Scavuzzo v. The Queen

Scavuzzo v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2005-12-21
Neutral citation
2005 TCC 772
File numbers
2001-4533(IT)G
Judges and Taxing Officers
Donald G.H. Bowman
Subjects
Income Tax Act
Decision Content
Dockets: 2001-4533(IT)G
2001-4534(GST)G
BETWEEN:
SANDRO (ALEX) SCAVUZZO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard together with the appeals of Jack Scavuzzo (2001-4535(IT)G) and (2001-4536(GST)G)), on April 27 and 28, 2004; November 22, 2004; July 11 to 13, 2005; August 3, 4, 5, 10, 11 and 12, 2005
at Toronto, Ontario
Before: The Honourable D.G.H. Bowman, Chief Justice
Appearances:
Counsel for the Appellant:
Stevan Novoselac
Counsel for the Respondent:
Marie-Thérèse Boris
JUDGMENT
The appeals from the assessments made under the Income Tax Act and the Excise Tax Act, are allowed and the assessments vacated. Counsel are requested to communicate with the Court to determine how the matter of costs can best be dealt with.
Signed at Ottawa, Canada, this xxx day of December 2005.
"D.G.H. Bowman"
Bowman, C.J.
Dockets: 2001-4535(IT)G
2001-4536(GST)G
BETWEEN:
JACK SCAVUZZO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard together with the appeals of Sandro Alex Scavuzzo (2001-4533(IT)G) and (2001-4534(GST)G)), on April 27 and 28, 2004; November 22, 2004; July 11 to 13, 2005; August 3, 4, 5, 10, 11 and 12, 2005
at Toronto, Ontario.
Before: The Honourable D.G.H. Bowman, Chief Justice
Appearances:
Counsel for the Appellant:
Stevan Novoselac
Counsel for the Respondent:
Marie-Thérèse Boris
JUDGMENT
The appeals from the assessments made under the Income Tax Act and the Excise Tax Act, are allowed and the assessments vacated. Counsel are requested to communicate with the Court to determine how the matter of costs can best be dealt with.
Signed at Ottawa, Canada, this xxx day of December 2005.
"D.G.H. Bowman"
Bowman, C.J.
Citation: 2005TCC772
Date: 20051221
Dockets: 2001-4533(IT)G
2001-4534(GST)G
BETWEEN:
SANDRO (ALEX) SCAVUZZO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND
Dockets: 2001-4535(IT)G
2001-4536(GST)G
BETWEEN:
JACK SCAVUZZO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowman, C.J.
[1] These appeals are from four assessments; two against Jack Scavuzzo and two against his son, Sandro (Alex) Scavuzzo. I shall throughout these reasons refer to the father as "Jack" and the son as "Sandro". Each of Jack and Sandro were assessed under section 227.1 of the Income Tax Act ("ITA") and section 323 of the Excise Tax Act ("ETA") on the view that they were directors of a company, Resici Group Inc. ("Resici") and that they were responsible for the unremitted income tax deducted at source on wages paid to employees and unremitted goods and services tax ("GST").
[2] This case has been wending its leisurely way through the court for about one and one half years. The trial started on April 27, 2004. It was adjourned because counsel for the appellants believed that he was obliged to withdraw. When new counsel were appointed they sought an amendment to the notices of appeal. This was strenuously opposed. If anyone is interested, the reasons for my disposition of the motion are found at 2005 DTC 169 and 2004 G.S.T.C. 168. The matter finally came on for hearing again in August, 2005.
[3] The issues are as follows:
(1) In respect of the unremitted payroll deductions, did the Minister assess the wrong company? Two companies hired and paid the employees - 1212726 Ontario Ltd. ("121") and 1328156 Ontario Ltd. ("132"). Appellant's counsel referred to them as employer companies and I shall do the same.
(2) Can a director who is assessed under section 227.1 of the ITA or section 323 of the ETA challenge the underlying assessments made against a company of which he is alleged to be a director?
(3) Was Jack a de facto director of Resici, despite the fact that he submitted a formal resignation from Resici on July 3, 1997, more than two years before he was assessed?
(4) If Jack was a de facto director, did he exercise due diligence as required by section 227.1 of the ITA and section 323 of the ETA?
