Reproduced below with the permission from the Canadian Tax Foundation is my part of a presentation I made at the 2011 Ontario Tax Conference. Often a directorship is accepted without thought of the consequences. It is my hope that the article below provides the reader with the tax liability that can stem from accepting a directorship.
Introduction
This paper is divided into two
parts. The first part will address the
civil liability provisions of the statutes administered by the Federal and the
Ontario Ministry of Revenue. The second
part will address the criminal liability provisions of the Income Tax Act[1]
and the Criminal Code of Canada[2].
The failure of a corporation to
deduct, withhold taxes or fail to remit source deductions under the Income Tax Act[3] (“ITA”), the Excise Tax Act[4] (“ETA”), the Employment Insurance Act[5] , the Canada Pension Plan Act[6] and
the Ontario Retail Sales Tax Act[7] (“RSTA”) will subject its directors to
personal liability for the unpaid and unremitted amounts. An officer of the corporation or anyone who
manages the corporation and holds him or herself out as a director will be
subject to the director liability provisions as mentioned in the aforementioned
statutes. Appendix A provides an overview of the various
provisions which will trigger the charging provisions. The civil liability part of the paper will
look at the recent case law challenging a director liability assessment.[8]
The aforementioned statutes including
the Ontario Employer
Health Tax Act[9] and the Ontario Corporations Tax Act[10]also
contain criminal liability provisions which can subject a director, officer or
agent in addition to the civil liability provisions also to a fine and/or
imprisonment.
Part I
Civil Liability
Under the charging director’s liability
provision of the aforementioned statutes, a director is jointly and severally
liable with the corporation. Generally
when Canada Revenue Agency or the Ontario Ministry of Revenue assesses a
director under the director liability provision it is usually when it is proven
that the corporation has no funds to pay the amount assessed. However in Seng Chin Siow (2011 TCC 301) the
Tax Court held that an assessment against a corporation was not a pre-condition
to proceed against a director.
A
director facing a director liability assessment will also be liable for
interest and penalties associated with the unpaid amounts. In Zen v. The Queen[11] the 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.[12]
Although the triggering of
the civil liability provision of the ITA, the ETA, the RSTA differ on how they
are triggered, the charging provisions are remarkably similar and as such an
analysis of the defences available to a director analyzed here are applicable
to the charging provisions of all three statutes. Please see Appendix B for a
reproduction of these sections. The
analysis is also applicable to the Employment Insurance Act and the Canada
Pension Plan Act as these statutes import the civil charging provision of the
ITA.[13]
Challenging the assessment
When assessed under subsection
227.1(1) of the ITA, subsection 323(1) of the ETA and subsection 43(1) of the
RSTA a director can challenge the assessment
if the director ceased to be a director two years or more from the date the
assessment was mailed to him or her.[14] A director will also not be liable if the
writ of execution was not filed on a timely basis as set out in subsection
227.1(2) of the ITA, subsection 323(2)
of the ETA and subsection 43(2) of the RSTA.
All three statutes also allow for the due diligence defence.
The term “director” is not defined in the in ITA, ETA or in the RSTA statutes. The definition of a director is important to a director’s defense as under subsection 227.1(4) of the ITA, subsection 323(5) of the ETA and subsection 43(5) of the RST a director is not personally liable under each of the aforementioned statute if he or she is assessed on the underlying corporation’s liability more than two years after resignation from directorship. Furthermore if one is not a director, a director liability assessment cannot be issued against him or her.
Cessation of Directorship
It is well established
that, since “director” is not a defined term in the ETA, it is appropriate to
look to a corporation’s incorporation documentation in order to determine
whether a person was a director of a corporation at a particular time.[15] This is applicable to the ITA and the RSTA as
well.[16]
A director is defined
under the Ontario Business Corporations Act (“OBCA”) as “a person occupying the position of
director of a corporation by whatever name called, and “directors” and “board
of directors” include a single director.”
Case law has interpreted the definition of a director to include a de facto director. “A de facto director is considered to be a
director if he acts as such by doing acts normally reserved for directors, for
example, participating in board meetings, signing board resolutions, making or
participating in administrative decisions or decisions to sell, giving
instructions in the name of the corporation, representing to third parties that
he is a director, etc.”[17] The
Courts have also recognized that it is possible to have a de jure director who
is not a de facto director. This is
usually where “the parties were family members, and the Director’s de jure
power or authority could not be exercised without impacting family harmony.”[18]
Having the existence of a de jure director ( a statutory creation) and a de facto director (a common law creation) side by side is problematic especially when it pertains to a de jure director. The existence of the concept of a de facto director in law makes it difficult for a de jure director to resign from office. A de jure director after resignation is often characterized as a de facto director as it is not unusual to see a de jure director resigning but deemed to have continued to act as a de facto director.
The determination of when
a de facto director ceases to act as one is a factual test. Resigning
is not sufficient. For a de facto
director to be deemed to have truly resigned he or she must stop managing the
corporation and must stop holding himself or herself as a director to third
parties. As Chief Justice Rip states in Bremner v. The
Queen[19] which was upheld by the Federal Court of
Appeal[20] at paragraph 26:
A de facto and a "deemed"
director may also cease to be a director by giving notice to the corporation
and actually stop managing or supervising the management of the company.
In the appeal at bar the director's bond between Mr. Bremner and
Excel was not broken. I acknowledge that it may be difficult for a person who
is the only shareholder of a corporation to divorce himself or herself from
activities normally carried on by a director but if that person is performing
functions of a director, he or she is a director. In the appeal at bar, the
following facts, for example, favour a finding that Mr. Bremner continued
to be a de facto director after September 1 and into October, 2000: he
was the sole shareholder of Excel and the only person who has ever managed and
supervised Excel; there is no evidence that he informed third parties,
creditors or others, except perhaps his son, who did not testify, that he was
no longer holding himself out as a director of Excel; and he continued acting
for Excel after September 2000; for example, payments were made on behalf of
Excel against its GST arrears.
