Director’s Liability for Tax Debts of a Corporation
Corporations under the Law
Under the law, a corporation is regarded as a separate and distinct legal entity from its owners and managers. This separate entity status is the keystone feature of a corporation and is explicitly set out in Canadian corporate law, which attaches the same legal capacity, powers, rights and privileges of a natural person to a corporation. This separate legal entity status is also reflected in Canadian tax laws, under which a corporation is assessed for its own tax debts and liabilities. As a result, directors of corporations will generally not be personally responsible for any tax liabilities incurred by their corporation.
Powers of CRA to Assess Directors of Corporations
There are certain exceptions to the general rule that directors of corporations will not be held personally liable for any tax liabilities incurred by their corporation. In certain circumstances, directors may be targeted by the Canada Revenue Agency (“CRA“) for their corporations’ tax liabilities. In cases where the CRA is unable to collect the taxes owed by a corporation, it has the power to assess the directors of corporations personally for the corporate tax liabilities, including any interest and penalties that the corporation accrued during the time they were the directors of the corporation. The most common assessments by the CRA are for unpaid payroll source deductions under section 227.1 of the Income Tax Act (“ITA“) and unremitted GST or HST under section 323 of the Excise Tax Act (“ETA“).
Joint and Several Liability of Directors
In assessing director liability, the CRA will assess every director they possibly can to recover the unpaid taxes. Each director who was a director during the time the corporation accrued the tax debts will be held jointly and severally liable. This means the tax liabilities will be shared by all the directors that have been assessed. Any payments by any of them will reduce the amount owed to the CRA.
Time Limit in Assessing a Director
There is a time limit for the CRA to assess a director for director’s liability, which is two years from the time the director resigned or two years from the corporation’s dissolution date.
Due Diligence Defence
There is a “due diligence” defence available in director’s liability cases, which is found under subsections 227.1(3) of the ITA and 323(3) of the ETA. This defence sets out that a director is not liable for a corporation’s failure to pay its payroll source deductions or remit GST or HST when the director has exercised the degree of care, diligence, and skill to prevent the failure that a prudent person would exercise in comparable circumstances. The burden of proof is on the director to establish this defence.
In the case of Soper v. Canada, the Federal Court of Appeal (“FCA“) set out that the due diligence defence is an objective standard that contains subjective elements and is measured after consideration of a director’s particular circumstances. The FCA held that rather than treating directors as a group of professionals whose conduct is governed by a single, unchanging standard, the test considers subjective factors, such as personal knowledge and background, and the corporation’s size, organization, resources, customs and conduct. As such, this is a highly fact-driven analysis and requires consideration of the director’s specific circumstances (subjective elements) to determine what the director should have done (the objective standard).
In the Soper case, the individual was an experienced businessperson who, in October of 1987, had become a director of a company that operated a talent agency and a modelling school. At a meeting of the Board of Directors in November of 1987, the director was given a copy of the company balance sheet, which showed a net loss of $132,000. The director was not given any notification by any employee or Board member that the company had failed to make its tax remittances as required under the ITA. He remained a director of the company from October 1987 until his resignation on February 10, 1988. He was subsequently assessed for the source deductions, plus interest and penalties in the amount of $13,000. The Court found that he was liable as a director for the company’s unremitted source deductions and that he had failed to satisfy the due diligence defence.
The FCA found that the director was under a positive duty to act, which arose, at the latest, in November 1987, when the balance sheet of the company revealed that it was experiencing financial problems. The FCA took into account the director’s ample experience in the field of business and found that the balance sheet should have alerted him to the existence of a possible problem with remittances. The Court also highlighted that this was all the more true since there was no indication or evidence that the company’s financial troubles were merely temporary. By doing nothing and at no time inquiring as to whether the company was complying with its remittance obligations, the FCA concluded that the director was unable to satisfy the due diligence defence and that he had not exercised the degree of care, skill and diligence required for the defence.
Professional Legal Help With the CRA
If you have received a letter from the CRA regarding director’s liability or a notice of assessment for director’s liability, we recommend that you seek professional legal assistance to navigate through the process, deal with the CRA on your behalf and help you in defending against a director’s liability assessment.
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By Kaveh Rezaei – Attorney at KR Law Firm
**Disclaimer
This article contains information of a general nature only and does not constitute legal advice. All legal matters have their own specific and unique facts and will differ from each other. If you have a specific legal question, it may be appropriate to seek the services of a lawyer.
