Written on behalf of Feigenbaum Consulting
Being the director of a company might seem glamorous on the outside, but the role comes with a great deal of responsibility, including personal tax liability should the company find itself unable to comply with its tax obligations. A recent decision from the Tax Court of Canada looks at what is needed for a director to resign and avoid liability for a company’s tax debt.
The appellant was the director of a company which had a GST debt of just over $15,000. A certificate of unpaid taxes was issued on July 3, 2015, followed by a writ of garnishment on February 4, 2016. The government was unable to collect from the company, and as a result pursued repayment from the appellant, who had served as a director for the company. The authority to do so comes from s.323(1) of the Excise Tax Act (the Act), which states:
The directors of a body corporate at the time it was required to pay, as required by subsection 228 (2) or (2.3), an amount of net tax […] are, in the event of default by the person moral, jointly and severally bound, with the latter, to pay the amount and the interest and related penalties.
The appellant was issued a notice of reassessment on August 30, 2016.
The director’s stance
The appellant did not argue one of his available defences, that he had acted diligently in collecting and remitting taxes which will prevent the director from being held personally liable under s. 323(3) of the Act. Instead, he based his argument on the Act’s limitation period, which states “the establishment of such a contribution for an amount payable by a director is prescribed two years after he ceased to be the director for the last time.”
The appellant claimed he resigned as a director on June 3, 2011, providing the court with a number of pieces of evidence, including a letter of resignation dated June 3, 2011. The appellant testified that in addition to a copy being mailed to the company, he also gave a copy to his wife, who at the time was the remaining director of the corporation.
When filing a copy of its directors’ register in 2017, the company noted that the appellant had resigned on June 3, 2011. The parties agreed that if it could be established the appellant had resigned in June 2011, he could not be held personally liable for the debt under s. 323(1).
The CRA claimed that the evidence provided by the appellant was not sufficient, mainly because a notice of change regarding the resignation had not been filed pursuant to the Corporations Information Act.
However, the court found that the Business Corporations Act, which addresses the termination of a director’s term states “A director’s term ends when one of the following occurs: (a) he dies or, subject to subsection 121 (2), resigns.”
As a result of this finding, the court held that the appellant had, in fact, resigned in 2011 and was therefore not liable for the taxes owed by the company.
Personal tax liability can be complex, as there are several timing and limitation rules in effect and requirements that must be established under various statutes. It is important when looking to avoid personal liability, to retain the services of an experienced tax lawyer who understands the complexities involved in this area of the law. Further, ensuring compliance with all corporate tax obligations will go a long way to protecting individual owners and operators from facing personal liability.
At Feigenbaum Law, we work with businesses as well as those who run them to help reduce their overall tax burden while also shielding the business from liabilities and pitfalls that may come without proper tax planning. Our firm is comprised of accountants, lawyers and financial advisors who work with businesses in both Canada and the United States, as well as those who do business on both sides of the border. Please call us at 877-275-4792 or email us to learn more about how we can help.