The
taxpayer in Bremner also continued to correspond with the CRA. At paragraph 27 Chief Justice Rip notes that
In his letter of April 10, 2001, Mr. Bremner
informed the tax authority that he "was" employed by Excel as manager
and requested that the CCRA correct its records. The fact that he wrote to the
tax authority suggests that he was still managing or supervising the management
of Excel's actions, however minimal such actions may have been.
The appellant, Donald
Snively, in a 2011 Tax Court case Donald Snively v. The Queen[21] became the sole director
of JDR, a corporation, incorporated under the Ontario Business Corporations Act[22]in December 1994. In August 2002, due to the bankruptcy of a
major business partner of JDR and the realization that JDR would be unable to
continue business, the appellant rendered a letter of resignation to JDR’s corporate lawyer. The Tax Court accepted this letter dated
September 3, 2002 as the date the appellant ceased to be a de jure director of
JDR. However the appellant was not
replaced and was involved in the disposition of assets owned by JDR, collecting
amounts that were due to JDR for work completed. The appellant also deposited such funds into
JDR’s bank account from which creditors were paid.
JDR was never formally
wound up but was inactive by the end of November 2002. In February 2004, JDR was reassessed under
the ETA for amounts of GST collected and not remitted for a project completed
from 1999 to 2000. In November 2004,
while the objection was still outstanding, JDR filed corporate income tax
returns on the instructions of the Appellant who proceeded to sign the returns
as the “authorized signing officer” for JDR.
On March 31, 2005 the Appellant further more signed a Canada Revenue
Agency form entitled “Business Consent Form” authorizing the release of account
information relating to JDR to a law firm.
The form stated that it required the signature of “an owner, partner,
director, trustee or officer”. The
Appellant listed his title as “owner”.
Based on the above facts
Justice Paris found that although the appellant resigned as a de jure director
in 2002, he continued to act as a de facto director for JDR. Justice Paris concluded at paragraph 38:
The Appellant’s explanation that he was acting
as authorized signing officer or as shareholder after September 3, 2002 is not
convincing. Without proof that his authority was limited to signing documents
on behalf of the corporation and that someone else was ultimately in charge of
the company’s affairs, I find that the acts of the Appellant on behalf of JDR
were carried out as deemed director. I also find that where there is only one
person carrying out the management and supervision of the corporation’s affairs,
this is sufficient to constitute that person a deemed director regardless of
the name given to his or her position. The word “director” is defined in
paragraph 2(1)(f) of the BCA as including “any person occupying the
position of director by whatever name called.” (emphasis added)
In Savoy v. the Queen[23] the Tax Court’s judgment which
was released around the same time as that of Donald Snively the Tax Court held
that a director’s resignation would only be held valid if the
requirements of the governing incorporation legislation was followed.
This would appear problematic for a sole shareholder /director as the OBCA provides that a first director[24] can only resign after there has been a shareholders meeting. [25] However as explained in Corporate Law in Canada: The Governing Principles, 3rd edition, 2006, at p. 474[26] Bruce Welling states
"By definition, a meeting means the coming together of two or
more persons. One person can't meet unless the relevant Act or corporate
constitution makes it possible." Section 101(4) of the OBCA
provides that: "If a corporation has only one shareholder, or only one
holder of any class or series of shares, the shareholder present in person or
by proxy constitutes a meeting."
Resignation is not
sufficient. Compliance with the
incorporation legislation is essential as emphasized by Justice Hershfield in Savoy at paragraph 56 quotes Justice
Campbell in Campbell v. R.[27] by stating that
It
is clear from the jurisprudence that a sole director can resign by giving
written notice of resignation to the corporation. In addition, other
requirements arising under the provincial corporate legislation may need to be
addressed in order for a resignation to become validly effective.
[...]
Taxpayers,
who have not strictly adhered to specific requirements for resignation as a
director under the provincial corporate legislation, have nevertheless been
held to be personally liable because they did not validly resign. (Zwierschke
v. M.N.R.,
[1991] 2 C.T.C. 2783, 92 D.T.C. 1003 and Shepherd v. The
Queen, 2008 D.T.C. 4284.)
Directors always hope that
the assignment of the corporation into bankruptcy means that they as directors
will be deemed to have ceased their directorship. Unfortunately this is not so as an assignment
of a corporation into bankruptcy does not trigger the cessation of a
directorship.[28]
In Butterfield v. The Queen[29], a 2010 Federal Court of Appeal case, a director unsuccessfully argued that the cessation from directorship provision contained in section 130 the B.C. Company Act should be as broadly interpreted as the definition provision of what constitutes a director “such that it would allow a director to cease holding office in any and all circumstances, including those mentioned in the statute, whenever a director is precluded from performing the functions of a director.”[30] A good argument but unfortunately the Federal Court of Appeal disagreed. One the cases cited by the Federal Court of Appeal in support of its decision was Lassonde, a 2001 case but worthwhile revisiting.
