Introduction — Directors’ Liability for Tax
The Canadian Income Tax Act and the Canadian Excise Tax Act make the directors of a corporation jointly and severally liable for certain tax debts of the corporation. In particular, directors are liable for the GST/HST and payroll remittance arrears of the corporation they are a director of. Directors are not liable for the income tax arrears of the corporation of which they are a director. The Canada Revenue Agency cannot attempt to collect from directors until they are validly assessed and certain procedural steps are taken. In particular, the CRA cannot assess the directors of a corporation until it has attempted and failed to collect the money from the corporation, or the corporation has gone bankrupt. The Canada Revenue Agency also cannot assess a director more than two years after the director last ceased to be a director. It is also possible for directors to escape liability for the arrears of their corporation if they can show that they exercised the degree of care, diligence and skill necessary to prevent the failure by the corporation to remit tax that a reasonably prudent person would have exercised in comparable circumstances. If you are the director of a company with GST/HST or payroll remittance arrears, please consider contacting one of our experienced Toronto tax lawyers regarding what steps you should take to limit your tax liability.
Directors’ Liability for Tax – De Facto Directorship
Directors’ liability applies to individuals who are validly appointed directors of a corporation under the incorporating statute of that corporation. These directors are called de jure directors. In addition, individuals who are not validly appointed directors of a corporation, but act or hold themselves out as directors of that corporation to a sufficient degree are also liable. Individuals in this second category are called de facto directors.
There is no single test which determines whether someone is a de facto director. Instead, the courts consider a number of different non-exhaustive indicators to determine whether an individual is a de facto director such as:
- • Whether the individual has been signing documents as a director,
- • Whether the individual has been signing tax returns,
- • Whether the individual has been attending director’s meetings,
- • Whether the individual introduces themselves to third parties as a director,
- • Whether the individual signs directors’ resolutions,
- • Whether the individual plays a significant role in supervising the management of the company or otherwise controlling the company.
It is also important to note that former de jure directors may become de facto directors if after they cease to be a de jure director, they lead other people to believe they are still serving as a director or if they continue in the same manner within the corporation after ceasing to be a de jure director as they did while they were a de jure director. If you are concerned that you may be a de facto director, please consider contacting one of our expert Toronto tax lawyers.
Directors’ Liability for Tax – Defences for De Facto Directors
De facto directors have access to the same procedural protections and defences as de jure directors. In particular, de facto directors have access to the due diligence defence and a former de facto director cannot be validly assessed on the basis of directors’ liability if they last ceased to be a de facto director more than two years ago. It is worth noting however that determining the time at which an individual ceased to be a de facto director is often more complicated and difficult to demonstrate than when an individual last ceased to be a de jure director. The most common ways individuals cease to be a de jure director is by virtue of delivering a written resignation to the corporation, or by the corporation being dissolved. Both events are easy to put a specific date on. Since the method the courts have adopted for determining whether an individual is a de facto director is multi-factor and highly fact dependent, it is frequently unclear when an individual ceased to behave as a de facto director.
De Facto Directorship - Tax Tips
Individuals should be cautious in their dealings with corporations which are in financial difficulty or known to be failing to remit GST/HST or their payroll source deductions. Since it is possible to become a de facto director by accident when dealing with a corporation, it is prudent to consult an experienced Toronto tax lawyer regarding whether your involvement could establish you as a de facto director and what specific behaviors you should avoid. If you are involved with a corporation in financial difficulty and are not a de jure director, it is worthwhile to send letters or other written communications that explicitly state you are not a director of the company and then keep copies of those communications. Should the Canada Revenue Agency ever attempt to assess you on the basis of being a de facto director, those documents would provide an evidential base for rebutting any assumptions made by the CRA.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."