Category Archives: Directors’ Liability

Chell v The Queen, 2013 TCC 29

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Director Liability for Failure to Remit: When is a Resignation NOT Enough?

Chell v The Queen, 2013 TCC 29

The main issue was whether a former director of two corporations was liable under the ETA and ITA for unremitted amounts, turning on the question of whether the person was a director within two years preceding the assessment for director’s liability. Another issue was whether as a director he had acted so as to have access to the due diligence defense.

The Court stated that both de facto and de jure directors can be liable under the ITA and ETA. In this case, though the appellant ceased to be a de jure director by resigning in accordance with the applicable corporate law statutes, he continued to act after the resignation such that third parties would have reasonably believed that he was continuing as a director.  The Court held that he was a de factor director within two years of the assessment, and therefore liable.  The Court also held that as a director he had taken no positive steps to make sure that the remittances were made, and stated that simply delegating to an employee without adequate supervision was not sufficiently diligent.

FACTS

The appellant was the director of two companies who had failed to remit payroll  deductions and GST as required.  He was the last to resign as a director on January 11, 2006, but continued to act on behalf of the companies as President and CEO, and argued that he was not responsible because the assessment came more than 2 years after he ceased being a director.

ANALYSIS

Under the Income Tax Act (subsection 227.1(1)) and the Excise Tax Act (subsection 323(1)) a director may be liable for a corporation’s failure to remit certain amounts collected on behalf of the crow, but the liability cannot be enforced if the person ceases to be a director more than two years after the individual’s resignation as a director (ITA s 227.1(4) and ETA s 323(5)).

Neither the ETA or ITA define when a person cease to be a director, meaning that the corporate law of the relevant jurisdiction must be looked at as determinative (Aujla v Canada, 2008 FCA 304, paras 23-25).  A director may be a de jure or a de facto  director for purposes of director’s liability under the ETA and ITA (Moiser v R, [2001] GSTC 124 (TCC) at para 23).  A de jure director is one who has been appointed pursuant to the applicable corporate law.  A de facto director can be either (1) “those who are ostensibly duly elected but who may lack some qualification under the relevant company law, and [2] those who simply assume the role of director without any pretenses of legal qualification”.

Both de facto and de jure directors are liable if they were such within two years of the assessment, unless they demonstrate that they exercised due diligence as a defiance under the ITA or the ETA.

A person becomes and ceases to be a de jure director according to the corporate law of the relevant jurisdiction. In this case, both in Delaware and Alberta (two relevant jurisdictions) a director resigns by giving notice in writing, which the appellant here did on January 11, 2006.

The appellant continued to be intimately involved with the company, including authorizing the sale of assets which only a director could have done.  “de facto directorships ‘must be considered to endure at least as long as [the] person manages or supervises the management of the business and affairs of the corporation in question” (see Bremner v The Queen, 2009 FCA 146).  The court held that the appellant continued to act as de facto director at least until June 2006.  The court also held that even after the legal resignation, the actions of the appellant would suggest to a third party that he was still a director of the corporation.  This is supported by the fact that the functions of the appellant didn’t change after his resignation, thus he attempted to fulfill those functions – “because the appellant’s behaviour remained the same following his legal resignation, a third party would not suspect that his status had changed” (para 31).  The impression left by the appellant that he was a director convinced the court that he continued to be a de facto director until at least October 2006 (he attempted to conclude a long term contract with a prospective client).

The appellant’s behaviour towards the CRA also didn’t’ change after his legal resignation, and he never indicated to the CRA that he was no longer a director until August 2007. “the appellant resigned occultly, yet he continued to cooperate with the CRA as if his status had not changed […] creating the impression that he was still an active director of both corporations” (para 33).

Given that the appellant was a de facto director within two years of the assessment, he is prima facie liable unless he can demonstrate acting diligently to prevent the failures to remit (para 34).

An objective standard must be employed to determine whether a director has satisfied the conditions of the due diligence defense under subsection 227.1(3) of the ITA and subsection 323(5) of the ETA (The Queen v Buckingham, 2011 FCA 142 – “a person who is appointed as a director must carry out the duties of that function on an active basis and will not be allowed to defend a claim for malfeasance in the discharge of his or her duties by relying on his or her own inaction[, but] an objective standard does not, however, entail that the particular circumstances of a director are to be ignored.”  The consideration is “what a reasonable person would have done in the circumstances of the individual under assessment.”