In Lassonde[31]the taxpayer unsuccessfully argued that the limitation period contained in subsection 227.1(4) of the ITA began to run on the 14th of May, the date of filing of the petition in bankruptcy. The Federal Court- Trial Division disagreed and repeated the comments of MacDonald J.A. of Kalef[32] who repeated the comments of MacKay J. in Wellburn and Perri [33] . Justice MacKay wrote:
The Federal Court Trial
Division decision in The Queen v. Wellburn and Perri was released after the decision
of the Tax Court Judge in this matter. In that case MacKay J. concluded that
the appointment of a receiver does not indicate the time at which the directors
of the company cease to hold their positions for the purposes of the Income
Tax Act. He discussed the proper interpretation to be given to subsection
227.1(4) as follows:
Subsection 227.1(4) limits an action to recover on
that vicarious liability, not with reference to the ability of directors to
redress any failure of the corporation, that is, within the term of their
office as directors, but to a reasonable period after they cease to hold
office, i.e., two years after the person last ceased to be a director of the
corporation. Termination of office under the law generally may vary from
province to province and from one circumstance to another depending upon the
relevant provincial or federal legislation. I may not fully comprehend what was
contemplated when the learned Tax Court Judge suggested such a view "would
in some circumstances, such as those under consideration, render the limitation
period devoid of meaningful substance". In my view, the limitation period
would be no more or less devoid of substance if it commences to run when a
director's office terminates under applicable legislation than if the
limitation period runs with the result of the Tax Court's decision, for in
either case vicarious liability extends for two years after a former director
can act, as a director, to do anything about a failure by the corporation to
meet its obligations under the Act.
I agree with the
reasoning of MacKay J. While it may be open to Parliament to expressly deviate
from the principles of corporate law for the purposes of the Income Tax Act,
I do not think such an intention should be imputed. Given the silence of the Income
Tax Act I think the guidance of the applicable corporate legislation, in
this case the Ontario Business Corporations Act, should be taken. A
director cannot and should not obtain the benefits of incorporation under the Ontario
Business Corporations Act without accepting the responsibilities as well[34].
A harsh position as a director of a corporation under bankruptcy assignment no longer has control of the corporation.
A corporate dissolution without the
resignation of a director also does not afford the director the defence that
they ceased to be directors in the event the corporation is dissolved. In Leger v. The Queen[35] the
Court states at paragraph 26:
It therefore follows that the revival of a
corporation is retroactive to the date of its dissolution and that, for all
intents and purposes, it is deemed to have never been dissolved. That being so,
the Crown’s position that the appellant never ceased to be a director of RSL after
his original appointment on August 18, 1987, is correct. That approach is
consistent with subsection 136(5) of the NBBCA and with the relevant case law.
The appellant’s position as director of RSL was in a state of suspension during
the time between RSL’s dissolution and its revival. Since the revival of RSL
returned that corporation to the same position as it would have been in if it
had not been dissolved, the appellant also returned to his position as
director. The appellant never resigned as director of RSL even though it ceased
operating in December 1998. There is no evidence that it ceased to exist as a
corporation after that date.
An alternative defense
directors have tried to raise is that of applying the statute of limitation
argument to director’s liability re-assessments raised four or more years after
the initial assessment of the underlying corporation.
Limitation Period
It is not uncommon now in our
times of deficit at both the Federal and at the Provincial level of government
to see assessments issued against directors when the underlying corporation was
last assessed in 1997 and in some cases even further back. This is problematic as many small business
owners are not the best of bookkeepers and it can be difficult to recreate
corporate records.
The Federal Court of Appeal in Jarrold v. The Queen[36] refused to grant Mr. Jarrold, the taxpayer, relief from a director liability assessment for unremitted GST of his company. The Court held that a director’s liability assessment made over ten years after the underlying Corporation was assessed was acceptable. Mr. Jarrold had argued that he could not reasonably be expected to contest assessment after that length of time. Sharlow J.A. stated that not only was the statute of limitation for a director’s liability contained in subsection 323(5) but that this time limitation never began to run as Mr. Jarrold had remained a director of his company. Sharlow J.A. held at paragraph 5 of her decision:
There
is a statutory time limit imposed on the Minister for assessing a person under
section 323. It is found in subsection 323(5), and requires the assessment to
be made within two years after the person last ceased to be a director of the
corporate tax debtor. That time limitation never began to run because Mr.
Jarrold remained a director. Mr. Jarrold is essentially asking this Court to
devise a further time limitation based on reasonableness. We cannot accede to
that request in the face of the decision of the Supreme Court of Canada in Canada
v. Addison v. Leyen Ltd[37].,
2007 SCC 33, [2007] 2 S.C.R. 793.
Subsection 323(5) is analogous to the provision subsection 227.1(4) contained in the ITA and to subsection 43(5) of the RTA and Justice Sharlow’s reasoning would extend to a director liability assessment under the ITA.
The ETA contains a four-year limitation
period under paragraph 298(1)(a). The
limitation period of paragraph 298(1)(a) is to impose a four year limit on
reassessments provided the GST return was filed on a timely basis. The taxpayers in Kern
v. the Queen [38],
Asadollah v. the Queen[39]
and Seng Chin Siow v. the Queen[40]
tried to apply the four year limitation period contained in section 298(1)(a)
to a director assessed under section 323(1).
The taxpayer, Ramin Asadollah, argued that this was logical as section
323(4) of the ETA engages sections 296 to 311.
Subsection 323(4) provides:
The
Minister may assess any person for any amount payable by the person under this
section and, where the Minister sends a notice of assessment, sections 296 to
311 apply, with such modifications as the circumstances require.
The Court disagreed with Mr. Ramin Asadollah and cited Justice Letourneau of the Federal Court of Appeal in Kern[41] in support of rejecting the four year limitation contained in paragraph 298(1)(a) to apply to section 323(1).
At paragraph 8 and 9 of the Kern[42]
decision Justice Letourneau stated:
In respect of the Tax Court’s judgment covering
the GST, the appellants raised before us an argument that the assessment in the
amount of $51,000 for the 1997 year was made out of time, i.e. out of the
four-year limitation period found in paragraph 298(1)(a) of the Excise
Tax Act.
With respect, the limitation period regarding
assessments made pursuant to section 323, as in the present instance, is found
in subsection 323(5). In a nutshell, the period is two years from the date that
the person assessed last ceased to be a director of the Corporation.
