Introduction: Vicarious GST/HST Liability for Directors
Under certain conditions, a director may become personally liable for a corporation's unremitted GST/HST. Section 323 of the Excise Tax Act gives the Canada Revenue Agency a means of pursuing a corporation's director for the corporation's unremitted GST/HST. (The Income Tax Act contains an analogous rule relating to a corporation's unremitted source deductions.)
By retaining our Canadian tax law firm, an individual (the "Client") managed to sidestep a $70,000 tax bill relating to the GST/HST debt of his now dormant corporation. Our experienced Canadian tax lawyers implemented a two-fold strategy that ultimately proved successful: we duly resigned the Client as the corporation's director, and we objected to the underlying GST/HST reassessment.
After reviewing section 323 of the Excise Tax Act, this article examines the Client's case, the strategy we implemented, and the results achieved. We then offer some tax tips based on this case study.
Director's Liability under Section 323 of the Excise Tax Act
Section 323 expands the Canada Revenue Agency's power to collect a corporation's unremitted GST/HST when efforts to collect against the corporation prove futile. Specifically, if the corporation failed to remit GST/HST, subsection 323(1) confers vicarious tax liability on "the directors of the corporation at the time the corporation was required to remit." Each director becomes "jointly and severally liable" to pay the corporation's unremitted GST/HST.
The vicarious GST/HST liability under section 323 may apply to either a de jure director or a de facto director. A de jure director is one who is appointed in accordance with the governing corporate statute—that is, a legally appointed director. A de facto director, on the other hand, is one who in fact fulfils the duties of a director despite no legal obligation to do so. This typically involves an individual who either (i) continued acting as a director even after properly resigning from that post or (ii) was never a legally appointed director yet took on the responsibilities of a director. In other words, the vicarious tax liability under section 323 doesn't discriminate between a person who acts like a director and a person who is a director. Each faces the same exposure to a director's liability assessment.
Still, section 323 contains three checks. These checks serve to limit a director's personal exposure to a corporation's GST/HST debts. And they ensure that the CRA cannot pursue the directors until the corporation's assets prove insufficient to satisfy the GST/HST debt.
First, a director isn't liable for a corporation's unremitted GST/HST unless one of the following has occurred:
- The CRA registers a certificate for the corporation's GST/HST arrears with the Federal Court, obtains a writ of execution, and sends the sheriff out to enforce that writ by seizing the corporation's assets. But the corporation's assets prove insufficient to cover the registered GST/HST debt.
- The corporation has commenced liquidation or dissolution proceedings (or has been involuntary dissolved), and the CRA files a proof of claim for the corporation's GST/HST debt within the statutory time limit.
- The corporation has assigned itself into bankruptcy (or a creditor has obtained a bankruptcy order against the corporation), and the CRA files a proof of claim for the corporation's GST/HST debt within the statutory time limit.
Second, there is a two-year limitation period on a director's exposure to a corporation's GST/HST debt. The Canada Revenue Agency cannot assess a director for a corporation's GST/HST arrears "more than two years after the person last ceased to be a director of the corporation." (The relevant corporate law governs whether and when a person has ceased to be a director.)
Third, a director avoids liability by exercising due diligence. A director isn't liable for the corporation's GST/HST debts if, to prevent the corporation's failure to remit, the director "exercised the degree of care, diligence and skill" that "a reasonably prudent person would have exercised in comparable circumstances."
The Client's File: At Risk of a $70,000 Assessment for Director's Liability
The Client consulted one of our Canadian tax lawyers and explained that his corporation, now dormant, had recently undergone a CRA tax audit. The tax auditor denied the corporation's input tax credits (ITCs) and accordingly increased the corporation's net tax owing. As a result, the corporation recently received a reassessment for GST/HST, interest, and penalties in the amount of $70,000.
The reassessment related to a reporting period ending in summer 2011, which preceded the CRA audit by about 6.5 years.
The Client also explained that he could not readily produce documents in support of the corporation's ITCs because, just before the audit, the corporation's bookkeeper had quit and kept some of the corporation's tax records. In addition, the bookkeeper now suffered from symptoms of Alzheimer's disease, which undermined her ability to locate those tax records.