(5) Were 121 and 132 agents of Resici so that their obligation to remit payroll deductions and GST was, in law, the obligation of Resici entitling the Minister to assess Resici?
(6) Was Sandro only a nominal director of Resici, with no power and no ability to take steps to ensure that GST or payroll deductions were remitted?
(7) Should payments made to the Canada Revenue Agency ("CRA") on Resici's behalf have been applied to Resici's GST account?
(8) Assuming the appellants are entitled to challenge the underlying assessments against Resici, should the assessments against the appellants be vacated because the respondent is allegedly unable to locate certain underlying assessments?
[4] Before I deal with the facts I should dispose of the question of the right of a person who is assessed as a director under section 227.1 of the ITA or section 323 of the ETA to challenge the underlying assessment against the corporation.
[5] A convenient summary of the conflicting positions in this court is found in Mr. David Sherman's editorial comment in Zaborniak v. The Queen, [2004] G.S.T.C. 110, a judgment of Justice Bowie. It reads as follows:
EDITORIAL COMMENT
These were appeals of directors' liability assessments. The principal issue was whether the directors could challenge the corporation's underlying assessment.
Whether this can be done has become an issue of some dispute. The Federal Court of Appeal ruled in Gaucher, [2001] 1 C.T.C. 125, that a third party can contest an underlying assessment, but this ruling might apply only to transfer-of-property assessments and not directors' liability assessments.
At the Tax Court, both Chief Justice Garon (Schuster, [2001] G.S.T.C. 91) and Justice Tardif (Maillé, [2003] G.S.T.C. 103) have expressed the view that a director cannot challenge the underlying assessment if he neglected to cause the corporation do so. despite the Gaucher decision. Justices Mogan (Schafer, [1998] G.S.T.C. 7) and Bowie (Papa, [2000] G.S.T.C. 74) had earlier expressed the same view. (Justice Bowie repeated this view in Garland, [2004] G.S.T.C. 97, but that was a case where the company had unsuccessfully appealed to the Tax Court.)
On the other hand, Justices Bowman (Wiens, [2003] G.S.T.C. 121), Campbell (Cochran, [2002] G.S.T.C. 2), Archambault (Marceau, [2003] G.S.T.C. 51) and Lamarre (Parisien, [2004] G.S.T.C. 45) have permitted challenges to the underlying assessment. Some of these rulings have been explicitly based on Gaucher.
Justice Eric Bowie has now reiterated his view that the director should not be able to challenge the corporation's assessment. He explored the issue at some length, noting that s. 299 provides that an assessment is "valid and binding" subject only to objection and reassessment. From this he concluded that the director cannot contest the assessment.
With respect, s. 299 should not be determinative. That was the whole point of the Gaucher decision. Section 299 refers to an assessment process that is between the Minister and the corporation. It should not bind third parties.
In my view, the fact that "the director will normally have had the opportunity to influence the corporation's decision whether to appeal" is not conclusive. There may be many reasons for the corporation not to have objected and appealed, usually including a lack of resources. But the corporation and the director are different persons with different interests. This reason should not be a bar to applying the Gaucher principle to directors' liability assessments.
Clearly this question will have to be resolved in due course by the Federal Court of Appeal. For purposes of this appeal, the Tax Court ruled that the assessment of the corporation was binding.
[6] In commenting on the reasons in the Scavuzzo motion, Mr. Sherman made the following observations:
EDITORIAL COMMENT
This was a motion by the appellants in two General Procedure appeals to amend the Notices of Appeal. The appellants were assessed under s. 323 as directors of a corporation which had gone out of business with unremitted GST.
In the motion, the directors sought to add a challenge of the underlying assessment of the corporation.
. . . . .
Associate Chief Justice Donald Bowman granted the motion, noting that the question of whether the underlying corporate assessment can be challenged by a director has not yet been resolved, and should be fully considered. Indeed, as the Court noted, there have been conflicting decisions from different Tax Court judges to date, as discussed in my editorial comment to Zaborniak, [2004] G.S.T.C. 110
It will be interesting to see this issue dealt with again. One hopes that it will eventually reach the Court of Appeal, and that that Court will reiterate the position it took in Gaucher, [2001] 1 C.T.C. 125, with respect to transfer-of-property assessments, so that directors are not precluded from challenging the underlying assessment. There may be many reasons for the corporation not to have objected and appealed, usually including a lack of resources -- after all, by definition the corporation is insolvent if the directors have been assessed. Since the corporation and the director are different persons with different interests, the director should not be estopped by the corporation's failure to act.
David Sherman
[7] In Gaucher v. The Queen, 2000 DTC 6678, the Federal Court of Appeal (Rothstein, Sexton and Evans JJA), reversing the Tax Court of Canada, held that a taxpayer who was assessed under section 160 of the ITA, which imposes a derivative liability on the non-arm's length transferee from a tax debtor, could challenge the underlying assessment made against the transferor, notwithstanding that the transferor's liability had been confirmed by the Tax Court of Canada. The Tax Court of Canada in Mrs. Gaucher's appeal had held that she could not challenge the correctness of her husband's assessment.
[8] Rothstein J.A., speaking for the unanimous court, after quoting the Tax Court judge's conclusion that Mrs. Gaucher could not challenge her husband's assessment, stated at page 6680:
[6] I am of the respectful view that the Tax Court Judge was in error in coming to this conclusion. It is a basic rule of natural justice that, barring a statutory provision to the contrary, a person who is not a party to litigation cannot be bound by a judgment between other parties. The appellant was not a party to the reassessment proceedings between the Minister and her former husband. Those proceedings did not purport to impose any liability on her. While she may have been a witness in those proceedings, she was not a party, and hence could not in those proceedings raise defences to her former husband's assessment.
[7] When the Minister issues a derivative assessment under subsection 160(1), a special statutory provision is invoked entitling the Minister to seek payment from a second person for the tax assessed against the primary tax payer. That second person must have a full right of defence to challenge the assessment made against her, including an attack on the primary assessment on which the second person's assessment is based.
[8] This view has been expressed by Judges of the Tax Court. See, for example, Actonv. The Queen (1994), 95 D.T.C. 107, at 108 per Bowman T.C.C.J.; Ramey v. The Queen (1993), 93 D.T.C. 791, at 792 per Bowman T.C.C.J.; Thorsteinsonv. M.N.R. (1980), 80 D.T.C. 1369, at 1372 per Taylor T.C.C.J. While the contrary view was expressed in Schafer (A.) v. Canada, [1998] G.S.T.C. 7-1, at 7-9 (appeal dismissed for delay (August 30, 1999), A-258-98 (F.C.A.)), I am of the respectful opinion that such view is in error. It seems to me that this approach fails to appreciate that what is at issue are two separate assessments between the Minister and two different taxpayers. Once the assessment against the primary taxpayer is finalized, either because the primary taxpayer does not appeal the assessment, or the assessment is confirmed by the Tax Court (or a higher court if further appealed), that assessment is final and binding between the primary taxpayer and the Minister. An assessment issued under subsection 160(1) against a secondary taxpayer cannot affect the assessment between the Minister and the primary taxpayer.
[9] By the same token, since the secondary taxpayer was not a party in the proceedings between the Minister and the primary taxpayer, she is not bound by the assessment against the primary taxpayer. The secondary taxpayer is entitled to raise any defence that the primary taxpayer could have raised against the primary assessment. The result may be that the assessment against the secondary taxpayer is quashed or is found to be for a lesser amount than the assessment against the primary taxpayer. That, of course, will have no effect on the assessment against the primary tax payer against whom the primary assessment was final and binding.
