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In Canada, the CRA can often pursue a corporation’s directors for unpaid tax debts of the corporation.  But there are certain “pre-conditions” that must be met.

One of these, which rarely gets any attention at all is the requirement that “a certificate for the amount of the liability of the corporation [be] registered in the Federal Court… and execution for that amount [be] returned unsatisfied in whole or in part”:  see section 323(2)(a) of the Excise Tax Act (ETA) and section 227.1(2)(a) of the Income Tax Act (ITA).

Historically, the Courts have considered that these provisions do not impose an obligation upon the CRA to make reasonable efforts to search for assets of a corporate debtor; rather, all the CRA needs to do is “act in good faith”:  see Barrett (2012 FCA 33).

In Tjelta (2017 TCC 187), the Tax Court of Canada (TCC) was asked to determine what the FCA meant in respect of the CRA’s good faith requirement. 

Not much it seems!

In the case, T was a director of a corporation that was in debt to its landlord and to the Minister for unremitted GST and payroll withholdings.  The landlord engaged a civil enforcement agency (S) which instructed a bailiff to affect the seizure.  T informed the CRA that there were assets, including a rig worth $1 million, available to be seized.  According to T, the corporation still owned the rig, which it was building for CWC, as the rig was not fully paid for by CWC.  

The CRA acted on T’s information, including registering certificates for the corporation’s debts in the Federal Court, obtaining writs and registering them against the corporation’s property in the personal property registry; taking steps to attempt to collect from the corporation’s customers; and following up with S to make sure that if S received any proceeds from the seized property, the Minister would be in a position to be paid first.  Furthermore, when informed that the rig was released by S to CWC, the CRA specifically followed up with S and satisfied itself that S was dealing with the assets appropriately. According to S, the rig was released to CWC when it was provided documentation showing that CWC owned the rig. The corporation was given an opportunity to object to the seizure and the release of the rig but failed to do so.

When the CRA concluded that the corporation was not going to pay the tax debt, it assessed T under the ITA and the ETA.  T challenged the assessments on the basis that the CRA had not made a good faith attempt to determine and seize the corporation’s assets. 

The TCC agreed with the CRA’s submission that the good faith requirement, as ruled in Barrett, was an “obligation on the part of the Minister to act without any ulterior or improper motive.”  

However, based on the evidence, the TCC found that the CRA had in fact acted in good faith, based on the information available to the CRA at the time.

A sad reality is that it seems that in Canada the CRA is held to a very low standard when pursuing tax debts from directors under Canada’s director’s liability provisions.

Directors finding themselves in these situations should immediately seek legal advice from a tax lawyer, as other pre-conditions may assist (e.g., due diligence defences, statute of limitations issues, etc.).

When in doubt, seek proper legal advice.

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