Canada: Canada v. Chriss – Directors Tax Liability Defences – Toronto Tax Lawyer Case Comment

Last Updated: June 5 2017
Article by David Rotfleisch

Introduction – Canada v. Chriss & Directors Tax Liability Defences

Under Canadian tax law, the directors of corporations can be held personally liable for the unpaid GST/HST or payroll remittances of their corporation. This liability is not unrestricted, and can be eliminated under certain circumstances including if the Canada Revenue Agency waits until two years or more have elapsed since the director resigned or if the director can show he or she diligently attempted to prevent the failure to remit. Canada v. Chriss is a recent case from the Federal Court of Appeal which deals with both of these limits to directors' tax liability.

The directors in Canada v. Chriss had resignations prepared, but did not execute them properly. Their resignations were accepted as effective by the Tax Court, but subsequently rejected by the Federal Court of Appeal. This underscores the importance of observing the relevant corporate formalities when resigning as a director. The taxpayers also made two due diligence defences that were ultimately rejected by the Federal Court of Appeal.

Background – Directors Tax Liability for Payroll and GST/HST Remittances

The Canadian Income Tax Act and the Canadian Excise Tax Act (GST/HST) contain provisions which allow the CRA to assess the directors of a corporation personally for unremitted payroll withholdings and GST/HST. The Canada Revenue Agency's ability to assess directors is not unrestricted; in particular, directors cannot be assessed for the remittance arrears of a corporation once two years have elapsed since they resigned. Another limitation on directors' liability is that if a director can show they exercised the degree of care, diligence and skill to prevent the failure to remit that a reasonably prudent person would have exercised in comparable circumstances, they are not personally liable for the corporation's remittance arrears.

In Canada v. Chriss, the court considered both of these limitations. The directors in the case argued both that they had successfully resigned and that they had exercised sufficient due diligence to shed the tax liability. If you are concerned about whether you are liable for the unpaid remittances of a corporation of which you are a director or former director, please consider contacting one of our top Toronto tax lawyers.

Facts – Canada v. Chriss Directors Tax Liability Defences

George Chriss and Derek Gariepy carried on an unsuccessful business through a corporation, CG Industries which eventually became insolvent with significant remittance arrears. Mr. Chriss and Mr. Gariepy decided to take another shot at the same business, and opened a new corporation, 1056922 Ontario Limited ("105 Ltd"), to continue their business. Mr. Chriss and Mr. Gariepy decided that they would not serve as the directors of 105 Ltd, and instead their wives Mrs. Sally Anne Chriss and Mrs. Donna Elizabeth Gariepy (the "Directors") became the directors of 105 Ltd.

By 2001, 105 Ltd had run into significant financial difficulties and the Directors informed their husbands, who owned 105 Ltd and served as its officers, that they wished to resign. Mr. Chriss instructed the solicitors of 105 Ltd to prepare resignations for the Directors. Resignations forms were prepared for both Directors, but never signed. Both forms also contained a blank date field, and never left the offices of 105 Ltd's solicitors. The Directors did not take any action to prevent 105 Ltd from failing to remit tax withholdings.

A few months later, Mr. Gariepy instructed Mr. Paul Caroline, a lawyer at a different firm, to prepare a resignation for Mrs. Gariepy. This second resignation could not be recovered at the time of trial. A backdated version of this second resignation was later created and given to the CRA. Mr. Paul Caroline was also a major creditor of 105 Ltd, and during its financial difficulties he exercised significant influence over the company's activities.

105 Ltd failed to remit any tax withholdings between 2000 and 2005. In 2008, the Canada Revenue Agency assessed the Directors for 105 Ltd's remittance arrears.

Trial Decision at the Tax Court of Canada - Canada v. Chriss Directors Tax Liability Defences

The Directors through their Canadian tax lawyers argued that they were not liable on the basis that they were assessed more than two years after they resigned in 2001. In the alternative, the Directors argued that they met the standards of the due diligence defence for directors liability.

The Directors provided two different grounds as to why their inaction still qualified them for the due diligence tax defence. First, they argued that it was reasonable for them to believe they had resigned in 2001, and that a reasonable person in comparable circumstances who believed they resigned would also have not taken any actions. Second, they argued that even if they didn't believe they had resigned, Mr. Caroline had effectively taken control of the company, which made it impossible for them to take any steps to prevent the failure to remit anyways.