[9] Bowie J. in Zaborniak, which dealt with an assessment under section 323 of the ETA, stated at pages 110-6 to 110-8:
If there were no authority on the subject, I would have had no hesitation in finding that the statutory language is clear, and that it leaves no room for a collateral attack on the judgment debt in the course of an appeal from an assessment under section 323. This is true of both the French and the English versions of the statute.[7] I would therefore feel constrained by the judgment of the Supreme Court of Canada in Shell Canada Ltd. v. Canada.[8] The present Chief Justice said there:
... Where the provision at issue is clear and unambiguous, its terms must simply be applied: ... [9]
There have, however, been conflicting decisions of this Court on the point since the decision of the Federal Court of Appeal in Gaucher v Canada[10]. That case dealt with an assessment made under section 160 of the Income Tax Act, which renders a non-arm's length recipient of a gratuitous transfer of property from a delinquent taxpayer liable, jointly and severally with the transferor, for the transferor's tax liability, up to a limit defined as the lesser of the extent to which the value of the property transferred exceeds the value of any consideration that may have been given for it, and the total of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year.[11] It was the latter expression that applied in that case. The Federal Court of Appeal held that this Court had erred in finding that the Appellant in an appeal from a derivative assessment made under section 160 could not dispute the amount of the tax liability of the principal debtor for the year in question, notwithstanding that the principal debtor had objected to the assessment and then pursued his right of appeal from it to this Court, all without success. The reasoning of the Court, as I understand it, is that the initial assessment against the primary taxpayer does not "bind" the secondary taxpayer, but only the primary taxpayer, for reasons arising out of the rules of natural justice. Since then there have been at least six decisions of this Court in cases where directors assessed under section 323 have sought to make a collateral attack on the primary assessment. In most of those cases,[12] it was not necessary to decide whether section 323 suffers from ambiguity. Only the decisions of Garon C.J. in Schuster v. Canada[13] and Tardif J. in Maillé v. Canada[14] have discussed the issue whether Gaucher applies to section 323. They both concluded that it does not, primarily because a director will normally have had the opportunity to influence the corporation's decision whether to appeal. That was certainly true in this case, where the Appellants are two of the three directors and shareholders of a small family business.
Whatever ambiguity may be found in section 160 of the Income Tax Act, I am not able to identify one in section 323, and that is a prerequisite to any departure from the plain words: see Bell ExpressVu Limited Partnership v. Rex[15] at paragraphs 28 to 30. Iacobucci J. said there:
... ambiguity cannot reside in the mere fact that several courts - or for that matter several doctrinal writers - have come to differing conclusions on the interpretation of a given provision...
To find that the Appellants in this case have a right to dispute the quantum of the judgment debt would require that I add to subsection 323(1), by implication, the words "or such lesser amount as the corporation might have been found liable to remit following a successful appeal of its assessment". I simply have no mandate to do that. I am in agreement with the conclusions reached by Garon C.J. and Tardif J. I note that these decisions have been criticized and described as "not ... good law".[16] I disagree. The policy is certainly a legitimate subject for criticism, but that criticism should be directed to Parliament, for it is there and not in the Court that policy is formulated: see Shell Canada Ltd., supra, at paragraphs 43 to 48; the Queen v. Ray,[17] at paragraph 14.
7 Paragraph 323(2)(b) and (c).
8 The French version of section 323 is annexed to these Reasons.
9 [1999] 3 S.C.R. 622 (S.C.C.).
10Ibid @ para. 40. See also the cases there cited.
11 2000 D.T.C. 6678 (Fed. C.A.).
12Income Tax Act, subparagraph 160(1)(e)(ii).
13 e.g. Wiens v. R., [2003] G.S.T.C. 121 (T.C.C. [Informal Procedure]) @ para. 5 and Lau v. R. (2002), [2003] G.S.T.C. 1 (T.C.C. [General Procedure]) @ para. 36, where Bowman, A.C.J. assumed, obiter, that the decision of the Federal Court of Appeal in Gaucher applied equally to section 323 of the Excise Tax Act.
14 [2001] G.S.T.C. 91 (T.C.C. [Informal Procedure]).
15 [2003] G.S.T.C. 103 (T.C.C. [Informal Procedure]).
16 [2002] 2 S.C.R. 559 (S.C.C.).
17 See the Comment [by David Sherman -- ed.] following Cochran v. R. (2001), [2002] G.S.T.C. 2 (T.C.C. [General Procedure]), and the Comments following Schuster and Maillé.
[10] With respect, I think that what was stated in Gaucher is a principle of broad application and ordinary fairness and it applies equally to assessments of director's liability under section 227.1 of the ITA and section 323 of the ETA.
[11] The distinction drawn in Schuster and Maillé, supra, between section 160 of the ITA assessment and section 227.1 of the ITA or section 323 of the ETA assessments does not, in my view, withstand scrutiny. It is based on the argument that a director who does not cause the company to file an objection cannot subsequently contest the corporate assessment when he or she is assessed as a director. This is in my view an erroneous rationalization of a refusal to follow the Federal Court of Appeal's judgment in Gaucher.
