Canada: CASE STUDY: Rotfleisch & Samulovitch Successful in Cancelling Tax Trust Exam And Preventing Directors Liability Assessment

Last Updated: July 17 2018
Article by David Rotfleisch

Brief Trust Exam Overview

Rotfleisch & Samulovitch Professional Corporation was retained by an entrepreneur in the construction industry. Over his career, the entrepreneur started several businesses some of which failed and some of which succeeded. In 2017 the entrepreneur was contacted by a trust examiner regarding the payroll remittances of two corporations (Aco and Bco), which he had used to run previous businesses in the past. A trust examiner is a Canada Revenue Agency ("CRA") auditor who specializes in GST/HST or payroll audits. They are called that because the CRA treats business as holding payroll and GST/HST amounts in trust for the government. This is because the Canadian Tax Law requires employers and businesses to collect income tax from their employees and GST/HST from their customers, hold that money in trust for the government, and then remit the money to the government.

In his initial contact letter, the trust examiner set two dates for initial meetings with the entrepreneur, one regarding each corporation. Most of the periods under tax audit were over seven years in the past.  The entrepreneur was surprised to hear about the corporations again as both had been inactive for many years and he had not taken any action regarding them for many years. Soon after receiving this letter, the entrepreneur decided to consult a tax lawyer and contacted our tax law firm.

The entrepreneur had limited records concerning Aco and Bco. The entrepreneur had Aco's minute book and almost no records concerning the corporation's finances or employees. For Bco, the entrepreneur had no minute book and almost no other records. The entrepreneur's recollection of the both businesses was that they had failed and that it was plausible there was failure to remit both payroll and GST/HST. Neither corporation had any assets remaining. The entrepreneur's also recalled being a director of both corporations and that he was unsure if he had resigned from one or both corporations. His remaining records did not contain a written resignation for either corporation.

Problems & Challenges – Trust Exam and Director's Liability

The entrepreneur's case involved two primary challenges. The first was that the lack of documents meant that if the entrepreneur participated in the trust exam, it would be very difficult for him to make an effective case to the trust examiner. CRA auditors have the ability to make factual assumptions about a taxpayer's business in order to fulfill their role. These assumptions will effectively determine the taxpayer's liability unless he or she can disprove them, either during the audit or in the course of a subsequent objection or appeal. It is difficult for taxpayers to displace the factual assumptions made by a Canada Revenue Agency auditor unless they have documentary evidence to back up their case. Since the entrepreneur had very little documentation pertaining to the periods under audit, defending himself in the trust exam would be difficult. When tax auditors are faced with a lack of documentation, they often make worst case assumptions, which can result in incorrect and unreasonably large tax liability for tax payers.

The second problem is that as a director or former director of Aco and Bco, the entrepreneur was potentially liable for the payroll remittance arrears of the corporations. Provided that certain conditions are met CRA has the ability to assess directors for the payroll or GST/HST liability of the corporations of which they are a director. These assessments are not automatic and there are defences available in certain situations. One of the most common defences is based on the director exercising the appropriate level of due diligence to prevent the failure to remit payroll or GST/HST. The other most common defence is for the director to resign and to take advantage of limitation period that prevents the former director from being assessed once two years have elapsed since they last ceased to be a director. Both these defences appeared difficult for the entrepreneur to establish due to the limited documentation available concerning the events during the period under audit and without copies of any written resignations that the entrepreneur may have delivered to the corporations.

The Approach & Solution – Dissolution and Director's Liability

In the course of reviewing all of the available information, our firm ordered information regarding both corporation's from the corporate registry. That information revealed that Aco had been dissolved in 2011 and that Bco had been dissolved in 2009. Both businesses had ceased to operate by the time they were dissolved. This allowed us to formulate a solution to both of the problems above.

Our approach was to request that the trust examiner cancel both trust exams and in particular, that they do not involve the entrepreneur in any future audits of the corporations or any attempts to collect any debts owing by the corporations. We brought up several reasons for this request. First since the corporations had been dissolved, the entrepreneur was no longer a director or officer of either corporation and so could no longer act as an agent of either corporation in the trust exams. Second, the entrepreneur had almost no documents relating to the corporations and was not able to request more documents from third parties like banks because he was no longer an officer or director of either corporation. Third, the CRA would not be able to collect from the entrepreneur via a director's liability assessment.

Our argument for why the entrepreneur could not be assessed for director's liability was based on the two year limitation period mentioned above. When a corporation is dissolved, it ceases to exist and its directors cease to be directors of the corporation. The Tax Court of Canada has considered cases where a director ceased to be a director by virtue of the corporation of which they were a director being dissolved and has come to the conclusion that it is sufficient to meet the requirements of the limitation period. Since both corporations were dissolved more than two years before the entrepreneur was approached regarding the trust exams, the limitation period applied.

Results – Trust Exam and Directors Liability

Initially we attempted to contact the trust examiner by phone to discuss cancelling the trust exams. Unfortunately, the trust examiner ignored our calls and voicemails. As we had not gotten a response, we wrote a letter to the trust examiner requesting that the trust exams be cancelled and explaining our reasons as outlined above. The trust examiner responded to the letter by informing us that the trust exams would be suspended while his superiors considered the contents of the letter. Several months later, the trust examiner informed us that the CRA would not be proceeding and that the trust exams for both corporations were cancelled. No director's liability assessments were levied against the entrepreneur with respect to Aco or Bco.

Practical Tax Tips – Tax Trust Audits

Disputes with the Canada Revenue Agency are complex and require expert assistance from Canadian tax lawyers. It is also important to involve a tax lawyer in the process as early as possible in the process. Had the entrepreneur not consulted an expert in tax law, it is likely that the trust exams would have proceeded and he would have been assessed for the payroll remittance arrears of the corporations. This would have lead to him either being required to pay tax that he was not legally obligated to pay, or to a much more expensive and time consuming journey to the same result through an objection or an appeal to the Tax Court of Canada. Tax law expertise is required to respond properly to the CRA, and the earlier you involve a tax lawyer in the process, the more likely that you will get a quick and cost effective outcome.

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

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

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions