Section 227.1

Subsection 227.1(1) - Liability of directors for failure to deduct

Cases

Attorney General of Canada v. McKinnon, 2000 DTC 6593 (FCA)

receiver supercedes directors

Evans J.A., before going on to find that the taxpayers had established the due diligence defence under s. 227.1(3), indicated (at p. 6602) that it was "inappropriate to import into subsection 227.1(1) a requirement that it is only engaged if the directors have de facto control over the financial operation of the company, particularly the payment of its bills". He further indicated that "the situation is different on the appointment of a receiver whose legal powers supercede those of the directors who, in a functional sense, cease to be directors and thus fall outside the ambit of subsection 227.1(1)".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(3) turnaround prospects 148

The Queen v. Corsano, 99 DTC 5658 (FCA)

The appellants were found not to be directors of a not-for-profit Nova Scotia corporation because they did not hold shares. Noel J.A. found that the statement in paragraph 2(1)(f) of the Companies Act (Nova Scotia) that "'director' includes any person occupying the position of director by whatever name called" spoke only to nomenclature, i.e., it indicated that someone called by a name other than director could still be a director, and did not establish that a de facto director was a director for purposes of that statute. However, the appellants could not avoid liability under s. 227.1 by virtue of not being directors in light of the common law principle "that a person who has not obtained the requisite qualifications, is prevented from pleading this failure in order to escape liability attaching to a director" (at p. 5662).

Létourneau J.A. concurred with the majority, but on the basis that the reference to director in s. 227.1(1) was not restricted to a person who was a director for purposes of the Companies Act, but extended to someone who was a director at common law (i.e., a de facto or acting director).

Clarke v. The Queen, 2000 DTC 6230 (FCTD)

Amounts which the corporation had failed to remit were evidenced by promissory notes issued to Revenue Canada to be paid on a deferred basis. MacKay rejected a submission that a failure to pay some of the amounts under the promissory note after a receiver-manager was appointed did not give rise to a liability under s. 227.1. He noted, at p. 6239, "that the liability of the directors arises at the time the corporation failed to remit the source deduction" and that "the promissory notes did not constitute a transaction separate from the liability of the plaintiffs under the Act". For similar reasons, he also rejected a submission that the plaintiffs were not liable in respect of a failure to remit that was not discovered until the time of a post-receivership audit by Revenue Canada.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(3) 94

Parton v. The Queen, 99 DTC 738 (TCC)

After noting the distinction in Morris v. Kanssen, [1946] 1 All E. R. 586 (HL) between a defective appointment and no appointment at all, Lammarre Proulx TCJ. found that the taxpayers in this case had been defectively appointed, with the result that they were de facto directors and liable under s. 227.1.

The Queen v. Leung, 93 DTC 5467 (FCTD)

A reassessment of a director in respect of the aggregate amount of source deductions which the corporation had failed to make under the Act and three other statutes which did not separately disclose the amounts purportedly owing under each statute, and that referred for further details to an assessment which had been made on the corporation, nonetheless was valid in light of ss.152(3) and (8) of the Act and the fact that it contained all the essential ingredients for a notice of assessment.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(3) reassessment valid notwithstanding missing particulars 82
Tax Topics - Income Tax Act - Section 152 - Subsection 152(8) 82

See Also

Le v. The Queen, 2018 TCC 65 (Informal Procedure)

an individual whose designation as a first director was defective, and who did not perform a director’s role, was not liable qua director

The taxpayer, who operated several beauty salons, entered into an arrangement (respecting a new beauty salon) which she understood to be a partnership between her and the corporation (“EKO”) of her former employee and that employee’s husband (Mr. Landry) under which she would provide capital and advice and the employee would perform the services. Mr. Landry along with a friend prepared the documents, including a partnership agreement entitled “Partnership Agreement of 0780221 B.C. Ltd.” and having a clause stating that 0780221 B.C. Ltd. (the “Corporation”) was the name of the partnership and that was signed by her and him as “Directors,” but otherwise only dealt with partnership agreement matters. Mr. Landry was under the misapprehension that it was necessary to use a corporation to form a partnership, and consequently he and the taxpayer signed articles of incorporation of the Corporation, each as “incorporator,” in early January 2007. In May 2009, the taxpayer sold her interest in the venture to Mr. Landry for $15,000 and transferred her 50 shares of the Corporation to him. She had no further contact respecting the venture until 2013, when she was contacted by CRA respecting unremitted source deductions and GST of the Corporation, and 2014 when she was assessed under ITA s. 227.1 and ETA s. 323.

Russell J found that although the taxpayer was designated as a first director in the notice of articles, this designation was not valid unless she had provided a written consent to be a director (which was not the case) or she was an “incorporator,” whose definition in the B.C. Business Corporations Act referenced her signing an “incorporation agreement” respecting the company. Notwithstanding the somewhat contradictory elements referred to above, the Partnership Agreement was not an “incorporation agreement,” so that the taxpayer was not a de jure director.

Russell J further found that the taxpayer was not a de facto director, stating (at paras 38, 40):

Jurisprudence reflects that the concept of de facto director should be limited to persons who hold themselves out as directors … . As well, in Perricelli v. R., 2002 GTC 244 (TCC), Justice C. Miller observed that a person could not be considered a de facto director where the person,

…did not believe he was a director and he never thought he had any authority to advise, influence or control, the management or direction of the company.

In this case the Appellant manifestly did not at any time hold herself out as a director of the Corporation. …[S]he engaged in no acts of management … let alone any actions specific to a director.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(1) individual was not validly appointed as director and was not a de factor director 186

Koskocan v. The Queen, 2016 CCI 277

individual fulfilling an officer function not a de facto director

A taxpayer sold all his shares of a company to his son, resigned as director, but continued to sign most of the cheques due to bank requirements. In rejecting the position of the ARQ that the taxpayer was a de facto director, so that he was liable for unremitted corporate GST under ETA s. 323, Archambault J noted that signing cheques was an officer rather than director core function - so that it could not be said that the taxpayer was usurping the function of the two (legal) directors - and that ETA s. 323 reflected an apparent legislative choice to limit its application to directors.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(1) individual signing most of a company’s cheques was not a de facto director 350

Jobin v. The Queen, 2015 DTC 1096 [at 560-561], 2014 TCC 326

neither assignment in bankruptcy nor removal from provincial business registry made director cease to be a director

The taxpayer was the sole director and shareholder of a numbered CBCA corporation that went bankrupt in 2003 with unremitted source-deductions. In 2010, CRA assessed him under s. 227.1 for the source-deductions.

