When Karla Penate attempted to collect on money owed to her company for roofing work, she didn’t get cash. Instead, she got sexual demands from male contractors for everything from a French kiss to a date to marriage.
Her efforts to make her brother the public face of the company to avoid that sexual harassment then collided with racism on the part of some customers, who were disinclined to give roofing work to a racialized man.
That blatant sexual harassment and racism punctured her young Vancouver-area business, saddling her with invoices that could not be collected and leaving an unpaid tax liability of $100,000 hanging over her head.
But that discrimination is also at the heart of a victory that Ms. Penate won against the Canada Revenue Agency last week, in which she successfully argued that the sexism and racism with which she contended meant that she should not be held personally liable for the GST/HST that her roofing company, Delphina Enterprises Ltd., had failed to pay.
In a Tax Court of Canada decision published July 20, Justice Diane Campbell ruled that Ms. Penate and her office manager, Lupe Sibrian, “attempted to deal with and circumvent these issues head on,” even though they ultimately failed, meeting the due diligence standard needed to absolve a director of personal liability for unpaid taxes.
The decision creates a precedent for other tax cases where sexual, racial or other discrimination are proven to be a central cause for an unpaid tax bill, and could have wider application in cases involving a director’s liabilities beyond tax law.
Ms. Penate savoured her win, a victory made all the sweeter since the case was heard on Feb. 10, the 27th anniversary of her arrival in Canada from El Salvador. “It’s been an eight-year battle,” she said in an interview.
“We feel like we were believed,” added Ms. Sibrian, who helped Ms. Penate to argue the case.
The decision by Justice Campbell orders the CRA to reassess Ms. Penate’s tax liability. Given that she was successful in establishing a due-diligence defence, that liability is certain to be reduced to zero, said Rob Kreklewetz, a tax lawyer specializing in indirect taxes such as the GST/HST, and a partner at Millar Kreklewetz LLP in Toronto.
A director won’t be held liable when they can demonstrate that they exercised due diligence, “the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances,” according to the Excise Tax Act.
Mr. Kreklewetz said he is not aware of a previous case in which sexual harassment has been the basis of a successful due-diligence defence. But the ruling in Ms. Penate’s favour now establishes binding precedent in the federal tax court, he said, adding that future applicants would still need to prove that they were the target of discrimination, and that it caused the tax liability. Beyond the tax court, lawyers could use the decision in broader matters of director liability, he said, but the decision would not be a binding precedent.
Ms. Penate, now 40, was still in her late 20s when she founded Delphina in 2008, a step she took after discovering an affinity for roofing work through helping out a friend. She defied those who told her it was not women’s work. “I don’t like to be told what not to do,” she said.
As described in the court ruling, sexism in the male-dominated industry was a constant. Her company acted as a subcontractor, being paid by a general contractor who dealt with the customer. But when the time came for those contractors to pay, Ms. Penate instead often received crude sexual propositions.
“Ms. Penate was forced to deal with harassment from some of the contractors, who withheld payment from the Company for a roofing job the Company had completed as a subtrade, while demanding that she meet sexual favours ranging from a kiss, to a date, to a marriage proposal,” Justice Campbell wrote.
That discrimination met the test of “exceptional circumstances and facts” that allow a director of a company to avoid personal liability, even when they continued operations knowing that it was likely that their company would be unable to pay its tax bill.
The problems with collecting on invoices eventually meant that Delphina started in 2010 to miss its required payments to the federal government for GST/HST, a debt that rose to around $50,000, Ms. Penate said. By the time of the court case, interest and penalties had pushed the total close to $100,000, she said.
Even though Delphina had not been paid, it was still required to remit sales tax to Ottawa. That’s because a company creates its tax liability when it issues an invoice, not when that invoice is paid.
Because of those continuing sexual overtures, Ms. Penate decided she would no longer visit work locations to prepare quotes and would instead hand that part of the job over to her brother, Miguel Penate. The company even had a brochure created in which Mr. Penate was in the foreground and Ms. Penate, the owner of the company, stood in the background.
However, that strategy proved short-lived, because of racist pushback from homeowners. Delphina then hired a white man to prepare quotes in the hopes of circumventing the racist headwinds it was encountering.
Even so, Ms. Penate said, racism continued to be a continuing problem for her company, which employed men and women, some of whom were people of colour. That diversity prompted a backlash from some potential customers. “They’d say, ‘Don’t bring those Mexicans on our roof,‘ ” she said in the interview, adding that the customers in question had no idea of the actual ethnicities of Delphina’s workers.
Eight years after the start of the tax dispute, Ms. Penate is still active in the construction business, as an estimator for a painting company. (Delphina, which she sold to her brother in 2013, was forced to close in 2015 because of the tax issue.)
Both Ms. Penate and Ms. Sibrian are pleased by their court victory and the legal precedent it has set. But they say that the construction industry needs to take action, including by setting up a committee that can hear complaints and help to root out sexist and racist behaviours.
“I think it’s important that there should be some sort of body that can support women,” Ms. Sibrian said.
The CRA said it was unable to comment, citing confidentiality restrictions under the Excise Tax Act.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.