2 June 2009 External T.I. 2009-0311161E5 - 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: Whether interest is exigible on a director's liability assessment for a corporation's failure to remit where the corporation is bankrupt and interest does not accrue on the corporate liability.

Position: Yes.

Reasons: At bankruptcy, the stay of proceedings protects the bankrupt from the Crown assessing further interest on a liability. However, by section 179 of the Bankruptcy and Insolvency Act, a person who is jointly bound with a bankrupt does not obtain that protection. Therefore, the Crown can assess interest against a director after the bankruptcy of a corporation.

XXXXXXXXXX 							2009-031116
								Lindsay Frank
								613-948-2227
June 2, 2009

Dear XXXXXXXXXX :

Re: Exigibility of Interest on Directors' Liability Assessments When Company Bankrupt

This is in reply to your email of February 19th, 2009. The issue is whether interest is exigible on a director's liability assessment for a corporation's failure to remit where the corporation is bankrupt, and interest does not accrue on the corporate liability. As explained below, the Crown has the authority to recover from the directors of a bankrupt corporation the amount that that corporation owed at the date of bankruptcy. In addition, the Crown is entitled to collect from the directors interest on that amount, assessed beyond the date of bankruptcy, notwithstanding the bankruptcy of the corporation.

Section 227.1 of the Income Tax Act imposes liability on directors of a corporation for the corporation's failure to pay, among others, source deductions and patronage dividends. Section 323 of the Excise Tax Act holds such directors liable for GST.

These provisions have two salient aspects, and afford the Crown the opportunity to recover an amount owing from a source other than the corporation - in this case - the directors. First, the liability is joint, meaning that the directors and the corporation are liable on the same set of facts. Second, the liability is several, meaning that the liability against the directors has a life of its own, and survives the extinguishment of the liability of a bankrupt corporation. Therefore, notwithstanding the bankruptcy of a corporation, an amount unpaid by a bankrupt corporation for source deductions, patronage dividends or GST may be recovered from the directors of a corporation, see Heavyside v. The Queen, 43 C.B.R. (3d) 128, [1997] 2 C.T.C. 1 (F.C.A.); rev'g 41 C.B.R. (3d) 173, [1996] 2 C.T.C. 2491 (T.C.C.).

Pursuant to section 179 of the Bankruptcy and Insolvency Act, the bankruptcy of a person is individual to that person. Therefore, a person who is jointly bound with a bankrupt does not obtain the protection that the bankrupt has in bankruptcy proceedings. In other words, the stay of proceedings, effected by a bankruptcy, does not shelter the other party. As a result, while the stay of proceedings inhibits the Crown from charging interest beyond the date of bankruptcy against the bankrupt corporation, it does not prevent the Crown from charging such interest against the person who is jointly bound with the bankrupt. In this respect, see D'Argys v. M.N.R., [1992] 2 C.T.C. 2778, 92 D.T.C. 1710 (T.C.C.), cited with approval in Heavyside.

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