Director's Liability for Unremitted Source Deductions - Director's Liability Limitation Period
The directors of corporations can be held personally liable for the unpaid GST/HST or payroll remittances of their corporations. This liability is not unrestricted. Canada Revenue Agency (CRA) cannot assess a director for unremitted amounts owing by a corporation unless:
- the CRA registers a certificate for the unremitted amounts with the Federal Court and execution for the amounts is returned partly or wholly unsatisfied,
- the corporation has commenced or completed dissolution and Canada Revenue Agency has proved a claim for the unremitted amounts within six months of the earlier of the commencement of dissolution proceedings or the date of dissolution, or
- the corporation has made an assignment in bankruptcy or a bankruptcy order has been made against it and the CRA has proved a claim for the unremitted amounts within six months of the date of the assignment or bankruptcy order.
Even when this requirement has been met, a director will not be liable if the director can show he or she diligently attempted to prevent the failure to remit or if the limitation period applies. The remainder of this article discusses how the limitation period for director's liability works.
The Two-year Limitation Period - Director's Liability Limitation Period
The CRA cannot commence any action or proceeding against a director based on director's liability for unremitted payroll or GST/HST amounts more than two years after the director last ceased to be a director of the relevant corporation. The ways in which an individual can cease to be a director are controlled by the statute under which the corporation was incorporated. The most common ways for individuals to cease to be directors are resigning, finishing their term as director without being reappointed, the dissolution of the corporation, and being removed as a director by the shareholders of the corporation.
Director's liability is only one tool in the Canada Revenue Agency's tax collection arsenal and this limitation period only applies to director's liability. In particular, under section 160 of the Income Tax Act and section 325 of the Excise Tax Act CRA has the ability to assess people who received property from a corporation while not at arm's length from that corporation and without providing fair market value consideration for that property. This would include dividend receipts from a corporation. This form of liability is unaffected by the above two-year limitation period and in some cases may be relevant to former directors.
Resigning as a Director - Director's Liability Limitation Period
When a director successfully resigns, the two-year director's liability limitation period begins to run. The Ontario Business Corporations Act requires a director to deliver a written resignation to the corporation in order to resign. Most if not all other Canadian corporate statutes also include this requirement. As the date of resignation needs to be known in order to determine when the limitation period elapses, it is important that the resignation be signed and dated. Ideally the director should keep both a copy of their written resignation and proof that it was sent to the Corporation. When a director resigns, the corporation is required to notify the corporate registry corresponding to its jurisdiction of incorporation. For Ontario corporations, this means filing a Form 1 Notice of Change with the Ministry of Government and Consumer Services.
Some corporate statutes impose additional restrictions on resignation that can prevent an otherwise valid resignation from being effective. For example, a "first director" of an Ontario corporation cannot resign unless certain requirements are met. Incorporating a corporation under the Ontario Business Corporations Act requires filing articles of incorporation that include a list of directors. The directors on this list are the first directors of the corporation. A first director cannot validly resign unless the first meeting of shareholders has taken place or unless at the time the resignation is to become effective a successor director has been elected or appointed. As a significant amount of liability may attach in circumstances where a resignation was unsuccessful, it is important to consult an expert Toronto tax lawyer to ensure your resignation was effective.
Ceasing to be a Director via Dissolution - Director's Liability Limitation Period
When a corporation is dissolved, it ceases to exist. When this happens, the individuals who were directors cease to be directors as of the date of dissolution which starts the clock on the two-year director's liability limitation period. Corporations can dissolve voluntarily or involuntarily.
When a corporation seeks voluntarily dissolution, it is required to satisfy all of its debts and obligations or obtain consent from its creditors, and then divide up its remaining property among its shareholders before it can be dissolved. This means that corporations with outstanding remittance arrears normally cannot be dissolved voluntarily, but it is not impossible that remittance arrears could be discovered by the Canada Revenue Agency after a voluntary dissolution.
Corporations can also be dissolved involuntarily when they cease to comply with certain requirements of its incorporating statute. Generally the most common instance of involuntary dissolution in director's liability scenarios in Ontario is that a corporation is involuntarily dissolved for failing to file corporate income tax returns. The directors of a corporation will be given notice by mail of pending involuntary dissolution by the appropriate ministry or department and a period of time to remedy the corporation's non-compliance. If the non-compliance is not addressed within that time period, the corporation will be involuntarily dissolved.
When an Ontario corporation has been involuntarily resolved, it is possible to revive it by correcting its non-compliance with its incorporating statute and then filing articles of revival. A similar technique is available under most if not all other Canadian corporate statutes. When a corporation is revived in this way, for most purposes it is treated as having never been dissolved in the first place. However, for the purposes of the two-year director's liability limitation period, revival does not restart the clock or reinstate director status. This means that, barring further involvement with the corporation after dissolution, an individual who ceased to be a director by virtue of a dissolution cannot be assessed by the CRA for director's liability once two years have elapsed after the dissolution even if the Corporation is subsequently revived before or after the two years have elapsed. The only known exception to this is if a court in the appropriate jurisdiction issues an order to revive a corporation where the order specifically reinstates the former directors. In that circumstance it is likely that the dissolution would not activate the limitation period.
Deemed and De Facto Director Status – Director's Liability Limitation Period
There are several ways in which an individual who successfully ceased to be a director under corporate law can be held liable as if they continued to be a director notwithstanding the two-year limitation period.
One of these ways is if the individual continued to act as a de facto director after ceasing to be a director. A de facto director is an individual who is not a validly appointed or elected director of a corporation but nevertheless acts or holds themselves out as a director of the corporation to a sufficient degree. To determine whether an individual is a de facto director the Courts will consider a number of different non-exhaustive indicators including:
- Whether the individual has been signing documents as a director,
- Whether the individual has been signing tax returns,
- Whether the individual has been attending director's meetings,
- Whether the individual introduces themselves to third parties as a director,
- Whether the individual signs directors' resolutions,
- Whether the individual plays a significant role in supervising the management of the company or otherwise controlling the company.
Another way an individual can unexpectedly still be a director is if he or she is deemed to be a director by virtue of the corporation's incorporating statute. For example, when all the directors of an Ontario corporation have resigned or been removed, the Ontario Business Corporations Act deems any person who manages or supervises the management of the business and affairs of the corporation to be a director. This can lead to a former director who is still involved with the business of the corporation unexpectedly to be deemed a director even though his or her conduct may not have been at the level where he or she would be considered a de facto director. There are various exceptions to this deeming rule including for professionals whose involvement is limited to providing professional services and for officers who manage the business of a corporation under the direction or control of another person.
Pro Tax Tips - Director's Liability Limitation Period
Ensuring that you ceased to be a director of a corporation with substantial remittance arrears can save you from a very large liability. Since the stakes can be so high and ensuring success can be deceptively complicated, it is essential to get assistance from an expert Canadian tax lawyer when making your exit as a director from a Corporation or when the Canada Revenue Agency approaches you regarding making an assessment for director's liability.
Since the limitation period is two years long, it is important to resign or otherwise exit as soon as possible from a corporation which is likely to have remittance issues. In addition, it is essential for directors seeking to exit a corporation to consult with an experienced Canadian tax lawyer to observe the relevant corporate formalities and to keep good records so they are in a position to prove to CRA or the Tax Court of Canada what happened in the event they are pursued for directors liability.
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.