4 February 2009 Internal T.I. 2008-0300111I7 - Directors' Liability

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: What is the amount recoverable from a director?

Position: The amount recoverable is (a) the amount remaining unsatisfied in whole or in part after the sheriff's levy; (b) in the case of a formal dissolution, the amount proved against the company, less any amount paid; (c) in the case of a bankruptcy, the amount proved against the estate less any dividends received.

Reasons: S. 227.1(5)

 February 4, 2009

HEADQUARTERS
Income Tax Rulings Directorate  

Lindsay Frank
(613) 948-2227  

2008-030011

Directors' Liability

This is in reply to an email from Don Harrison, who has requested our position on the quantum recoverable from a director.

In his email, reference is made to an internal document which states that a director is liable only for the amount returned unsatisfied, following the Minister's instructions to the sheriff to enforce a writ of seizure and sale. However, where a series of writs reflect the entire corporate liability, the issue is whether enforcing one of those writs would be sufficient to assess a director for the entire amount owed by the corporation.

Section 227.1 of the Income Tax Act ("ITA") and section 323 of the Excise Tax Act ("ETA") each make a director of a corporation jointly and severally liable with the corporation for the corporation's failure to pay source deductions or GST. Subsection 227.1(2) of the ITA and subsection 323(2) of the ETA require the Minister to take certain steps to establish liability.

The liability of a director is directly related to the amount owing by the corporation: Schuster v. R., [2001] G.S.T.C. 91 (T.C.C.). Pursuant to subsection 227.1(2) of the ITA and subsection 323(2) of the ETA, a director is not liable unless the Minister has determined, in one of three ways, the corporation's liability. If the corporation has commenced liquidation or dissolution proceedings, the Minister must prove a claim within six months after the earlier of the date of the commencement of the proceedings and the liquidation. If the corporation is bankrupt, the Minister must prove a claim within six months of the bankruptcy: Wollitzer v. R., 96 D.T.C. 1122 (T.C.C.). For all other situations, the Minister must certify the amount owing and instruct the sheriff to enforce collection: Re BlueStar Battery Systems International Corp., [2001] G.S.T.C. 2 (Ont. S.C.J. [Commercial List]); Pozzebon v. R., 98 D.T.C. 1940 (T.C.C.); Filippazzo v.R., 2000 D.T.C. 2326 (T.C.C).

This link is made clearer in subsection 227.1(5) of the ITA and subsection 323(6) of the ETA, which provide that the amount recoverable from a director is the amount remaining unsatisfied after the sheriff has attended and levied. In Zaborniak v. R., [2004] G.S.T.C.110 (T.C.C.), the directors were assessed for the full amount of the corporation's liability as stated on two writs, notwithstanding the fact that when the Minister had instructed the sheriff to enforce only one of the writs. The Court held in that case that the amount recoverable from the directors was limited to the amount remaining unsatisfied on the writ levied, and not on the one on which the sheriff had no instructions to enforce.

A similar link is established when the corporation is bankrupt: Matossian v. R., 2005 D.T.C. 357 (T.C.C.); aff'd 2006 D.T.C. 6150 (F.C.A.). In that regard, the amount recoverable was the amount of the claim proved net of any dividend remitted by the estate. Where a company is liquidated or dissolved, the amount recoverable would be the amount of the claim proved net of any amount remitted by the liquidator.

Trusting you find this satisfactory

B. J. Skulski
Manager
Administrative Law Section
Business and Partnerships Division
Income Tax Rulings Directorate

c.c. Don Harrison