Canada: Buckingham v. Canada – A New Standard for Due Diligence In Director’s Liability Tax Cases?

In our article, "The CRA is not a Bank - Director's Liability in an Age of Economic Uncertainty",1 we strongly warned corporate directors to make sure that source deductions, GST/HST, employee EI premiums and employee CPP contributions are remitted to the Crown and not used as operating funds, regardless of whether the corporation has cash flow problems. This is because a corporation's failure to remit these amounts makes directors personally liable for the default, if:

  1. the Canada Revenue Agency ("CRA") is unable to collect from the corporation;
  2. the director currently holds that position or has within the last two years; and
  3. the director failed to exercise the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

The Federal Court of Appeal ("FCA") judgment in Buckingham v. Canada2 may have set a new standard for due diligence. Unfortunately, as discussed in more detail below, a subsequent FCA case applied the pre-Buckingham standard. As a result, it is unclear which standard will prevail. This makes litigating director's liability cases involving a due diligence defence essentially a judicial lottery for the foreseeable future.

Buckingham concerned unremitted source deductions and GST/HST. The main issue was the appropriate standard of care, diligence and skill required of a director to avoid being held personally liable for a corporation's failure to remit those amounts.

Mr. Buckingham was chairman of the board of a corporation and also its largest shareholder. The corporation folded after experiencing losses for two consecutive years and failing to secure adequate financing. The corporation ceased operating without remitting certain amounts deducted, withheld or collected on behalf of the Crown, ultimately leading to reassessments against Mr. Buckingham personally. Mr. Buckingham and the Minister of National Revenue ("Minister") were each partially successful in a hearing before the Tax Court of Canada ("TCC"). When they both appealed, the FCA allowed the Minister's appeal and dismissed Mr. Buckingham's appeal.

Buckingham is significant because the FCA held that:

  1. the standard of care, diligence and skill required of a director is objectively determined. The FCA adopted and followed the reasoning in the Supreme Court of Canada's judgment in Peoples Department Stores v. Wise,3 which concerned a provision of the Canada Business Corporations Act. On this point, the FCA overruled its own previous judgment in Soper v. Canada,4 in which the FCA held that the appropriate approach was the more forgiving "objective subjective" standard.5 The objective standard from Peoples Department Stores is much stricter than the objective subjective standard from Soper, in that it disregards the personal knowledge, background and circumstances of the individual director. Thus, if this standard is applied in the future it will be much more likely that Courts will uphold the CRA's reassessments against directors who seek to rely on a due diligence defence;
  2. the due diligence standards under the Income Tax Act (Canada) and the Excise Tax Act (Canada) are indistinguishable, thus overruling the TCC, which had incorrectly held that while GST/HST is paid by third parties and held in trust for the Crown, source deductions are funded by the company's available resources; and
  3. a due diligence defence under either taxation statute will not be successful where the efforts of the directors are intended to cure failures to remit, rather than prevent the failures. The FCA emphasized that it has typically been the directors' duty to prevent failures to remit, not to allow the failure to happen in the hope that the deficiency could be rectified later. In this case, the FCA noted that Mr. Buckingham had transferred part of the risk associated with the transaction to the Crown and that avoiding this type of shift is precisely why the relevant provisions existed.

However, this decision has received mixed treatment since its release. Although in Boles v. The Queen6 (released on June 9, 2011), the TCC relied on Buckingham, in a judgment delivered on May 10, 20117, Liddle, a different panel of FCA judges ignored Buckingham, and relied on Soper and Hartrell v. The Queen.8 At paragraph 12 of Hartrell, the FCA specifically questioned whether Peoples Department Stores could apply to a tax case, a question that was seemingly answered affirmatively by Buckingham. It is therefore difficult to reconcile the guidance from Buckingham with the judgment in Liddle, and it appears that the only way out of this conundrum is for the Supreme Court of Canada to rule on the issue.

Buckingham is another cautionary tale for corporate directors. When the financial future of a business is uncertain, a director must be very careful to avoid applying unremitted tax money toward keeping the business afloat. Every step taken by a director in an effort to keep a business operating at the potential expense of the Crown may negatively affect future reliance on the due diligence defence, and result in personal liability for the director.

We would like to thank student-at-law Christina Sgro for her kind assistance in preparing this article.


1.Published in the May 11, 2009 edition of Taxation Law @ Gowlings.

2. 2011 FCA 142 ("Buckingham").

3. [2004] 3 S.C.R. 461.

4. [1998] 1 F.C. 124 (FCA) ("Soper").

5. Pursuant to the "objective subjective" standard, directors are not regarded as a homogeneous group governed by a single, inflexible standard, but rather are judged with reference to their individual personal knowledge and background, as well the relevant circumstances, including the corporation's organization, resources, customs and conduct. Therefore, a higher standard applies for well experienced directors with superior qualifications.

6. 2011 TCC 288 ("Hartrell").

7. Liddle v. The Queen, 2011 FCA 159 ("Liddle"), at paragraph 5.

8. 2008 D.T.C. 6173.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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