Brian M. Studniberg, "Identifying the De Facto Director", Canadian Tax Journal, (2015) 63:4, 1073-95

Corporate law concept of de facto director (p.1079)

A recent text on Canada's modern business corporations' law observes that there are now three classes of de facto director: [fn 30: See Kevin P. McGuiness, Canadian Business Corporations Law, 2d ed, (Markham, ON LexisNexis Canada, 2007), at 775-77]

1. Directors whose term of office has expired but who have nevertheless continued to act as if it had not.
2. Individuals who take upon themselves the office of director without having been validly elected.
3. Situations where all of the directors have resigned or been removed. In such cases, a person who manages or supervises the business and affairs of the corporation is deemed to be a director.

A person in the third category may be better identified as a deemed director rather than a de facto director….

Two key indicators

Canadian tax cases have generally considered two key indicators as the basis for a finding that an individual is or has been a de facto director of a corporation. These two indicators might be styled as "acting as a director" (the individual does the things that a director does) and "being held out as a director" (the individual is represented to be a director)….a person "acting as a director" will be found to be a de facto director of the corporation, whereas "being held out as a director" may or may not be significant, but under the existing case law seems much less likely to be determinative. [fn 31: See, for example, Hartrell v. The Queen, 2006TCC 480, at paragraph 24 (aff'd. 2008 FCA 59), where Paris J suggests that, in certain circumstances, an individual need not explicitly represent himself or herself as a director to third parties….]

MacDonald and McDonald (p. 1080)

Two recent decisions of the Tax Court are helpful in clarifying the critical factors to be considered in de facto director cases. In MacDonald, [fn 33: ...2014 TCC 308... .] the taxpayer had signed a number of documents indicating that he was a company director, but was nevertheless held by the court not to be such. In McDonald [fn 34: ...2014 TCC 315... .] in contrast, the taxpayer was found to be a director where the facts showed that he was a key man on the operational side and also played a part in the company's administration.

Performing functions of director (pp. 1083-1085)

The clearest line to emerge from Canada's case law seems to be that a person who performs acts that only a director can perform faces a strong prospect of being found to be a de facto director….

[I]n Brenner, the Tax Court suggested that the following actions were characteristic of a director's role: [fn 62: ...Bremner...at paragraph 24, per Rip ACJ...aff'd. 2009 FCA 146, per Ryer JA.]

• participating in board meetings,
• signing resolutions of the board,
• participating in administrative decisions of the company,
• deciding to sell company assets, and
• giving instructions in the name of the corporation.

Another indicator of director status might be accepting the resignation of another director or a senior officer. [fn 63: See...Chell....2013 TCC 29, at paragraph 28, per Hogan J.]

The case law has established the existence of de facto directorships predicated on the actions of individuals in a number of situations, including the following:

• The individual participated in and unambiguously contributed to the administration and management of the corporation, both on day-to-day matters and (perhaps more importantly) on important (strategic) decisions tied to the company's business.
• The individual played a key role in the administration and management of the corporation and had ultimate decision-making authority.
• The individual was self-supervised, the only signing officer, and effectively answerable to no one with respect to the duties of a director.

[W]hether an individual has been performing the functions of a director may be a comparative exercise. Thus, in McDonald, although the taxpayer tried to leave as much of the administration of the company as possible in the hands of his spouse, the Tax Court nevertheless found that he had functioned as a director, particularly by comparison with the involvement of his spouse. In contrast, in other cases, where the taxpayer reported to the company's de jure director or was clearly subordinate to the corporation's ultimate decision makers, the taxpayer was found not to be performing the functions of a director.

Whether taxpayer has an essential role in decision-making (pp.1086-1087)

There are several reported cases in which the essential nature of the taxpayer's contribution to the company's existence, business operation, or administration strongly suggested that it would be difficult to view anyone else as the company's director. These cases covered situations such as the following:

• The taxpayer, who was the company's principal shareholder and initially its sole director, had resigned as a director. However, he still managed and controlled the company and had given himself the title of general manager. The taxpayer negotiated with banks and signed contracts and other documents for the corporation. The taxpayer was the only person authorized to sign cheques for the company. [fn 74: ...Thibeault...2005 TCC 393...at paragraphs 6,8-9, and 46... .]
• The taxpayer was the company's sole signing officer with its bank. The Tax Court found that the taxpayer had "effectively" and "without interference" taken on the role of the corporation's "directing mind." [fn 75: Bonotto v. The Queen, 2008 TCC 221, at paragraph 22.] Moreover, because it was the taxpayer (and only the taxpayer) who was writing the company's cheques, he would have known about the tax problem at the time that the corporation failed to make its remittances.
• The taxpayer was found to have played a "key role in the administration" and, with his business partner, had "ultimate decision making authority" over the corporation. [fn 77: Hartrell..., 2006TCC 480, at paragraph 28 (aff'd. 2008 FCA 59)] The taxpayer, for instance, had signed many of the cheques issued by the corporation, had regular contact with its bank, participated in drawing up the budget, and personally paid significant amounts of the operating expenses.
• Following the resignation of all of the other directors, the taxpayer found himself as the last director. Although the taxpayer had then posted his own formal resignation, he seems to have carried on as the "last person standing"; for example, he met with the CRA to discuss outstanding tax liability and continued to pursue business opportunities for the company. [fn 79: Chell v. The Queen, 2013 TCC 29, at paragraph 7, per Hogan J.]

Actions of senior manager not those of de facto director (p. 1088)

[T]he cases cover a number of situations where the responsibilities or actions of a senior manager of a company did not cross over into a de facto directorship:

• Having signing authority for the corporation does not make a person into its director. [fn 82: See Perricelli v. R, [2002] GSTC 71 (TCC), per C. Miller J; and see also Beauchemin v. The Queen, 2007 TCC 105, per Bedard J.]
• The taxpayer was the corporation's general manager with signing authority on behalf of the corporation but had never held himself out as a director. [fn 83: Scavuzzo v. The Queen, 2005 TCC 772, at paragraph 27, per Bowman CJ.]
• Being a senior company executive—even its chief executive officer (CEO)— does not mean that the individual has become a director.[fn 84: Master v. R, [2001] GSTC 124 (TCC), per Bowman ACJ.] What seems to have been determinative here is that the taxpayer served at the pleasure and direction of the de jure directors, who were still very much in charge and who did not heed the advice of the CEO at the time.

Tainting if former director (p. 1089)

The Federal Court of Appeal has noted that it does not take much action on the part of an incumbent director to continue a directorship. [fn 90: Bremner...2007 TCC 509...at paragraph 6...aff'd. 2009 FCA 146]…

Ceasing being a de facto director (p. 1092)

The Tax Court has stated that there is no fixed rule for determining when a de facto director ceases to be such. What is important is the person's conduct….an individual may cease to be a de facto director when

• the shareholders elect a replacement; [fn 105: Bremner...2007 TCC 509...at paragraph 26...aff'd. 2009 FCA 146... .]
• the individual gives notice to the corporation of his or her intended cessation of activity and then actually stops managing or supervising the company; [fn 106: Bremner...at paragraph 26]
• the individual has performed his or her last formal act for the company (such as signing a cheque for tax remittances); [fn 107: In Parisien...2004 TCC 276...per Lamarre J, the taxpayer was a director but explicitly expressed his desire to continue to help out following his formal resignation.] or
• the individual has ended negotiations with a prospective customer on behalf of the company. [fn 108: ...Chell...2013 TCC 29, at paragraph 28... .]

[C]easing to be a de facto directtor may be more difficult in practice for a sole shareholder or sole director. In this regard, it might be possible for the company to engage accounting or legal professionals to assist in its orderly winding down. A stark change in behaviour on the part of the indicividual can also be useful... .

From conclusions (p. 1095)

In situations where the individual has not performed any of the definitive or major acts that only a director could perform but has instead been involved in the corporation's administration or operations, what seems to matter is the extent of the lesser acts that cumulatively may signal the existence of a de facto directorship.