Section 323

The ARQ commenced a QST audit of a corporation (Motostar) after its voluntary dissolution by its sole individual shareholder (Delia) and assessed Motostar for some unremitted QST – and five months later assessed Delia for the same amount under the Quebec equivalent of ETA s. 323(1) (and ITA s. 227.1(1).) Cameron JCQ found that the assessment of Motostar was void given that the equivalent provision in the Quebec BCA to CBCA s. 226(2) did not (unlike s. 226(2)) provide that a proceeding may be brought against the dissolved corporation within X years after its dissolution, and instead merely provided that “judicial or administrative proceedings to which the corporation was a party” are continued against its shareholder on the dissolution. (As noted, the “administrative proceedings,” i.e., audit, were commenced after the dissolution.)

Nonetheless, the assessment against Delia was valid but for the due diligence defence (which he found to be available) given that the Quebec equivalent of ETA s. 323(2)(b) (and of ITA s. 227.1(2)(b)) merely required that the corporation have been dissolved (or was in the process of dissolution proceedings) and did not require that a claim for the corporation’s liability have been proved.

Cameron JCQ stated (at paras. 68-70):

[T]he remittance obligation of Motostar before its dissolution constituted a legal reality whose existence did not depend on the administrative act of issuing a notice of assessment.

The application of TAA Article 24.0.1(c) to the director rests on the existence of a remittance obligation of the corporation, one in advance of the day of dissolution, and not on the assessment of the corporation prior to the dissolution.

Otherwise, the dissolution would become a way to avoid obligations arising under tax law each time an assessment had not yet been issued, which would give rise to an impossible situation for the tax authorities.

It was unnecessary to consider whether the assessment of Delia could be founded in the alternative on the basis that under the QBCA he had assumed the tax obligation of Motostar, as this argument had been abandoned by the ARQ.

The taxpayer had intended to form a partnership with another party, who was under the misapprehension that a corporation was required in order to form a partnership and drafted documents for her to sign that reflected this confusion. Russell J found that the taxpayer was not a de jure director of the corporation, notwithstanding that she had been named in the notice of articles as a first director. She had not provided a written consent to be a director and she also was not an “incorporator,” whose definition in the B.C. Business Corporations Act referenced her signing an “incorporation agreement.” The only relevant agreement that she had signed was found by Russell J to instead be a partnership agreement.

She also was not a de facto director, Russell J stated (at para. 38):

Jurisprudence reflects that the concept of de facto director should be limited to persons who hold themselves out as directors.

The taxpayer in fact “engaged in no acts of management … let alone any actions specific to a director” (para. 40).

Accordingly, she was not liable for assessments under the ITA s. 227.1 and ETA s. 323.

The taxpayer, sold all the shares of a corporation (“9056”) operating a pizzeria, resigned as director, but continued to sign cheques for 9056 (usually in blank for his son to complete) due to the requirements of the bank. Following his resignation, 9056 had two directors. The ARQ assessed the taxpayer under ETA s. 323 in respect of unremitted GST of 9056, primarily on the basis that the taxpayer was a de facto director of 9056 during the relevant period.

In allowing the taxpayer’s appeal, Archambault J stated (at paras. 69, 71, TaxInterpretations translation):

One does not usurp the functions of a director where one signs cheques, signs contracts, engages personnel, signs income tax or GST returns or receives invoices. These activities arise out of the prerogatives of a manger or any other person designated by the board of directors or by a person designated by the manager of the business and not those of a director.

… Subsection 323(1) of the ETA is an exemption from the common law and applies only to directors. Parliament could have provided that its application should extend to the senior officers of the corporation. It could have stipulated …that any person authorized to sign the cheques of a corporation be held responsible for the failure of the corporation in its obligation to remit the GST amounts stipulated by the ETA. However, …the legislator … limited the application of subsection 323(6) to the office of director.