Rip J dismissed the taxpayer's appeal. He rejected the taxpayer's argument that he ceased to be a director when the corporation was assigned to a trustee in bankruptcy in 2003, or when the corporation was expunged from the Quebec business registry in 2005, or when the trustee was discharged in 2007. Kalef establishes that a person does not cease to be a director because of the appointment of a trustee in bankrupcy (para. 11). Neither does removing a corporation from the Quebec business registry; it would be "absolute constitutional anarchy" for a provincial statute to dissolve a federal corporation (para. 12), and being removed from the registry would not have prevented the corporation from carrying on businesses in other provinces (para. 13).

MacDonald v. The Queen, 2014 DTC 1212 [at 3839], 2014 TCC 308 (Informal Procedure)

not de facto director where unwittingly named to 3rd parties as director

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.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(1) not de facto director where unwittingly named to 3rd parties as director 330

Chell v. The Queen, 2013 DTC 1055 [at 299], 2013 TCC 29

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.

Nachar v. The Queen, [2011] GSTC 12, 2011 TCC 36

director could challenge underlying corporate GST 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.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(3) failure to remit was due to confusion on 3rd party responsibilities and other sales handled properly 109
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(1) director can challenge substantive merits of underlying assessment 107

Lequier v. The Queen, 2010 TCC 474, 2010 DTC 1321 [at 4219] (Informal Procedure)

The taxpayer was a corporate director with her husband. When the two separated, the taxpayer believed she had resigned as director. She did not submit a written resignation, a requirement under Alberta's Business Corporations Act. Woods J. noted that while the court will not always require a written resignation, the resignation must nevertheless be communicated to the corporation in some manner, which the taxpayer did not. She was therefore liable under s. 227.1 for the unpaid amounts.

Hartrell v. The Queen, 2006 DTC 3548, 2006 TCC 480

Before finding that the taxpayer was a de facto director of a corporation that had never been organized on the basis that the taxpayer along with the other major shareholder were the directing minds of the corporation, Paris J. stated (at pp. 3551):

"... where a corporation operates without having been properly organized and the only director of record plays no part in running the corporation, those persons who take it upon themselves to direct the affairs of the company may be held to be de facto directors, whether or not they have explicitly represented themselves as directors to any third party. The essential question is whether those individuals have, in fact, taken on the role of director of the corporation."

Buckingham v. The Queen, 2010 TCC 247, rev'd 2011 FCA 142

rev'd on other grounds 2011 FCA 142

Webb J. found that, to the extent that the taxpayer's appeal pertained to the New Brunswick Income Tax Act, that portion of the taxpayer's case should be heard by the New Brunswick Queen's Bench and not the Tax Court of Canada. He stated (at para. 6):

No jurisdiction is granted to this Court under the Tax Court of Canada Act to hear appeals on matters arising under any provincial income tax statute.

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Tax Topics - Statutory Interpretation - Provincial Law 71

McDougall v. The Queen, 2001 DTC 2651 (TCC)

The appellant was found to be a de facto director and, therefore, subject to the application of s. 227.1 of the Act and s. 323 of the ETA given that the registration of the corporation showed him as a director, he completed ETA forms as a director, he failed to withdraw such filing after he was notified he had been recorded as a director, and he participated as director in opening up a bank account for the company.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(3) 29

Mosier v. The Queen, [2001] GSTC 124 (TCC)

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.

Dirienzo v. The Queen, 2000 DTC 2230 (TCC)

The uncle of the taxpayer was found to be a de facto director as described under s. 1(1) of the Business Corporations Act (Ontario). Accordingly, the Minister would have been entitled to pursue the uncle as a director.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(3) 44

Wheeliker v. The Queen, 98 DTC 1110 (TCC)

Because the taxpayer and other alleged directors of a non-profit corporation did not hold any shares of the corporation contrary to the requirements of the Companies Act (Nova Scotia), they were not de jure directors of the corporation. Furthermore, a provision of the Companies Act providing that a director "includes any person occupying the position of director by whatever name called" connoted "the concept of having the title of director rather than simply behaving like a director" (p. 1114) and did not have the effect of including persons who may have been de facto directors at common law. Accordingly, the taxpayer was not a director for purposes of s. 227.1.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(3) 58

Myers v. The Queen, 98 DTC 1057 (TCC)

The taxpayer, who acquired all the shares of a private company, was found not to become a director of the corporation for purposes of s. 227.1 given that he made very sure that he was never elected to the position of director, and he never held himself out as a director.

Roll v. MNR, 92 DTC 1446 (TCC)

An assessment of the appellant under s. 227.1 which referred to unpaid deductions, interest and penalties payable by the corporation in respect of notices of assessment of the corporation dated on specified dates for the period that the appellant was director of the corporation was found to satisfy the requirement that the appellant be in a position when he read the notice of assessment "to know - or to be capable of knowing - the date or dates the corporation failed to remit so that he may consider whether he was director at the time of the failure by the corporation". The appellant was not only director of the corporation at the relevant times but was the person at the corporation who was responsible for remitting source deductions to the Receiver General. He knew, when he received the notice of assessment, the date that he resigned as director.

Laxton v. MNR, 89 D.T.C. 629 (TCC)

GP responsible for LP source deductions

The taxpayer were the director of a corporation (the "Corporation") which was the general partner of a limited partnership, and he also was a limited partner. In 1984, when the limited partnership business was not going well, the limited partners advance moneys with instructions that only the net wages of employees were to be paid. He was assessed under s. 227.1 following the bankruptcy of the limited partnership and the Corporation,

In rejecting a submission that it was not limited partnership and not the Corporation who was the payor of the wages of the limited partnership employees, so that the Corporation itself was not responsible for withholding, and so that the directors were not liable, Lamarre Proulx TCJ found that, as general partner, the Corporation had the powers and duties to manage, control, and administer and operate the business and affairs of the limited partnership and that "the Corporation did in effect carry on these managerial duties" (p. 632). Accordingly, the Corporation was the payor of the salaries and wages of the employees and was obligated by s. 153(1) to withhold and remit the source deductions. Furthermore, the provisions of s. 227.1(1) of applied to the directors so that (as the taxpayer did not submit a due diligence defence) he was liable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 153 - Subsection 153(1) - Paragraph 153(1)(a) GP responsible for LP source deductions 207

Administrative Policy

16 August 2017 Internal T.I. 2015-0622751I7 - Part XIII Tax on Benefit to Non-resident

s. 227.1 liability can extend to NR directors of a CFA

A foreign subsidiary of Canco (Opco) in turn wholly-owned a non-resident “Finco,” which made an interest-free loan to a non-resident sister of Canco (Foreign Sub), that was repaid within two years. The benefit imputed under s. 80.4(2) from the absence of interest was, in turn, deemed by s. 15(9) to be a benefit conferred on “a” shareholder, which CRA interpreted as being Foreign Sub. S. 214(3)(a) then deemed this benefit to be paid “to the taxpayer as a dividend from a corporation resident in Canada.” CRA considered Foreign Sub to be the “taxpayer” and effectively treated Finco as the deemed corporation resident in Canada, so that Finco was liable under s. 215(1) for failure to “withhold” and remit Part XIII tax on the imputed benefit.

