TaxMatters@EY - November 2013
Director’s liability: resignation date critical
Bohbot-Gagnon v The Queen, 2013 TCC 128
Brian Studniberg and Al-Nawaz Nanji, Toronto
When determining a director’s liability for source deductions, the person’s effective resignation date and the reasonable steps taken while he or she was a director can be critical in making the determination.
In this case, the taxpayer was found not to have ceased to be a director at the relevant time, allowing the Minister to reassess the taxpayer for the corporation’s unremitted source deductions. The taxpayer also failed to establish the due diligence defence, not exercising the reasonable care, diligence and skill to prevent the failure of the corporation to remit the source deductions.
The taxpayer incorporated her corporation, Jus d’Or, in March 1981 and became the sole shareholder in 1999. From 1999 to 2004, the company operated a restaurant business and held a liquor licence. In 2004, the taxpayer discontinued the operations of Jus d’Or and cancelled the liquor licence. The taxpayer was asked to work for a woman and her husband to manage one of their restaurants. The husband asked the taxpayer to transfer the liquor licence that was held by her company, as he could not obtain one because he had a criminal record.
After learning of this, the taxpayer had concerns and initially refused. She was also concerned about the tax consequences for failure to make the necessary tax remittances of her company, as she was well aware of the tax remittance requirements, having operated her own restaurant business for several years.
She finally agreed to let the husband make use of her company and its liquor licence and to be a nominee director. She took steps to reactivate the liquor licence.
The taxpayer was told that a management company would take care of the tax remittances for employees. She saw the weekly pay stubs on which source deductions were shown, but assumed that the amounts were collected and remitted.
In December 2005, the taxpayer learned from a Canada Revenue Agency (CRA) official that the company’s source deductions had not been remitted. The taxpayer contacted the husband’s lawyer in early January 2006 to sell the business. When no buyer could be found by February 2006, the taxpayer contacted a well-known payroll company to handle the remittances.
On 7 July 2006, the taxpayer signed an agreement to sell her company. The agreement provided for the taxpayer’s resignation as president, secretary and director from the corporation as of the date of the agreement, but the resignation would be effective on the date the corporation’s articles would be amended (which occurred in August 2006).
Following calls from the provincial tax authority in August 2006, the taxpayer realized that her resignation had not been registered and contacted the husband’s lawyer, who registered the sale in August 2006.
On 18 July 2008, the CRA reassessed the taxpayer for Jus d’Or’s failures to remit from 31 December 2004 to 18 July 2006.
The two issues before the Tax Court were:
- Whether the taxpayer resigned on 7 July 2006 so that the CRA reassessment was beyond the two-year limitation of 7 July 2008
- Whether the taxpayer met the due diligence defence
Tax Court of Canada decision
Justice Lucie Lamarre found that the sale agreement clearly stipulated that the resignation took effect on the date of the corporation’s next articles of amendment. The court found that the taxpayer knowingly signed the sale agreement. She had also claimed in a letter to the CRA that she had not been the owner since August 2006, implicitly admitting that the sale and resignation did not come into effect on 7 July 2006. Thus, the CRA reassessment was made within the two-year period from the date the resignation was effective.
On the issue of due diligence, Justice Lamarre explained that directors must objectively establish that they exercised the degree of care, diligence and skill required to prevent the corporation’s failure to remit the source deductions.
On the facts of the case, Justice Lamarre found that the taxpayer should have known that she should be vigilant once she agreed to let the husband operate her company since there were signs that alerted her to the potential problems. While she may have inquired about source deductions being made, she did not inquire about whether they were in fact remitted.
Because she operated a business herself, she knew how the government remittances worked and knew the difference between deducting source amounts and then remitting them. Finally, she should have been more attentive to the legal obligations of the company, knowing that the husband was unable to obtain a liquor licence in his own name because of his criminal record.
As she did not seek any information about what became of the source deductions, the court found that she could not claim that she took care as a reasonably prudent person would in similar circumstances. The taxpayer failed to establish that she took appropriate steps to prevent the corporation from failing to remit the source deductions.
While the result in this case is not unusual, it does remind directors to be especially vigilant in ensuring that their resignation is in accordance with the relevant corporate law, including when the resignation is effective. In addition, the burden is on the taxpayer to establish the due diligence defence to demonstrate reasonable actions taken to prevent the failure of the corporation to remit the source deductions.
In cases where the taxpayer has doubts or concerns, or should have known based on the facts, a reasonable person would make inquiries and ensure source deductions were made.