In Seng Chin
Siow[43] the
Tax Court not only considered the case law (Jarrold,
Kern and Asadollah) to support its position that the four year limitation
period of subsection 298(1) could not be imported into subsection 323(5) but
also considered the rules of statutory interpretation:
The
Appellant's argument that the use of the words found in subsection 323(4):
"The Minister may assess any person for any amount payable by the person
under this section and, where the Minister sends a notice of assessment,
sections 296 to 311 apply, with such modifications as the circumstances require
import the four-year limitation period into section 323 is not supported by
either the clear wording of section 323 nor by the contextual interpretation.
The use of the words "where the Minister sends a notice of
assessment" refers to an assessment "under this section" and
accordingly, it is clear a director's liability assessment occurs under section
323 only, not under any other section of the Act.[44]
The
Appellant's argument that the four-year limitation period is imported due to
the wording in subsection 323(4) is not sound. Clearly, subsection 298(1) above
says "... an assessment of a person shall not be made under section 296
..."and clearly only contemplates assessments made under section 296 and
not those made under section 323. Paragraph 296(1)(a), of course,
clearly refers to the ability of the Minister to assess the "net tax of a
person under Division V for a reporting period of the person" and
accordingly refers to the person who is required to remit net tax for a
reporting period, being the Corporation in this case. It would be impossible to
substitute the Appellant as director in paragraph 298 and find he qualified as
the person required to remit the net tax for the reporting period contemplated
by section 296.
Accordingly,
I cannot find that the four-year limitation period of subsection 298(1) applies
to the Appellant, and accordingly, the Minister was not statute barred from
assessing the Appellant more than four years after the Corporation filed its
returns.
The limitation period appears to be the two year period contained in subsection 227.1(4) of the ITA, subsection 323(5) of the ETA and subsection 43(5) of the RSTA. This is prejudicial to a director due to expect records to be intact after a decade or more. Often corporations are headed by inexperienced contractors who have little education in the area of corporate law and who expect an inactive corporation to be just that and to not be liable for an assessment dated many years back. This is not good public policy as an assessment dated that many years back could be incorrect and case law as can be seen from the following discussion does not always allow the director to challenge a derivative assessment.
Challenging the
assessment of the underlying corporation
There are opposing views at the Tax Court Level on
whether a director can attack the underlying corporate assessment.[45]
The cases in support of challenging the underlying corporate
assessment follow the lead of the Federal Court of Appeal in Gaucher v. The Queen[46]. In Gaucher[47]
the underlying assessment was issued under subsection 160(1) of the Income Tax
Act. In this case Ms. Gaucher was
taxed vicariously under section 160 of the Act with respect to a
transfer to her by her former spouse of a residential property at a time the
former spouse had been reassessed tax. Ms. Gaucher wanted to have her
assessment vacated by establishing that the reassessments of the former spouse
were statute-barred and invalid. The Tax Court rejected her argument since it
had already affirmed the former spouse's reassessments. Rothstein J. of the Federal Court of Appeal held, at
paragraph 6, that:
... It is a basic rule of natural justice that, barring a statutory
provision to the contrary, a person who is not a party to litigation cannot be
bound by a judgment between other parties. The appellant was not a party to the
reassessment proceedings between the Minister and her former husband. Those
proceedings did not purport to impose any liability on her. While she may have
been a witness in those proceedings, she was not a party, and hence could not
in those proceedings raise defences to her former husband's assessment.
Justice Rothstein further continued in paragraph 7:
When the Minister issues a derivative assessment under subsection
160(1), a special statutory provision is invoked entitling the Minister to seek
payment from a second person for the tax assessed against the primary taxpayer.
That second person must have a full right of defence to challenge the
assessment made against her, including an attack on the primary assessment on
which the second person's assessment is based.
Chief Justice Rip of the Tax Court in Wayne Barry[48], a 2007 case focussing on section 227.1 of the ITA for failure to remit source deductions under section 153 held that the fact that the issue in Gaucher was under section 160 was not sufficient for it not to apply to a section 227.1 case. At paragraph 26 he states;
I have difficulty in appreciating the respondent's argument
suggesting that the different nature of the debts in section 160 and section
227.1 of the Act is the major determining factor affecting the erstwhile
director's rights to contest an assessment issued under one of these
provisions. At the end of the day a section 160 assessment and a section 227.1
assessment are both assessments levied under the Income Tax Act and
taxpayers have rights under that statute. The respondent appears to have lost
sight of the fact that a taxpayer has the right to fight an assessment with all
artillery available to him or her by law irrespective of the cause or origin of
the assessment.
Chief Justice Rip further continues at para. 27:
There are many reasons a director may be prejudiced by a
corporation deciding not to object or appeal the underlying assessment. And it
is not necessarily so, as the respondent argues, that the director assessed
under section 227.1 could have caused the corporation to object and appeal the
assessment. The amount the corporation may recover, if successful in an appeal,
may not be sufficient to prevent its insolvency or bankruptcy and the directors
have decided that it was not worth throwing good money after bad. Or, the
individual director who has been assessed under section 227.1 may have wanted
to object to the assessment but he or she was outvoted by the other directors.
Or the corporation's books and records may have been in such disorder at the
time the corporation was assessed that it would have been useless to object or
appeal, but later on, when the director was assessed under section 227.1, he or
she, or someone else, may have put the books and records in such good order
that it was at least arguable that the underlying assessment was bad. And I am
sure there are other examples as well.
Justice Rip concludes:
If Parliament's intent in section 227.1 was to prohibit the
director from contesting the assessment, the provision would refer to the
amount assessed rather than refer to "failed to deduct or withhold an
amount as required by ... section 153 ..., failed to remit such an amount ...
of tax ..." since a section 227.1 assessment can only be issued after the
underlying assessment. Indeed, Mr. Barry's whole purpose in wanting to ask questions
and see documents relating to the underlying assessments is to prove that the
"amount as required" is not the amount the corporations failed to
deduct or withhold.