CRA then noted that this tax liability of Finco could attach to dividends that flowed up the chain to Canco, and then stated:

Finally, the Minister could potentially apply subsection 227.1(1) to collect the tax from the directors of Finco, unless the exceptions under subsections 227.1(2) or 227.1(3) apply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(9) s. 15(9) applies to interest-free loan between two foreign affiliates 257
Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) use of s. 160 to collect s. 15(9) liability of indirect FA on dividends paid to Canco 269
Tax Topics - Income Tax Act - Section 215 - Subsection 215(1) CFA liable for failure to "withhold" and remit Pt XIII tax on interest-free benefit on loan to NR sister of its Cdn grandparent 122
Tax Topics - Income Tax Act - Section 214 - Subsection 214(3) - Paragraph 214(3)(a) benefit from interest free loan by CFA to Canco sister deemed to be a dividend subject to Pt XIII tax 160
Tax Topics - Income Tax Act - Section 80.4 - Subsection 80.4(2) extra-territorial application of s. 80.4(2) 132

4 December 2014 Internal T.I. 2014-0531251I7 - Directors' Liability

directors of GP potentially liable for source deduction and GST remittance failures of LP

A limited partnership, which shortly will be declared bankrupt, failed to remit source deductions. Would the general partner, which is a corporation, be liable for the unremitted source deductions GST/HST, and could such liability extend to that corporation's directors?

After discussing Laxton, the Directorate stated:

[T]he corporation, as the general partner, has the power to manage, control, administer and operate the business and affairs of the limited partnership. Accordingly… the corporation is the payor of the amount and must meet the requirements of subsection 153(1)… .. Furthermore… section 227.1… appl[ies], such that the directors of the corporation, together with the corporation, could be jointly and severally liable for any unremitted source deductions and any penalties and interest thereon [and similarly respecting ETA s. 323.]

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(3) directors of GP potentially liable for GST remittance failures of LP 122
Tax Topics - Income Tax Act - Section 153 - Subsection 153(1) - Paragraph 153(1)(a) GP generally liable for source deduction failures of LP 79

9 August 2012 External T.I. 2012-0446051E5 - Director's liability for provincial assessment

Although the Tax Court lacks jurisdiction to hear appeals from a provincial assessment (see Buckingham v. The Queen, 2010 TCC 247 and Seier v. The Queen, 2010 DTC 1344 [at 4313], 2010 TCC 495), it is CRA's policy to vacate or reduce a provincial assessment, in accordance with a Tax Court ruling on the same matter on an appeal from a federal reassessment, e.g., for director's liability under s. 227.1, where CRA has a Tax Collection Agreement with that province.

88 C.R. - F.Q. 7

The legislation does not draw a distinction between directors of business and non-share corporations.

85 C.R. - Q.81

a notice of objection filed by a director is usually dealt with by the district office where he resides.

84 C.R. Q.7

re interrelationship between s. 227.1 and 227(8)

Articles

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.

Subsection 227.1(2) - Limitations on liability

Paragraph 227.1(2)(a)

Cases

Kyte v. The Queen, 96 DTC 6050 (FCTD), aff'd 97 DTC 5022 (FCA)

wrong s. 227.1(2)(a) amount was not fatal

Although a certificate issued under s. 227.1(2)(a) for a principal amount of $500,000 did not correspond to the amount of the corporation's tax liability (in this case, under Part VIII of the Act), this error did not invalidate the assessment of the taxpayer under s. 227.1(1) in light of s. 166 of the Act.

See Also

Archambault v. Agence du revenu du Québec, 2018 QCCQ 3291

director’s assessment invalidated because the preceding corporate judgment proceeding had the wrong address

The taxpayer, a painter and plasterer who read only haltingly, was persuaded to let a rogue (“Bellefleur”) to acquire (together with Bellefleur’s son) a majority interest in a corporation owned by the taxpayer (that was dormant, but which held a useful building licence). The taxpayer remained as a director of “Xcalibur,” but Xcalibur‘s registered address was changed from the home address of the taxpayer to that of Bellefleur.

In purported compliance with s. 24.0.1(a) of the Tax Administration Act (Quebec), which references the situation “where the notice of execution of a seizure of movable property in respect of the corporation is returned unfulfilled in whole or in part following a judgment rendered under section 13,” the certificate and judgement issued under s. 13 as well as the writ of execution referred to the home address of the taxpayer rather than the registered address of the corporation (being the home address of Bellefleur). The ARQ proceeded in this manner because, due to prior experiences with Bellefleur, they surmised correctly that neither he nor the corporation run by him that was delinquent in its remittances (Xcalibur) had any assets, so that it wished to pursue the taxpayer for recovery of the unpaid amounts of Xcalibur.

In granting the taxpayer’s appeal, Bourgeois JCQ stated (at para. 71, TaxInterpretations translation):

In this instance, the Court cannot arrive at the conclusion that the preliminary condition was satisfied for the issuance of a notice of assessment against Archambault, as Revenu Québec had proceeded to execution not at the registered office of Xcalibur, but instead the personal address of Archambault, which did not only not conform with the rules for the execution of judgment against a corporation, but also did not conform with paragraph 24.0.1(a) of the TAA.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(2) - Paragraph 323(2)(a) failure to use the correct corporate address 132

Custodio v. The Queen, 2018 CCI 47

failure of Crown to tender documents proving the unsatisfied-execution requirement

The sole client for the IT and accounting services of the taxpayer was a group of companies. He was appointed as the director for one of these companies (“369”), but played a negligible role in that capacity. 369 and other group companies subsequently failed and the taxpayer subsequently was assessed under s. 227.1(1) and the EI equivalent respecting the failure of 369 to remit source deductions and EI premiums. Counsel for the Minister conceded that proof had not been made of satisfaction of the requirements of s. 227.1(2) but argued that this was not necessary as the taxpayer had not pleaded in his Notice of Appeal that no certificate had been registered in the Federal Court. In rejecting this position and allowing the taxpayer’s appeal, Ouimet J stated (at paras. 27-29, TaxInterpretations translation):

Given that the respondent had the burden of proving that a certificate had been registered in the Federal Court, the respondent cannot claim to have been “surprised” by virtue of the appellant not having so alleged in his “amended” Notice of Appeal that he would put in issue the question of a properly registered certificate. …

[T]he respondent was required to demonstrate, on a preponderance of evidence, not only that a certificate specifying the amount for which the corporation was liable had been registered in the Federal Court, but also that that amount had been returned unsatisfied in whole or in part.

However, in the hearing, no proof of these facts was made by the respondent. This proof is normally made by the deposit of the certificate registered in the Federal Court [and], a writ of seizure and sale or a report of the default by the bailiff. Here, no such documents were deposited in proof.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus onus of Crown to demonstrate compliance with s. 227.1(2)(a) irrespective of taxpayer's pleadings 90

Walsh v. The Queen, 2009 DTC 1372, 2009 TCC 557

After the Court refused the admission into evidence of a copy of a letter from the Sheriff's Office advising that the Writ of Seizure and Sale had been returned unsatisfied, on the basis that this document had not been included in the Crown's List of Documents, Sheridan, J. went on to find that the Minister had failed to satisfy the burden of proof on it that s. 227.1(2)(a) had been satisfied. The taxpayer's appeal was allowed.

Gaitens v. The Queen, 93 DTC 54 (TCC)

The Minister did not fulfil the precondition in s. 227.1(2)(a) when he filed a certificate that did not take into account the amount of a Part VIII refund that had been determined and assessed by the Minister on the same day.

Walters v. MNR, 86 DTC 1740 (TCC)

writ of execution in incorrect name did not satisfy s. 227.1(2)(a)]

Notwithstanding that the CRA had seen the minute book of the corporation in question which recorded the change in its name from W.S.W. Tool & Die Company Limited to W.S.W. Tool & Die Inc., the writ of execution and report of nulla bona were in the former company name. In finding that the s. 227.1(2)(a) condition for a s. 227.1 assessment of the taxpayer had not been fulfilled, Kempoc TCJ stated (at p. 1745) that this error “goes beyond simple error or omission.”

Administrative Policy

86 C.R. - Q.88

the sale of all or substantially all of a corporation's assets is not "liquidation or dissolution proceedings".

Paragraph 227.1(2)(b)

Cases

Madison v. Canada, 2012 DTC 5072 [at 6935], 2012 FCA 80

In deciding which of ss. 227.1(2)(a), (b) or (c) applied to the taxpayer's appeal from director's liability, Sharlow J.A. stated (at para. 20):

This debate was settled in the Kennedy case... . In that case, this Court adopted the decision of the Associate Chief Judge Christie that paragraph 227.1(2)(b) does not apply where a corporation is dissolved under a procedure that does not require the appointment of a liquidator or the submission of proofs of claim. In my view, Kennedy was correctly decided.

Instead, s. 227.1(2)(a) applied. As the Minister had complied with that paragraph, the taxpayer's appeal could not succeed on the argument that her assessment was barred by s. 227.1(2).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence hearsay evidence in informal procedure case 135

Kennedy v. MNR, 91 DTC 1037 (TCC), briefly aff'd 92 DTC 6380 (FCA)

Following the voluntary dissolution of the corporation pursuant to s. 205 of the Business Corporations Act (Alberta) the Crown obtained the certificate described in s. 227.1(2)(a), and then assessed the taxpayer under s. 227.1. With respect to the taxpayer's submission that where a corporation has been dissolved, the Minister must comply with the procedure in s. 227.1(2)(b) rather than s. 227.1(2)(a), Christie A.C.J. noted that this argument was sustainable only if it were possible for the Minister to comply with s. 227.1(2)(b). This was not the case here because, where a corporation is dissolved under s. 205 of the Business Corporations Act, there is no provision for the appointment of a liquidator to whom proof of the corporation's liability can be made. Accordingly, it was satisfactory in this case for the Minister to observe the requirements of s. 227.1(2)(a).

See Also

Savoy v. The Queen, [2011] GSTC 15, 2011 TCC 35

6 month mandatory deadline applied even where involuntary dissolution

The appellant's company was dissolved in May 2006 by the Ontario Ministry for failure to file returns, and CRA did not register a certificate in the Federal Court for the company’s debt until April 2007. Accordingly, he was relieved under ETA s.332(2)(b) of liability under the subsequent assessment which was made under s.323 in July 2007. Moriyama, 2005 FCA 207 indicated that s.323(2)(b) is only “directory” and not “mandatory. However, that finding only applied when proof of claim has been issued on a timely basis and the amount was later adjusted after expiration of the six-month period.

In rejecting an argument that the company had been dissolved by for failure to file returns and “not by any action taken by the company,” Hershfield J stated (at para. 32):

The provision speaks of a corporation which has commenced such proceedings “or has been dissolved”. The dissolution itself triggers the application of this paragraph. How the dissolution occurred is of no import.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(2) - Paragraph 323(2)(b) mandatory 6 month deadline applied even where corporate dissolution by Ontario Ministry 230
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(5) director resignation not effective for failure to hold first shareholders' meeting 115
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(1) director had right to challenge underlying assessment 98

Paragraph 227.1(2)(c)

See Also

Grant v. The Queen, 2017 TCC 121

failure of CRA to timely send proof of claim to the right trustee was not fatal (s. 227.1(2)(c) is directory)

The taxpayer was the director of a corporation that made an assignment in bankruptcy on August 1, 2006. Shortly thereafter, the trustee in bankruptcy who previously had been appointed to lead in connection with filing of the previous unsuccessful filing of a proposal, was replaced. However, CRA collections apparently issued its proof of claim (two days later) to the first trustee in bankruptcy. However, a revised proof of claim showing additional claims was subsequently filed with the replacement trustee in bankruptcy, 11 months after the bankruptcy. In May, 2012, the taxpayer was assessed pursuant to s. 227.1 respecting the corporation’s failure to remit source deductions in 2004 to 2006.The taxpayer was assessed in 2012 pursuant to s. 227.1 for the unpaid balance of the source deductions together with penalties and interest in the amount of $66,865.44.

