The Tax Court of Canada (the "Court") in Marc Bisharav. His Majesty the King, 2022 TCC 105 ("Bishara")1 held that two individual shareholders of a corporation were liable for the corporation's sales tax remittance obligations because they did not properly resign as directors of the corporation. Despite a letter of resignation signed by each director that was dated more than two years before the assessment, the Court refused to recognize the validity of their resignation since the letters were not addressed to the corporation. The Court also concluded that the letters had no probative value because it found that they were likely prepared for the purposes of the litigation.
Assessments of Directors for GST/HST
Subsection 323(1) of the Excise Tax Act ("ETA") allows the Minister of Revenue (the "Minister") to assess the directors of a corporation for a corporation's GST/HST debt under the ETA where collection action against the corporation does not result in the recovery of the entire GST/HST remittance obligation. In such case each director will generally be jointly and severally liable with the corporation for the obligation unless they were duly diligent or,2 due to the application of subsection 323(5) of the ETA, the director had ceased to hold office more than two years prior to the assessment. There is a similar rule in section 227.1 of the Income Tax Act pertaining to a directors' liability for a corporation's source withholdings (e.g., for employee wages).
The Court in Bishara recognized that there exists a presumption of validity for the information maintained in the Registraire des entreprises du Québec (the "REQ") with respect to a corporation, including the names of the directors, but that the presumption may be rebutted with sufficient evidence. In Bishara, the appellants were both listed as directors in the REQ but claimed that they signed a resignation letter and had sent it to the individual who, according to the appellants, had accepted appointment as a replacement director. The Court noted that a letter of resignation signed by a director must be addressed to the corporation for the resignation to be valid and take effect pursuant to section 142 of the Business Corporations Act (Quebec). Also, the Court found that the appellants were not credible witnesses as they contradicted themselves in the discovery and later in their testimony as it pertained to the recipient of the resignation letters. As a result, the Court found the letters were likely evidence invented for the purposes of the trial. It was relevant to the Court that there was no shareholder resolution by which a new director was elected. The Court therefore rejected the appellants claim that an individual had accepted the appointment as a replacement director (the individual alleged to be a replacement director could not testify as he had passed away before the trial).
The Court's conclusions are consistent with other decisions where a director failed to properly resign, such as Canada v. Chriss, 2016 CAF 236 and Muellerv.La Reine, 2018 CCI 260. It is not sufficient that a director believes he or she has resigned. Rather, there must be sufficient evidence that the corporate law requirements for resignation have been met.
Although there are other means for a director to avoid liability for a corporation's GST/HST remittance obligations, source withholdings, or other tax debts, it is prudent for a director who seeks to cease holding office to do so properly according to the statutory requirements for that corporation, which are best determined upon the receipt of legal advice. At minimum, this commonly requires notifying the corporation itself, such as by sending a letter to the corporation.3 It is also advisable to ensure that the government business registry is properly updated and that one or more directors are elected by the shareholders in place of the director who resigned. It is important to maintain sufficient and credible evidence of properly resigning.4 If a director does not properly resign, they may continue to be a director in which case the two-year period during which the CRA may assess the directors never begins.5 In such case, the directors risk liability for the corporation's obligations to remit GST/HST (and certain other tax liabilities).
1. The decision was not appealed.
2. See e.g., subsection 323(3) of the ETA.
3. For a corporation of Québec or Ontario, the resignation of a director becomes effective at the time the director's written resignation is received by the corporation pursuant to subsection 121(2) of the Business Corporations Act, RSO 1990, c. B. 16 (Ontario); and section 142 Business Corporations Act, RLRQ c. S-31.1 (Québec). For a federal corporation, the resignation of a director becomes effective at the time a written resignation is sent to the corporation, or at the time specified in the resignation under subsection 108(2) of the Canada Business Corporations Act, RSC, 1985, c. C-44.
4. See also our discussion of the recent Federal Court of Appeal decision Contact Lens King, 2022 FCA 154. Schwartz, Randy, Jesse Waslowski and Almut MacDonald, "Contact Lens King : When to Rely on Proof Without Paper", Sales Tax, Customs & Trade, Federated Press, Volume XX No. 1, 2023.
5. As provided for in subsection 323(5) of the ETA (or subsection 227.1(4) of the Income Tax Act).
To view the original article click here
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.