Canada: Directors’ Derivative Liability For Appropriation Of Crown Funds


When a corporation is insolvent or on the path to insolvency, all too often it improperly sources cash by appropriating for its own use monies collected from sales taxes and monies deducted from employees' wages and meant to be submitted to the Canada Revenue Agency.

This is clearly in breach of the Excise Tax Act ("ETA") and the Income Tax Act ("ITA"), respectively.

Subsection 227.1(1) of the ITA states that the directors of the corporation at the time the corporation was required to deduct and remit these monies, are jointly and severally liable with the corporation to pay that amount and any interest or penalties relating thereto.

If claims are made against directors for unremitted source deductions, the directors have a due diligence defence. They are not liable if they exercised the duty of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.1 Similar provisions are found in the ETA.2

Note that each of these Acts provides that no proceedings may be commenced more than two years after the director last ceased to be a director. Neither the Canada Business Corporations Act ("CBCA") nor the Ontario Business Corporations Act ("OBCA") require that a resignation be made in writing. If assessed, the person who claims to have resigned as a director will be required to present credible evidence to support that position. Accordingly, a director who has resigned would be well-advised to submit his or her resignation, dated, and in writing and then present it to the corporation for inclusion in the corporation's minute book and records. It is advisable to ensure that the requisite notice of change is filed with the applicable ministry offices.

Claim Against a Director

When a director is assessed for the corporation's failure to remit taxes, there are two issues that must be addressed.

  1. Was the person who was assessed as a director actually a director?
  2. Has that person demonstrated conduct to support the claim that he or she acted with care, diligence and skill to prevent the failure to remit the subject monies? Neither the ITA or the ETA defines "director".

The CBCA and the OBCA3 each defines a "director" to mean a person occupying the positon of director by whatever name called. It would appear that the legislative draftsperson intentionally left the definition wide as so to be capable of flexible adaptation (my emphasis).

The Court in Christopher Roderick MacDonald and Her Majesty the Queen4 referred to Mosier v. R.5 where the Court stated that for the purposes of directors' liability under the ITA and ETA, a director may be a de jure director or a de facto director. A de jure director is an individual who has been properly elected or appointed provincially pursuant to the relevant legislation. But a de facto director, as pointed out in the Mosier case, can exist in two forms: (i) one who is ostensibly duly elected, but who may lack some qualification under the relevant corporate law, or (ii) one who simply assumes the role of director without any pretense of legal qualification.

Both a de facto and a de jure director could be liable for failure to remit source deductions under the ITA.

As stated in Scavuzzo v. R:6

I think it will be apparent that one must be careful about the use of the expression de facto director. It does not cover as broad a field as is sometimes ascribed to it. It does not, for example, at least for the purposes of the derivative liability of directors under the ITA and the ETA cover everyone who exercises authority in the corporation. It may cover persons who although elected as directors may not be because of some technical requirement. And it also includes persons who hold themselves out as directors so that third parties rely upon their authority as directors.

In Wheeliker v. R.7 ("Wheeliker"), the Federal Court of Appeal stated as follows:

[S]ub-section 227.1(1) of the Act [ITA] imposes liability on all the directors of a corporation who have failed to remit to Revenue Canada the sums due. The word "directors" in the said sub-section is unrestricted and unqualified. It is a basic rule of legislative drafting based on the corresponding rule of interpretation which conditions drafting, that the use of a generic word without restrictions or qualifications conveys the legislator's intention that the word be given a broad meaning. Here by using the word "directors" without qualifications in sub-section 227.1(1) Parliament intended the word to cover all types of directors known to the law in company law, including amongst others de jure and de facto directors.

It is not appropriate to assess an alleged de facto director if there are legally appointed directors and officers at the relevant time. The test of de facto directors should only be considered in cases where a person is representing him or herself as a director.

Wheeliker further stated that directors ought not to use monies which the company is currently liable to pay over to the Crown to finance its current trading activities—the Court may draw the inference that the directors were continuing to trade at a time when they ought to have known that the company was unable to meet its current and accruing liabilities and was unjustifiably putting at risk monies which ought to have been paid over to the Crown.

It would appear that the Tax Court is prepared to give an alleged director some latitude in determining if that person was a de facto director. See Perricelli v. Rex8 and Hay v. Canada.9

In Christopher Roderick MacDonald v. Her Majesty the Queen,10 the Court found that all major decisions relating to the business were made by persons other than the appellant. While the appellant did sign some banking documents and certificates showing him as an officer/director, those documents were executed by him at the request of others, i.e., lawyers, bankers, accountants, etc. The Court further stated that with respect to those documents listing him as a director, the appellant relied entirely upon the preparers of such documents who are largely company solicitors who provided little or no explanation as to the nature of the documents or the financial situation of the company. The Court found that the appellant had never intended to act as a director, was never asked to be director, and had no knowledge of being a director. Accordingly, the appellant was not found to be a de facto director or a de jure director.

A person who has been elected or appointed as a director, but lacks the appropriate qualifications, will not be considered a de jure director, but if that person actually acts a director, he or she may be a de facto director. In essence, such a person who has acted as a director cannot claim his or her lack of qualification as a de jure director. He or she may nonetheless be considered a de facto director.

Due Diligence Defence

In Wheeliker, the Court had to consider whether the director met the standard of care provided for in subsection 227.1(3) of the ITA.

It would appear no positive steps were taken such as setting up controls to account for remittances, asking for regular reports from the Manager on the ongoing use of such controls. The failure continued to occur for some time. In fact, the directors delegated their authority to the Manager, but literally failed to control its exercise notwithstanding clear evidence and repeated omissions and failure on the Manager's part. The delegation amounted to abdication.

The Court held the directors failed to exercise the degree of care and diligence expected to prevent a failure to withhold and remit when such known failure was allowed to repeat itself uninterruptedly for one year.

In Charles Hugh Maddin and Her Majesty the Queen11 ("Maddin"), the Court referred to an objective standard as set out by the Supreme Court of Canada in People's Department Stores Inc. (Trustee of) v. Wise.12

The Court concluded in Maddin that a director must focus upon the source deductions issue and must exercise due diligence directed to prevent a failure to remit same. These dual obligations are to be consistent, omnipresent, and invariable; a creative or alternative business plan, no matter how plausible, economic, or lucrative, which diverts or attempts to divert resources away from remitting source deductions to the Crown, will end availability of a due diligence defence.


It is incumbent upon a director to ensure that the Crown funds are remitted and to requisition a meeting of directors to ensure proper compliance. A director should be proactive; he or she should speak and act against the corporation's failure to comply with the ITA and ETA. Evidence to support the director's insistence upon meaningful and timely compliance should be noted in the corporation's records and in the minutes of the directors' meetings. It is always open for a concerned director to resign and start the limitation clock running, but some may consider this to be an abdication of responsibilities and duties provided by corporate legislation which imposes duties upon the directors to act in the best interests of the corporation, i.e., to cause the subject taxes and deductions to be remitted.


1. Section 227.1(3) ("ITA").

2. Section 323(1)(3).

3. Section 2(1); section 1(1) of the CBCA and OBCA, respectively.

4. 2013-2568 (IT) 1, 2013-2569 (GST) 1.

5. [2001] GSTC 124.

6. 2005 TCC 772.

7. 1999 Carswellnat 417.

8. [2002] GTC 244.

9. 2004 TCC 51.

10. 2013-2568 (IT) and 2569 (GST).

11. 2012-2024 (IT) G.

12. 2004 SCC 68, [2004] 3 SCR 461.

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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