The recent decision in Canada v. Colitto (2020 FCA 70) has seen the FCA weigh in on a huge issue for so called “derivative assessment” of directors and other person potentially at risk for a corporate taxpayer’s tax liability. With the financial pressures of COVID 19, this may come as bad news for corporate directors!
By way of background, when CRA assesses a corporate taxpayer or GST registrant and is unable to collect on the taxes assessed, the CRA can turns to certain persons, and assess them personally. The most common example of these are “directors’ liability assessments” (DLAs) under ETA s. 323 / ITA s. 227.1, and “related party assessment” (RPAs) under ETA s. 325 / ITA s. 160. The DLA sees the CRA assess the corporation’s directors personally for certain corporate liabilities. The RPA sees the CRA assess any persons that are related to a tax debtor, who may have received a transfer from the tax debtor for less than fair market value (FMV) (e.g., a corporate director transfers his interest in the matrimonial home for $1 to the wife, at the time that the corporation owes the CRA taxes).
In Colitto the FCA overturned a decision of the TCC, which was favourable to the corporate director fighting a DLA. The FCA concluded that a director’s personally liability under ETA s. 323 / ITA s. 227.1 for the tax debts of the corporate tax debtor starts immediately after the corporate default.
This is an important timing point, because once the director’s liability crystallizes, those directors become classified as “tax debtors” themselves, and are thereafter precluded them from attempting to judgement-proof themselves by, for example, disposing of assets for less than FMV to a wife or child, prior to the CRA’s technical issuance of the DLA.
The facts of Colitto were not particularly sympathetic: Mr. Colitto’s corporation failed to remit source deductions from February to August 2008. In May 2008, Mr. Colitto, the corporation’s director, transferred what appears to be two houses to his spouse, Ms. Colitto, for $2 each – i.e. a less than FMV transaction.
The corporation was assessed in October 2008, and Mr. Colitto was issued a DLA in March 2011. Ms. Colitto was issued an RPA in the amount of $228,746 in January 2016.
Ms. Colitto appealed her RPA to the TCC, and the issue for the TCC was how to deal with all of this, given the timing of the various assessments. There, the TCC concluded that Mr. Colitto’s liability as a director only began when all the pre-conditions for the CRA’s DLA were satisfied (namely when a Sheriff’s writ was return unsatisfied under the particular directors’ liability rules). Since this writ has been obtained in 2011, this meant that Mr. Colitto was free to sell the houses at less than FMV in May 2008, because he was not a tax debtor at that time.
The FCA overturned the TCC’s decision based on its own textual, contextual, and purposive analysis of ITA s. 227.1. The FCA concluded that it would defeat the purpose of ITA s. 227.1 if there was a significant time gap between a corporation’s default and the director becoming personally liable. Instead, and based also on the context of the section, the FCA concluded Mr. Colitto’s liability began immediately after the corporation’s default and upheld the RPA assessments against Ms. Colitto accordingly.
By way of commentary, the Colitto case clarifies that directors are liable immediately after a corporate default, limiting the creditor-proofing steps that directors can undertake. Directors in these financial situations, should seek out specialized tax advice in understanding the legal obligations and the limitations facing them, including additional considerations flowing from provincial legislation like Ontario’s Fraudulent Conveyances Act and/or the Assignments and Preferences Act.
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