He went on (at para 85) to quote with approval (from Scavuzzo v. The Queen, 2005 TCC 772) the following statement from CRA Directive RCD-95-12:

Caution should be exercised prior to assessing an alleged "de facto" director. It is not sufficient that a person be signing cheques for the corporation for him or her to be considered a "de facto" director. The general rule is that it is not appropriate to assess an alleged "de facto" director if there are legally appointed directors in office at the relevant times. The assessment of a de facto director should be considered only in cases where a person is representing himself or herself as a director. There should be written evidence of such behavior available.

After being approached by the incorporator ("Marney") of a pub, the appellant subscribed $10,000 for shares as a passive investment. He became an authorized signatory and was appointed secretary/treasurer and signed cheques on the basis that two signatories were required, which he would do without any document review - his involvement was minimal. He also signed various banking documents and certificates, as well as a corporate tax return, CRA RC59 business consent form and disclaimer letter in favour of CRA (all without review) showing him as a director. Marney and another individual, who had been named as the initial directors, were struck from the corporate register shortly after the commencement of operations and the name of the name of the common-law wife of Marney ("Richards"), who now was running the operations, was added to the register. However, no directors or shareholder meetings were held, noone was appointed by the shareholder as director. The appellant purchased all the remaining shares of the corporation for $1 from Richards, upon her bankruptcy. The Minster assessed the appellant personally for the corporation's GST and income tax remittance shortfalls under ETA s. 323(1) and ITA s. 227(1).

Rossiter ACJ found that the taxpayer was not so liable. After finding (at para. 37), that the appellant had not become a de jure director, he then found (at para. 39) that "the concept of de facto director ... should be limited to those who hold themselves out as directors" (para. 39), and stated (at para. 44):

[T]he Appellant was a shareholder only. …[H]e did not at any time give his consent to be a director. He did not realize that he was in fact listed as a director with the Corporations Division… until very late and once he did, he took every step possible to have his name struck from the record. He did not… complete any of the required steps to be appointed as a director… . Further, all major decisions relating to the business were made by persons other than the Appellant.

The Minister assessed the appellant for director's liability in respect of a corporation that had not remitted net tax for reporting periods ending on and after July 1, 2000. The appellant had been excluded by the franchisor of the corporation's business from any input into the financial affairs of the corporation after October 2001, and from any involvement at all after July 2002. The applicant had no access to the corporation's records, and CRA would not provide any background as to how it had computed the corporation's liability. Paris J found that this was sufficient to shift onto the Minister the burden of proving the correctness of the corporation's assessment, and that this burden had not been discharged.

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.

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.

After finding that the assessment of the appellant under ss 323 was not valid by virtue of s. 323(2)(b) as a certificate was not registered in the Federal Court until more than six months after the dissolution of the company for failure to file returns, Hershfield J (citing Gaucher) stated (at para. 32):

I acknowledge that the Appellant has the right to challenge the underlying assessment and with that it follows that he must have the right to discover documents relating to it

and went on to criticize CRA for having disposed of documents relevant to the underlying corporate assessment.

After finding that the taxpayer director had shown due diligence respecting the failure of his corporation to remit GST on one category of its sales, Lamarre J. went on to refer to Gaucher, supra, para. 6:

“It is a basic rule of natural justice that, barring a statutory provision to the contrary, a person who is not a party to litigation cannot be bound by a judgment between other parties.”

She then stated (at para. 43):

I further do not agree with the respondent that the context and purpose of section 323 of the ETA suggest that a challenge by a director of an underlying assessment should not be permitted.

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.

The taxpayer was liable for unremitted GST as a director of his business corporation, notwithstanding a finding that the Minister failed to validly assess the corporation (there was no evidence that any assessments had been mailed) and that an assessment against the corporation would have been statute-barred. Pizzitelli J. stated (at para. 41):

The clear wording of [s. 323(1)] crystallizes a director's liability to pay the net tax not remitted by the Corporation "at the time the corporation was required to remit or pay, as the case may be, the amount...".

