A topic of interest often overlooked is the resignation of a director. How does one ensure that a resignation will be recognized by the tax authorities ...
Incorporation protects a proprietor’s personal assets from lawsuits associated with the business such as for example a slip and fall on the premises of the business. Incorporating also protects a proprietor’s personal assets because under corporate law a corporation is a separate legal entity from its shareholder. A lawsuit action stemming from a corporation’s business will generally not access the shareholder’s assets but will only latch on to the assets of the corporation. One exception is where the shareholder personally guaranteed a debt of the corporation. A further exception is where the business was carried out through fraudulent means or was a front for criminal activities.
Another exception where the personal assets of a shareholder are not protected is where the shareholder acts as a director for the corporation and such corporation has failed to remit taxes and/or employee source deductions owing to the Federal and/or Provincial tax authorities. This is because directors are jointly and severally liable under the tax statutes administered by the provincial and federal tax authorities. Under the law one is a director if one is listed on the minute book and/or is registered with the Provincial or Federal government as a director. Such a director is referred to as a “de jure director”. A director also includes anyone including a shareholder who holds him or herself out to the world as a director. This is referred to as a “de facto director”. Note however that anyone can accept the position of a de jure or a de facto director. Employees or third parties can be nominated to act as directors or they can assume the role of directors by managing the corporation and holding themselves out as directors.
Directors of corporations which run into financial trouble are often advised to resign once the corporation starts having trouble making remittances to the government. This is because a director who has resigned two years prior to the mailing of a director liability assessment to him or her by the tax authority will not be liable for unpaid taxes and unpaid remittances. However simply handing in a resignation letter to the corporation or informing Corporate Services is not sufficient. A resignation for a director must comply with the incorporating legislation of the corporation. For example the Ontario Business Corporations Act holds that a director cannot resign unless there has been a first shareholders meeting. Assuming that a director has met the legal requirement of resignation he or she must take care to ensure that he or she is not deemed to be a de facto director by continuing to manage and run the corporate affairs as a director to the world.
Otherwise a de jure director who has properly resigned will be deemed to have continued as a de facto director without resignation and as such be held personally liable for the corporation’s failure to remit employee source deductions or pay taxes due.
A director whether de facto or de jure should be cognizant of the potential interest and penalties which continue to accumulate when objecting to a director’s liability assessment. In a 2010 case a director was held liable for interest and penalties of $630,000 which had accumulated while the director disputed the underlying corporation’s assessment of $100,000.
Incorporation is a good thing. Most individuals who incorporate do this to avoid subjecting their personal assets to risks associated with the business and to access the more favourable corporate tax regime. This is good but a shareholder who acts as a director or anyone acting as a director must at all times be cognizant of the director liability provisions contained in the tax statutes.