Tax Interpretations Judicial and CRA interpretations of Canadian tax law and transactional implications

Income Tax Act - 221-240 - Section 227.1

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Subsection 227.1(1)

Cases

Attorney General of Canada v. McKinnon, 2000 DTC 6593 (FCA)

Evans J.A., before going on to find that the taxpayers had established the due diligence defence under s. 227.1(3), indicated (at p. 6602) that it was "inappropriate to import into subsection 227.1(1) a requirement that it is only engaged if the directors have de facto control over the financial operation of the company, particularly the payment of its bills". He further indicated that "the situation is different on the appointment of a receiver whose legal powers supercede those of the directors who, in a functional sense, cease to be directors and thus fall outside the ambit of subsection 227.1(1)".

The Queen v. Corsano, 99 DTC 5658 (FCA)

The appellants were found not to be directors of a not-for-profit Nova Scotia corporation because they did not hold shares. Noel J.A. found that the statement in paragraph 2(1)(f) of the Companies Act (Nova Scotia) that "'director' includes any person occupying the position of director by whatever name called" spoke only to nomenclature, i.e., it indicated that someone called by a name other than director could still be a director, and did not establish that a de facto director was a director for purposes of that statute. However, the appellants could not avoid liability under s. 227.1 by virtue of not being directors in light of the common law principle "that a person who has not obtained the requisite qualifications, is prevented from pleading this failure in order to escape liability attaching to a director" (at p. 5662).

Létourneau J.A. concurred with the majority, but on the basis that the reference to director in s. 227.1(1) was not restricted to a person who was a director for purposes of the Companies Act, but extended to someone who was a director at common law (i.e., a de facto or acting director).

Clarke v. The Queen, 2000 DTC 6230 (FCTD)

Amounts which the corporation had failed to remit were evidenced by promissory notes issued to Revenue Canada to be paid on a deferred basis. MacKay rejected a submission that a failure to pay some of the amounts under the promissory note after a receiver-manager was appointed did not give rise to a liability under s. 227.1. He noted, at p. 6239, "that the liability of the directors arises at the time the corporation failed to remit the source deduction" and that "the promissory notes did not constitute a transaction separate from the liability of the plaintiffs under the Act". For similar reasons, he also rejected a submission that the plaintiffs were not liable in respect of a failure to remit that was not discovered until the time of a post-receivership audit by Revenue Canada.

Parton v. The Queen, 99 DTC 738 (TCC)

After noting the distinction in Morris v. Kanssen, [1946] 1 All E. R. 586 (HL) between a defective appointment and no appointment at all, Lammarre Proulx TCJ. found that the taxpayers in this case had been defectively appointed, with the result that they were de facto directors and liable under s. 227.1.

The Queen v. Leung, 93 DTC 5467 (FCTD)

A reassessment of a director in respect of the aggregate amount of source deductions which the corporation had failed to make under the Act and three other statutes which did not separately disclose the amounts purportedly owing under each statute, and that referred for further details to an assessment which had been made on the corporation, nonetheless was valid in light of ss.152(3) and (8) of the Act and the fact that it contained all the essential ingredients for a notice of assessment.

See Also

Qian v. The Queen, 2014 DTC 1024 [at 2639], 2013 TCC 386 [director with no actual power to remit deductions]

The taxpayer was an accountant and employee of a corporation ("Goldstaff") and was appointed to its board of directors.  When she discovered that Goldstaff was failing to remit source deductions, she urged the board to consider various measures to ensure that deductions would be remitted.  She was unsuccessful, and promptly resigned.

Favreau J found that the taxpayer had been duly diligent, and was absolved from director's liability.  While due diligence is an objective standard, individual circumstances are relevant.  The taxpayer had no direct authority to require that remittances be made; she took every other reasonable step to encourage that they be made; and when they were not, she resigned.

Chell v. The Queen, 2013 DTC 1055 [at 299], 2013 TCC 29

The taxpayer was a director of an Alberta corporation ("cDemo") and a Delaware corporation ("Global").  Both corporations owed Canadian source deductions, and cDemo owed GST collections.  Although the taxpayer had resigned as director more than two years before being assessed, Hogan J. found that the taxpayer was not beyond the limitations periods in s. 227.1(4) of the Income Tax Act or s. 323(5) of the Excise Tax Act.  He remained a de facto director of each corporation, based on his taking actions in respect of the corporations that only a director could take.

The taxpayer was a de facto director of cDemo because he signed a declaration removing a fellow director from the corporate registry, and he signed a bill of sale of certain of cDemo's assets (with the proceeds being used to pay down the amounts owing).

The taxpayer was a de facto director of Global because he met with a prospective Global client in order to generate a revenue stream.  The taxpayer provided CRA with documentation indicating approximately how much revenue Global would obtain from such a deal.

Finally, the taxpayer was a de facto director of each because he continually dealt with CRA on the corporations' behalf regarding the unremitted deductions and GST.

Lequier v. The Queen, 2010 DTC 1321 [at 4219], 2010 TCC 474

The taxpayer was a corporate director with her husband. When the two separated, the taxpayer believed she had resigned as director. She did not submit a written resignation, a requirement under Alberta's Business Corporations Act. Woods J. noted that while the court will not always require a written resignation, the resignation must nevertheless be communicated to the corporation in some manner, which the taxpayer did not. She was therefore liable under s. 227.1 for the unpaid amounts.

Hartrell v. The Queen, 2006 DTC 3548, 2006 TCC 480

Before finding that the taxpayer was a de facto director of a corporation that had never been organized on the basis that the taxpayer along with the other major shareholder were the directing minds of the corporation, Paris J. stated (at pp. 3551):

"... where a corporation operates without having been properly organized and the only director of record plays no part in running the corporation, those persons who take it upon themselves to direct the affairs of the company may be held to be de facto directors, whether or not they have explicitly represented themselves as directors to any third party. The essential question is whether those individuals have, in fact, taken on the role of director of the corporation."

Buckingham v. The Queen, 2010 TCC 247, rev'd on other grounds 2011 FCA 142

Webb J. found that, to the extent that the taxpayer's appeal pertained to the New Brunswick Income Tax Act, that portion of the taxpayer's case should be heard by the New Brunswick Queen's Bench and not the Tax Court of Canada.  He stated (at para. 6):

No jurisdiction is granted to this Court under the Tax Court of Canada Act to hear appeals on matters arising under any provincial income tax statute.

McDougall v. The Queen, 2001 DTC 2651 (TCC) (Informal Procedure)

The appellant was found to be a de facto director and, therefore, subject to the application of s. 227.1 of the Act and s. 323 of the ETA given that the registration of the corporation showed him as a director, he completed ETA forms as a director, he failed to withdraw such filing after he was notified he had been recorded as a director, and he participated as director in opening up a bank account for the company.

Mosier v. The Queen, [2001] GSTC 124, Docket: 96-3504-GST-G (TCC)

Bowman A.C.J. found that the taxpayer's appointment as president of a failing business corporation, which entailed broad management powers, did not make the taxpayer a director or de facto director for the purpose of liability for the corporation's unremitted source deductions under s. 227.1(4) of the Income Tax Act or s. 323(5) of the Excise Tax Act.  The question whether a de facto director could be liable for remittance failures had not previously been considered.  Bowman A.C.J. found that a de facto director could be liable, but that "one must be very careful about what one means by the expression 'de facto director'."  He stated (at paras. 29-30):

There is a lengthy and learned discussion of de facto directors at pages 408 to 411 in Mr. Wegenast's leading text on corporate law Canadian Companies. I cite only a short passage from page 411 which is, I think, useful in this case (footnotes omitted):

There must, however, have been something more than a mere usurpation of office. There must have been something to justify outsiders in assuming that the person or persons in question had been duly elected or were acting with the concurrence of the shareholders, for the doctrine of de facto directors is merely an application of the doctrine of estoppel or "holding out."