A strong argument made by Chief Justice Rip but not followed in the2009 decision Jarrold v. The Queen[49]. In Jarrold[50] Margeson J. speaking for the Tax Court firmly held that “this Court’s decision is that you cannot attack the underlying assessment no matter what the reason is”.[51] The Court distinguished Zaborniak v. Canada[52] on the basis that its facts can be distinguished on the following basis:
In
this particular case, the Court is satisfied that it can distinguish the facts
here from the facts that Justice Bowman considered in his case. Here,
certainly, there would not be any basis for the Appellant arguing that he could
not attack the original assessment when it was made, because he was not
prohibited from looking at the books and he was not prohibited from finding out
that the money was owing, or that the taxes were not being paid, because all
that subject matter was within his personal knowledge. As a matter of fact he,
as a sole director had complete control over them so nobody would have been in
a better position that he would be to know what was going on. The Court is satisfied
on the basis of his evidence that he certainly was in a position to know.
This reasoning contradicts what
the statement of this Court’s decision is that you cannot attack the underlying
assessment no matter what the reason is”.[53] I am not sure that the Court intended to
state that an assessment could not be challenged where in fact situations where there exists only a
sole director. The Court further softens
its harsh position by further stating that anyways that “there was no reasonable
basis for attacking the assessment here even if as a general principal of law
it was open to be attacked.” The
derivate assessment defence was not
raised at the Federal Court of Appeal level in Jarrold[54].
In 2010 Justice C.J. Miller of the Tax Court who wrote the judgment in Kern v. R.[55]
again repeated his position in Vrsic v. R.[56]
and held in paragraph 16 of his judgment :
First, can Mr. Vrsic challenge the underlying assessment of AC?
There have been two schools of thought developing in the Tax Court on this issue (see for example the cases of Kern v. R. and Scavuzzo v. R., Maillé c. R. and Zaborniak v. R. I
stand by my comments in Kern, where I stated that the language of the Act
leaves the door open for a director to challenge the underlying assessment,
where the company has not itself done so. Combined with the principles of
natural justice approach taken by the Federal Court of Appeal in the case of Gaucher v. R. , I find it is open to Mr. Vrsic to challenge
the assessment against AC.
In Vrsic the taxpayer, essentially a sole director as his father a co-director had suffered a stroke, relied on his bookkeeper to ensure that GST remittances were made on a timely basis. The corporation was in the business of supplying tools and fasteners and similar goods to the tool and die industry. September 11 and the recession thereafter severely affected the steel industry and ultimately the corporation`s customers. In 2005 Mr. Vrsic found out that the bookkeeper had not been remitting GST withheld due to other debts being covered. Mr. Vrsic poured $300,000 of his own funds to attempt to keep the company afloat and eventually tried selling the company to his competitor. He was unsuccessful. The Corporation failed to file GST returns for its last two quarters of 2007. For those two last quarters, the CRA auditor estimated GST remittances on the basis of its past sales history failing to take into account that the business no longer had a sales history as successful in the past. The auditor also did not take into account input tax credits that may have been available to the corporation.
In Savoy v. R.[57] ( decision was rendered on the 7th of February, 2011) Justice Hershfield speaking for the Tax Court held that the appellant, a director charged with unremitted GST, has the right to challenge the underlying assessment and with that it follows he must have the right to discover documents relating to it.[58] The Court relied on the principle of natural justice argument from Gaucher and repeated in Scavuzzo as support for his position.. Vrsic was also quoted as support. In Savoy the CRA showed great reluctance to provide the director, Mr. Savoy, with documents requested on discovery of CRA`s representative.
Justice Hershfield dismissed CRA`s argument that the fact that the assessments were based on returns filed, CRA`s documents could not be relevant. According to Justice Hershfield;
" Another response to the Respondent's failure to produce
documents was they could not be helpful in attacking the underlying assessments
since they were based on the returns filed. That is no answer. As filed" assessments are as open to
attack as any other. They are all the more open to attack given that the
underlying assessment was never challenged by the company.
Directors being held liable under section 323 require this forum to have that
assessment reviewed.
Mention should be made of Seng Chin Siow[59]
( a May 6, 2011 case) where the appellant director argued that as the
corporation never received any notices of assessment, it was not properly
assessed. As such the appellant director
argued the corporation should be assessed first before holding a director
liable. The Court agreed with the
Minister that the requirement for an assessment against the primary debtor was
not a pre-condition to assessing a director pursuant to section 323(1) of the
ETA. At paragraph 52 Justice Pizzitelli
held that
To
make an assessment against the corporation a precondition to proceeding against
a director under subsection 323(2) would render subsection 299(2) meaningless, which
would be a ridiculous result. Parliament intended such subsection to have
meaning and the Appellate Courts have confirmed its application as the basis
for a director's liability. Clearly, the right of the Minister to proceed
against a director is not based on a purely derivative action, as supposed by
the Appellant's counsel in argument, but on the basis that due to sections 323
and 299 of the Act, a director is jointly and severally liable for an
unremitted amount, regardless of whether there was an assessment against the
corporation.