After finding (at para. 49) that “there is nothing in the statutory language contained in paragraph 227.1(2)(c) that requires delivery of a signed proof of claim to the Appellant as a director,” Smith J went on to reject the taxpayer’s submission that the assessment of the taxpayer was void for not satisfying the requirements of s. 227.1(2)(c), stating (at paras 54-55):

[S]ending the proof of claim to the first trustee was indeed an error. However, on the basis of the wording of section 166…the Court cannot vacate the assessment. …[T]his conclusion is consistent …in particular with the…conclusion [in Kyte and Moriyama] that paragraphs 227.1(2)(a), (b) and (c) are directory.

…[E]ven if I am wrong in reaching this conclusion, it is not disputed that a second proof of claim was sent to the substituted trustee in bankruptcy approximately 11 months after the date of bankruptcy. I find that the decision of Moriyama…is authority for the proposition that this was a valid proof of claim and that the requirements of paragraph 227.1(2)(c) were met, again given the directory nature of that provision.

Finally, Smith J found (at para 58):

As indicated… in Kyte … there may be discrepancies as the amounts owed for source deductions may be fluid. …I conclude that nothing turns on the fact that the amounts owing changed between the date of the initial proof of claim and the second proof of claim.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(4) corporate bankruptcy did not cause the taxpayer to cease to be a director/“due dispatch” requirement inapplicable to director’s assessment 245
Tax Topics - Income Tax Act - Section 227 - Subsection 227(10) “due dispatch” not required for director’s assessment 117

Subsection 227.1(3) - Idem [Limitations on liability]

Cases

Canada v. Chriss, 2016 FCA 236

director must verify that she has resigned

The two taxpayers (Mrs. Gariepy and Mrs. Chriss) were appointed as the two directors of an Ontario corporation ("105") which was run by their husbands. In 2001, the taxpayers expressed to their husbands their desire to resign as directors, and corporate counsel prepared written resignations on the instructions of Mr. Chriss. However, the resignation forms were never provided to the taxpayers.

After finding that the taxpayers had not resigned in 2001, Rennie JA further found that the taxpayers did not have a reasonable belief that they had resigned and that a due diligence defence could not be made, stating (at para 24):

Directors must carry out their duties on an active basis. A director cannot raise a due diligence defence by relying on their own indifferent or casual attitude to their responsibilities. A reasonable director would insist on being satisfied that their intention to resign had been effected.

Furthermore, Rennie JA rejected the argument that they lost effective control of 105 Ltd. to another individual, and that as a consequence they were prevented from remitting the taxes to the CRA, stating (at para 31):

If a corporation faces bankruptcy and a third party offers the corporation a reprieve from bankruptcy if the corporation dips into what is, in effect, a trust account held for the benefit of its employees, as is the case here, the law is clear as to the obligations of the directors. They must not take from or dissipate the employee deductions. If they diverge from the course of action the law prescribes, they do so at their peril.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(4) a written resignation must be signed and delivered to the corporation to start the two-year s. 227.1(4) period running 253

Liddle v. Canada, 2011 DTC 5083 [at 5838], 2011 FCA 159

The taxpayer's appeal from liability under ss. 227.1 of the Income Tax Act and s. 323 of the Excise Tax Act was denied, given that the taxpayer had effective control of the corporation during the period where it failed to remit GST and payroll source deductions, and that he took no proactive steps to ensure that such remittances were made.

Canada v. Buckingham, 2011 DTC 5078 [at 5810], 2011 FCA 142

The taxpayer was a director in a corporation that was in arrears on source deductions. He attempted to address the arrears through an equity issue, loans, reductions in expenditures, and attempts to merge with another company. The trial judge took the view that "the company should continue to operate as long as there is a reasonable expectation that [a capital injection] would occur," and that the taxpayer was consequently not liable under s. 227.1(1) for the remittance failures arising while the taxpayer still had such an expectation.

The Court of Appeal found that the conclusion at trial was unacceptable, agreeing with the Crown's position (para. 17) that the conclusion, "if accepted, would pass to the Crown part of the risk associated with continuing a business which is facing financial difficulties." Mainville J.A. found that the director's duty is to prevent failures to remit (paras. 48-51). Allowing such a failure in anticipation of correcting it later will not discharge this duty. The taxpayer's circumstances did not resemble McKinnon, where the corporation's finances were effectively outside the directors' control.

Mainville J.A. also noted that while People's Store v. Wise replaced the objective-subjective standard under s. 227.1(3) with a purely objective standard, an objective standard "makes it clear that the factual aspects of the circumstances surrounding the actions of the director are important as opposed to the subjective motivations of the directors," (para. 38) and that "an objective standard does not... entail that the particular circumstances of a director are to be ignored" (para. 39).

Smith v. The Queen, 2001 DTC 5226 (FCA)

The taxpayer, who was a high school teacher and a minority shareholder of a company ("ECO") was elected to the board of directors of ECO in order to act as a liaison between the majority and minority shareholders of ECO. The trial judge had erred in finding that the taxpayer initially was an inside director of ECO as the taxpayer was not involved in the day-to-day management of the company and he did not influence the conduct of its business affairs.

Later, the taxpayer became an inside director but by that time ECO's financial resources were so depleted that there was little that could have been done to meet its remittance obligations, although despite these difficulties the taxpayer was able to have the corporation remit employee source deductions for all months except the last month for the period under review. Accordingly, the taxpayer was not liable under s. 227.1 of the Act and s. 323 of the Excise Tax Act.

Hanson v. The Queen, 2000 DTC 6564 (FCA)

The taxpayer failed to make out the due diligence defence given that she made no effort to find out what were her responsibilities as a director, she did not stay generally informed about what was happening with the business nor did she inquire when she was told that the business was encountering a "rocky spot". There is a minimum duty under s. 227.1(3) to remedy one's ignorance of the legal obligations of a director.

Attorney General of Canada v. McKinnon, 2000 DTC 6593 (FCA)

turnaround prospects

On October 18, 1993 the company's bank dishonoured a cheque drawn in favour of the Receiver General for Canada in respect of September payroll source deduction, and a few days later it informed the company that it should be careful not to issue cheques that would be beyond its credit limit with the bank (which the bank commenced to reduce) and the bank appointed a "monitor" of the company.

