Canada: Ceasing To Be A Director – Directors' Liability For Tax – Toronto Tax Lawyer Analysis

Last Updated: September 21 2018
Article by David Rotfleisch

Introduction – Directors' Liability for Tax

Directors are jointly and severally liable for some of the tax debts of the corporation of which they are a director. The Canadian Excise Tax Act makes the directors of a corporation liable for the GST/HST remittance arrears of that corporation. Similarly, the Canadian Income Tax Act makes the directors of a corporation for liable for the payroll remittance and the part XIII withholding tax arrears of the Corporation. Notably, the Canadian Income Tax Act does not make directors liable for the corporate income tax debts of their corporation. Directors' liability is a formidable tool in the Canada Revenue Agency's arsenal, but it is subject to several important restrictions. One is that the CRA cannot collect from directors without first assessing them for the relevant remittance arrears and both the Canadian Excise Tax Act and the Canadian Income Tax Act require several procedural steps to be satisfied before a director can be validly assessed. For example, the Canada Revenue Agency needs to unsuccessfully attempt to collect from the corporation before it can assess the corporation's directors. Most importantly, the CRA cannot assess an individual for director's liability if that person last ceased to be a director more than two years ago. Directors are also able to avoid liability for remittance arrears if they are able to demonstrate that they exercised the degree of care, diligence and skill necessary to prevent the failure by the corporation to remit tax that a reasonably prudent person would have exercised in comparable circumstances

Resignation – Ceasing to be A Director

One way to cease to be a director of a corporation is to resign. The Canadian Income Tax Act and the Canadian Excise Tax Act do not explicitly impose any requirements on how a resignation is to be accomplished, so the question of how to resign effectively is determined by reference to corporate law and the relevant incorporating statute. For corporations incorporated under Ontario's Business Corporations Act, a resignation becomes effective at the time a written resignation is received by the corporation, or at the time specified in the resignation, whichever is later. Many of Canada's other incorporating statutes have similar requirements.

In Canada v. Chriss , the Federal Court of Appeal determined that written resignations prepared for the directors by their lawyers but that were never executed were not effective. It is not necessary for the written resignation to be stored in the minute book of the corporation for the resignation to be effective. Corporations are required to provide information to various provincial corporate registries depending on where they operate and what statute they were incorporated under. The information in the provincial corporate registry is available to the public. Normally, when a director resigns, the corporation should update the appropriate provincial corporate registry so that the former director is no longer listed as a director. Some but not all court decisions have found that a resignation is still effective for the purposes of the time limit even if the provincial registry was not updated.

Dissolution – Ceasing to be A Director

The process by which a corporation ceases to exist as a legal entity is called dissolution. If a corporation is dissolved, the individuals who were directors of the corporation cease to be directors at the time of the dissolution. The Tax Court of Canada and the Federal Court of Appeal have repeatedly found that this is sufficient to start the clock for the two year director's liability limitation period. The most common causes of a corporation being dissolved are when the corporation is involuntary dissolved because it hasn't kept up with its corporate filings or when the corporation is dissolved voluntarily. Either type of dissolution is sufficient for the purposes of the limitation period. If the corporation is later revived, it does not mean that the limitation period clock has been reset for individuals who ceased to be a director by virtue of the corporation being dissolved. Former directors will only be restored to director status for the purposes of director's liability if the corporation is revived by a court order which specifically reinstates the directors. So far, the courts have proven reluctant to grant such orders to the CRA. Note that dissolution is not the same as bankruptcy or insolvency. An insolvent corporation is a corporation which cannot continue to meet its financial obligations. Bankruptcy is a process that can be applied to insolvent corporations whereby all legal action by creditors of the corporation is ceased and the corporation's property is assumed by a trustee on behalf of the corporation's creditors. Neither bankruptcy nor insolvency automatically causes the corporation to be dissolved or means that an individual ceases to be a director of the corporation. However, the director of a corporation which has gone bankrupt is not liable for the corporation's remittance arrears if the Canada Revenue Agency fails to prove a claim for the corporation's remittance liability within six months of the corporations assignment in bankruptcy or bankruptcy order.

De Facto Directorship – Ceasing to be a Director

Individuals who have not been validly appointed a director of a corporation may still be subject to directors liability under the Canadian Excise Tax Act or the Canadian Income Tax Act by virtue of being a de facto director . An individual is a de facto director if they have not been validly appointed as a director, but still act as a director and hold themselves out as a director to third parties. There is no cut and dry legal test to determine if an individual is a de facto director, instead, the court consider a large number of different non-determinative factors to make a decision about each particular individual. Examples of factors considered by the court include whether the individual attends directors' meetings, signs documents as a director, plays a significant role in supervising the management of the corporation, and introduces himself to third parties as a director of the corporation. This means that directors who cease to be a director by resigning but continue their role with the corporation may not have started the director's liability limitation period running by virtue of being a de facto director. Individuals can cease to be a de facto director by ceasing to act as a director and by making it clear within the corporation and to third parties that they are not a director.

Ceasing to be a Director - Tax Tips

Individuals who are a director of a corporation that is in financial difficulty or that is known to have remittance arrears should consider resigning to start the two year limitation period running as soon as possible. If the individual resigns, they should keep a copy of the resignation and proof that it was delivered to the corporation at a specific time. This will make it more likely that the limitation period will have run by the time the Canada Revenue Agency attempts to assess the individual and that the individual will be able to persuade CRA or the courts that they did resign. It is also worthwhile to seek advice from an experienced Toronto tax lawyer when you resign to ensure that you meet all the formal requirements for resignation and to ensure you do not become a de facto director. If the Canada Revenue Agency has approached you regarding director's liability and you have not resigned, it is also worth checking if the corporation was ever dissolved, as this will mean that the limitation period has already started running.

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
Similar Articles
Relevancy Powered by MondaqAI
Minden Gross LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Minden Gross LLP
Related Articles
 
Related Video
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
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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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