The Court also did not deny the right of the appellant to challenge the underlying assessment even though it may have not been issued. At paragraphs 53 and 54 Justice Pizzitelli continued:
The Federal Court of Appeal in the cases of both Gaucher and
Abrametz[60] confirmed a director's rights under the principle of natural
justice to challenge the amounts owed as certified under section 316 of the Act
and I do not find such a fundamental right to only apply in the case of
where an assessment is issued against the corporation. To do so would be to
weaken such principle to something less than one of natural justice which I do
not find the learned Justices did in their said decisions. (underline mine)
Whatever
limitations the Minister may have in enforcing collection against a corporation
for lack of valid assessment do not limit the Minister in enforcing against a
director unless specifically set out in the legislation. The only limitations
apparent to me are that the Minister cannot collect more than owed in the first
place as subsection 323(6) limits the amount collectable from a director to be
the amounts not paid by the corporation, which is clearly a bar against double
recovery, itself a principle of natural justice, and the principles of natural
justice entitling a director to challenge the underlying amount owing,
regardless if assessed against the corporation or not, ……
The purpose of the above analysis was to provide to the reader the uncertainty currently in the law on whether a director can challenge the underlying corporate assessment. In 2009 the Tax Court in Jarrold ruled firmly that a sole director could not. In 2011 so far and as discussed above the Tax Court cases appear to do allow a director to challenge the underlying assessment.
Registration of
certificate (writ of seizure and sale) for the amount of corporate liabilities
in Federal Court
Paragraph 227.1(2)(b) of the ITA,
paragraph 323(2)(b) of the ETA and paragraph 43(2)(b) provide that the writ of
seizure and sale must be registered with the Federal Court within 6 months of
the dissolution of a corporation. A director
charged under the director liability provision should as a defence always
ensure that the Minister`s writ was filed on a timely basis.
In Savoy[61] the writ was not filed on a timely basis and the director was able to use this as a defence. The company had ceased to exist on March 13, 2006. The Writ of Seizure and Sale issued under the certificate registered with the Federal Court was dated April 4, 2007. The company was experiencing difficulties with cash flows and receivables. The appellant director, a sole director, was advised to retire by the corporation`s accountant from the company. Mr. Savoy did so on June 30, 2000 and this is reflected in the Companies Branch records of the Ministry of Government Services. In December of 2000 and August of 2001, the appellant, Mr. Savoy, was informed by the Ministry of Consumer and Commercial Relations that the company`s certificate of incorporation would be cancelled. The company was not dissolved not until March 13, 2006.
The Minister argued at the Tax Court that paragraph 323(b) of the ETA did not apply to a dissolution triggered by the Ontario Business Corporations Act. Justice Hershfield dismissed this logic by stating at paragraph 32:
That argument has no merit in my view. The provision speaks of a
corporation which has commenced such proceedings "or has been
dissolved". The dissolution itself triggers the application of this
paragraph. How the dissolution occurred is of no import.
Justice Hershfield further distinguished Kennedy v. Minster of National Revenue[62] where the Court took the position that the Crown should not be forced to prove a claim where the company had involuntarily commenced liquidation or dissolution proceedings and that therefore no liquidator existed against whom the Crown could make a claim. Justice Hershfield held:
There is evidence here of the proof of the claim. There is no
need for a liquidator to prove the claim. The proof of the Minister's claim
is the registration of the section 316 certificate with the Federal Court which
in turn is evidenced by the Writ of Seizure and Sale. That, in my view, is
sufficient. Subsection 316(2) provides that the registration of the Minister's
certificate with the Federal Court has the effect as if the certificate were a
judgment of the Court against the debtor for the amount certified. However,
even accepting the operation of section 316 as proof of the claim, it was
obtained far too late. The company had been dissolved more than one year
earlier. That is not within the time frame that the Act requires the
Minister to act.[63]
Justice Hershfield continued at paragraph 36: Here, I
note as well, that subsection 242(1) of the OBCA allows actions to be
commenced against dissolved corporations. That would support the finding that
the registration of the certificate with the Federal Court, the judgment
against the company, is properly before the Court as proof of the claim. As such the Justice Hershfield held that the Minister
failed to meet the 6 months limitation period as prescribed in paragraph
323(2)(b).
Due Diligence
In Buckingham v.
R.[64]
a 2011 case the Federal Court of Appeal addressed the confusion on whether the
objective standard of care, due diligence and skill developed by the Supreme
Court of Canada in Peoples Department Stores[65]
in relation to paragraph 122(1)(b) of the Canada Business
Corporations Act, R.S.C. 1985, c. C-44 ("CBCA") can extend to
subsection 227.1(3) of the Income Tax Act and to subsection 323(3) of
the Excise Tax Act.
Paragraph 122(1)(b) of the CBCA reads as
follows:
122.
(1) Every director and officer of a corporation in exercising their powers and
discharging their duties shall
[...]
(b)
exercise the care, diligence and skill that a reasonably prudent person would
exercise in comparable circumstances.
The Federal Court of
Appeal concluded that the “objective subjective ”
standard set out in Soper
v. R.[66]
has been replaced by the objective standard laid down by the Supreme Court of
Canada in People's
Department Stores Ltd. (1992) Inc., Re.. Through statutory interpretation of
subsection 227.1(3) of the Income Tax Act, subsection 323(3) of the Excise Tax
Act and paragraph 122(1)(b) of the CBCA Justice Mainville stated
Moreover, the language used in paragraph 122(1)(b) of the
CBCA is similar to that used in both subsections 227.1(3) of the Income Tax
Act and 323(3) of the Excise Tax Act. This is not a mere
coincidence, but rather a further indication that the standard of care,
diligence and skill required by all these provisions is similar. Similar
legislative language dealing with similar matters should be given a similar
interpretation unless the legislative context indicates otherwise: Pointe-Claire
(Ville) c. Syndicat des employées & employés professionnels-les & de
bureau, local 57, [1997] 1 S.C.R. 1015
(S.C.C.) at para. 61; R. v. Ulybel Enterprises Ltd.,[2001] 2 S.C.R. 867,
2001 SCC 56 (S.C.C.), at para. 52; Bell ExpressVu Ltd. Partnership v. Rex, above at para. 27; Ruth Sullivan, Sullivan on the
Construction of Statutes, 5th ed. (Markham, Ontario: LexisNexis
Canada 2008) at pp. 223 to 225.[67]
Consequently, I conclude that the standard of care, skill and
diligence required under subsection 227.1(3) of the Income Tax Act and
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.