Also, even though the corporation was now dormant, it hadn't been dissolved and the Client hadn't resigned as its director.
Our Strategy: Resign and Object
Concerned that the CRA might ultimately assess the Client personally for the $70,000 tax debt under section 323, our experienced Canadian tax lawyer Kevin Persaud recommended a two-fold response. First, we would properly resign the Client as the director. Second, we would file a notice of objection to the corporation's GST/HST reassessment. The resignation would trigger the two-year limitation period on a director's liability assessment. And the objection might serve to either delay a personal assessment for director's liability or eliminate the underlying GST/HST debt stemming from the corporation's reassessment.
Because we could not access documents to support the objection, we initially aimed to use the active objection as leverage in delaying a personal assessment for director's liability. Ideally, we might stall a director's liability assessment long enough so that the Client would escape personal liability under the 2-year limitation period.
The Outcome: Tax-Law Expertise Pays Off
But our Canadian tax lawyers later uncovered a fact that obligated the Canada Revenue Agency to vacate the entire reassessment—thus extinguishing the underlying GST/HST debt entirely. In the course of advancing the corporation's objection, our tax lawyers requested that the CRA appeals officer send us a copy of the tax auditor's report. Upon reviewing the audit report, our Canadian tax lawyers discovered that the auditor had failed to satisfy the Excise Tax Act's requirements for reassessing a statute-barred year.
Subsection 298(1) of the Excise Tax Act generally prohibits a reassessment of net tax for a reporting period "more than four years after" the day that the GST/HST return was filed for that period.
Granted, the CRA may reassess an otherwise statute-barred year if, when filing the tax return, the taxpayer (i) committed fraud or (ii) made a misrepresentation attributable to neglect, carelessness, or wilful default. But the CRA bears the onus of proving that the taxpayer committed fraud or made such a misrepresentation.
In the Client's case, the CRA had reassessed his corporation about 2.5 years after the reassessment deadline in subsection 298(1). So, the auditor's report should have, at the very least, listed facts that evidenced fraud or a misrepresentation attributable to neglect, carelessness, or wilful default. The report disclosed no such evidence.
In response, our Canadian tax lawyers delivered written arguments showing that the tax auditor had failed to meet the Excise Tax Act's requirements for reassessing an otherwise statute-barred year. We requested that the appeals officer vacate the corporation's GST/HST reassessment.
The Canada Revenue Agency's Appeals Division agreed and vacated corporation's the reassessment—thereby eliminating both the corporation's $70,000 GST/HST debt and the Client's personal exposure to this debt under the director's-liability provisions of section 323.
Tax Tips – Director's Vicarious GST/HST Liability & The Value of Consulting an Experienced Canadian Tax Lawyer
If you're a director (or merely acting as a director) of a corporation with GST/HST arrears, you may become vicariously liable for those GST/HST debts. You may limit your exposure by resigning—thereby starting the clock on the two-year limitation period.
The Client's file, however, demonstrates the value of a comprehensive, strategic response. If the Client had solely resigned and opted not to dispute the underlying GST/HST debt, he would have missed the opportunity to extinguish the liability based on the tax auditor's procedural error. And of course, none of this would have been possible without first recognizing the Client's personal exposure to the corporation's GST/HST debt.
The Client's file also demonstrates that Canada's tax legislation is complex, with many interrelated rules. In the Client's case, exposure to director's liability under section 323 turned on the validity of the underlying corporate GST/HST reassessment, which turned on subsection 298(1), a procedural rule that rendered the reassessment statute-barred because the Canada Revenue Agency failed to show fraud or misrepresentation.
The Client's file ultimately shows the merits of consulting our Certified Specialist Canadian tax lawyers. Our tax lawyers not only developed a comprehensive plan to pre-empt the Client's personal exposure to the tax liability but also identified an error in the CRA's position and terminated the dispute.
Speak with one of our experienced Canadian tax lawyers today. We thoroughly understand this area of law. We can advise on arranging your post-directorship involvement so that you reduce or avoid the risk of being personally assessed as a director. If you are assessed for director's liability or if you are at risk of a director's-liability assessment, we can ensure that you deliver a thorough, cogent, and forceful response.