A recent case has hopefully clarified a huge issue for so called "derivative assessment" of directors and other person potentially at risk for a corporate taxpayer's tax liability.
By way of background, when CRA assesses a corporate taxpayer or GST registrant and is unable to collect on the taxes assessed, the CRA is permitted to turns its gaze to certain persons, and assess them personally. The most common example of that is a "directors' liability assessment" (DLA): ETA s. 323 / ITA s. 227.1. Other examples include issuing a "related party assessment" (RPA) to parties related to a tax debtor, for less than fair market value (FMV): ETA s. 325 / ITA s. 160.
Under prior case law (e.g., Pliskow, 2013 TCC 283; and Filippazzo, 2000 CanLII 250 (TCC)), the Tax Court of Canada has suggested that a director was personally liable under ETA s. 323 / ITA s. 227.1 for the tax debts of the corporate tax debtor from the moment those tax debts arose (e.g., at the time of the corporate default). This was an important point, because it lead to the classification of these directors as "tax debtors" themselves, and precluded them from attempting to judgement-proof themselves, by, say, disposing of assets for less than FMV to a wife or child prior to the CRA's issuance of the DLA.
We had noted previously here and here that this caselaw seemed faulty, and that it was likely that a director was not personally liable until the DLA was actually issued – theoretically allowing a director to deal with his or her assets prior to the DLA as the director so wished.
A more recent Tax Court case in Colitto v. The Queen, 2019 TCC 88 seems to have changed the law, confirming our views from 2014.
On the facts, a corporation named Precision failed to remit source deductions from Feb. – Aug. 2008. In May of 2008, Mr. Colitto, Precision'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 October 10, 2008, and Mr. Collito was issued a DLA on March 28, 2011. Five years later -- January 13, 2016 – the CRA issued the director's wife, Ms. Colitto, an RPA in the amount of $228,746.
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.
In the result, the TCC ruled 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). Because that did not occur until January 2011, the less than FMV transaction between Mr. Colitto and Mrs. Colitto was not undertaken at a time that Mr. Colitto was a tax debtor; hence there was no basis for assessing Ms. Collito under ITA s. 160.
There remained a possibility that ITA s. 227.1 applied liability retroactively on Mr. Colitto in respect of his 2008 taxation year (the year of Precision's failure to remit). Justice Visser reviewed the prior case law on the interaction between ITA s. 227.1 and ITA ss. 160, including Filippazzo and Pliskow, but declined to follow those prior cases as "it is not apparent that these cases engaged in a textual, contextual and purposive interpretation of how sections 160 and 227.1... should interact with each another." Instead, Justice Visser determined that Mr. Colitto's ITA s. 227.1 liability as a director was not "in or in respect of" his 2008 taxation year. Ms. Colitto's assessments under ITA s. 160 were therefore reversed.
By way of commentary, the Colitto case is a possible gamechanger, and directors with personal liability assessments ought to seek out specialized tax advice to understand their options. While Colitto is much more thorough and reasoned in its analysis than prior TCC decisions – in our view – there could also be other statutes (e.g., Ontario's Fraudulent Conveyances Act and/or the Assignments and Preferences Act, which may render certain transactions void or voidable).
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