Canada: Recent cases on directors’ liability
09 October 2014
Posted by: Author: Bobby B. Solhi
Author: Bobby B. Solhi (TaxChambers LLP)
In the last few months, the TCC has heard no fewer than four cases before on directors’ liability under the ITA. This should come as no surprise, given the CRA’s aggressive campaign of tax audit, enforcement, and collection over the past several years.
A director’s liability for certain tax debts of a corporation is a topic that may—or rather should—come up in discussions with a client about the formation of a business, its reorganization, its wind-down, and/or its dissolution. This article highlights the decisions in Roitelman (2014 TCC 139), Bekesinski (2014 TCC 245), Gariepy (2014 TCC 254), and Qian (2013 TCC 386) as a reminder of the basic legal framework that determines a director’s liability and the legal defences that may be available. The taxpayers succeeded in all four cases.
Both the ITA and the ETA hold a director personally liable for certain tax debts of the corporation—for example, employee source deductions such as EI, CPP, GST/HST, and income tax amounts payable. These amounts, which the minister considers to be held in trust for Her Majesty and not the property of the corporate taxpayer, do not include a corporation’s part I tax payable.
As a practical matter, a director’s liability assessment under the ETA is more daunting for a client than an assessment under the ITA, mainly because the CRA will enforce a GST/HST assessment 90 days after it has been issued to the director even if the assessment has been disputed. The taxpayer must pay the outstanding amount or otherwise arrive at a payment agreement with the CRA and/or furnish security, whereas collection activity under the ITA is generally put on hold by the CRA until the disputed assessment is resolved.
There are three primary defences to a director’s liability assessment: (1) the minister’s failure to exhaust collection steps against the corporation; (2) due diligence; and (3) the director’s resignation.
- Attempts to collect from the corporation. In practice, the first defence is rarely pursued because the CRA is normally systematic in taking the necessary collection steps against the corporation.
- Due diligence. The due diligence defence is the one most commonly used to dispute a director’s liability assessment. A director will not be liable if he or she exercised the degree of care, diligence, and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. In Canada v. Buckingham (2011 FCA 142), the FCA clarified that the due diligence test is to be determined on an objective standard, with consideration given to the particular circumstances of the director.
The taxpayers in both Roitelman and Qian successfully argued the due diligence defence. Mr. Roitelman argued that while he was the sole director of the failed corporation, he relied on the company bookkeeper to make the necessary remittances during his frequent absences from the office. He demonstrated that he was diligent in his duties and had exercised the requisite care that a reasonable person would have exercised in similar circumstances. He was also able to establish that the outstanding remittances were attributable to the bookkeeper, who knowingly hid the CRA’s notices and assessment from him. When Mr. Roitelman discovered the transgressions, he increased the supervision of the bookkeeper to ensure compliance. The TCC held that the bookkeeper’s conduct was tantamount to fraud with an intention to deceive the director and was not attributable to simple oversights or mistakes by the director.
In Qian, the taxpayer was the corporation’s accountant and a minor shareholder and director of the company. She was not permitted to attend directors’ meetings and she lacked any authority as a director—that is, she was an outside director. The TCC found that Ms. Qian had consistently alerted the other directors to the tax liabilities of the corporation with no effect. Moreover, other directors had taken advantage of Ms. Qian because she had poor English-language skills at the time and lacked knowledge of Canadian rules governing the potential liability of directors. It was established that she was a director in name only and had performed her duties to the standard expected of someone in similar circumstances.
- Resignation. The resignation defence precludes the minister from pursuing an action or proceeding against a director if he or she ceased to be a director more than two years prior to the action. In Bekesinski, the taxpayer asserted that he had resigned as a director of the corporation on July 20, 2006 and that the minister’s assessment, issued on October 15, 2010, was outside the two-year limitation period. The minister argued that the taxpayer had not disclosed his resignation to the CRA or other creditors and that he had in fact backdated it. The main issue was the authenticity of the resignation document. On the evidence, Campbell J believed that the taxpayer had "probably” backdated the resignation. Nevertheless, the minister had failed to properly plead this point in her reply and was therefore precluded from introducing evidence that would have shown that the resignation was backdated. In the absence of that evidence, the taxpayer successfully established that he had resigned as a director to avoid liability. At the time of writing, Bekesinski had not been appealed.
In Gariepy, the taxpayers were directors in name only. The husband of one of the taxpayers provided instructions to their legal counsel to draft letters of resignation for the taxpayers. The documents were neither signed by the taxpayers nor filed with the corporate registrar. After 10 days of hearings, the court held that the resignations were valid. The evidence demonstrated a clear intention for the taxpayers to resign, and a reference to the Ontario Business Corporation Act specified that a resignation had to be written but did not need to be signed. Boyle J was critical of the CRA for pursuing the taxpayers as de jure directors when it could have pursued their husbands as de facto directors and, presumably, had a stronger case.
This article first appeared on ctf.ca.