Appeared in the May 2009 issue of The Bottom Line
In Aujla v. R., the Federal Court of Appeal considered whether two brothers could be held personally liable, as directors of Aujla Construction Ltd. (the Company), for taxes owed by the Company under the Excise Tax Act, R.S.C. 1985 (the "Act"). Subsection 323(1) of the Act provides that if a corporation has failed to pay the amounts owing under the Act, the directors of the corporation at the time of such failure may be liable for the amount. However, subsection 323(5) of the Act provides that a director's liability assessment cannot be made against a person more than two years after that person last ceased to be a director of the corporation.
The issue in the case was whether the limitation period in subsection 323(5) applied to preclude the assessments against the brothers. This issue arose because in 1999, approximately one year after the Company was assessed under the Act, the Company was involuntarily dissolved under British Columbia's Company Act, R.S.B.C. 1996, c. 62 (the "BCCA") for failing to file its annual report. In 2003, in an attempt to collect the amount owing, the Minister obtained a court order (the "Order") to restore the Company's status. The Minister argued that the effect of the Order was to retroactively reinstate the directorships of the brothers, so that they did not cease to be directors of the Company on the date of dissolution.
The Federal Court of Appeal held that the limitation period applied in this case. The majority examined the wording of the Order in light of the applicable corporate legislation. In this case, the relevant provisions were sections 262 and 263 of the BCCA, as they existed at the time of the assessments against the brothers. Subsection 262(1) permits the court to make an order restoring the Company to the register on the terms that the court considers appropriate (emphasis added). Subsection 262(2) provides that if a company is restored to the register, the company is deemed to have continued in existence. Section 263 empowers the court to give directions and make provisions it considers appropriate for placing the company and every other person in the same position, as nearly as may be, as if the company had not been dissolved (emphasis added).
To interpret these provisions, the court relied on the British Columbia Court of Appeal decision in Natural Nectar Products Canada Ltd. v. Theodor, which considered provisions that were either identical or substantially similar to these provisions. That case held that when a court orders a corporation to be restored, the order will not have retroactive effect unless there is express language providing for retroactivity. Thus, although subsection 262(2) deems a company that is restored to the register to have continued in existence, the deeming provision does not go so far as to restore the company retroactively. Instead, the court must explicitly provide for retroactivity. By extension, the majority held that an order restoring the Company would reinstate the directorship of the brothers only if there was express language in the Order. That express language was lacking.
The Court noted that there is a presumption against expanding by interpretation the scope of retrospective legislation, so that subsection 262(2) should not be interpreted to deem the directors to have continued as such. Second, the Order specified that the Company shall be deemed to have continued in existence without prejudice to the rights of any parties, which signified the Court's intent that the directors are not to be deemed to have continued to be directors. Furthermore, the Court which issued the Order, was not aware that the Minister sought same in order to assess the brothers under the Act. In fact, the brothers received no notice of the Minister's application for the Order.
Thus, the majority concluded that the brothers ceased to be directors when the Company was dissolved in 1999. The two-year limitation period applied to preclude the Minister from assessing the brothers for the Company's tax liability in 2003.
There was a dissenting judgment, which held that the effect of the Order was to reinstate the brothers' directorship. The dissent stated that there is a conceptual difficulty in restoring a company that has no directors. Under section 108 of the BCCA a company must have at least one director; there would be an inconsistency in presuming that the dissolution of the Company would trigger the termination of the brothers' directorship, but then finding that the retroactive annulment of the dissolution is insufficient to reverse the termination.
The differing views of the Court show the ongoing debate across Canada on the interpretation of these restoration provisions. For example, in Ontario courts have come to different conclusions on whether our corresponding provision, which appears in subsection 241(5) of the Business Corporations Act, R.S.O. 1990, c. B. 16, has retroactive effect. The most recent decision by the Ontario Superior Court of Justice, Litemor Distributors (Ottawa) Ltd. v. W.C. Somers Electric Ltd. (2004), 73 O.R. (3d) 228 (Ont. S.C.J.) held that the restoration of a corporation was deemed to have retroactive effect to the date of its dissolution, whereas in Swale Investments Ltd. v. National Bank of Greece (Canada) (1997), 37 B.L.R. (2d) 324 (Ont. Gen. Div.), Chapnik J. commented in obiter that the restoration of the corporation did not have retroactive effect. One thing is certain: the Minister will continue to assess directors for taxes owing by a dissolved corporation.
* The author wishes to thank articling student Diana Yeung for her assistance in preparing this article
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