Category Archives: 227.1(1)

De Jure versus De Facto Directors of Corporations

Download PDF

De Jure versus De Facto Directors of Corporations

MacDonald v The Queen, 2014 TCC 308

The Appellant was assessed under the directors’ liability provisions of the Income Tax Act (Section 227.1) and Excise Tax Act (Section 323) to be liable for a corporation’s tax debts.

The Appellant argued that he never consented to be a director and never held himself out to be a director of the corporation, or in the alternative exercised due diligence, and therefore not liable for the corporation’s debts.


For the purpose of the directors’ liability provisions under the ITA and the ETA a “director” is either a de jure or a de facto director: Mosier v. R., [2001] G.S.T.C. 124.

De Jure Director

A de jure director is a person who has been appointed as a director under the appropriate corporate statute.  Therefore one must look to the governing corporate statute under which the corporation was created or continued.

The public registry of directors only creates a rebuttable presumption that a person so listed is de jure director.  This presumption may be overcome using evidence to the contrary, including evidence that the person never consented to be a director.

A person who was not aware they were a director and never consented to be a director is not a de jure director: Lau v. R., [2003] G.S.T.C. 1; Hay v. Canada, 2004 TCC 51.

In this case, the person did not know he was a director and did not consent to act as a director.  Also, the corporate process required to appoint a director was not followed, and no resolution was passed.

De Factor Director

A de facto director may be either (I) a person who is ostensibly duly elected but lacks some qualification under the relevant corporate statute, or (ii) a person who simply assumed the role of director without any pretense of legal qualification.

The FCA in Wheeliker v. R., [1999] 2 C.T.C. 395, held that de facto directors may be liable even without a valid appointment.  But, de facto director findings are limited to persons who hold themselves out as directors: Scavuzzo v. R., [2005] G.S.T.C. 199.

Generally, it is not appropriate to assess a person as a de facto director where “there are legally appointed directors in office at the relevant time” (para 40), and should only be based on a person holding himself out as  director based on written evidence of such behaviour (para 40). [NOTE: but see decisions in McDonald v The Queen, 2014 TCC 315; Hartrell v The Queen, 2006 TCC 480, aff’d 2008 FCA 59; where third party representation as director is not such an essential factor that its presence or absence would be conclusive]

Where a person “did not believe he is a director and never thought he had any authority to advise, influence, or control the management or director of the company”, that person should not be considered a de facto director: Perricelli v. R., 2002 G.T.C. 244. Also, steps including “steps taken to satisfy the requirements of the Excise Tax Act such as the preparation of invoices, meeting with the auditor, hiring a lawyer and signing cheques were not in themselves acts of a director”: Hay v. Canada, 2004 TCC 51.  The role the person plays cannot be limited or inconsistent with that of a director: Mikloski v. R., 2004 TCC 253.

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

If you like this website, please share it with others.

Back To Top OR Home

Director Liability Standard – “care, diligence and skill”

Download PDF

Director Liability Standard – “care, diligence and skill

Maddin v The Queen 2014 TCC 277

The facts in this case are all too common – a business transitions from one company to another in paper only, and fails to do that properly – the business is carried on without due regard to regulatory obligations and controls.  Finally, the chickens come home to roost and the CRA assessed directors for failure to deduct and/or remit.

Justice Bocock reviews the law as to the standard of “care, diligence, and skill” expected of a corporate director under the Income Tax Act and its director liability provisions (s 227.1), as well as similar provisions in the Canada Pension Plan (s 21.1) and the Employment Insurance Act (s 83) that incorporate the ITA due diligence defense by reference.

The decision in Buckingham v R, 2011 FCA 142, settled the debate as to the appropriate standard to be applied to directors – the objective standard is what is applicable.  The standard was summarized in Balthazard v R, 2011 FCA 331 at paragraph 32:

In Buckingham, this Court recently summarized the legal framework applicable to the care, diligence and skill defence under subsection 323(3), as follows:

a. The standard of care, skill and diligence required under subsection 323(3) of the Excise Tax Act is an objective standard as set out by the Supreme Court of Canada in Peoples Department Stores Inc.(Trustee of) v. Wise, 2004 SCC 68, [2004] 3 S.C.R. 461. This objective standard has set aside the common law principle that a director’s management of a corporation is to be judged according to his or her own personal skills, knowledge, abilities and capacities. However, an objective standard does not mean that a director’s particular circumstances are to be ignored. These circumstances must be taken into account, but must be considered against an objective “reasonably prudent person” standard.

b. The assessment of the director’s conduct, for the purposes of this objective standard, begins when it becomes apparent to the director, acting reasonably and with due care, diligence and skill, that the corporation is entering a period of financial difficulties.

c. In circumstances where a corporation is facing financial difficulties, it may be tempting to divert these Crown remittances in order to pay other creditors and thus ensure the continuity of the operations of the corporation. That is precisely the situation which section 323 of the Excise Tax Act seeks to avoid. The defence Page: 14 under subsection 323(3) of the Excise Tax Act must not be used to encourage such failures by allowing a care, diligence and skill defence for directors who finance the activities of their corporation with Crown monies, whether or not they expect to make good on these failures to remit at a later date.

d. Since the liability of directors in these respects is not absolute, it is possible for a corporation to fail to make remissions to the Crown without the joint and several, or solidary, liability of its directors being engaged.

e. What is required is that the directors establish that they were specifically concerned with the tax remittances and that they exercised their duty of care, diligence and skill with a view to preventing a failure by the corporation to remit the amounts at issue.

In short, directors have a dual obligation: (1) turn their minds to the issue of source deduction and their withholding, and (2) exercise due diligence to prevent the failure to remit the source deductions.  The TCC said that “the dual obligations are to be consistent, omnipresent and invariable; a creative or alternative business plan, no matter how plausibly economic or lucrative, which diverts or attempts to divert resources away from remitting Source Deductions to the Crown will end availability of the due diligence.” (Para 24).

– Sas Ansari, JD LLM PhD (exp)

If you like this website, please share with others and consider supporting us with a donation.

Back To Top OR Home