...

I am inclined to think that the concept of de facto director may have evolved in some degree since Mr. Wegenast wrote the above in 1931. However one wishes to define de facto director — either as one who occupies, whether by usurpation or default, the role of director or one in whose election there is some defect — it is clear that Mr. Mosier was not one of those.

Dirienzo v. The Queen, 2000 DTC 2230 (TCC)

The uncle of the taxpayer was found to be a de facto director as described under s. 1(1) of the Business Corporations Act (Ontario). Accordingly, the Minister would have been entitled to pursue the uncle as a director.

Wheeliker v. The Queen, 98 DTC 1110 (TCC)

Because the taxpayer and other alleged directors of a non-profit corporation did not hold any shares of the corporation contrary to the requirements of the Companies Act (Nova Scotia), they were not de jure directors of the corporation. Furthermore, a provision of the Companies Act providing that a director "includes any person occupying the position of director by whatever name called" connoted "the concept of having the title of director rather than simply behaving like a director" (p. 1114) and did not have the effect of including persons who may have been de facto directors at common law. Accordingly, the taxpayer was not a director for purposes of s. 227.1.

Myers v. The Queen, 98 DTC 1057 (TCC)

The taxpayer, who acquired all the shares of a private company, was found not to become a director of the corporation for purposes of s. 227.1 given that he made very sure that he was never elected to the position of director, and he never held himself out as a director.

Roll v. MNR, 92 DTC 1446 (TCC)

An assessment of the appellant under s. 227.1 which referred to unpaid deductions, interest and penalties payable by the corporation in respect of notices of assessment of the corporation dated on specified dates for the period that the appellant was director of the corporation was found to satisfy the requirement that the appellant be in a position when he read the notice of assessment "to know - or to be capable of knowing - the date or dates the corporation failed to remit so that he may consider whether he was director at the time of the failure by the corporation". The appellant was not only director of the corporation at the relevant times but was the person at the corporation who was responsible for remitting source deductions to the Receiver General. He knew, when he received the notice of assessment, the date that he resigned as director.

Administrative Policy

9 August 2012 T.I. 2012-0446051E5: Although the Tax Court lacks jurisdiction to hear appeals from  a provincial assessment (see Buckingham v. The Queen, 2010 TCC 247 and Seier v. The Queen, 2010 DTC 1344 [at 4313], 2010 TCC 495), it is CRA's policy to vacate or reduce a provincial assessment, in accordance with a Tax Court ruling on the same matter on an appeal from a federal reassessment, e.g., for director's liability under s. 227.1, where CRA has a Tax Collection Agreement with that province.

88 C.R. - F.Q. 7: The legislation does not draw a distinction between directors of business and non-share corporations.

85 C.R. - Q.81 : a notice of objection filed by a director is usually dealt with by the district office where he resides.

84 C.R. Q.7 : re interrelationship between s. 227.1 and 227(8)

Paragraph 227.1(2)(a)

Cases

Kyte v. The Queen, 96 DTC 6050 (FCTD), affirmed 97 DTC 5022 (FCA)

Although a certificate issued under s. 227.1(2)(a) for a principal amount of $500,000 did not correspond to the amount of the corporation's tax liability (in this case, under Part VIII of the Act), this error did not invalidate the assessment of the taxpayer under s. 227.1(1) in light of s. 166 of the Act.

See Also

Walsh v. The Queen, 2009 DTC 1372, 2009 TCC 557

After the Court refused the admission into evidence of a copy of a letter from the Sheriff's Office advising that the Writ of Seizure and Sale had been returned unsatisfied, on the basis that this document had not been included in the Crown's List of Documents, Sheridan, J. went on to find that the Minister had failed to satisfy the burden of proof on it that s. 227.1(2)(a) had been satisfied. The taxpayer's appeal was allowed.

Gaitens v. The Queen, 93 DTC 54 (TCC)

The Minister did not fulfil the precondition in s. 227.1(2)(a) when he filed a certificate that did not take into account the amount of a Part VIII refund that had been determined and assessed by the Minister on the same day.

Administrative Policy

86 C.R. - Q.88: the sale of all or substantially all of a corporation's assets is not "liquidation or dissolution proceedings".

Paragraph 227.1(2)(b)

Cases

Madison v. The Queen, 2012 DTC 5072 [at 6935], 2012 FCA 80

In deciding which of ss. 227.1(2)(a), (b) or (c) applied to the taxpayer's appeal from director's liability, Sharlow J.A. stated (at para. 20):

This debate was settled in the Kennedy case... .  In that case, this Court adopted the decision of the Associate Chief Judge Christie that paragraph 227.1(2)(b) does not apply where a corporation is dissolved under a procedure that does not require the appointment of a liquidator or the submission of proofs of claim.  In my view, Kennedy was correctly decided.

Instead, s. 227.1(2)(a) applied.  As the Minister had complied with that paragraph, the taxpayer's appeal could not succeed on the argument that her assessment was barred by s. 227.1(2).

Kennedy v. MNR, 91 DTC 1037 (TCC), briefly affirmed 92 DTC 6380 (FCA)

Following the voluntary dissolution of the corporation pursuant to s. 205 of the Business Corporations Act (Alberta) the Crown obtained the certificate described in s. 227.1(2)(a), and then assessed the taxpayer under s. 227.1. With respect to the taxpayer's submission that where a corporation has been dissolved, the Minister must comply with the procedure in s. 227.1(2)(b) rather than s. 227.1(2)(a), Christie A.C.J. noted that this argument was sustainable only if it were possible for the Minister to comply with s. 227.1(2)(b). This was not the case here because, where a corporation is dissolved under s. 205 of the Business Corporations Act, there is no provision for the appointment of a liquidator to whom proof of the corporation's liability can be made. Accordingly, it was satisfactory in this case for the Minister to observe the requirements of s. 227.1(2)(a).

Subsection 227.1(3)

Cases

Liddle v. The Queen, 2011 DTC 5083 [at 5838], 2011 FCA 159

The taxpayer's appeal from liability under ss. 227.1 of the Income Tax Act and s. 323 of the Excise Tax Act was denied, given that the taxpayer had effective control of the corporation during the period where it failed to remit GST and payroll source deductions, and that he took no proactive steps to ensure that such remittances were made.

The Queen v. Buckingham, 2011 DTC 5078 [at 5810], 2011 FCA 142

The taxpayer was a director in a corporation that was in arrears on source deductions.  He attempted to address the arrears through an equity issue, loans, reductions in expenditures, and attempts to merge with another company.  The trial judge took the view that "the company should continue to operate as long as there is a reasonable expectation that [a capital injection] would occur," and that the taxpayer was consequently not liable under s. 227.1(1) for the remittance failures arising while the taxpayer still had such an expectation.

The Court of Appeal found that the conclusion at trial was unacceptable, agreeing with the Crown's position (para. 17) that the conclusion, "if accepted, would pass to the Crown part of the risk associated with continuing a business which is facing financial difficulties."  Mainville J.A. found that the director's duty is to prevent failures to remit  (paras. 48-51).  Allowing such a failure in anticipation of correcting it later will not discharge this duty.  The taxpayer's circumstances did not resemble McKinnon, where the corporation's finances were effectively outside the directors' control.

Mainville J.A. also noted that while People's Store v. Wise replaced the objective-subjective standard under s. 227.1(3) with a purely objective standard, an objective standard "makes it clear that the factual aspects of the circumstances surrounding the actions of the director are important as opposed to the subjective motivations of the directors," (para. 38) and that "an objective standard does not... entail that the particular circumstances of a director are to be ignored" (para. 39).

Smith v. The Queen, 2001 DTC 5226 (FCA)

The taxpayer, who was a high school teacher and a minority shareholder of a company ("ECO") was elected to the board of directors of ECO in order to act as a liaison between the majority and minority shareholders of ECO. The trial judge had erred in finding that the taxpayer initially was an inside director of ECO as the taxpayer was not involved in the day-to-day management of the company and he did not influence the conduct of its business affairs.

Later, the taxpayer became an inside director but by that time ECO's financial resources were so depleted that there was little that could have been done to meet its remittance obligations, although despite these difficulties the taxpayer was able to have the corporation remit employee source deductions for all months except the last month for the period under review. Accordingly, the taxpayer was not liable under s. 227.1 of the Act and s. 323 of the Excise Tax Act.

Hanson v. The Queen, 2000 DTC 6564 (FCA)

The taxpayer failed to make out the due diligence defence given that she made no effort to find out what were her responsibilities as a director, she did not stay generally informed about what was happening with the business nor did she inquire when she was told that the business was encountering a "rocky spot". There is a minimum duty under s. 227.1(3) to remedy one's ignorance of the legal obligations of a director.

Attorney General of Canada v. McKinnon, 2000 DTC 6593 (FCA)

On October 18, 1993 the company's bank dishonoured a cheque drawn in favour of the Receiver General for Canada in respect of September payroll source deduction, and a few days later it informed the company that it should be careful not to issue cheques that would be beyond its credit limit with the bank (which the bank commenced to reduce) and the bank appointed a "monitor" of the company.

Evans J.A. found that the taxpayers had established the due diligence defence under s. 227.1(3) and under s. 323(3) of the Excise Tax Act with respect to failures of their company to remit source deductions and GST after October 18 given that they were acting on the advice of a consultant who advised them that there was a good prospect of finding a new investor and that the company could be quickly turned around, and who then identified a number of potential investors.

The Queen v. Corsano, 99 DTC 5658 (FCA)

Before going on to find the appellants (who were de facto directors of a Nova Scotia non-for-profit corporation) liable, Létourneau J.A indicated (at p. 5667) that "all directors of all companies are liable for their failure if they do not meet the single standard of care provided for in subsection 227.1(3)", that "the flexibility is in the application of the standard since the qualifications, skills and attributes of a director will vary from case to case" and that "it was an error for the Tax Court Judge to conclude that the standard of care was different and less rigorous in not-for-profit corporations".

Berdugo v. The Queen, 99 DTC 5424 (FCTD)

Before going on to find liability for the taxpayer, Richard A.C.J. indicated (at. p. 5427) that the taxpayer was an inside director of the corporation given that he had founded and made a major investment in the corporation in order to supply clothing to his other business and that he was an experienced director who, in addition to acting as co-signatory for the cheques issued by the business, regularly visited the production plant and was told of the financial problems of the business, including a failure to make remittances.

Clarke v. The Queen, 2000 DTC 6230 (FCTD)

The plaintiffs were absolved of responsibility in respect of failures to remit that occurred during a "soft receivership" given that ultimate responsibility in all key financial decisions rested with an accounting firm acting to protect the interests of the bank. With respect to other periods when there was neither a soft receivership nor an actual receivership in place, it was found that the directors had failed to take sufficient affirmative measures to ensure that current remittances were paid on time and in full given their knowledge of the cash flow difficulties the corporation faced.

Short v. The Queen, 99 DTC 5371 (FCTD)

The taxpayer, who was the president of a small construction company and a co-director with his wife, failed to meet the due diligence defence in light of there being no formal assignment to the Bank of Montreal for the months in question, his failure to specifically raise with the bank branch manager the question of whether the bank would honour cheques drawn in favour of Revenue Canada to meet source deductions, the continued under-capitalization of the company, and his failure to comply with an arrangement when made with Revenue Canada for the remittance of source deductions.

Soper v. The Queen, 97 DTC 5407 (FCA)

The taxpayer, who was the chief operating officer of an unrelated corporation, was invited to sit on the board in order to promote the corporation's interests in the marketplace and to lend his name and reputation in conjunction with a proposed public listing of the corporation, and never inquired as to whether the corporation was complying with its remittance obligations. Before finding that the taxpayer had failed to establish the defence, Robertson J.A. found that s. 227.1(3) established a similar standard to s. 122(1)(b) of the Canada Business Corporations Act. Accordingly, a greater degree of skill and care was not required than might reasonably be expected from a person of that individual's knowledge and experience, when, in the circumstances it was reasonably possible to attend directors' meetings a director ought to do so, and in the absence of grounds for suspicion, it was not improper for a director to rely on company officials to perform honestly duties that had been properly delegated to them. (This, in turn, meant that it was not necessary to insure the establishment and monitoring of source deduction accounts in the absence of grounds for suspicion.)

Wilson v. The Queen, 96 DTC 6417 (FCTD)

The taxpayer failed in establishing the due diligence defence for two of the three corporations of which he was an officer, director and controlling shareholder given that: he failed to inform himself about his obligations and those of the companies respecting source deductions (including when remittances were required, putting a system in place to ensure that source deductions were paid, and an inappropriate level of delegation); he was the controlling mind determining to whom payments were made and did not take any positive steps to ensure that Revenue Canada was paid, even from extra funds he personally contributed to the company; he frustrated the collection efforts of Revenue Canada; and there was no evidence that prior to the companies being placed in receivership, the bank exercised any substantial control over which of the company payables would be satisfied.

With respect to the third corporation, he was not liable given that there was no evidence that he received the balance sheets, that he made any choice about the payables, that he had corporation was affected by a cash flow crisis affecting the other two corporations or that Revenue Canada contacted him to inform him of the arrears.

Shindle v. The Queen, 95 DTC 5502 (FCTD)

The taxpayers were directors of a Saskatchewan company that was managed by their son. After the unsuccessful operations of the company in Saskatchewan were terminated, their son started a new business venture in Ontario. It was found that they had no inkling that the Ontario operations were carried on by the company (rather than a new Ontario company), with the result that they satisfied the exception in s. 227.1(3).

Robitaille v. The Queen, 90 DTC 6059 (FCTD)

The appellant was appointed as one of the three directors of a company managed by her brother-in-law, but did not participate in the management of the company or attend any directors' meetings. In October 1982, the Bank sent an individual to the company who took control of all disbursements. He did not authorize the reimbursement of deductions at source for that month, the following month and arrears for September. The appellant was not liable:

"Where the effective control of the corporation has been taken over by a bank ... without the bank being requested or invited to do so by the directors, and where the decisions as to what cheques will or will not be issued without consultation with the Board of Directors, are exclusively those of the bank, then from that time the actions of the corporation regarding the payment or withholding of monies are essentially those of the bank and I would be prepared to hold that, even without considering section 227.1(3), there would be no liability on the directors under section 227.1(1) because the latter obviously contemplates that the corporation is freely acting through its Board of Directors. The exercise of freedom of choice on the part of the director is essential in order to establish personal liability."

Addy J. also noted that the "circumstances" referred to in s. 227.1(3) "include subjective elements such as degree of education, business knowledge and general ability of the director."

See Also

D'Amore v. The Queen, 2013 DTC 1005 [at 33], 2012 TCC 373

The taxpayer directed a tavern business whose main clientele were university students.  Payroll and GST/PST remittances were handled by his general manager (Hughes).  The taxpayer co-signed all expense cheques on a weekly basis, and also conferred with Hughes on a weekly basis about how the business was doing.  In mid-August, CRA advised him that the corporation had GST remittance failures beginning in June.  Hughes advised him that she made an arrangement to pay the arrears in instalments.  In early September, he was also informed of payroll remittance failures, and of PST remittance failures.  He injected $22,000 of his own capital into the business, but it was used mainly to replenish inventory.

C. Miller J. found that the taxpayer was liable for the remittance failures from August until the business closed in November, given that the taxpayer had deliberately collected payroll deductions and sales tax and not remitted those amounts.

Before August, however, the taxpayer had no reason to suspect that the corporation's remittance obligations were not being met, and he had been reasonably prudent in keeping abreast of the corporation's finances, relying principally on Hughes to keep him informed and keep the business in order.  C. Miller J. stated (at para. 32):

The assessment of a director's conduct prior to deemed or actual knowledge of financial difficulties should simply not be as demanding.  I agree with the Respondent that a director should ask specific questions about remittances during a period of financial difficulties.  I do not believe though that such a level of diligence is required up to that point in determining the director's due diligence.

Deakin v. The Queen, 2012 DTC 1231 [at 3634], 2012 TCC 270

Boyle J. found that the taxpayers did not have a due diligence defence for unremitted source deductions and GST collections because, regardless of their earnest efforts to restore their corporation's fortunes and their forthright dealings with CRA, the fact remained that they deliberately chose to float their business with the unremitted amounts.  Boyle J. stated (at para. 23):

Given the specific wording of [ss. 227.1(3) of the ITA and 323(3) of the ETA] and the Federal Court of Appeal's comments in Buckingham, it appears somewhat difficult to imagine circumstances in which an informed and active owner-manager and director of a corporation will not be liable for unremitted employee source deductions and unremitted GST amounts.

Boyle J. acknowledged that an attempt to restore a company's fortunes may be enough to establish due diligence in exceptional circumstances, but the present case did not entail such circumstances (para. 21).

Martin v. The Queen, 2012 DTC 1253 [at 3725], 2012 TCC 239

Angers J. found that the taxpayer, who was a director of two corporations forming part of a related group, was liable for unremitted income tax source deductions of those two corporations, but not for a period starting with the initial remittance failures.  During that period, it became apparent that the group was in financial difficulty, and the taxpayer hired a chief financial officer, a lawyer and a chartered accountant to assist him with the financial crisis.  He also made the payment of taxes a priority - he refused to have certain accounts receivables applied to pay suppliers in priority to the remittance obligations.  Although payroll remittance failures did indeed arise, the corporations had  overpaid GST/HST remittances as a result of poor advice, and the overpayment amounts would have covered the remittance obligations.  The taxpayer was liable for subsequent remittance failures because of the finding that his attention was no longer directed towards avoiding such failures.

Seier v. The Queen, 2010 DTC 1344 [at 4313], 2010 TCC 495

In October 2000, a newly-incorporated corporation of of the taxpayer (the "Corporation") acquired all the assets of a bankrupt truck repairs company ("Beverley") in which the taxpayer had invested as well as continuing to retain the services of Beverly's manager who, in turn, continued to some extent to be overseen by a business associate of the taxpayer.  The assets of the Corporation were sold later a year later.

Woods J. found that the taxpayer was liable under s. 227.1(1) for the unremitted source deductions of the Corporation in 2001, and that he had not satisfied the due diligence defence in s. 227.1(3).  The report of the trustee in bankruptcy that there had been substantial source deduction failures by Beverley should have put the taxpayer on notice that his close attention to source deduction compliance by the Corporation was required.  Furthermore, he did not take any action following being informed by CRA in March 2001 that the Corporation already had source deduction arrears, other than having one meeting with the manager and the business associate.  Respecting a submission that the taxpayer had not been informed of a director's obligations in this area, Woods J. stated  (at para. 42) that "unless there is satisfactory evidence that a director sought advice as to his legal obligations as a director, ignorance is not sufficient to bring the director within the so-called due diligence defence."

Lequier v. The Queen, 2010 TCC 474, 2010 DTC 1321 [at 4219]

The taxpayer was a corporate director with her husband. When the two separated, the taxpayer erroneously believed she had resigned as director. She was liable under s. 227.1(1) for the corporation's failure to remit employee deductions. Woods J. ruled that she could not make out a due diligence defence under s. 227.1(3). At para. 24: "the appellant was an experienced business person and she was aware that her husband had a history of ignoring remittance obligations. Even though the appellant was not actively involved in the day-to-day activities of [the corporation], she had an obligation to take some action to prevent the remittance failures."

Pascoal v. The Queen, 2010 DTC 1010 [at 2578], 2009 TCC 608

The two taxpayers were the father and sister of the controlling shareholder ("Tony") of the corporations in question. In finding that they were not liable under s. 227.1, MacArthur, J. concluded that the father, who had limited abilities and business knowledge, reasonably relied on his son to apprise him of his duties and obligations as a director when they arose, and that the sister, who was only a director on paper, acted reasonably in relying on an undertaking given by Tony (which he breached) that if the corporations in question were activated, she would get out as a director.

Burton v. The Queen, 2006 DTC 2001, 2005 TCC 762 (Informal Procedure)

MacArthur J. accepted testimony that the taxpayer had resigned as director early in 2002 notwithstanding that the only copy of the written notice of resignation was mislaid and not found until the taxpayer was assessed under s. 227.1, and that notice was not filed in the minute book or communicated to the Ontario Corporations branch. Accordingly, the Minister was barred from assessing the taxpayer under s. 227.1 more than two years after the resignation in respect of remittance obligations arising after the resignation.

People's Stores v. Wise, 2004 SCR 68

In commenting on the statutory fiduciary duty of directors under s. 122(1)(b) of the Canada Business Corporations Act, the Court indicated that the characterization in the Soper case of the similar standard in s. 227.1(3) of the Income Tax Act as an "objective subjective" standard would lead to confusion, and that the Court preferred to describe the standard as an objective standard in order to make it clear "that the factual aspects of the circumstances surrounding the actions of the director or officer are important in the case of the s. 122(1)(b) duty of care, as opposed to the subjective motivation of the director or officer, which is the central focus of the statutory fiduciary duty of s. 122(1)(a) of the CBCA".

McKinnon v. The Queen, 2004 DTC 2049, 2003 TCC 884

The failure of the company to remit source deduction was due to an unforeseen supervening event (the arbitrary improper refusal of a major customer to pay amounts due by it to the company), and it was unreasonable of CCRA to take the position that the taxpayer, as sole director of the company, had showed a lack of due diligence when he failed to terminate the business upon the commencement of cash flow problem. Accordingly, the due diligence defence was made out.

McDougall v. The Queen, 2001 DTC 2651 (TCC) (Informal Procedure)

Beaubier TCJ applied the six tests in Attorney General of Canada v. McKinnon (FCA), No. A-421-98 to find that the appellant failed to establish the due diligence defence.

Dirienzo v. The Queen, 2000 DTC 2230 (TCC)

The taxpayer, who was nominally the director of a company dominated by his uncle (the uncle having been found to be a de facto director) was found to have satisfied the defence under s. 227.1(3) because he was powerless to do anything given such domination.

