Colitto – Federal Court of Appeal finds that a director’s s. 227.1 liability can flow through to a transferee under s. 160 well before the s. 227.1(2) claim conditions have been met

The taxpayer’s husband (Mr. Colitto) was acknowledged to be liable under s. 227.1 for the failure of his corporation to remit source deductions between February and August, 2008. In 2016, CRA assessed Ms. Colitto on the basis that Mr. Colitto’s s. 227.1 liability had flowed through to her under s. 160 (given the gratuitous transfer to her by him of real estate in 2008). The Tax Court found that Mr. Colitto’s s. 227.1 liability did not arise until 2011, when the last precondition for its application was satisfied (i.e., the corporation’s source-deduction tax debt was executed and returned unsatisfied) and, hence, his s. 227.1 liability had not arisen “in respect of” his 2008 taxation year,” as required under s. 160(1)(e)(ii) in order for that liability to flow through to her on the 2008 real estate transfers.

In allowing the Crown’s appeal, Dawson JA first noted that the wording of s. 227.1(1), although ambiguous, was consistent with that provision addressing not only who was liable (i.e., a director at the time of the corporate failure to withhold in 2008), but also when that director’s liability arose (i.e., at that same time, in 2008). Conversely, the expansive effect given by the Tax Court to the exclusion from director’s liability in s. 227.1(2) had the effect of reading two words into that provision, namely, that a director is not liable for the corporation’s default unless “and until” the specified s. 227.1(2) procedures took place (in 2011).

These considerations were reinforced by the purposes of s. 227.1, which had been judicially stated to be “to strengthen the Crown’s ability to enforce the statutory obligation imposed on corporations to remit source deductions,” whereas the Tax Court interpretation “render[ed] this purpose nugatory and pointless.”

Neal Armstrong. Summary of Canada v. Colitto, 2020 FCA 70 under s. 227.1(1).