Subsection 299(2) also clearly obviates the need for a corporate assessment. Furthermore, the only limitations period for director' liability is the one in s. 323(5), which only commences when the director ceases to be a director.

The taxpayer was not a director on the basis only of various unsigned documents in the minute book designating her as a director.

The appellant (“Delia”) had been the sole shareholder and director of a corporation (“Motostar”) engaged in a recreational vehicle sales business. All the accounting and tax returns were handled by an experienced accounting employee in consultation with an accountant at Motostar’s accounting firm. Following the dissolution of Motostar, the ARQ commenced a GST/QST audit. With the exception of one very small item, the ARQ auditor was satisfied with all the items reviewed other than an adjusting entry to the account for QST on sales, which debited that account for $12,631. The former Motostar accounting personnel were unable to substantiate this entry or provide documentary support.

After finding that Delia would be liable under an assessment made of him for the above amount plus interest under the Quebec equivalent of ETA s. 323(1) (s. 24.0.1 of the Tax Administration Act (the “TAA”)) but for the due diligence defence (under s. 24.0.2), Cameron JCQ then found that such defence was made out, stating (at paras. 122-123, 125-126):

…Mr. Delia did everything that was reasonable in establishing and maintaining a reliable accounting system. The audit also confirmed this, as all that which was reviewed on the audit was to the full satisfaction of the auditor, save for that one entry … [concerning] a small amount… .

As for the adjusting entry, the Court does not see it as an extraordinary transaction, in terms either of nature or amount. … The entry accounted for around 2.4% of the total gross QST (before input tax refunds) generated annually on sales. The error, if error it was, or the loss of documentation were that the case, concerned an amount with a certain effect, but which is minimal compared with the sales volume.

…[T]he inability of those at Motostar to substantiate with precision the entry does not in any way establish a lack of diligence, care or skill on the part of the director who had entrusted the accounting and the handling of the tax returns to them.

There was nothing extraordinary about the entry in itself so as to attract the particular attention of Mr. Delia when signing the documents for the dissolution of the enterprise which, to the best of his knowledge, had paid all tax debts.

The taxpayer was the sole director (as well as CEO) of Atcon Group companies, including “Atcon” and “NB Inc.” In September 2008, the CRA advised by letters addressed to the taxpayer’s attention that CRA was considering assessing the taxpayer personally for unremitted taxes. In March 2010, the two companies were assigned into bankruptcy. CRA assessed the taxpayer in 2014 respecting Atcon’s unremitted net GST for the month of March 2009 and in 2013 respecting NB Inc.’s unremitted net GST for the months of April, May, and June 2009.

Smith J found (at paras 91 and 93):

I find that “a reasonably prudent person acting reasonably and with due care, diligence and skill”, faced with comparable circumstances, would have realized that Atcon and NB Inc. were facing serious financial difficulties by no later than the end of April 2009. …

[T]herefor his conduct, for purposes of the due diligence defence, should be examined from that point on.

In this regard, he referred to the unwillingness of the principal lender to extend additional funding, the need to obtain interim financing at a high interest rate, a drop in monthly revenues of 90% and the well-known climax of the global financial crisis in March 2009.

In further finding that due diligence had not been established, he stated (at paras 102 and 103):

Since Chriss establishes that a director must carry out his or her duties “on an active basis”, it would appear to follow logically that a director cannot simply delegate his or her oversight duties to a subordinate, at least not without some evidence of an established management system involving, for example, periodic reporting. …

…[T]he onus was on him to satisfy the Court that indeed a management system had been put in place. His evidence … falls short of convincing the Court that the Appellant had sought to fulfill his duties “on an active basis” and that he had taken measures to prevent the failure of Atcon and NB Inc. to effect GST remittances after April 30, 2009.

The appellant, a professional engineer, had three related companies (the "Three Companies") which entered into a contract with a developer to design and build mechanical systems for a condominium project. The developer deferred payments several times, in spite of collection actions taken, causing significant cash flow issues by January 2007. However, the Appellant decided that the Three Companies should continue their work under the contract. He stopped paying remittances, expecting that the developer would pay the amounts owed to the Three Companies, relying on the fact that the developer required an engineer’s certificate before the building could be occupied and on the Three Companies’ ability to place a lien on the Happy Valley property. In June 2007, the Three Companies stopped working on the Happy Valley Resort project. They filed a default notice under the Happy Valley Contract and executed a lien on the project. Notwithstanding these actions, the Three Companies were not been able to collect the amounts owed to them by the developer.

Consistent with Buckingham, D’Arcy J dismissed the taxpayer's appeal in the main, on the basis of s.227.1(3) of the Income Tax Act and s.323(3) of the Excise Tax Act. The belief that a remittance failure will be corrected in the future does not constitute due diligence (para. 32).

It was unnecessary to evaluate the appellant's due diligence arguments, but Paris J found that they would not have succeeded. The essence of the appellant's argument was that he had met his diligence obligations by appointing another director to manage the corporation's financial difficulties. Paris J found that the appellant should have at least taken some steps to monitor the new director's management and ensure that he was meeting tax obligations.

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).

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, 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.

The Appellant (an optometrist practising in Unity and Meadow Lake, Saskatchewan), who owned 75% of the shares of a corporation holding three commercial properties in a different city, was found by McArthur J to be an outside director of the corporation (with limited business experience) who had left responsibility for GST and accounting matters to the minority shareholder, who was the Appellant's investment advisor. The due diligence test had been met notwithstanding that the GST remittance failures in question had extended over a period of six years, and the Appellant had been required to inject additional capital into the corporation towards the end of the fifth year.

The taxpayer (“Nachar”) was the sole director of a corporation (“Naza”) which operated a Mohawk/Husky (MH) gas station. GST had not been remitted on the sale of propane sold at the pumps. Lamarre J. found that Nachar had established a due diligence defence, given that he was confused and thought MH was remitting GST for propane sold at the pumps as he knew MH did remit GST for gas sold at the pumps. MH did not advise him to collect GST at the pump for propane, and Nachar had exhibited due diligence in properly remitting GST on all other sales made in the course of Naza’s business.

In rejecting a submission of the second appellant (Mr MacKay) that he had satisfied his due diligence defence by delegating management of the corporation (including responsibility for HST remittances) to a third party manager, D'Arcy J stated (at para 49) that:

due diligence normally requires that, when a director becomes aware, or ought to have become aware, the the company is falling behind with its remittances, he or she should take some positive steps to prevent the default

and (at para 64) "such a delegation is not an abdication and does not exonerate Mr. MacKay from liability.

Somewhat similarly, "once Mr. Power [the first appellant] became aware of the financial problems of the Corporation, he should have taken some positive steps to assure himself that the Corporation was remitting the HST," which he failed to do. Both appellants were liable under s. 323.

The appellant was the sole shareholder and sole director of a construction and heavy equipment rental business corporation (JDR). JDR had made purchases from various suppliers on behalf of a client. CRA and the Court accepted that JDR had acted as an agent of the client, and therefore the amounts paid by the client were reimbursements, exempt from GST. However, JDR had also claimed ITCs for the GST included in the reimbursement amounts notwithstanding that such GST was not incurred by JDR, and those amounts were disallowed.

Paris J. found that the appellant could not establish due diligence because his evidence was inadequate regarding his bookkeeper, who allegedly was responsible for the erroneous ITC claim. The appellant had neither called her as a witness, nor brought evidence to establish her training and qualifications. There was therefore no basis on which to conclude that the appellant's reliance on the bookkeeper met the standard of a reasonably prudent person in the circumstances.

The taxpayer exercised due diligence in leaving the bookkeeping work to his wife who had relied on an accounting firm for any assistance she needed with respect to GST filings and remittances. In these circumstances "it would be unreasonable to require him to go further and check her work, particularly when neither he nor Agatha were given any indication that anything was wrong" (p. 2214).

