A director of a corporation is personally liable under subsection 323(1) of the Excise Tax Act1 ("ETA") for the failure of the corporation to remit goods and services tax ("GST"). However, subsection 323(5) imposes a time limit on this liability whereby a director will not be held liable for unremitted GST two or more years after ceasing to be a director. Unfortunately, the Tax Court of Canada's ("TCC") decision in Snively v. The Queen2 ("Snively") makes it more difficult for an individual to rely on subsection 323(5). Indeed, this decision may have broader ramifications on directors' liability in general, and beyond the ETA. According to the TCC, an individual may still be a deemed director of a corporation even after formally resigning from that position.
In Snively, the Appellant was the sole shareholder and director of a corporation incorporated in Ontario (the "Corporation"). In 2002, facing severe difficulties, the Appellant consulted his lawyer, and decided to wind down the Corporation's activities and sell its assets. In September 3, 2002, the Appellant formally resigned as officer and director in a letter to his lawyer. His lawyer then filed the letter with the corporate records. From that date, no new director was appointed, and the Corporation carried on without a director. By November 2002, all of the Corporation's equipment had been sold, and uncompleted contracts transferred to a new company. The Appellant remained a signing officer of the Corporation, and continued to collect accounts receivable for the Corporation.
Even though the Corporation was inactive after November 2002, it was never fully dissolved. Moreover, the Appellant gave instructions to the Corporation's accountants to continue to prepare financial statements and file income tax returns. The Appellant signed these tax returns as an authorized signing officer for the Corporation. In February 2004, the Corporation was reassessed for failing to collect and remit GST on a project. In response, the Corporation filed a Notice of Objection. Subsequently, on October 11, 2005, the Appellant was assessed and held personally liable for the unremitted GST.
The Appellant appealed to the TCC and argued that he was not personally liable given that it had been more than two years between his resignation on September 3, 2002 and the initial assessment on October 11, 2005. The Appellant argued that his actions on behalf of the Corporation after his resignation were residual in nature and undertaken merely to wind down the Corporation. Even then, all such actions ceased before October 11, 2003. Finally, the Appellant stated that any other actions on behalf of the Corporation were taken in his capacity as shareholder or authorized signing officer. However, the TCC ruled against the Appellant on this issue.
Deemed Director – Resignation Alone May Not be Sufficient
The TCC agreed that the Appellant ceased to be a de jure director of the Corporation in September 3, 2002. Nevertheless, the TCC noted that "director" is not a defined term in the ETA. Thus, the TCC looked to the incorporating legislation, the Ontario Business Corporations Act3 (the "OBCA"), to supply the definition. Subsection 115(4) of the OBCA states that an individual may be a deemed director of a corporation in certain circumstances:
"Where all of the directors have resigned or have been removed by the shareholders without replacement, any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director for the purposes of this Act."
Based on the facts of the case, the TCC ruled that the Appellant was a deemed director per subsection 115(4) of the OBCA. The TCC highlighted the fact that no other director was appointed after the Appellant resigned. Moreover, the Appellant's role in the Corporation did not change even after his resignation, and there was no indication that management and supervision of the Corporation were transferred to another individual. While the amount of work performed by the Appellant declined, the TCC noted that the nature of the work performed by the Appellant remained the same.
Ceasing to be a Deemed Director
The TCC went on the consider the issue of when a deemed director ceases to act as such. Referring to the decision in Bremner v. The Queen4 ("Bremner"), the TCC indicated that "a deemed director does not cease to be a director merely because a company's commercial operations end" as there are other director duties that continue after the cessation of operations.5 According to Bremner, a former director who has officially resigned but continues to act in the manner of a director, or who holds himself out to be a director, can be considered a de facto director subject to the same liabilities as a de jure director. Bremner was upheld by the Federal Court of Appeal.
Based on Bremner, the court in Snively went on to list the actions taken by the Appellant which are consistent with management and supervision of the Corporation even after the it ceased operations. For example, the Appellant directed the Corporation's accountants to prepare the tax returns and signed the tax returns. Also, the Appellant gave instructions to counsel regarding the filing and handling of the Notice of Objection. The TCC disregarded the Appellant's claim that he was only acting as an authorized signing officer or shareholder. There was no proof that the Appellant's "authority was limited to signing documents on behalf of the corporation"6, and that someone else was in charge of the Corporation.
Directors of Canadian corporations are exposed to personal liability under a host of different statutes. Conceivably, the ruling in Snively can be extended to these other statutes where "director" is not defined. In addition, this ruling is troubling for the small, private corporation with few active shareholders. It is very difficult for such shareholders to distance themselves from their corporation, and activities normally performed by directors.
1. R.S. 1985 c.E-15, as amended.
2. 2011 TCC 196.
3. R.S.O. 1990, c. B.16.
4. 2007 TCC 509.
5. Supra note 2 at para 32.
6. Supra note 2 at para 38.
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