An objective standard is stricter and quoting Kevin
McGuiness cited by Justice Mainville “ 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”.[68]
Justice Mainville
continued to state “to say that the standard is objective
makes it clear that the factual aspects of the circumstances surrounding the
actions of the director are important as opposed to the subjective motivations
of the directors ” but cautioned that “An
objective standard does not however entail that the particular circumstances of
a director are to be ignored. These circumstances must be taken into account,
but must be considered against an objective "reasonably prudent
person" standard”.[69] At paragraph 52 Justice Mainville further
stated that
Parliament did not require that directors be subject to an
absolute liability for the remittances of their corporations. Consequently,
Parliament has accepted that a corporation may, in certain circumstances, fail
to effect remittances without its directors incurring liability. 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
concerned amounts.
In Buckingham[70]
the director diverted employee source deductions in order to continue the
operation of the corporations business with the hope that the business would
pick up and he would be able to pay back the government. The director failed the due diligence test as
the Federal Court held
A director of a corporation cannot justify a defence under the
terms of subsection 227.1(3) of the Income Tax Act where he condones the
continued operation of the corporation by diverting employee source deductions
to other purposes. The entire scheme of section 227.1 of the Income Tax Act,
read as a whole, is precisely designed to avoid such situations. In this case,
though the respondent had a reasonable (but erroneous) expectation that the
sale of the online course development division could result in a large payment
which could be used to satisfy creditors, he consciously transferred part of
the risks associated with this transaction to the Crown by continuing
operations knowing that employee source deductions would not be remitted. This
is precisely the mischief which subsection 227.1 of the Income Tax Act
seeks to avoid.
It appears from the above reasoning now is the objective test as set out by People’s Department Stores Ltd.(1992) Inc., Re.[71] This conclusion is supported by Justice Boyle of the Tax Court of Canada who cited the Federal Court of Appeal decision in James Boles v. The Queen[72]. Justice Boyle state in paragraph 2:
The most
recent pronouncement on the scope of director’s liability for unremitted GST or
income tax withholdings and upon director’s possible defences thereto are set
out by the Federal Court of Appeal in its recent decision in Canada v.
Buckingham, 2011 FCA 142, dated April 21, 2011. In Buckingham the
Federal Court of Appeal confirmed that the scope of the director’s liability
provisions is potentially broad and far reaching in order to effectively move
the risk for a failure to remit by a corporation from the fisc and Canadian
taxpayers generally to the directors of the corporation, being those persons
legally entitled to supervise, control or manage the management of its affairs.
The Court also confirmed that a director seeking to be exculpated for having
exercised reasonable care, diligence and skill must have taken those steps “to
prevent the failure” to remit and not to cure it thereafter. Further, the
standard of care, diligence and skill required is overall an objective
standard.
[1] Income Tax Act RSC 1985, c. 1 (5th
Supp.), as amended.
[2]
R.S.C. 1985, C. C-46, as amended.
[3] Income Tax Act RSC 1985, c. 1 (5th
Supp.), as amended (herein referred to as "the ITA").
[4] Excise Tax Act, RSC 1985, c. E-15, as
amended.
[5] Employment Insurance Act, SC 1996, c. 23,
as amended.
[6] Canada Pension Plan Act, RSC 1985, c.
C-8, as amended.
[7] Retail Sales Tax Act (RSO 1990, c. R.31,
as amended.
[8] Please
also see Tim Rorabeck, "Directors' Liability for Unremitted Taxes: An
Update," 2008 Atlantic Provinces Tax Conference, (Halifax: Canadian Tax Foundation, 2008), 3B:1-18.; R.
Lynn Campbell, "The Supreme Court's Decision in Peoples: A New Standard of
Director's Liability?," (2007), vol. 55, no. 3 Canadian Tax Journal,
465-480.; Timothy P. Kirby,
"Directors' Liability Update" (2007) vol. 7, no. 1 Tax for the Owner
Manager, 8-9.;
[9] Employer Health Tax Act, 1989, SO 1989,
as amended.
[10] Ontario Corporations Act, RSO 1990, c.
B.38, as amended.
[11]
2010 FCA 180
[12] See Jim Yager, “Director Liable for
Late-Payment Interest” (2010) vol. 18, no. 9 Canadian Tax Highlights, 4
[13] Subsections 83(1) and 83 (2) of the Employment Insurance Act provide that
where a corporation has failed to deduct or remit employment insurance
premiums, the provisions of subsection 227.1(2) to (7) of the ITA will apply to
the directors. Similarly subsections
21.1(1) and 21.1(2) of the Canada Pension Plan Act provide that where a
corporation has failed to deduct or remit CPP premiums, the provisions of
subsection 227.1(2) to (7) of the ITA will apply as well.
[14]
See subsection 227.1(4) of the ITA, subsection 323(1) of the ETA and subsection
43(1) of the RSTA.
[15]
See Donald Snively v. Her Majesty the
Queen 2011 TCC 196 at para. 27 quoting The
Queen v. Kalef [1996] 2 C.T.C. 1 (F.C.A.) an income tax case.
[16]
As stated in footnote 11 – Snively
Ibid. an excise tax case relied on Khalef
an Income Tax case.
[17] Business Corporations in Canada – Legal and
Practical Aspects (Loose-leaf), Paul Martel at para. 21-16 and cited by
Chief Justice Rip in Bremner v. The Queen
2007 TCC 509. For an excellent analysis
on “de facto” directors please see Scavuzzo
v. The Queen, 2005 TCC 772 from paragraphs 24 to 33.
