227.1(3) | Canadian Tax Decisions & Tax Law

Director Liability – Efficacy of Director Resignations

Canada v Chriss, 2016 FCA 236

At issue was whether two directors, being the spouses of shareholders, had effectively resigned as directors and therefore were not liable for unremitted payroll deductions and GST/HST amounts.

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FACTS

Both Appellants had indicated to their husbands (owners and executives of the corporations) that they desired to resign as directors. Resignations were drafted by solicitors but were not executed or dated.

The Tax Court of Canada had held that the draft resignations and verbal communications to the husbands of their tendering of resignations resulted in an effective resignation. Alternatively, even if not effective, a reasonable belief of resignation could be sufficient for a due diligence defence as the person would have lost control of the company.

ANALYSIS

The Federal Court of Appeal held that the TCC erred in concluding the appellants had resigned. Absent a communication of a written resignation to the corporation, a resignation is not effective. The Ontario Business Corporations Act, subsection 121(2), states that a resignation is effective at the time a written resignation is received by the corporation or at the time specified in the resignation (para 10). This is an important requirement as business decisions and legal liability depend on the identity of directors and the timing of their resignations. The status of a person as a corporate director must be capable of objective verification.

NOTE: The FCA held that unsigned resignation letters with no effective date in the solicitor’s file do not satisfy the preconditions of an effective resignation (para 15), and said at para 14 that “allowing anything less than the delivery of an executed and dated written resignation” is unacceptable. The FCA’s imposition of a signature requirement adds a non-existent element to the OBCA, held in other cases to be not to be required.

The FCA agreed that a director may rely on a reasonable belief of resignation as part of a due diligence defence. However, the standard is higher than that applied by the TCC. To be operational, a reasonable belief of resignation has to be close to the requirements of actual effective resignation. The courts cannot ignore the requirement that the resignation be received by the corporation or its solicitors.

The due diligence defence on the basis of a reasonable belief of resignation must be informed by the obligations the ITA imposes on directors. The FCA referred to the decision Canada v. Buckingham, 2011 FCA 142, in stating that the standard of care, skill, and diligence required by ITA subsection 227.1(3) is an objective standard as set out in Peoples Department Stores. The Income Tax Act is a contextual element in determining what a reasonably prudent person would have done in comparable circumstances (para 20). To succeed, a director has to convince the court that (i) s/he turned attention to the required remittances and (ii) exercised the duty of care, diligence, and skill with a view to preventing the corporation’s failure to remit the amounts. This standard is meant to discourage the appointment of passive directors so that a defence cannot be founded on inaction, indifference, or casual attitude towards duties by the director (para 21). A reasonable director would insist on being satisfied that the intention to resign has been effected (para 24).

Finally, the Appellants relied on Liddle v. Canada, 2011 FCA 159; Moriyama v. Canada, 2005 FCA 207, to argue that they had lost effective control of the corporation such that they should not be held liable. The FCA distinguished those cases by stating that those cases the directors were prevented from discharging their duties as a third party had intervened with the legal power to prevent the company from remitting funds. This was not the case at bar, the directors had the power to remit the funds in corporate hands.

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

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Degree of Care, Diligence and Skill – Corporate Directors

Maddin v The Queen, 2014 TCC 277

The sole issue was whether the appellant, in the role of director of a corporation, exercised the degree of care, diligence and skill required so as to avail himself of the due-diligence defense available against personal liability of a director for unremitted source deductions – subsection 227.1(3) Income Tax Act.

FACTS

The operating company, of which the appellant was the director, withheld source deductions but did not remit them to the Receiver General. The appellant attended the business premises 2-3 days per week, was familiar with tis business structure, banking information, operations, bookkeepers, and accounting software.

A previous bookkeeper was in constant communication with the Appellant, and this included communications about the lack of skills of the newly-hired bookkeeper who was to replace her. The appellant also had a history of payroll debts to the CRA and was previously convicted for failing to file returns.

ANALYSIS

The Court referred to ITA sections 153(1)(a) and 227.1(1), as well as the liability sections in the Canada Pension Plan and Employment Insurance Act, before referring to the leading case on the standard to be applied to directors in Buckingham v R, 2011 FCA 142.

In short:

[24] Conjunctively then, a director must focus upon the Source Deductions issue and exercise due diligence directed to preventing a failure to remit same. These 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 defence: Buckingham at paragraph 57. The circumstances (ie: the factual particularities) are to be considered, but viewed against the objective standard of a “reasonably prudent person”.

In this case the court reviewed the evidence and found that the taxpayer’s assertions and actions fell well short of the required standard.

NOTE: There were three directors of this corporation, with one having official management duties, but it is unclear whether they were also pursued so as to collect the tax debt.

– Sas Ansari, JD LLM PhD (exp)

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Income Tax – HST/GST – International Tax

Canadian Tax Decisions & Tax Law

Category Archives: 227.1(3)

Director Liability – Efficacy of Resignations – Sas Tullo

Degree of Care, dilligence and Skill – Corporate Directors

Income Tax – HST/GST – International Tax