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Director's Liability: Creditor-Proofing Personal Assets?

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Directors often ask about creditor-proofing personal assets when facing a possible assessments for "Director's Liability" under Canada's income tax and GST legislation. That question usually follows the director's first understanding that the Canada Revenue Agency (CRA) has special powers in both the Income Tax Act (ITA) and the Excise Tax Act (ETA) to assess a director where a corporation leaves behind unpaid income tax or GST debts, and to realize on (seize) a director's personal assets (e.g,, homes, cottages, cars, monetary savings) to satisfy those debts. (These rules are more specifically found in section 227.1 of the ITA and section 323 of the ETA, and is almost identical.)

Also surprising most directors are special rules in the ITA and ETA allowing the CRA to attack transfers of a director's personal assets to non-arm's-length parties (e.g. wives, children, siblings, parents, etc.) where the value paid by the relatives is less than the fair-market value of the property being transferred. (These rules are found in subsection 160(1) of the ITA and section 325 of the ETA, and are also fairly similar.)

Recent case law is somewhat unclear on when and whether a director may be lawfully permitted to make such transfers, leaving a number of difficult questions. For example, can a director not yet assessed for Director's Liability freely transfer personal assets, for less than fair market value, to related persons? Or can those sorts of transfers later by undone by the CRA when attempting to collect on Director's Liability Assessments ? And quite apart from the ITA and ETA provisions, would such transfers be subject to provincial attack under various statutes like the Ontario Fraudlent Conveyances or Fraudulent Preferences legislation.

The case law may not be altogether clear on this fundamental question, often forcing director's to obtain specialized legal advice with attempting to understand their legal obligations, often starting with a tax lawyer.

[Portions of the content of this blog were previously published by the Canadian Tax Foundation's Canadian Tax Highlights publication.]

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