Evans J.A. found that the taxpayers had established the due diligence defence under s. 227.1(3) and under s. 323(3) of the Excise Tax Act with respect to failures of their company to remit source deductions and GST after October 18 given that they were acting on the advice of a consultant who advised them that there was a good prospect of finding a new investor and that the company could be quickly turned around, and who then identified a number of potential investors.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(1) receiver supercedes directors 96

The Queen v. Corsano, 99 DTC 5658 (FCA)

Before going on to find the appellants (who were de facto directors of a Nova Scotia non-for-profit corporation) liable, Létourneau J.A indicated (at p. 5667) that "all directors of all companies are liable for their failure if they do not meet the single standard of care provided for in subsection 227.1(3)", that "the flexibility is in the application of the standard since the qualifications, skills and attributes of a director will vary from case to case" and that "it was an error for the Tax Court Judge to conclude that the standard of care was different and less rigorous in not-for-profit corporations".

Berdugo v. The Queen, 99 DTC 5424 (FCTD)

Before going on to find liability for the taxpayer, Richard A.C.J. indicated (at. p. 5427) that the taxpayer was an inside director of the corporation given that he had founded and made a major investment in the corporation in order to supply clothing to his other business and that he was an experienced director who, in addition to acting as co-signatory for the cheques issued by the business, regularly visited the production plant and was told of the financial problems of the business, including a failure to make remittances.

Clarke v. The Queen, 2000 DTC 6230 (FCTD)

The plaintiffs were absolved of responsibility in respect of failures to remit that occurred during a "soft receivership" given that ultimate responsibility in all key financial decisions rested with an accounting firm acting to protect the interests of the bank. With respect to other periods when there was neither a soft receivership nor an actual receivership in place, it was found that the directors had failed to take sufficient affirmative measures to ensure that current remittances were paid on time and in full given their knowledge of the cash flow difficulties the corporation faced.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(1) 132

Short v. The Queen, 99 DTC 5371 (FCTD)

The taxpayer, who was the president of a small construction company and a co-director with his wife, failed to meet the due diligence defence in light of there being no formal assignment to the Bank of Montreal for the months in question, his failure to specifically raise with the bank branch manager the question of whether the bank would honour cheques drawn in favour of Revenue Canada to meet source deductions, the continued under-capitalization of the company, and his failure to comply with an arrangement when made with Revenue Canada for the remittance of source deductions.

Soper v. The Queen, 97 DTC 5407 (FCA)

The taxpayer, who was the chief operating officer of an unrelated corporation, was invited to sit on the board in order to promote the corporation's interests in the marketplace and to lend his name and reputation in conjunction with a proposed public listing of the corporation, and never inquired as to whether the corporation was complying with its remittance obligations. Before finding that the taxpayer had failed to establish the defence, Robertson J.A. found that s. 227.1(3) established a similar standard to s. 122(1)(b) of the Canada Business Corporations Act. Accordingly, a greater degree of skill and care was not required than might reasonably be expected from a person of that individual's knowledge and experience, when, in the circumstances it was reasonably possible to attend directors' meetings a director ought to do so, and in the absence of grounds for suspicion, it was not improper for a director to rely on company officials to perform honestly duties that had been properly delegated to them. (This, in turn, meant that it was not necessary to insure the establishment and monitoring of source deduction accounts in the absence of grounds for suspicion.)

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Other/Conflicting Statutes presumption of coherence 32
Tax Topics - Statutory Interpretation - Similar Statutes presumed coherence in federal statutes 38

Wilson v. The Queen, 96 DTC 6417 (FCTD)

The taxpayer failed in establishing the due diligence defence for two of the three corporations of which he was an officer, director and controlling shareholder given that: he failed to inform himself about his obligations and those of the companies respecting source deductions (including when remittances were required, putting a system in place to ensure that source deductions were paid, and an inappropriate level of delegation); he was the controlling mind determining to whom payments were made and did not take any positive steps to ensure that Revenue Canada was paid, even from extra funds he personally contributed to the company; he frustrated the collection efforts of Revenue Canada; and there was no evidence that prior to the companies being placed in receivership, the bank exercised any substantial control over which of the company payables would be satisfied.

With respect to the third corporation, he was not liable given that there was no evidence that he received the balance sheets, that he made any choice about the payables, that he had corporation was affected by a cash flow crisis affecting the other two corporations or that Revenue Canada contacted him to inform him of the arrears.

Shindle v. The Queen, 95 DTC 5502 (FCTD)

The taxpayers were directors of a Saskatchewan company that was managed by their son. After the unsuccessful operations of the company in Saskatchewan were terminated, their son started a new business venture in Ontario. It was found that they had no inkling that the Ontario operations were carried on by the company (rather than a new Ontario company), with the result that they satisfied the exception in s. 227.1(3).

Robitaille v. The Queen, 90 DTC 6059 (FCTD)

The appellant was appointed as one of the three directors of a company managed by her brother-in-law, but did not participate in the management of the company or attend any directors' meetings. In October 1982, the Bank sent an individual to the company who took control of all disbursements. He did not authorize the reimbursement of deductions at source for that month, the following month and arrears for September. The appellant was not liable:

"Where the effective control of the corporation has been taken over by a bank ... without the bank being requested or invited to do so by the directors, and where the decisions as to what cheques will or will not be issued without consultation with the Board of Directors, are exclusively those of the bank, then from that time the actions of the corporation regarding the payment or withholding of monies are essentially those of the bank and I would be prepared to hold that, even without considering section 227.1(3), there would be no liability on the directors under section 227.1(1) because the latter obviously contemplates that the corporation is freely acting through its Board of Directors. The exercise of freedom of choice on the part of the director is essential in order to establish personal liability."

Addy J. also noted that the "circumstances" referred to in s. 227.1(3) "include subjective elements such as degree of education, business knowledge and general ability of the director."

See Also

Filion v. Agence du revenu du Québec, 2018 QCCQ 2759

no director liability for source deductions where no suspected financial difficulty

The appellant invested $15,000 in the shares of a company (“9209’) that opened a small restaurant in December 2010. Although the appellant was one of the four directors, he took no part in the management or direction of the restaurant, which was in the hands of the wife (Sophie Paul) of a highly regarded restauranteur. He did not receive any information that the operation was in financial difficulty before the restaurant closed in April 2012.