The director hast point to steps taken to prevent the failure to remit, thus “turned his attention to the remittances, and then exercises due care, diligence and skill with a view of preventing failure.”(para 37). There is no evidence that the director took any positive steps to prevent the failure to remit, but used the remittances to fund the corporation’s failing business – he didn’t review the company’s books, review the pattern of remittances, and cannot discharge the statutory obligation by delegating remittance functions to an employee without any oversight on his part (para 39)

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

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Martin v The Queen, 2012 TCC 239

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Directors’ Liability for Unremitted GST/HST and for Payroll Taxes – Due Diligence Defence

Martin v The Queen, 2012 TCC 239

At issue was whether the Taxpayer has exercised the of care, diligence and skill to prevent the failure to remit the net tax and payroll deduction amounts that a reasonably prudent person would have exercised in comparable circumstances, and thus whether he was liable under subsection 323(1) of the Excise Tax Act (ETA) with respect to one of the corporations’ failure to remit net tax and under section 223 of the Income Tax Act (ITA) with respect to payroll deductions and employer contributions payable by the corporation he was a director of, plus interest and penalties.

The Court partially allowed the appeal. For the 2001 tax year, the court held that the taxpayer was concerned with remitting the relevant amounts, and

had turned his attention to the required remittances, and did in these circumstances exercise the care, diligence and skill that a reasonably prudent person would have exercised in similar circumstances for the 2001 year.  HOWEVER, the court held that for the 2002 tax year, the taxpayer was no longer directing his efforts towards avoidances of failures to remit.

FACTS

The Taxpayer was a shareholder and director for the relevant corporations as well as  for more than a dozen other related corporations. The corporations ran into financial difficulties, and the taxpayer became concerned with the corporations’ ability to pay its GST/HST and payroll taxes.  The Taxpayer hired an accountant as CFO, and this CFO consulted with the corporation’s solicitors, agreeing to consult a bankruptcy expert.  The taxpayer and these experts were in communication with the CRA regarding the difficulties and their concern as to the taxes due.

The internal dealings among the related corporations were subject to GST/HST as the corporations had not elected under section 156 of the ETA to have supplies made among them treated as having been made for nil consideration.  The corporation was also unable to reduce its GST/HST owing by reducing its invoices amounts by the amounts charged but unpaid, pursuant to subsection 232(2), but found out about this provision outside the 4 year period allowed.  If these provisions were properly used, the result would be that the corporation has in fact overpaid payroll taxes and GS/HST by $160,000.00.

ANALYSIS

The Court began by reviewing the liability of directors under ETA s 323 and ITA section 227.1.

With regard to the question of whether the taxpayer exercised the degree of care, diligence and skill to prevent the failure to remit that a reasonably prudent person would have exercised in comparable circumstances, the Court referred to two decision of the FCA being Balthazard v. Canada, 2011 FCA 331, and Canada v. Buckingham, 2011 FCA 142.  In Balthazard the FCA summarized the legal framework as

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 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 [sic] 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.

The court held that the financial difficulties of the corporation were somewhat unforeseeable, and that when difficulties arose the taxpayer was concerned with paying taxes first.  He and his experts were of the view that the GST/HST would be a wash but, though not wrong, because the group of companies were not a closely related group of companies as defined for GST/HST purposes and therefore could not benefit from subsection 231(1) of the ETA, and because no bad debt was available between the related companies, and the companies could not benefit from a reduction with respect to unpaid invoiced under subsection 232(2) of the ETA, the corporations were left with no recourse.

The Court noted two other things:

  • At the time, this was only 10 years after the GST/HST regime was introduced, and it was not surprising that all its details were not known;
  • The corporations had good history with the CRA and were in communication with them, but the CRA did not inform them of the relief available under the legislation when the corporations and the CRA met to discuss potential problems.

The Court, after referring to the overpayment if the relief provisions available had been used, partially granted the appeal.

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

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