Tax & Trade Blog
Director's Liability: The FCA Affirms an Objective Standard for Due Diligence
The recent FCA decision, Canada v Chriss (2016 FCA 236), underscores the resignation obligations of directors. If directors do not execute their resignations properly and completely, they will remain liable for the actions of the corporation, including director’s liability assessments issued by taxing authorities like the Canada Revenue Agency (“CRA”).
The Minister challenged a decision of the Tax Court of Canada (2014 TCC 254), which had accepted the appeals of two taxpayers, Sally Anne Chriss and Donna Elizabeth Gariepy. The taxpayers had argued that they had effectively resigned from 105 Ltd, and were therefore not liable for the corporation’s failure to remit source deductions to the CRA.
The FCA reversed the TCC’s decision, holding that the taxpayers had not properly resigned.
The taxpayers had become the directors of 105 Ltd upon the request of their respective spouses, whose prior corporation had ended up insolvent. The spouses asked the taxpayers to act as directors because they believed that their liabilities with respect to the prior corporation would affect 105 Ltd. From the outset, the taxpayers understood that they would cease to be directors of 105 Ltd in 2001.
In 2001, the taxpayers both told their spouses that they wanted to resign as directors. A solicitor at Gowlings drafted the resignations, but the resignations were never signed by the taxpayers, and never left Gowlings’ offices.
The FCA held that “in the absence of the communication of a written resignation to the corporation, a resignation is not effective”: (at para 9). On this point the FCA, explained that the written notification requirement is necessary because third-parties rely on representations as to who is responsible for corporate governance. Put otherwise, the status of directors must be capable of objective verification.
The FCA also considered the effective timing of a resignation, emphasizing that a resignation only becomes effective a) when it is received by the corporation, or b) at the time specified in the resignation.
In addition, the FCA discussed the availability of the due diligence defence, explaining that under the Income Tax Act and pursuant to Canada v Buckingham (2011 FCA 142), the defence must be assessed on an objective standard, which evaluates a taxpayer’s actions against a reasonably prudent person “in comparable circumstances”: (at para 20).
Finally, considering the claim that the taxpayer’s had lost control of the corporation, the FCA emphasized that, with respect to employee deductions, “the law is clear as to the obligations of the directors…If they diverge from the course of action the law prescribes, they do so at their peril”: (at para 31).
As of December 2016, the taxpayers have filed leave to appeal with the Supreme Court. However, at this point it is unclear if the Supreme Court will decide to hear the case.
This case is a strong reminder of the gravity associated with corporate directorship, a position that can incur significant liabilities. The decision to become a corporate director should not be taken casually. In addition, the case demonstrates the importance of properly executed resignations. Resignations are effective, only with communication of written resignation to the corporation. Without such objective evidence the resignation will not count.
The Court of Appeal's decision also significantly underscores that the tests for the effectiveness of a resignation of a directorship, and the application of the so-called due-diligence defence under sections to 227.1 of the Income Tax Act and 323 of the Excise Tax Act, are to be measured and applied on the basis of the "objective" standard. This is important because it means that subjective intention of the director, both in attempting to resign, and in attempting to govern the corporation in a duly diligent manner, takes a backseat to how the situation would be regarded objectively by the "reasonable person.”
Kathryn Walker and Robert G. Kreklewetz
A version of this article appeared in the December 2016 issue of GST & Commodity Tax.