After reviewing the federal and Quebec jurisprudence on directors' due diligence defence, Massol JCQ found that the appellant had established a due diligence defence under the Quebec equivalent of s. 227.1(3), stating (at paras. 88-89, TaxInterpretations translation):

[T]he liability of a director is not engaged until the time that the corporation commences, to the knowledge of the director, a period of financial difficulty such that the corporation cannot meet its obligations or, worse, begins to favour some creditors to the detriment of the fisc.

In this case, the evidence indicated that, during a relatively short period of time, the appellant was duped by his partners and he was unaware that the corporation was having financial difficulties … .

Tozer v. The Queen, 2018 TCC 56

ETA due diligence defence required active efforts once financial difficulty apparent

Smith J found that the taxpayer was required to take active efforts to pursue the timely remittance of the corporate GST net tax rather than relying on his CFO once he became aware of the corporation’s financial difficulty, which did not occur in this case.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(5) taxpayer did not cease to be a de jure director when displaced by receiver on the corporation’s bankruptcy 219
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(4) bankruptcy did not result in constructive cessation of directorship 95
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(3) taxpayer did not take active efforts (which required more than delegation) until some time after he became aware of the corporations’ financial difficulty 324

6094350 Canada Inc. and Genex Communications Inc.v. Agence du revenu du Québec, 2018 QCCQ 556

tax advice that was based on clearly flawed factual assumptions could not be relied upon for defence

The individual appellant (“Demers”) was a director at all relevant times of a corporation that owned and operated a minor professional hockey team that played in the Ligue Nord-Americaine de Hockey from 2004 to 2008. It had been treating its players (and other staff) as employees rather than independent contractors for Quebec health tax purposes in accordance with the views of the ARQ which had been expressed to the League. However, in 2006, it commenced to treat them as independent contractors in order to reduce operational costs. The players did not register for GST/QST purposes or invoice for their services, and refused to sign a written contract (which did not reflect the realities of how the team continued to be operated), and the only substantive change made was that the team manager was incorporated. The ARQ assessed Demers under the relevant Quebec equivalent of s. 227.1 given that the team owner had been wound up without remitting source deductions.

After finding that the players in fact were still employees, so that the ARQ assessments of the team owner for failure to remit were well founded, Cotnam JCQ next dealt with the due diligence defence of Demers under the equivalent of ITA s. 227.1(3), which was based on the proposition that he had been advised by his tax advisor, Ms. Rochette (who was also his wife and a director of the team owner) that the players were independent contractors. In rejecting this defence, Cotnam JCQ noted that the views of Ms Rochette were based on a factually incorrect matters that could have been readily checked by her, including that the players could play for other teams, that they had their own tools and that the team did not reimburse the players for their expenses, and also noted that Ms. Rochette had not consulted the jurisprudence. She then stated (at paras. 187, 206, TaxInterpretations translation):

Mr. Demers, in his capacity of director, could not blindly rely on an opinion whose assumptions were clearly incomplete. He knew the functionings of the Team and the realities of the League. …

Mr. Demers is an experienced director. Nothing permitted him to believe that the cosmetic changes made to the structure of the Corporation sufficed to change its tax obligations and to terminate its obligations to collect and remit the source deductions for personnel.

However, the assessment of Demers was statute-barred as having been made beyond the four-year prescription period as the ARQ had not established carelessness or neglect of the Corporation or Demers.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) hockey players were employees of the team 359
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) CRA treatment of taxpayer’s players as independent contractors was not binding on the ARQ 88

Maxwell v. The Queen, 2015 DTC 1102 [at 610], 2015 TCC 74

expectation of future payments, to which the taxpayer was clearly entitled, did not constitute due diligence]

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).

Other locations for this summary
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(3) expectation of future payments, to which the taxpayer was clearly entitled, did not constitute due diligence]

Gariepy v. The Queen, 2014 TCC 254

reasonable belief in resignation constituted a due diligence defence, "economic necessity" defence rejected

After finding that the taxpayers had resigned in 2001, notwithstanding that written resignation forms were not signed by them, so that 2008 assessments of them under s. 227.1 were not permitted (see the summary under s. 227.1(4)), Boyle J went on to find (at para. 32) that in the case of one of the taxpayers, her failure to take any action respecting source deduction remittances was reasonable as her belief, that she had resigned, was "entirely reasonable" even if the resignations were not legally effective, stating (at para. 30):

If the knowledgeable and experienced lawyers representing the parties could so credibly argue the point armed with authorities…it is entirely reasonable to think that an average non-lawyer Canadian would reasonably think she had resigned… ."stated (at para. 25) that "the OBCA specifies that a resignation be written but not that it be signed" and noted (at para. 22) that "all of the directors, officers and principals of the company understood the wives were resigning at that time" which "means that the company clearly understood they resigned."

However, this alternative finding was not applicable to the second taxpayer as she was not aware that her oral resignation had been communicated to legal counsel to be evidenced in writing.

A further alternative submission that there also was an "economic necessity" for the company to pay its only source of financing in priority to making source deductions was rejected.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(4) unsigned written resignations were effective 138

Roitelman v. The Queen, 2014 DTC 1129 [at 3348], 2014 TCC 139

reliance on fraudulent bookkeeper was reasonable

The appellant hired, through his corporation, a bookkeeper whose responsibilities included payroll remittances, which enabled him to do the essential travel he needed to carry on the corporate business. After having trained the bookkeeper, the appellant on a number of occasions discovered lapses in the corporation's remittances - then he would supervise her closely and then "step back" based on the situation now apparently having been remedied. After her subsequent departure, he discovered that she had not sent cheques and documentation as instructed, had failed to bring deficiency notices to the appellant's attention, and had even attempted to erase sensitive financial information when she quit.

Campbell J found (at para. 32) that the appellant "could not reasonably have known or be expected to have known that the bookkeeper would engage in fraudulent and misleading actions." After noting that the due diligence standard takes the personal circumstances of the subject into account, she observed (at para. 29) the "backdrop" of the appellant's need to be away from the office frequently at construction sites.

D'Amore v. The Queen, 2013 DTC 1005 [at 33], 2012 TCC 373

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.

Deakin v. The Queen, 2012 DTC 1231 [at 3634], 2012 TCC 270

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).

Martin v. The Queen, 2012 DTC 1253 [at 3725], 2012 TCC 239

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, and 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.