MacDonald v. The Queen,99 DTC 1108 (TCC)

The taxpayer (who was a highly educated civil engineer with extensive business and management history and the controller and general manager of the corporation, had agreed with the other executives, in the face of the refusal of the Royal Bank of Canada to not fund source deductions, to continue carrying on business in the hope that future business would eventually solve the corporation's cash flow problems. Because the taxpayer had allowed the corporation to continue on this basis and had done nothing tangible to prevent its failure to remit, he failed to establish the due diligence defence.

Boisvert v. The Queen, 98 DTC 1146 (TCC)

The taxpayers were liable for failures of the corporation to remit source deductions during the period between the time of appointment of a monitor by the Quebec Superior Court pursuant to the Companies' Creditors Arrangement Act and the effective date of bankruptcy of the corporation given that "the appellants could have exercised real influence over the company's activities even though, ultimately, the monitor may have had the final authority except in the event of a court action" (p. 1153) and, that during this period, the taxpayers "attitude towards these remittances was one of indifference and even carelessness" (p. 1154).

Wheeliker v. The Queen, 98 DTC 1110 (TCC)

Before going on to find that the taxpayers, who were alleged by the Crown to be directors of a non-profit corporation, had established the defence in s. 227.1(3), O'Connor TCJ. found (at p. 1119) that the standard demanded of volunteer directors of non-profit corporations was not as rigorous as the standard applied to directors of normal corporations run for profit.

Schultheiss v. The Queen, 97 DTC 863 (TCC)

Unlike the two other taxpayers (who were liable given their active involvement in the business), the third taxpayer "was an elderly man of minimal education who had virtually no idea what was going on ... and could not have influenced the course of events" (p.865) and, accordingly, was not liable.

Hanson v. The Queen, 97 DTC 796 (TCC)

The taxpayer, who was a nurse, testified that she knew nothing about the restaurant business of her son's corporation, had no interest in it as she was busy with other matters and did not ask anyone what her role or duties or responsibilities were. In finding that she had failed to establish the defence under s. 227.1(3) Sarchuk TCJ. found (at p. 799) that "the mere fact that one becomes a director in a family context is not sufficient to permit such director to turn his or her back on the affairs of the company".

Johnstone v. The Queen, 97 DTC 355 (TCC)

Teskey TCJ. was satisfied that in the circumstances the taxpayers (who were passive directors) had appropriately relied upon management and a part-time chartered accountant to make remittances of source deductions and that they had believed that source deductions were being paid. In fact, although the cheques had been prepared, they never had been delivered.

Davies-Edwards v. The Queen, 97 DTC 373 (TCC)

The taxpayer, who was described as being unsophisticated and naive in corporate and business matters, served as a volunteer director of a non-profit child care organization that was dominated by a senior employee who was described as forceful, flamboyant and overwhelming. In finding that the taxpayer satisfied the due diligence defence by co-signing with the other individual cheques that were payable to the Receiver General (but which the other individual then locked in a drawer rather than mailing), Mogan TCJ. stated (at p. 376)):

"Having regard to the Appellant's formal education, lack of business experience and the fact that she co-signed the cheques to the Receiver General, I think she exercised a degree of care to prevent the failure that a reasonably prudent person in her position would have exercised."

Hadad v. MNR, 94 DTC 1847 (TCC)

Christie A.C.J. characterized the failure of a corporation to make sufficient qualifying expenditures in order to eliminate its liability for Part VIII tax as being attributable to an unexpected decline in the price of oil, with the result that the appellant was not liable under s. 227.1(1).

Davies v. The Queen, 94 DTC 1716 (TCC)

The three appellants, became directors of the corporation ("INOVA") in order to provide their expertise in the areas of marketing, production and medical issues. Sarchuk found that it was reasonable for them to rely on the qualified and experienced financial officers who were responsible for the day-to-day operations of Inova because there was no basis for them to question their competence, there was a system in place to ensure that the proper remittances were made, and the actual state of affairs (including overriding the system) was hidden from them. Accordingly, their due diligence defence was established.

Ivezic v. MNR, 92 DTC 1066 (TCC)

In upholding a liability of the taxpayer under s. 227.1 in respect of the corporation's ilure to reduce his Part VIII tax liability through the failure to expend approximately $4 million on qualifying expenditures, he noted that the taxpayer "did not point to any detailed concrete financial plan whereby the objective might have been accomplished" and that he could not "find that the ill-defined scheme for financing the $4 million of research with about $1.6 million in cash plus unknown other assets and liabilities as one in which the Appellant might reasonably have relied".

Myers v. MNR, 91 DTC 72 (TCC)

The taxpayer authorized the payment of the payroll at a time when he anticipated that, notwithstanding great financial pressures, the company would be able to make the remittance on the 15th of the following month. However, in the interim, he was advised to accept the wind-up and receivership of the company, which he did. In the circumstances, he was not responsible for the company's failure to make the required remittance.

Myers v. MNR, 91 DTC 72 (TCC)

The taxpayer authorized the payment of the payroll at a time when he anticipated that, notwithstanding great financial pressures, the company would be able to make the remittance on the 15th of the following month. However, in the interim, he was advised to accept the wind-up and receivership of the company, which he did. In the circumstances, he was not responsible for the company's failure to make the required remittance.

Vogt v. MNR, 91 DTC 1326 (TCC)

The taxpayer exercised the requisite degree of care and diligence when, at a time that he thought that amounts due to the corporation which had been garnished by Revenue Canada were sufficient to discharge overdue source deductions from previous months, he undertook to Revenue Canada to personally secure the funds to pay the source deductions currently coming due and honoured this promise by depositing such funds to the corporation's bank account, notwithstanding that the bank refused to honour a cheque for the current source deductions drawn on that account.

Van Leenen v. MNR, 91 DTC 1265 (TCC)

The taxpayer, who was the president and majority shareholder of the corporation, was found to have been deficient in relying on established administrative procedures for the remittance of source deductions when he knew the corporation was under tremendous financial pressures and "could pay only those creditors who shouted the loudest" (p. 1268). In addition, the taxpayer was unable to establish that he should be relieved of liability on the basis that the Crown should have been more vigilant in collecting the amounts in question from the assets of the corporation.

Pidskalny v. MNR, 91 DTC 1046 (TCC)

The appellant, who became director merely to accommodate his brother's needs and suggestions, who had no real economic interest in the corporation, who had no knowledge of the rights, responsibilities and obligations of a director and who was totally uninvolved with management or operations of the corporation, was not liable on the basis of s. 227.1(3). However, for purposes of s. 227.1(4), his resignation more than two years prior to the assessment of the Minister was ineffective due to a failure to deliver the resignation to the head office of the corporation in compliance with s. 154(2) of the Company Act (B.C.).

MacArthur v. MNR, 91 DTC 957 (TCC)

At the closing of a sale of his shares of a corporation carrying on a restaurant business, the taxpayer tendered a resignation which was to become effective upon acceptance by the board of directors (which never occurred). The intent was that he would remain as a director until the new owner received approval from the Nova Scotia Liquor Licence Board. The taxpayer, who did not thereafter participate in any directors' meetings or in management decisions, was absolved from responsibility for the subsequent failure of the corporation to make remittances given that at the date he signed his resignation he "ceased to be a de facto Director of the Company and thereafter was not even in a position to exercise due care, diligence and skill in dealing with payroll deductions" (p. 960).

