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)

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