Feigenbaum Law

Directors of Companies With Canadian And American Offices Need To Be Mindful Of Tax Obligations

Business Expansion to the U.S.
September 24, 2021

The border between the United States and Canada may be extremely long, but it’s also extremely fluid in terms of how many physical goods pass through it each day. In addition, many businesses operate on both sides of the border, sometimes having separate corporations in each country. For example, Canadian employees of an American employer may receive paycheques from a Canadian version of the company. A recent decision from the Tax Court of Canada highlights some of the issues that businesses that operate individual corporations in Canada and the United States need to be careful in how money moves between the two entities.

American corporation pays Canadian employees

The matter made its way to the court after an employee was held to be liable for money not provided to the Canadian government when Canadian employees were paid by the American branch of the employer. The company had two corporations. One was in Canada (“KTC”), and one was in the United States “(KTU”). The CEO of the employer (“PM”) lives in the United States, while the defendant lived in Canada.

The matter that brought the defendant to court was that he was in a senior position with the employer from 1999-2011, and that during that time, KTU paid Canadian employees of KTC and did not remit the proper taxes when doing so. The defendant faced director’s liability for the employer’s failure in this regard.

How much tax is owed, and who is responsible?

The Canada Revenue Agency found that from 2008-2014, the employer failed to remit withholdings from paycheques paid by KTU to employees of KTC. The total amount owed according to the government is $305,390

The defendant was hired by PM after graduating from University in 1988. He was named director of KTC in 1999. He served in this capacity until 2011 when he resigned from employment with KTC. During this time, he stated that despite being the director of KTC, he had no involvement in the financial operations of the business, stating that such matters were managed entirely by PM.

The employee stated that even if he should have been aware of the tax issue, he resigned as a director in 2011 when he stopped working for the employer.

Did the employee resign as a director when leaving his job?

The employee provided the court with an email he sent to PM on October 18, 2011, stating he was going to “pull himself off at (KTC) payroll” for a period of at least six months. The email stated that after that time, the employee and PM would determine whether the employee would return to his position.

The employee stated that he resigned all together following that email, but that it was never put in writing.

However, the court stated that simply leaving the employ of a company does not necessarily mean one has resigned as a director. The Federal Court of Appeal held in 2016 that a director is only considered to have resigned if a written resignation is provided. In this case, there was no written resignation, and as such, the employee was liable.

Contact the tax lawyers at Feigenbaum Law to start your business expansion into the US with confidence. Our team will create a personalized approach and walk you through all aspects of the process, saving you money and potential complications. We offer services to clients in the US, Canada and around the world. Contact us by email or at call us at (905) 695-1269 or toll free at (877) 275-4792.


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