Byrt v. MNR, 91 DTC 923 (TCC)

The taxpayer failed to meet the due diligence defence given that he chose to ignore various "disturbing actions" of the president of the corporation which indicated that he was not totally trustworthy. In addition, the taxpayer was estopped from proving that he had resigned as director on January 24, 1985, which was more than two years prior to an assessment of him on May 6, 1987, given that the taxpayer initially had represented to the Minister that he had resigned on August 1, 1985 and the Minister had relied upon this representation. Various Charter arguments also were rejected.

Sheremeta v. MNR, 91 DTC 867 (TCC)

The taxpayer, who was a school teacher, became the sole director of the corporation to accommodate her husband, who was unable to be a director himself because of a judgment against him. She had nothing to do with the company. Margeson J. found her not to be liable on the basis that she did not know and should not have known under the circumstances that she was a director; she did not know her responsibilities as a director and did not deliberately turn a blind eye to those responsibilities; and was without control during the relevant periods of time.

Collins v. MNR, 91 DTC 819 (TCC)

The taxpayer believed that his corporation had an arrangement with the T-D Bank whereby the bank would finance the gross payroll costs (including employee source deductions) of an electrical services contract. The bank, however, refused to pay the required source deduction. Nonetheless, the taxpayer decided that the contract would be completed, given that it was profitable. This decision was found to be reasonable, with the result that the taxpayer was not liable.

Perry v. MNR, 91 DTC 696 (TCC)

In 1981 the taxpayer sold all his shares of the corporation in consideration for a secured debenture of the corporation, but remained on as a passive (and inactive) director. He was advised that the corporation was experiencing some financial difficulties, offered to come into the office for a few days to help with administration in order that the other director could promote sales, wrote a cheque to the Receiver General for source deductions that had then come due, which then bounced because, unbeknownst to him, the corporation had exceeded its credit limit. In these circumstances, he had met the required standard. In addition, following the decision in Currie v. MNR, 91 DTC 197, he was not responsible for the current month's source deductions which were not due until May 15 of the following month.

Noonan v. MNR, 91 DTC 416 (TCC)

Unlike her co-directors, who were accountants and experienced businessmen and who were involved in the business of the corporation, the taxpayer established the due diligence defence on the bases that she was not involved in the corporation, apart from a 12.5% shareholding in the corporation she was little more than an employee, and she did not know that she was a director.

Golfman v. MNR, 90 DTC 1863 (TCC)

A legal advisor to the corporation, who prior to becoming director examined the financial statements and received assurances that there were no arrears of source deductions, and who resigned immediately upon finding out that the corporation was in arrears, and who until that time had solid reasons for believing that the corporation was not in financial difficulties, had exercised the requisite degree of care, diligence and skill under s. 227.1(3).

Deschènes v. MNR, 90 DTC 1342 (TCC)

Proulx J. quoted with approval (at p. 1344) the following passage from Emshwiller v. U.S., 565 F. (2d) 1041:

"We are not insensitive to the dilemma faced by the manager of an insolvent corporation who is making an earnest effort to keep the business on its feet. Should he choose to refrain from paying net wages, he runs the risk of losing employees with the business; should he choose to pay net wages, he runs the risk of being unable to pay over those withheld. Despite the difficulty of this choice, there is no basis for allowing a responsible person to choose that course which disables him from meeting his tax obligation by preferring those with wage claims."

Champeval v. MNR, 90 DTC 1291 (TCC)

The taxpayers successfully appealed against assessments under s. 227.1 on the ground that the corporation's bank alone determined which of the corporation's cheques would be honoured (on the basis of whether the cheques exceeded the credit line set by it for the corporation). In addition, one of the taxpayers had sought to pay source deductions through post-dated cheques, most of which the bank refused to honour.

Swertz v. MNR, 90 DTC 1056 (TCC)

By virtue of s. 91 of the Business Corporations Act, the appointment of a receiver-manager by the CIBC rendered the appellant powerless to do anything to alter the receiver-manager's decision not to remit source deductions. Accordingly, the appellant was not liable.

McCullough v. MNR, 89 DTC 446 (TCC)

Revenue Canada assessed a co-director (Mr. Sandrin) of the taxpayer for $27,000 in respect of unpaid source deductions, garnished this amount, and then repaid Mr. Sandrin this amount after Mr. Sandrin successfully lobbied his Member of Parliament. Bonner J. held that because the payment by one joint and several debtor discharges the other, a reassessment of the taxpayer under s. 227.1 for the same amount could not stand. "The section is spent when it has served its purpose by putting the Minister in funds .... I cannot see how the original [company] liability was in some mysterious way revived simply because the Minister choose to reimburse Mr. Sandrin."

Merson v. MNR, 89 DTC 22 (TCC)

The company's failure to remit source deductions was attributed to the unexpected refusal of the de facto receiver of the company to authorize payment of the amount of the source deductions, which decision was not communicated to the company's sole director. "A director has an obligation to be aware of what is happening within the corporation ... However, when all reasonable measures are taken and these measures have been successful in the past, he may reasonably be expected to rely on the measures in the future."

Beutler v. MNR, 88 DTC 1286 (TCC)

The taxpayer and his co-director made a deliberate decision not to make remittances on time because of cash flow difficulties, and did not keep the source deductions in a separate trust bank account. When the gravity of the situation was realized and they attempted to ensure the payment of Revenue Canada, it was too late.

Cybulski v. The Queen, 88 DTC 1531 (TCC)

The taxpayer submitted his resignation as an officer and director on May 1, 1984, and was effectively shut out from the company after that point. The resignation arguably was ineffective by virtue of s. 119(2) of the Business Corporations Act, 1982, which provides that no director named in the articles shall be permitted to resign unless a successor is appointed.

The taxpayer was not liable for source deductions which the corporation failed to remit on 15 September 1984, 15 October 1984, and 15 January 1985. "Parliament established an exonerating standard of conduct the presence of which is to be determined in particular cases by the actual relevant facts and not by fixing to a taxpayer knowledge of a somewhat esoteric point of corporation law that in reality is probably not within the actual knowledge of a good number of legal practitioners ... It may well be that a taxpayer would not take positive steps in some circumstances and still be correctly regarded as having 'exercised' that degree of care, diligence and skill expected of a reasonably prudent person ..."

Edmondson v. MNR, 88 DTC 1542 (TCC)

The taxpayer, who was "completely unaware of a director's duties," when he realized that Revenue Canada had made a demand of the company for arrears in remittances insisted, before injecting $40,000 into the company in order to pay off the arrears, on being made a co-signer on all cheques and in having his daughter placed in the position of bookkeeper. The principal of the company foiled these precautions by hiding in his desk remittance cheques that had been signed by the taxpayer.

These actions of the principal were fraudulent, and a director is not to be held responsible for fraud of his co-directors unless he has expressly or impliedly authorized it.

Fancy v. MNR, 88 DTC 1641, [1988] 2 CTC 2256 (TCC)

When a small excavating company of which the taxpayer and has wife were directors and officers began encountering cash flow difficulties, the bank to which it had made a general assignment of its receivables as security, began monitoring all cheques issued by it and only authorizing certain specified payments. The bank refused to authorize the issuance of a cheque to cover the remittance of the source deductions for August 1982, and the company thereafter ceased operations.

Couture, C.J. found that the taxpayer and his wife were "entangled in a legal network which had its origins when the company began its operations and assigned its receivables to the bank, a situation that legally restrained their control over its cash flow as long as it owed money to the bank. They were conscious of the company's obligations under the Act and of their respective personal liability and ... under the prevailing circumstances they exercised the degree of care, diligence and skill referred to in s. 227.1(3)". The proposition advanced by the Crown, that the appellants in order to avoid personal liability should have ceased operations when the company entered into financial difficulties, did not reflect the true intent of the legislation.