[12] There are, as Mr. Sherman notes in his editorial comment, many reasons why the company might not have filed an objection - lack of funds, insolvency or disagreement among the directors come to mind. Also, the directors may not have been permitted to object if the company was bankrupt. I note for example that Garon C.J. (as he then was) in Schuster relied on a transfer of property case, Schafer v. The Queen, [1998] G.S.T.C. 7. Schafer had been explicitly overruled by Gaucher. More recently, Miller J. held that a director who was assessed derivatively under section 323 of the ETA could challenge the underlying corporate assessment in Kern v. R., [2005] G.S.T.C. 101. As Miller J. noted in Kern, a company headed for bankruptcy or insolvency is not likely to object to an assessment.
[13] It is also noteworthy that Justice Bowie in Zaborniak did not base his conclusion on the distinction drawn in Schuster and Maillé. He based it solely on his interpretation of the words in section 323 of the ETA.
[14] I do not think that the reasoning in Gaucher can be distinguished in a director's liability case. The principle established in Gaucher is that a person who is not a party to an assessment and who is derivatively assessed is not bound by the failure of the primary obligor to contest its assessment. This principle is consistent with common sense and ordinary fairness. I do not think that the salutary rule stated in Gaucher should be eroded or whittled away by flawed distinctions. To extrapolate into the Gaucher principle a requirement that in every case we enquire into why the primary assessment was not challenged, or whether the derivatively assessed directors should have or could have influenced the primary taxpayer to contest its assessment would so dilute the principle as to make it meaningless and unworkable. Once we eliminate the fallacious distinction drawn in Schuster and Maillé between directors' liability cases and property transfer cases we are left with the full force of the Gaucher authority applying to all derivative assessment cases.
[15] I have, therefore, concluded that the appellants, in disputing their derivative assessments, may challenge the underlying assessments against Resici.
[16] Resici was incorporated in 1996 and carried on the business of concrete forming in the construction industry. Three other companies were incorporated, two of which, 121 and 132, are relevant to this case. Their function was to employ the persons who worked in the contract forming business of the appellant. It is not suggested that the employer companies or the legal relationships with them were shams. The employer companies paid the employees and invoiced Resici.
[17] The Minister issued assessments against Resici as well as 121 and 132. The internal documents of the CRA described these assessments as "joint" assessments or "joint and several". The use of these terms in the circumstances of these cases is inappropriate. The concept of joint and several liability is found in the ITA only in other circumstances. Persons assessed derivatively under section 160 or 227.1 of the ITA or section 323 of the ETA are said to be jointly and severally liable with the principal debtor but that is not what is meant here. Either Resici or the employer companies were obliged to remit the payroll deductions but not both. Indeed Mr. Brannen, the official of CRA, agreed on cross-examination that "a joint assessment in these circumstances is not supportable under the Income Tax Act".
[18] At all events, the Crown's position is that the employer companies were agents of Resici and the failure of the employer companies to remit was the failure of Resici. I have concluded that the employer companies were not agents of Resici and I do so for several reasons. As a general principle to establish that one corporation is an agent of another person or an agent of its shareholders is a difficult undertaking. In general, the separate identity of corporations is respected as is the separateness of their businesses. See for example Odhams Press v. Cook, [1938] 4 All E.R. 545 at 551; Richardson v. M.N.R., 2 DTC 531, [1941] Ex. C.R. 136.
[19] In Denison Mines Ltd. v. Minister of National Revenue [1971] F.C. 295; aff'd on a different point [1972] F.C. 1324, aff'd [1976] S.C.R., Cattanach J. dealt with an allegation that a subsidiary was an agent of the parent company at pages 320 - 322:
Briefly the appellant's position is that the business of Con-Ell was in reality the business of the appellant and in contradistinction thereof the position of the Minister rests on the case of Salomon v. Salomon, [1897] A.C. 22, that there are two separate legal entities and the losses of one are not the losses of the other.
