Canada: Statutory Sources Of Liability

Directors of corporations (whether federal, provincial, public, private or non-profit) are responsible for supervising the management of the affairs of the corporation. In the course of carrying out those responsibilities, directors are exposed to a growing number of statutory liabilities.

Directors have obligations to manage the affairs of their companies and govern themselves in accordance with the incorporating statutes for their companies. In addition to these obligations, directors have specific statutory obligations.

Of all the liabilities that directors face, those relating to tax or source deduction remittance are the ones most likely to materialize. If there has been a failure to remit or withhold tax under the Income Tax Act (Canada) (ITA), directors are jointly and severally liable with their companies for payment of tax, interest and penalties. Section 227.1(1) of the ITA provides that, if a corporation has failed to deduct, withhold, remit or pay tax as required, directors are jointly and severally liable with the company to pay the amount owed. Liability is imposed on individuals who are directors at the time the corporation was required to deduct, withhold, remit or pay the tax.

In addition to the above, there is also potential liability under Section 242 of the ITA. If a corporation commits any offence under the ITA, any officer, director or agent of the corporation who directed, authorized, assented or acquiesced to or participated in the commission of the offence is a party to and guilty of the offence. This very broad exposure to liability applies to offences such as failing to file tax returns, failing to withhold or remit taxes, failing to keep proper records and documentation, failing to carry out compliance offers and making false or deceptive statements on a tax return. The Excise Tax Act is an Act that imposes joint and several liability on directors and their companies for failure to remit the Goods and Services Tax.

Other remittance statutes and obligations to note are the Ontario Retail Sales Tax Act, the Ontario Pension Benefits Act, the Employment Insurance Act (Canada), the Canada Pension Plan and the Employer Health Tax Act (Ontario). Most of the abovementioned statutes allow for the defence of reasonable due diligence. In other words, liability can be avoided if the director is able to establish that he or she exercised a reasonable degree of care, diligence or skill to prevent the failure to withhold or remit.

Corporate and employment statutes in many provinces impose liability upon directors for a portion of unpaid wages, vacation pay and other employment related obligations.

As a practical matter, a director’s liability for unpaid wages or vacation pay will only arise after recovery against all assets of the corporation has been exhausted. In addition, there are procedural requirements for recovery of such claims. The director must be acting or have acted within two years that the claim arose (six months in the case of the Ontario Business Corporations Act (OBCA)) and the corporation must be sued within six months after the debts became due.

Safety in the workplace is not only the employer’s obligation; it also extends to the directors of the employer corporation. In Ontario, the Occupational Health and Safety Act (Ontario) (OHSA) places an obligation on directors to take all reasonable care to ensure that their corporation complies with:

• the provisions of the OHSA and its regulations;

• orders and requirements imposed by inspectors and Directors empowered under the OHSA; and

• orders of the Minister of Labour.

Offences under the OHSA involve strict liability, meaning that offences can be committed without there being an accompanying intent to break the law. If a corporation is convicted, directors may also be prosecuted for failing to comply with their statutory duty to take all reasonable care to ensure such corporate compliance.

The OHSA is a regulatory statute and, as such, imposes strict liability but not absolute liability on corporations and their directors. The Crown must prove the commission of the offence beyond a reasonable doubt; thereafter, the onus shifts to the accused to prove the existence of due diligence upon a balance of probabilities. To establish the due diligence defence, an accused director must prove, on a balance of probabilities, that all due care or "due diligence" has been taken to prevent the act or omission that forms the basis of the charge.

The Ontario Business Corporations Act and Canada Business Corporations Act ("CBCA") impose director liability for a variety of corporate actions or failures to act. These include duties to creditors of the corporation, meeting the requirements with respect to the purchase, redemption or other acquisition of shares and the payment of dividends. Under Federal Bankruptcy legislation, directors are also jointly and severally liable for authorizing the improper payment of dividends or for "reviewable transactions" between related corporations. There are also obligations relating to financial assistance provided by the corporation in connection with the purchase of its shares, share issuance, indemnification payments and unreasonable commissions.

One of the most important defences available to directors with respect to the above possible sources of liability is the reliance defence. The OBCA provides that a director is not liable for certain actions or breaches of the general fiduciary duty if he or she relies in good faith on:

• financial statements of the corporation represented to him or her by an officer of the corporation or in a written report of the auditor of the corporation to present fairly the financial position of the corporation in accordance with generally acceptable accounting principles; or

• a report of a lawyer, account, engineer, appraiser or other person whose profession lends credibility to a statement made by any such person.

In the case of the CBCA, the reliance defence has been replaced with the defence of due diligence. This permits the director to show that he or she acted reasonably in the circumstances and, as such, is broader than the reliance defence. The due diligence defence provides that a director will not be held liable in certain circumstances if he or she exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances, including reliance in good faith on:

• financial statements of the corporation represented to the director by an officer of the corporation or in a written report of the auditor of the corporation fairly to reflect the financial condition of the corporation; or

• the report of a person whose profession lends credibility to a statement made by the professional person.

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.