Quantz v. MNR, 88 DTC 1201 (TCC)

The director of a private manufacturer of caskets who concentrated on manufacturing and marketing, was faulted by Goetz J. for not at least enquiring about the amounts owing to the Receiver General and for not giving instructions to anyone to ensure payment even after a Revenue Canada auditor brought the arrears to his attention. He failed to meet the requisite standard.

Fraser v. MNR, 87 DTC 250 (TCC)

A director of a private company was responsible for the manufacturing side of the business and the two other directors (the president and treasurer) were responsible for financial and other matters. When he became aware that a Revenue Canada collections official was raising a "ruckus" about income tax arrears he was told by the other two that they were taking care of the problem. He did not make further enquiries or take further action. He failed to meet the due diligence standard. S.227(3) "does not assist those whose only excuse is that others had a better opportunity to prevent failure than they did." Although he was unaware of the requirements of ss.153 and 227, s. 227.1 does not impose liability only on those who are aware of its requirements.

Administrative Policy

88 C.R. - "Director's Liability": The director is required to take positive steps to ensure the corporation remits source deductions (which may include establishing controls and monitoring compliance with those controls), and has special responsibilities when the corporation is in financial difficulty.

88 C.R. - F.Q.5: A director may be able to protect himself by putting forward a resolution for the requisite controls, then having it recorded that he was out-voted.

88 C.R. - F.Q.6: There should be evidence in the minute book of the director tabling, as an objective, the obtaining of a guarantee from the corporation's bankers that cheques covering the required remittances will clear upon presentation.

88 C.R. - F.Q. 8: The onus of proof that due diligence has been exercised always rests with the directors.

87 C.R. - Q.77 : the obligation to administer appropriate controls applies equally to directors of small private corporations and major public ones.

87 C.R. - Q.78 : every effort is made to collect the amounts owing from the corporation prior to considering assessment under s. 227.1. Head Office and perhaps Justice, review the director's submission.

87 C.R. - Q.81 : there is no distinction between active and outside directors.

86 C.R. - Q.86 : RC does not distinguish between active and passive directors.

86 C.R. - Q.87 : each director is first given an opportunity to make written submissions

IC 89-2 "Directors' Liability - Section 227.1 of the Income Tax Act"

Articles

Fien, "Directors' Liability and Indemnifications, Section 160 Assessments and Ordinary Course of Business Provisions", 1992 Conference Report, c. 53.

Fulcher, "Section 227.1 of the Income Tax Act and the Director's Duty of Care in BCA Jurisdictions: Some Lessons From the Corporate Governance Debate of the Last Twenty-Five Years", Canadian Petroleum Tax Journal, Spring, 1992, p. 17.

Moskowitz, "Directors' Liability: An Update", 1991 Conference Report, c. 47.

Heinrich, "Judicial Response to Director's Liability and Crown Garnishment Priorities", 1991 British Columbia Tax Conference, Volume 1

Moskowitz, "Directors' Liability under Income Tax Legislation and Other Related Statutes", 1990 Canadian Tax Journal, p. 537.

Subsection 227.1(4)

Cases

Létourneau v. The Queen, 2012 DTC 5044 [at 6777], 2011 FCA 354

The trial judge found that the taxpayer was a director of a business corporation when its remittance failures arose in 2001 and 2002, despite her having submitted a written resignation in 1999.  The trial judge's findings had two bases.  The first was that the sole director who replaced the taxpayer had no business expertise, and would automatically sign any document at the request of the corporation's principal shareholder.  The second was that there was evidence that the corporation's records had been amended in 2002 to retroactively remove the taxpayer as director as of 1999.

The Court overturned the trial judge's findings.  The business expertise of the taxpayer's replacement director had no bearing on the validity of the taxpayer's resignation.  At best, it proved that the principal shareholder was a de jure director of the corporation.  There was also no reason to conclude that the amendment of the corporate records was anything but an attempt to accurately reflect what had in fact happened - namely, that the taxpayer had ceased to be a director in 1999.

Butterfield v. The Queen, 2009 DTC 1382 [at 2108], 2009 TCC 575, aff'd 2011 DTC 5005 [at 5510], 2010 FCA 330

In rejecting the taxpayer's argument that he ceased to be a director by virtue of an assignment in bankruptcy by the corporation in question, C. Millar, J. stated (at para. 7) that "case law is very clear and well established, that an assignment in bankruptcy does not trigger a director ceasing to be a director".

Re Blackwater Marine Inc., 2010 DTC 5087 [at 6877], 2010 BCSC 340

CRA sought to have a BC corporation, that had been dissolved, restored and its sole director restored as of the date of the dissolution in order to be able to pursue remedies for unpaid taxes and unremitted source deductions against the corporation and the individual.

The requested restoration for the corporation was granted, but not that for the individual's status as director, as the application was brought more than two years after the date of dissolution and there would be potential prejudice to a due diligence defence of the individual under s. 227.1 - as well as putting in jeopardy his compliance with a four-year non-compete agreement.

The Queen v. Kalef, 96 DTC 6132 (FCA)

The taxpayer did not cease to be a director of an Ontario corporation for purposes of the two-year limitation period in s. 227.1(4) when a trustee in bankruptcy was appointed and took control of the corporation's assets to the exclusion of its directors, given that he did not resign or otherwise cease to be a director in accordance with s. 121 of the Business Corporations Act (Ontario).

The Queen v. Wellburn, 95 DTC 5417 (FCTD)

Although under the B.C. Company Act, the appointment of a receiver-manager of the corporation did not cause individuals to cease to be directors, they ceased to be directors when they delivered a written notice of resignation to the receptionist at the law firm at which the registered office of the corporation was maintained, who then placed the resignation notice directly in the company's records without informing a lawyer.

See Also

Bekesinski v. The Queen, 2014 TCC 245 [appellant, who likely backdated resignation, was plausible enough to demolish assumptions]

The appellant contended that he had resigned as director in 2006, so that an assessment under s. 227.1(1) in 2010 was out of time.  The Minister’s forensic evidence to establish that the resignation had been backdated had been disallowed in a prior hearing.

The Minister had not pleaded backdating  - only that the appellant had continued as a director – nor did she plead lack of due diligence.  Accordingly, explanations of the appellant which were plausible were sufficient to demolish the Minister’s assumptions notwithstanding that “in all likelihood, the Appellant backdated the Resignation” (para. 45).  The appeal was allowed.

Bohbot-Gangnon v. The Queen, 2013 DTC 1185 [at 998], 2013 TCC 128 [resignation with subsequent effective date]

The taxpayer was the sole director of a corporation which had, under another person's management, failed to remit source deductions.  Upon learning of the failures, she took measures that culminated in the sale of the corporation to a third party on 7 July 2006, but her notice of assessment for director's liability was dated 16 July 2008, i.e., just over two years later.  The relevant terms of the contract were:

7.1 The seller shall resign from her position as President, Secretary and Director of the corporation on the date of this agreement;

7.2 This resignation is accepted by the corporation on the date of this agreement and shall be effective on the date of the corporation's next articles of amendment;

Lamarre J found that the taxpayer's limitations period ran not from 7 July 2006, but from 18 July 2006 when the articles of amendment were signed.  Section 108 of the Canada Business Corporations Act provides that a resignation is effective on the later of the date of delivery (i.e. when the agreement was signed) and the date specified in the resignation (i.e. when the articles were amended, which turned out to be on 18 July 2006).