It is well settled that the mere fact that a person holds all the shares in a company does not make the business carried out by that company the shareholder's business, nor does it make that company the shareholder's agent for carrying on the business. However it is conceivable that there may be an arrangement between the shareholder and the company which will constitute the company the shareholder's agent for the purpose of carrying on the business and so make the business that of the shareholder. It is immaterial that the shareholder is itself a limited company.
The question therefore is whether in the circumstances of the present appeal such an arrangement exists. The basis of agency is a contractual relationship either express or implied. There was no express arrangement here and whether one may be implied is a question of fact based on the circumstances of each particular case.
Counsel for the appellant relied strongly on Smith Stone and Knight Ltd. v. Birmingham Corporation, [1939] 4 All E.R. 116. In this case the plaintiff company was the sole shareholder of a subsidiary company. The premises occupied by the subsidiary were expropriated by the defendant. The parent company sought compensation for business disturbance on the ground that the subsidiary's business was the parent's business. The claim was contested on the ground that the proper claimant was the subsidiary, that being a separate entity.
Atkinson, J. reviewed the authorities and found six points that were relevant for the determination of the question: Who was really carrying on the business? Those points were:
1. Were the profits treated as the profits of the parent company? Here there were no profits but losses.
2. Were the persons conducting the business appointed by the parent company?
3. Was the parent company the head and brain of the trading venture?
4. Did the parent company govern the adventure, decide what should be done and what capital should be embarked on the venture?
5. Did the parent company make the profits by its skill and direction? In the present appeal were the losses incurred by the appellant's direction? and
6. Was the parent company in effectual and constant control.
On the evidence in the present appeal each of the six questions so posed must be answered in the affirmative but in my opinion this is not conclusive. The points outlined by Atkinson, J. are but indicia helpful in determining the question. Other factors may be present which point to a different conclusion.
Later Atkinson, J. said at page 121:
... Indeed, if ever one company can be said to be the agent or employee, or tool ... of another, I think the (subsidiary) company was in this case a legal entity, because that is all it was. There was nothing to prevent the claimants at any moment saying: "We will carry on this business in our own name".
(Brackets are mine.)
Here the very reason for the incorporation of Con-Ell was predicated on the legal advice that the appellant would be in breach of the conditions of the trust deed if it conducted the housing operation on its own account. It is a principle of agency that a person cannot do by an agent what he cannot do himself.
Here Con-Ell acted as principal. It contracted with the building contractor. It obtained bank loans. Because the subsidiary was without a backlog of security the bank insisted upon a guarantee of the subsidiary's indebtedness by the appellant, but it was Con-Ell that contracted the debt as principal and the appellant acted as guarantor only and the appellant also acted as guarantor of Con-Ell to Central Mortgage and Housing Corporation with which corporation Con-Ell contracted directly. Therefore the appellant did not hold out Con-Ell as its agent, nor did Con-Ell purport to act on behalf of a principal undisclosed or otherwise.
Con-Ell was carrying on business and it is important to bear in mind that limited companies that carry on businesses are separate taxable persons and the profits of their respective businesses are separate taxable profits whether or not one be the subsidiary of the other. Any attempt to erode this principle must be based upon clear and unequivocable facts leading to the irrebuttable conclusion that one legal entity is acting as the agent of another and that legal entity is really doing the business of the other and not its own at all.
In my view the facts in the present appeal do not justify such a conclusion for the reasons I have expressed.
[20] It should be noted that the sole shareholder of 121 and 132 was Lisa Piccin, not Resici. Lisa Piccin was also the sole director. None of the six conditions mentioned by Atkinson J. are present in this case. In Denison, Cattanach J. held that despite the presence of all six of the conditions set out by Atkinson J. Con-Ell was not an agent of Denison Mines Ltd. As stated by both Mr. Irving, Resici's lawyer, and Mr. Resnick, Resici's chartered accountant, it was common in the construction industry to incorporate separate payroll companies. There were several business reasons for doing so. One was to insulate the construction company and its assets from claims by workers who had accidents on the job. The other had to do with obligations under the Workers Compensation Act. It appears that if an employer has a certain number of accidents, the employer's obligations under the Workers' Compensation Act increase. Therefore the practice was to incorporate a separate payroll company when the limit was approaching. This was probably the reason for incorporating 132 in a subsequent year.