Bocock J accepted the taxpayer’s evidence that he had resigned by written letter of resignation dated effective June 11, 2011 and had “delivered” that letter to the corporation (e.g., to his wife as the other director), so that the two-year period referenced in ETA s. 323(5) had passed before he was assessed under s. 323 for unremitted net tax of the corporation, so that such assessment was invalid. In this regard, he held (at para. 49):

Legally, a director ceases to hold office when he or she resigns or at the date such resignation references, whichever is later.

He found that it was not contrary to this conclusion that the taxpayer (or corporation) had not filed a notice of change under the Corporations Information Act, and that the directors’ register (in the corporate minute book) was not fully updated to reflect the change.

In March 2010, two companies of which the taxpayer was the director were assigned into bankruptcy and a receiver and receiver manager (EY) was appointed pursuant to s. 243 of the Bankruptcy and Insolvency Act. The taxpayer thereafter was denied access to the head office and could only do so when EY asked him to assist with receivables.

Smith J found that the taxpayer did not cease to be a director at the time Atcon Group was put into receivership, stating (at paras 69 and 70):

[E]ven though section 60(1) of the NBBCA provides that “(…) the business and affairs of a corporation shall be managed by one or more directors”, those powers are displaced and may not be exercised by the directors until such time as the receiver or receiver‑manager has been discharged. Section 59 then provides that the receiver manager shall, upon completion of his duties, “send a copy of the final report to each of the directors”, clearly supporting the notion that directors who have not effectively resigned continue to hold office for purposes of the provincial legislation despite the court ordered appointment of EY as receiver‑manager.

… I conclude that the Appellant did not cease to be a de jure director (MacDonald v. The Queen, 2014 TCC 308, para. 30) and as such, is not entitled to rely on subsection 323(5) of the ETA.

A company (financed by the appellant's husband but which has been run by a questionable character) was on shaky financial grounds, and her husband had suggested that she resign. However, the only other directors were the shady character, who was being sued for having misappropriated company funds, and his inactive spouse.

Rip J found that in these circumstances it was sufficient for her to hand a written resignation to the lawyer who had acted for the company, even though he never got around to filing the resignation in the minute book (or notifying the company's branch of the resignation, as required) – so that from the time of giving him the resignation, the two year period for barring CRA from making a derivative assessment under ITA s. 227.1(4) and ETA s. 323(5) started running. Accordingly, such reasssessments made more than two years later were effectively vacated.

The appellant was unsuccessful in a submission that he had ceased to be a director of a corporation at the time of a meeting between him and another individual (who together indirectly held 80% of the shares of the corporation) and the franchisor of the corporation at which the franchisor informed him that henceforth he would be excluded from any involvement in company management.

Although the corporation of which the Appellant was a director was struck from the Saskatchewan Corporate Register more than two years before the assessments of the Appellant under s. 323, MacArthur J found that it was not possible to resolve whether or not the Appellant thereby ceased to be a director without evidence that the corporation also was dissolved. (However, he found that the due diligence test had been met.)

The appellant, who was the sole shareholder and director of a corporation with a rental business, was found to be deemed by s. 115(4) of the Business Corporations Act (Ontario) to continue to be a director given that he continued to engage in various steps relating to taxation filings of the corporation, which Paris J. characterized as being management activities. S. 115(4) provided:

Where all of the directors have resigned or have been removed by the shareholders without replacement, any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director for the purposes of this Act.

The appellant resigned as director in June 2000 when his company ceased operating, but the resignation was not valid because no one was appointed to replace him and his resignation was suspended by the OBCA until the holding of the first shareholders’ meeting, of which there was no evidence. Furthermore, he was a de facto director as he continued to wind down the company’s affairs. He also failed to establish a due diligence defence.

However, the assessment of him under ss 323 was not valid by virtue of s. 323(2)(b) as a certificate was not registered in the Federal Court until more than six months after the dissolution of the company for failure to file returns.