The tax court found that both Directors had successfully resigned in 2001. The basis for this decision was that Directors had communicated their intention to resign to the company and a written resignation was prepared, even though it wasn't signed or dated. The tax court pointed out that since the Directors told their husbands they wanted to resign, all of the officers, directors, and shareholders of the corporation knew the Directors intended to resign. In response, Mr. Chriss acting as an officer of the corporation had resignation documents prepared. The tax court was prepared to overlook the fact that the resignations were not signed. On this basis, the Tax Court of Canada found in favor of the taxpayers. The court did not find sufficient evidence for the existence of Mrs. Gariepy's supposed second resignation and did not accept the backdated version.

The court also considered the Directors' alternative arguments. The tax court accepted Mrs. Chriss's due diligence defence on the grounds that she had a reasonable belief that she resigned, which justified her lack of positive action to prevent the failure to withhold. The tax court rejected Mrs. Gariepy's parallel due diligence defence on the basis that she did not have a reasonable belief that she resigned since she and her husband later had a second resignation prepared. The court also rejected the due diligence argument based on Mr. Caroline taking control of the company for both Directors. The court points out that the fact that the influence Mr. Caroline had was due to him being a key creditor who needed to be paid to keep business operations going. In the view of the tax court, this type of economic influence is not sufficient to remove the powers of the directors and officers of a company over its affairs, and so does not remove the need to take positive action to live up to the standard required for the due diligence tax defence.

Appellate Decision at the Federal Court of Appeal – Canada v. Chriss Directors Tax Liability Defences

The Federal Court of Appeal overturned the Tax Court of Canada's decision and rejected all of the arguments made by the Directors. The Federal Court of Appeal rejected the efficacy of the resignations on the basis that the Ontario Business Corporations Act requires the corporation to receive a written resignation from a director in order for that director to resign. The court pointed out that may limitation periods require a precise date for when a director resigns, and that many third parties also need to be able to check who the directors of a corporation are. As a result, the law requires written resignations so that the status of directors is capable of objective verification. This lead the court to conclude that the unsigned letters of resignation with no effective date that never left the file of 105 Ltd's solicitors did not constitute a written resignation received by the corporation.

The Federal Court of Appeal rejected the tax due diligence argument on the basis of a reasonable belief in resignation for both Directors. The court states that the scope of the tax due diligence defence is informed by the nature of the responsibility in question. In the opinion of the court, the question of whether or not a person is a director is fundamental to corporate governance and by nature requires an unambiguous answer. Therefore, a reasonable belief in resignation must be attentive to the actual requirements of resignation. Since in this case, the directors never executed the written resignations or were told they were sent to the corporation, they cannot be judged to have a reasonable belief in having resigned. Additionally, the court emphasized that directors must carry out their duties on an active basis, and should not be allowed to rely on their own inaction. In this case, the court points out that a reasonable director would have insisted on being satisfied that their intention to resign had been implemented.

The Federal Court of Appeal also rejected the tax due diligence argument on the basis of Mr. Caroline's control of the company for both Directors. The Federal Court of Appeal concurred with the Tax Court of Canada, and emphasized that despite the economic influenced wielded by Mr. Caroline as a creditor, the legal power to decide how to dispose of 105 Ltd's funds still remained with 105 Ltd under the stewardship of its directors.

Tax Tips for Taxpayers – Canada v. Chriss Directors Tax Liability Defences

The main lesson for taxpayers from Canada v. Chriss is not to cut corners with formalities when resigning as a director. If the taxpayers in this case had signed and dated the resignations they had prepared in 2001 and delivered them to the Corporation, the Canada Revenue Agency would not have been able to successfully assess them for the tax remittance arrears of 105 Ltd in 2008. It is clearly worth the time, effort, and money to ensure that a director resign properly.

Another tax tip is that the demands of creditors like Mr. Caroline are not enough relieve them of their responsibility to ensure that their corporation remits tax as required. The courts have approved tax due diligence arguments based on the loss of control to creditors, but only when creditors had the legal ability to prevent the company from remitting funds. Typical examples include when remittance cheques signed by the company are not honored by the company's bank or when all cheques must be approved by lender appointed monitors who refuse approval to remittance cheques. If a receiver is appointed or the company goes bankrupt, the directors' loss of legal control over the company to a person acting in the interest of the company's creditors is also sufficient to ground a tax due diligence argument.

In other cases such as Franck v. The Queen and Canada v. McKinnon the courts have considered in more detail how the directors of companies on the verge of default should behave. Directors who oversee a company which temporarily fails to remit tax source deductions in order to continue operating can be successful in making a tax due diligence defence argument if the company's financial difficulties are due to unforeseen circumstances and the directors are actively taking steps to ensure the remittances will be paid. The presence of severe economic pressure on the company by itself however, is not enough to ground a tax due diligence defence for the company's directors.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.