[21] Mr. Resnick, Resici's chartered accountant, testified that the payroll companies were treated separately for accounting purposes. I do not think it is necessary to set out in detail the way in which the accounts were kept. 121 or 132 billed Resici for the labour services it provided. This was treated as a labour cost by Resici. 121 and 132 were carrying on separate businesses of supplying labour to Resici. It would require far more compelling evidence than I have seen to hold that 121 and 132 were agents of Resici. It is, I think, sufficient on this aspect of the case to say that there is simply no evidentiary basis upon which I can find that they were agents of Resici. It follows that the obligation to withhold and remit payroll deductions was that of 121 and 132 and not of Resici. This case is very similar to Elias v. The Queen, 2002 DTC 1293. The facts are:
[11] It is of course open to the appellant to challenge the assessments of Gold Corp., in light of Gaucher v. R., [2001] 1 C.T.C. 125, and that is what he has done.
[12] The assessments against Gold Corp. and hence the derivative assessment against the appellant are premised on the assumption that Gold Corp. was paying salary, wages or remuneration to the employees of GSR within the meaning of section 153 of the Income Tax Act. That assumption is wrong. Gold Corp. advanced funds to GSR who paid GSR's employees. No principle of interpretation permits or requires that I extend the meaning of the words of subsection 153(1)
Every person paying at any time in a taxation year
(a) salary, wages or other remuneration
...
to a person who advances funds to the true payor. The evidence is clear that the person paying the salary wages or remuneration to GSR employees was GSR not Gold Corp. even though it received the funds from Gold Corp.
[13] Some point was made of the fact that Gold Corp. when the remittances were made to Revenue Canada paid them directly. I do not think this makes Gold Corp. the person who pays the salary, wages or remuneration. It was merely satisfying, on behalf of GSR, GSR's obligation to Revenue Canada. GSR was a viable operating company. It was not a sham, nor was it an agent of Gold Corp. nor was Gold Corp. an agent of GSR. They were separate corporate entities, with separate legal existences.
[14] I conclude therefore that Gold Corp. never had an obligation to pay the remittances to Revenue Canada under subsection 153(1). Accordingly subsections 227(9), (9.1), (9.2), (9.4) and (10.1) referred to by counsel for the respondent have no application to Gold Corp.
[15] It follows therefore that the assessments against Gold Corp. are wrong and must fall insofar as they form the basis of the assessment against the appellant. The appellant's assessment must as a consequence fall as well. As between Gold Corp. and the Minister of National Revenue, Gold Corp.'s assessments may well be conclusive if it has not objected. I make no finding on this point. Gold Corp. is not a party to this action. There was no failure on the part of Gold Corp. as envisaged by subsection 227.1(1) and so the foundation of the appellant's liability under that subsection disappears.
[22] Therefore, the assessments against Jack and Sandro under s. 227.1 of the ITA for the amounts assessed against Resici for unremitted payroll deductions must be vacated because the underlying assessments against Resici were wrong.
[23] The next issue is whether Jack was a director of Resici. He submitted a written resignation on July 3, 1997, two years before he was assessed and the resignation was accepted. There is no question of the authenticity of the resignation or of its legal effect. Jack was not a de jure director after July 3, 1997. The assessments against him are premised on the view that he was a director. The Crown argues that he was a de facto director.
[24] In Dirienzo v. The Queen, 2000 DTC 2230, I used the expression de facto director in connection with the sole owner and controller of a construction company. In that judgment I held that a 20 year old nephew of the owner of the company was not liable as a director under section 227.1 of the ITA because he exercised no responsibilities as director and was powerless to do anything. I referred to a decision of the Federal Court of Appeal in Wheeliker v. R. [1999] 2 C.T.C. 395. The majority decision was rendered by Noël J. on behalf of himself and Desjardins J. There was a dissent by Létourneau J.. Noël J. referred at length to the Nova Scotia Companies Act. Paragraphs 7 to 9 of his judgment read:
7 The ITA does not define "director" either for the purposes of the ITA as a whole or for the purposes of section 227.1. As this Court held in Kalef , it is therefore appropriate to look to the Corporation's incorporating legislation for guidance as to who is a "director" for the purposes of section 227.1. Under paragraph 2(1)(f) of the Act,
"director" includes any person occupying the position of director by whatever name called; [emphasis added]
I agree with the conclusion of the Tax Court judge that the words "occupying the position of director by whatever name called" brings within the definition a director irrespective of how this position may be designated. This is consistent with the approach of the Chancery Division in Lo-Line Electric Motors Ltd., Re6 where the Court interpreted the identical definition under the U.K. Companies Act, 1985. According to the Court:7
...the words "by whatever named called" show that the subsection is dealing with nomenclature; for example where the company's articles provide that the conduct of the company is committed to "governors" or "managers."
