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Published: April 16, 2020

Last Updated: October 25, 2021

CASE STUDY: Rotfleisch & Samulovitch Successful in Cancelling Tax Trust Exam and Preventing Directors Liability Assessment


Brief Trust Exam Overview

Rotfleisch & Samulovitch Professional Corporation was retained by an entrepreneur in the construction industry. Over his career, the entrepreneur started several businesses some of which failed and some of which succeeded. In 2017 the entrepreneur was contacted by a trust examiner regarding the payroll remittances of two corporations (Aco and Bco), which he had used to run previous businesses in the past. A trust examiner is a Canada Revenue Agency (“CRA”) auditor who specializes in GST/HST or payroll audits. They are called that because the CRA treats business as holding payroll and GST/HST amounts in trust for the government. This is because the Canadian Tax Law requires employers and businesses to collect income tax from their employees and GST/HST from their customers, hold that money in trust for the government, and then remit the money to the government.

In his initial contact letter, the trust examiner set two dates for initial meetings with the entrepreneur, one regarding each corporation. Most of the periods under tax audit were over seven years in the past. The entrepreneur was surprised to hear about the corporations again as both had been inactive for many years and he had not taken any action regarding them for many years. Soon after receiving this letter, the entrepreneur decided to consult a tax lawyer and contacted our tax law firm.

The entrepreneur had limited records concerning Aco and Bco. The entrepreneur had Aco’s minute book and almost no records concerning the corporation’s finances or employees. For Bco, the entrepreneur had no minute book and almost no other records. The entrepreneur’s recollection of the both businesses was that they had failed and that it was plausible there was failure to remit both payroll and GST/HST. Neither corporation had any assets remaining. The entrepreneur’s also recalled being a director of both corporations and that he was unsure if he had resigned from one or both corporations. His remaining records did not contain a written resignation for either corporation.

Problems & Challenges – Trust Exam and Director’s Liability

The entrepreneur’s case involved two primary challenges. The first was that the lack of documents meant that if the entrepreneur participated in the trust exam, it would be very difficult for him to make an effective case to the trust examiner. CRA auditors have the ability to make factual assumptions about a taxpayer’s business in order to fulfill their role. These assumptions will effectively determine the taxpayer’s liability unless he or she can disprove them, either during the audit or in the course of a subsequent objection or appeal. It is difficult for taxpayers to displace the factual assumptions made by a Canada Revenue Agency auditor unless they have documentary evidence to back up their case. Since the entrepreneur had very little documentation pertaining to the periods under audit, defending himself in the trust exam would be difficult. When tax auditors are faced with a lack of documentation, they often make worst case assumptions, which can result in incorrect and unreasonably large tax liability for tax payers.

The second problem is that as a director or former director of Aco and Bco, the entrepreneur was potentially liable for the payroll remittance arrears of the corporations. Provided that certain conditions are met CRA has the ability to assess directors for the payroll or GST/HST liability of the corporations of which they are a director. These assessments are not automatic and there are defences available in certain situations. One of the most common defences is based on the director exercising the appropriate level of due diligence to prevent the failure to remit payroll or GST/HST. The other most common defence is for the director to resign and to take advantage of limitation period that prevents the former director from being assessed once two years have elapsed since they last ceased to be a director. Both these defences appeared difficult for the entrepreneur to establish due to the limited documentation available concerning the events during the period under audit and without copies of any written resignations that the entrepreneur may have delivered to the corporations.

The Approach & Solution – Dissolution and Director’s Liability

In the course of reviewing all of the available information, our firm ordered information regarding both corporation’s from the corporate registry. That information revealed that Aco had been dissolved in 2011 and that Bco had been dissolved in 2009. Both businesses had ceased to operate by the time they were dissolved. This allowed us to formulate a solution to both of the problems above.

Our approach was to request that the trust examiner cancel both trust exams and in particular, that they do not involve the entrepreneur in any future audits of the corporations or any attempts to collect any debts owing by the corporations. We brought up several reasons for this request. First since the corporations had been dissolved, the entrepreneur was no longer a director or officer of either corporation and so could no longer act as an agent of either corporation in the trust exams. Second, the entrepreneur had almost no documents relating to the corporations and was not able to request more documents from third parties like banks because he was no longer an officer or director of either corporation. Third, the CRA would not be able to collect from the entrepreneur via a director’s liability assessment.

Our argument for why the entrepreneur could not be assessed for director’s liability was based on the two year limitation period mentioned above. When a corporation is dissolved, it ceases to exist and its directors cease to be directors of the corporation. The Tax Court of Canada has considered cases where a director ceased to be a director by virtue of the corporation of which they were a director being dissolved and has come to the conclusion that it is sufficient to meet the requirements of the limitation period. Since both corporations were dissolved more than two years before the entrepreneur was approached regarding the trust exams, the limitation period applied.

Results – Trust Exam and Directors Liability

Initially we attempted to contact the trust examiner by phone to discuss cancelling the trust exams. Unfortunately, the trust examiner ignored our calls and voicemails. As we had not gotten a response, we wrote a letter to the trust examiner requesting that the trust exams be cancelled and explaining our reasons as outlined above. The trust examiner responded to the letter by informing us that the trust exams would be suspended while his superiors considered the contents of the letter. Several months later, the trust examiner informed us that the CRA would not be proceeding and that the trust exams for both corporations were cancelled. No director’s liability assessments were levied against the entrepreneur with respect to Aco or Bco.

Practical Tax Tips – Tax Trust Audits

Disputes with the Canada Revenue Agency are complex and require expert assistance from Canadian tax lawyers. It is also important to involve a tax lawyer in the process as early as possible in the process. Had the entrepreneur not consulted an expert in tax law, it is likely that the trust exams would have proceeded and he would have been assessed for the payroll remittance arrears of the corporations. This would have lead to him either being required to pay tax that he was not legally obligated to pay, or to a much more expensive and time consuming journey to the same result through an objection or an appeal to the Tax Court of Canada. Tax law expertise is required to respond properly to the CRA, and the earlier you involve a tax lawyer in the process, the more likely that you will get a quick and cost effective outcome.


"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."

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