[18] See Ramin Asadollah v. The Queen, 2007
TCC 333 where the court cites the following cases: François
Lambert v. Her Majesty the Queen, [2005] G.S.T.C. 76 (T.C.C.); Gordon
Fitzgerald et al. v. The Minister of National Revenue, 92 DTC 1019
(T.C.C.); Emilio Dirienzo v. Her Majesty the Queen, 2000 DTC 2230 (T.C.C.).
[19]
2007 TCC 509.
[20]
2009 FCA 146.
[21]
2011 TCC 196
[22]
R.S.O., c. B. 16.
[23] 2011
TCC 35.
[24] A first
director is generally the incorporator and is common in unorganized simple
corporations.
[25]
Subsection 119(2) of the OBCA. Section 119
states:
First directors
119(1) Each director named
in the articles shall hold office from the date of endorsement of the
certificate of incorporation until the first meeting of shareholders.
Resignation
(2) Until the first
meeting of shareholders, the resignation of a director named in the articles
shall not be effective unless at the time the resignation is to become
effective a successor has been elected or appointed.
Powers and duties
(3) The first directors of
a corporation named in the articles have all the powers and duties and are
subject to all the liabilities of directors.
[26]
Cited by Hershfield in Savoy at foot note 21.
[27]
2010 TCC 100, 2010 DTC 1090 (Eng.) (T.C.C.)
[28] See Butterfield v. The Queen 2010
FCA330.
[29] See Butterfield v. The Queen 2010
FCA330.
[30] See Paragraph
10 of Butterfield.
[31]
2001 FCT 726.
[32]
(1996) 194 N.R. 39 (F.C.A.)
[33]
(1995), 98 F.T.R. 161 at paragraphs 14 and 15.
[34] See footnote 28.
[35]
2007 TCC 322.
[36]
2010 FCA 278.
[37] In September 1989, the applicants Addison & Leyen
Ltd., William Roach and Janet Dietrich sold all of their shareholdings in York
Beverages (1968) Ltd. (York Beverages) to a third party. In December 1992, the
Minister of National Revenue (Minister) issued a notice of reassessment against
York Beverages for its taxation year ending in 1989. The assessment was for
$3,247,074.05, including penalty and interest. York Beverages filed a notice of
objection to the assessment in March 1993. In February 2001, the Minister issued assessments under
section 160 of the Income Tax Act, against the applicants. The Minister
claimed that because the transfer of shares in York Beverages was non-arm's
length, the applicants were jointly and severally liable for the taxes owed by
York Beverages, which by 2001, amounted to $6,664,634.60 (comprising of
$1,978,665.98 in taxes, $229,527.82 in penalty and $4,456,440.80 in interest).
The applicants filed notices of objection in May 2001. The Minister failed to respond
to the notices of objection filed by York Beverages or the applicants.
[38]
2006 FCA 257 (CanLII)
[39]
2007 TCC 333
[40]
2011 TCC 301
[42]
Ibid. at 31.
[43]
Ibid. at footnote 38.
[44]
At paragraph 35
[45] The following are examples of cases proposing that a
director cannot challenge an underlying assessment: Schafer v. The Queen, 1998 CanLii 414 (TCC), Schuster v. The Queen 2001 CanLii 657 (TCC), Maillé
v. The Queen, 2003 TCC 222, Zaborniak v. The Queen 2004 TCC 560 and the recent case of Jarrold v. The Queen 2009 TCC 164, 2010
FCA 278. Case law stating that a
director can challenge the underlying assessments are Nachar
v. The Queen, 2011 TCC 36, Elias v.
The Queen 2002 CanLii 852 (TCC), Scavuzzo
v. The Queen, 2005 TCC 772; La
Buick v. The Queen 2007 TCC 433, Abrametz
v. The Queen, 2007 TCC 316, Brace v.
The Queen 2008 TCC 43, Kern v. The
Queen 2005 CanLii 314, Lau v. The
Queen, 2002 CanLii 47028 (TCC), Weins
v. The Queen (2003) T.C.J. No. 42 and
Parisien v. The Queen 2004 TCC 276.
[46]
54 DTC 6678
[47]
Ibid.
[48] Wayne Barry v. The Queen, 2009 TCC 508.
[49]
2009 TCC 164.
[50]
Ibid.
[51] Thomas Ralph Jarrold v. Her Majesty The
Queen 2009 TCC 164 at paragraph 9.
[52]
[2004] G.S.T.C. 110 (T.C.C)
[53] Thomas Ralph Jarrold v. Her Majesty The
Queen 2009 TCC 164 at paragraph 9.
[54]
2010 FCA 278.
[55]
2005 T.C.C. 314 [2005] G.S.T.C. 1001 (T.C.C. [Informal Procedure].
[56]
2010 T.C.C. 127
[57]
2011 TCC 35
[58]
At paragraph 40.
[59]
2011 TCC 301
[60]
The Federal Court of Appeal did not consider whether a director could challenge
the underlying corporation`s assessment in Abrametz
2009 FCA 70 but the characterization of the inter-accounts transfers.
[61]
2011 TCC 35
[62]
91 DTC 1037 (TCC).
[63]
At para. 34.
[64] 2011
FCA 142.
[65]
Paragraph 11 of Vrsic.
[66]
1997 CarswellNat 853.
[67]
Paragraph 36
[68] Kevin P. McGuinness, Canadian
Business Corporations Law, 2nd ed. (Markham, Ontario: LexisNexis
Canada, 2007) at 11.9.
[69]
At para. 39
[70]
Ibid at footnote 64.
[71] [2004]
3 S.C.R. 461.
[72]
2011 TCC 288.