8 As section 2(1)(f) speaks simply to nomenclature and is inclusive, it is therefore necessary look to the provisions of the Act to determine the legislative intent with respect to those who have under the law the status of "director."
9 Before turning to the relevant provisions, I note that the Act nowhere speaks of de facto or de jure directors. Rather it uses the term director in various contexts, some of which suggest a reference to a director who is qualified to act as such under the Act, and others which refer to a person who in fact acts as such without being so qualified. The question to be answered is whether the word director only connotes a person qualified to act as such under the Act.
Paragraphs 16 to 20 read:
16 It is therefore apparent that the Act recognizes that persons will act as directors without being qualified to do so, and that the legislator has, despite this absence of qualification, chosen to validate those acts in the circumstances that we have seen. The question then becomes whether this statutory recognition of specified acts by persons who act as directors despite their lack of qualification also has the effect of making them directors under the Act.
17 In my view, section 95 of the Act and the relevant sections of the Articles would be rendered meaningless if the Act was construed as granting the status of director to those who are not qualified. A director is one who meets the requirements imposed under the Act including those prescribed by section 95. Indeed, a penalty is imposed on those who act as director without meeting those requirements. It would be odd if those who breach the Act by acting as directors while not qualified thereunder would nevertheless have the status of director under the Act. As a matter of legislative intent, it seems unavoidable that only those who meet the requirements prescribed by the Act, are directors under the Act.
18 In my view, the Act cannot be construed as giving those acting as directors without the requisite qualifications the status of director, nor can it be said that the common law has provided such individuals this status. What the courts have done over the years, however, is devise remedies to assist third parties who deal with persons who act as directors or who are held out by the company as directors although they lack the required qualification or authority.
19 As I understand it, one principle underlying these common law remedies is that a person who has not obtained the requisite qualifications, is prevented from pleading this failure in order to escape liability attaching to a director. As held by Richards J.A. in MacDonald v. Drake,
I cannot assent to the contention that a director, who, with his consent, has been elected and has acted as a director, should, merely because he was not qualified to hold the office, escape liability that he would have incurred if he had been qualified. The true principle seems to be that a man cannot take advantage of his own wrong.12
It being recognized in this instance that the respondents acted as directors, in conformity with the will of the shareholders, I see no reason why they should be allowed to assert their lack of qualification to escape the liability cast upon directors by virtue of section 227.1 of the ITA.
20 Thus, while I would agree with the conclusion of the Tax Court judge that those acting as directors without having the requisite qualifications are not directors under the Act, I do not believe that the respondents can raise this lack of qualification as a defence to their liability under subsection 227.1(1) of the ITA.
[25] I think the same conclusion could be reached in the case of a corporation formed under the Ontario Business Corporations Act, ("OBCA") as was Resici. I do not, however, think the facts here justify the same conclusion. After Jack resigned as director he never held himself out as a director nor did he exercise the sort of control over the corporation's affairs that one would expect of a director. Jack signed many contracts as General Manager but never as director. In Canada Revenue Agency directive RCD-95-12 relating to director's liability the CRA makes the following statement:
(1) Caution should be exercised prior to assessing an alleged "de facto" director. It is not sufficient that a person be signing cheques for the corporation for him or her to be considered a "de facto" director. The general rule is that it is not appropriate to assess an alleged "de facto" director if there are legally appointed directors in office at the relevant times. The assessment of a de facto director should be considered only in cases where a person is representing himself or herself as a director. There should be written evidence of such behavior available.
[26] Such statements are not binding but they represent what I believe to be an administrative approach that is consistent with the law. I have concluded that Jack was not a director of Resici, either de facto or de jure.
[27] I think it will be apparent that one must be careful about the use of the expres