Tax & Trade Blog
Effective Resignation is Crucial in Defeating Director's Personal Liability for Corporation's Tax Debt
A director can defeat personal liability for his/her corporation’s tax debt by establishing that the director’s assessment was made more than two years after he/she has ceased to be a director of the corporation (section 325(5) of the Excise Tax Act (“ETA”); section 227.1(4) of the Income Tax Act). What a director needs to do in order to demonstrate that there was an effective resignation? As discussed in the following cases, an objectively verifiable communication of a resignation to the corporation is required and that any mess up in the requirements of Ontario’s Business Corporations Act (“OBCA”) will affect the efficacy of the resignation. When in doubt, it is advisable for directors to seek legal advice.
In Gariepy v. The Queen (2017 TCC 106), the appellants, who were directors, expressed their desire to resign as directors to their husbands, who were the owners of a company (the “Corporation”). The Corporation’s solicitor was instructed to draft the resignations but they were not executed, contained a blank date field and never left the solicitor’s offices. As the Corporation failed to remit payroll tax withholdings, the appellants became personally liable for the corporation’s unremitted amounts. The appellants appealed to the Tax Court of Canada (“TCC”), arguing, among others, that the steps taken by them meant that they had in fact resigned as directors. The TCC agreed and held that the steps taken by the directors resulted in an effective resignation. However, the TCC’s decision was overturned by the Federal Court of Appeal, which determined that merely a subjective intention to resign would not be sufficient and that there must be written resignation which can be objectively verified (2017 TCC 106).
In Sud v. Her Majesty The Queen (2017 TCC 106), the appellant’s corporation ceased operations in August 2005. When the corporation failed to repay the tax debt, the appellant, as the sole director of the corporation, was assessed in August 2014 in respect of the corporation’s unremitted amounts. The corporation was eventually dissolved by the Ministry of Finance in October 2016. The appellant appealed to the TCC on the basis that he did not act as a director after the corporation ceased operations in August 2005 and, therefore, the director’s assessment was out of time. The main issue before the TCC was whether the appellant ceased to be a director two years prior to the 2014 assessment.
The TCC began by pointing out that section 121(2) of the OBCA specifically requires resignation to be in writing and to be received by the corporation. The TCC found that the appellant did not ever formally resign from being a director. The TCC further reconfirmed that the fact that the corporation ceased operation was not relevant to the determination of director’s liability as the appellant continued to be involved in the corporation’s affairs after it became inactive. Accordingly, the TCC held that the appellant would still be considered a director until the corporation was dissolved in 2016. In obiter, the TCC raised the question that even if the appellant did resign as a director, it was not clear whether the appellant’s resignation would even be effective as section 115(2)(a) of the OBCA requires a corporation to have at least one director.