Pfitis, 2013 DTC 1030 [at 141], 2012 TCC 414

The Minister assessed a director on 15 July 2010 for unremitted CPP amounts of a corporation that was dissolved on 15 July 2008.  Angers J. found that, under s. 27(5) of the Interpretation Act, the two year limitations period commenced on the day after the taxpayer ceased to be a director, and therefore 15 July 2010 was just within the limitations period.  The taxpayer's appeal was granted on other grounds.

Walsh v. The Queen, 2009 DTC 1372, 2009 TCC 557

The taxpayer had satisfied the requirement that there have been "meaningful communication with the corporation" of his decision to resign when he signed a letter of resignation as the sole director of the corporation in question and placed it with the company records (but without filing it in the minute book). Furthermore, his actions following the cessation of operations of the corporation and such resignation, of forwarding correspondence to the company accountant and authorizing the accountant to carry on discussions with CRA officials, did not cause him to be a de facto director following his resignation. The taxpayer's appeal was allowed.

Moll v. The Queen, 2008 DTC 3420, 2008 TCC 234 (Informal Procedure)

A written resignation of the taxpayer as sole director of the corporation dated more than two years before his assessment under s. 227.1 was found to have been fabricated after the fact. However, even if he had resigned on the date of the purported letter, he would have continued to be a director under s. 115(4) of the Business Corporations Act (Ontario) (which stipulates that "any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director" following that person's resignation), given that after the date of the purported resignation he continued to hold himself out as the director of the corporation and continued to do various acts such as meeting with CRA and giving them post-dated cheques.

Hamilton v. The Queen, 2007 DTC 121, 2006 TCC 603

The taxpayer was liable under s. 227.1 in respect of the failure of a corporation of which he was a director to withhold on various amounts paid to non-residents of Canada under Regulation 105. Boise J. stated (at p. 124) that "I do not consider that simply having the company hire a payroll company to process the payments is sufficient to establish due diligence on his part."

Hartrell v. The Queen, 2006 DTC 3548, 2006 TCC 480

The taxpayer was not liable with respect to the second of two periods of time during which the corporation failed to make source deductions given that the other major shareholder of the corporation had precipitously refused to make any further contributions of money to the corporation at a point during the playing season for the corporation (which ran a soccer team) at which the taxpayer was powerless to prevent the failures to remit.

Schultheiss v. The Queen, 97 DTC 863 (TCC)

Although two of the taxpayers had signed documents resigning as officers and directors, these documents were not formally filed with the corporation or accepted by a responsible officer of the corporation or by the board of directors, the provisions of s. 119 of the Business Corporations Act (Ontario) were not complied with in that as first directors they were not replaced by anyone on the board, there was no resolution of the corporation reducing the number of board members, and the two individuals, in fact, continued to attend board meetings. Accordingly, the purported resignations were not effective or complete.

Crossley v. MNR, 91 DTC 827 (TCC)

The two-year limitation period commenced running at the time of the appointment of a receiver-manager notwithstanding that the taxpayer still retained certain vestigial powers as a director.

Nagy v. MNR, 91 DTC 993 (TCC)

The decision of the directors of a corporation, following its filing of a proposal under the Bankruptcy Act, to discontinue its business operations did not result in any restriction on their powers and, accordingly, did not cause the two-year period referred to in s. 227.1(4) to commence running.

Larocque v. MNR, 91 DTC 899 (TCC)

The issuance of a notice of reassessment was a "proceeding" for purposes of s. 227.1(4), with the result that the making of such a reassessment on the second anniversary of the date of resignation of the taxpayer as a director was permissible for purposes of s. 227.1(4). However, the taxpayer met the due diligence defence given that the failure of the operation's banker to honour the monthly remittance cheque was unexpected, and the taxpayer resigned shortly thereafter.

McConnachie v. MNR, 91 DTC 873 (TCC)

In finding that the two-year limitation period commenced running when the corporation was deemed to make an assignment in bankruptcy and a receiver-manager was appointed, with the result that the corporation ceased to have any capacity to dispose of or otherwise deal with this property (pursuant to s. 50(5) of the Bankruptcy Act) and the directors ceased to have the authority to exercise their powers (pursuant to s. 91 of the Business Corporations Act (Ontario)), Bonner J. stated (p. 877):

"The directors of a corporation which has lost the capacity to dispose of or deal with corporate property are not the sort of persons who are the target of section 227.1."

Hawkins v. MNR, 91 DTC 648 (TCC)

When a receiver-manager was appointed, the taxpayer ceased to be a director for purposes of s. 227.1(4) by virtue of s. 73 of the Companies Act (N.S.), which provided that in such event "the powers of the directors of the company that the receiver-manager is authorized to exercise may not be exercised by the directors until the receiver-manager is discharged".

DeWitt v. MNR, 90 DTC 1027 (TCC)

Following the continuance of a corporation under the Alberta Business Corporations Act, there was a failure to have the appellant consent to continue to act as a director of the corporation. Therefore, in light of subsection 100(6) of the Alberta Business Corporations Act, which provides that a person who is elected or appointed as a director and who refuses or fail to consent to act as a director shall be deemed not to have been elected or appointed as a director, the appellant was found not to be liable under s. 227.1.

Perri v. MNR, 89 DTC 723 (TCC)

The taxpayers ceased to be directors for purposes of s. 227.1(4) upon the appointment of a receiver manager notwithstanding that the taxpayers did not resign until later, and that they continued on as employees of the company. S.110 of the Company Act (B.C.) provided:

"Where a receiver manager is appointed, the powers of the directors and officers of the corporation cease with respect to that part of the undertaking for which he is appointed until he is discharged."

Cybulski v. The Queen, 88 DTC 1531 (TCC)

The taxpayer submitted his resignation as an officer and director on May 1, 1984, and was effectively shut out from the company after that point. The resignation arguably was ineffective by virtue of s. 119(2) of the Business Corporations Act, 1982, which provides that no director named in the articles shall be permitted to resign unless a successor is appointed.

The taxpayer was not liable for source deductions which the corporation failed to remit on 15 September 1984, 15 October 1984, and 15 January 1985. "Parliament established an exonerating standard of conduct the presence of which is to be determined in particular cases by the actual relevant facts and not by fixing to a taxpayer knowledge of a somewhat esoteric point of corporation law that in reality is probably not within the actual knowledge of a good number of legal practitioners ... It may well be that a taxpayer would not take positive steps in some circumstances and still be correctly regarded as having 'exercised' that degree of care, diligence and skill expected of a reasonably prudent person ..."

Administrative Policy

88 C.R. - Q.81: An assessment cannot be made against directors once the corporation has been dissolved for two years.

85 C.R. - Q.13: RC does not distinguish between active and passive directors.

Subsection 227.1(7)

Cases

Adams v. Anderson, 2011 ONCA 381

The appellant and respondents were former directors of the same corporation.  The appellant was assessed for the corporation's unremitted source deductions and GST and sought contribution from the respondents.  The Court dismissed the appeal on the basis that ss. 227.1(7) of the Income Tax Act and 323(8) of the Excise Tax Act allow contribution from other directors only where those directors were liable for the claim.  While the respondents were initially assessed for the unremitted amounts, CRA subsequently conceded in a letter that the respondents were no longer directors when the remittance failures arose.  The Court found (at para. 10) that the trial judge was required to defer to CRA's determination of the respondents' tax liability.