience of the director at issue.
[20] Counsel for the respondent pointed out that Mrs. Stein had a university education and got genuinely involved in the business when her husband became ill. Mrs. Stein claimed that she did not know whether Mr. Sanzone was originally an entrepreneur or an employee and therefore did not inquire as to whether he was an experienced manager. Nor, according to her testimony, did she ask to see the financial statements. She had no idea of the company's indebtedness year after year, although she lent it $50,000 and guaranteed the $75,000 line of credit, and her investment dated back to 1992. She was the only other director of the corporation and, according to her testimony, she attended none of the shareholder meetings. The fact that she sits on the boards of directors of many companies is proof that she is an experienced businesswoman. Despite her substantial investment in Altima Designs, she contended that she did not know what happened to the business's assets following Mr. Sanzone's death. Yet it was she who had become the company's sole director. The appellant claimed that she knew virtually nothing about what happened. She was totally passive and entered the premises only to ask how things were going, out of courtesy, and pick up a few comforters. Counsel for the respondent argued that outside directors do not escape liability if they choose not to inquire, and he referred on this point to Soper, supra, at page 266, paragraph 42:
In my view, the positive duty to act arises where a director obtains information, or becomes aware of facts, which might lead one to conclude that there is, or could reasonably be, a potential problem with remittances. Put differently, it is indeed incumbent upon an outside director to take positive steps if he or she knew, or ought to have known, that the corporation could be experiencing a remittance problem. The typical situation in which a director is, or ought to have been, apprised of the possibility of such a problem is where the company is having financial difficulties. . . .
Conclusion
[21] The lack of transparency in this appeal ultimately does the appellant a disservice. In the Notice of Appeal, the appellant states that she was not a director of the corporation and added that she was kept out of the corporation's business by Mr. Sanzone, who was the company's real director. The first statement was not repeated at the hearing since it was obviously inconsistent with the facts. The second one was repeated, although no clear evidence was adduced to support it. The testimony of the appellant and the other witnesses was not credible because it was not consistent with the facts. First of all, the testimony of Mr. Saxner, a former employee of the Stein family, was evasive. Mr. Saxner took an active part in the management of the business and thus could have revealed exactly what happened. He managed to avoid giving an accurate description of the facts. The appellant and her husband said they did not know whether Anthony Sanzone was a businessman before the business started up or an ordinary employee. The appellant thus did not know whether Mr. Sanzone was a manager on whom she could rely to remit the source deductions. The appellant sits on a number of corporate boards and is thus experienced in the affairs of a business, but she claimed to have no experience. It is implausible that she would have taken no interest in the business's financial situation when she had lent it $50,000 and guaranteed a $75,000 line of credit and was the corporation's only other shareholder. Nor is it plausible that she did not know what happened to the business's assets after Mr. Sanzone's death. She wanted to present a totally passive image of herself as a director, but such an image is inconsistent with the evidence. She is a person with business experience.
[22] The Federal Court of Appeal explained in Soper that the directors of a corporation do not all have the same liability. It drew a distinction between inside and outside directors and stated that, in each of these two categories, a director's personal experience and role within the corporation must be considered. The Federal Court of Appeal did not define what it meant by "outside director" but did define what it meant by "inside director". An inside director is one who is involved in day-to-day management and influences the conduct of its business affairs (paragraph 33 of Soper, supra). I can accept that the appellant was not involved in the day-to-day management of the business. However, as she guaranteed the business's line of credit, was the only other shareholder and was authorized to sign cheques, it would be more difficult to accept that she did not influence the conduct of the company's business affairs. In the circumstances, she could be considered an inside director. Even if it were agreed that the appellant fell into the category of outside directors, she nevertheless had a duty, once she had become aware of the business's financial difficulties, to ensure that source deductions were remitted. The appellant could not help but know of the business's financial difficulties, since she had lent it $50,000 and guaranteed the line of credit. In view of her corporate experience, she had to ensure, as a director of the corporation, that the source deductions were remitted. In failing to do so, she did not exercise the diligence required by subsection 323(3) of the Act.
[23] The appeal is accordingly dismissed with costs.
Signed at Ottawa, Canada, this 22nd day of June 1999.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]