Seier v. The Queen, 2010 DTC 1344 [at 4313], 2010 TCC 495

In October 2000, a newly-incorporated corporation of of the taxpayer (the "Corporation") acquired all the assets of a bankrupt truck repairs company ("Beverley") in which the taxpayer had invested as well as continuing to retain the services of Beverly's manager who, in turn, continued to some extent to be overseen by a business associate of the taxpayer. The assets of the Corporation were sold later a year later.

Woods J. found that the taxpayer was liable under s. 227.1(1) for the unremitted source deductions of the Corporation in 2001, and that he had not satisfied the due diligence defence in s. 227.1(3). The report of the trustee in bankruptcy that there had been substantial source deduction failures by Beverley should have put the taxpayer on notice that his close attention to source deduction compliance by the Corporation was required. Furthermore, he did not take any action following being informed by CRA in March 2001 that the Corporation already had source deduction arrears, other than having one meeting with the manager and the business associate. Respecting a submission that the taxpayer had not been informed of a director's obligations in this area, Woods J. stated (at para. 42) that "unless there is satisfactory evidence that a director sought advice as to his legal obligations as a director, ignorance is not sufficient to bring the director within the so-called due diligence defence."

Lequier v. The Queen, 2010 TCC 474, 2010 DTC 1321 [at 4219] (Informal Procedure)

The taxpayer was a corporate director with her husband. When the two separated, the taxpayer erroneously believed she had resigned as director. She was liable under s. 227.1(1) for the corporation's failure to remit employee deductions. Woods J. ruled that she could not make out a due diligence defence under s. 227.1(3). At para. 24: "the appellant was an experienced business person and she was aware that her husband had a history of ignoring remittance obligations. Even though the appellant was not actively involved in the day-to-day activities of [the corporation], she had an obligation to take some action to prevent the remittance failures."

Pascoal v. The Queen, 2010 DTC 1010 [at 2578], 2009 TCC 608

The two taxpayers were the father and sister of the controlling shareholder ("Tony") of the corporations in question. In finding that they were not liable under s. 227.1, MacArthur, J. concluded that the father, who had limited abilities and business knowledge, reasonably relied on his son to apprise him of his duties and obligations as a director when they arose, and that the sister, who was only a director on paper, acted reasonably in relying on an undertaking given by Tony (which he breached) that if the corporations in question were activated, she would get out as a director.

Burton v. The Queen, 2006 DTC 2001, 2005 TCC 762 (Informal Procedure)

MacArthur J. accepted testimony that the taxpayer had resigned as director early in 2002 notwithstanding that the only copy of the written notice of resignation was mislaid and not found until the taxpayer was assessed under s. 227.1, and that notice was not filed in the minute book or communicated to the Ontario Corporations branch. Accordingly, the Minister was barred from assessing the taxpayer under s. 227.1 more than two years after the resignation in respect of remittance obligations arising after the resignation.

People's Stores v. Wise, 2004 SCR 68

In commenting on the statutory fiduciary duty of directors under s. 122(1)(b) of the Canada Business Corporations Act, the Court indicated that the characterization in the Soper case of the similar standard in s. 227.1(3) of the Income Tax Act as an "objective subjective" standard would lead to confusion, and that the Court preferred to describe the standard as an objective standard in order to make it clear "that the factual aspects of the circumstances surrounding the actions of the director or officer are important in the case of the s. 122(1)(b) duty of care, as opposed to the subjective motivation of the director or officer, which is the central focus of the statutory fiduciary duty of s. 122(1)(a) of the CBCA".

McKinnon v. The Queen, 2004 DTC 2049, 2003 TCC 884

The failure of the company to remit source deduction was due to an unforeseen supervening event (the arbitrary improper refusal of a major customer to pay amounts due by it to the company), and it was unreasonable of CCRA to take the position that the taxpayer, as sole director of the company, had showed a lack of due diligence when he failed to terminate the business upon the commencement of cash flow problem. Accordingly, the due diligence defence was made out.

McDougall v. The Queen, 2001 DTC 2651 (TCC)

Beaubier TCJ applied the six tests in Attorney General of Canada v. McKinnon (FCA), No. A-421-98 to find that the appellant failed to establish the due diligence defence.

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Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(1) 76

Dirienzo v. The Queen, 2000 DTC 2230 (TCC)

The taxpayer, who was nominally the director of a company dominated by his uncle (the uncle having been found to be a de facto director) was found to have satisfied the defence under s. 227.1(3) because he was powerless to do anything given such domination.

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Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(1) 37

MacDonald v. The Queen, 99 DTC 1108 (TCC)

The taxpayer (who was a highly educated civil engineer with extensive business and management history and the controller and general manager of the corporation, had agreed with the other executives, in the face of the refusal of the Royal Bank of Canada to not fund source deductions, to continue carrying on business in the hope that future business would eventually solve the corporation's cash flow problems. Because the taxpayer had allowed the corporation to continue on this basis and had done nothing tangible to prevent its failure to remit, he failed to establish the due diligence defence.

Boisvert v. The Queen, 98 DTC 1146 (TCC)

taxpayers had influence even after appointment of monitor

The taxpayers were liable for failures of the corporation to remit source deductions during the period between the time of appointment of a monitor by the Quebec Superior Court pursuant to the Companies' Creditors Arrangement Act and the effective date of bankruptcy of the corporation given that "the appellants could have exercised real influence over the company's activities even though, ultimately, the monitor may have had the final authority except in the event of a court action" (p. 1153) and, that during this period, the taxpayers "attitude towards these remittances was one of indifference and even carelessness" (p. 1154).

Wheeliker v. The Queen, 98 DTC 1110 (TCC)

Before going on to find that the taxpayers, who were alleged by the Crown to be directors of a non-profit corporation, had established the defence in s. 227.1(3), O'Connor TCJ. found (at p. 1119) that the standard demanded of volunteer directors of non-profit corporations was not as rigorous as the standard applied to directors of normal corporations run for profit.

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Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(1) 108

Schultheiss v. The Queen, 97 DTC 863 (TCC)

Unlike the two other taxpayers (who were liable given their active involvement in the business), the third taxpayer "was an elderly man of minimal education who had virtually no idea what was going on ... and could not have influenced the course of events" (p.865) and, accordingly, was not liable.

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Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(4) 98

Hanson v. The Queen, 97 DTC 796 (TCC)

The taxpayer, who was a nurse, testified that she knew nothing about the restaurant business of her son's corporation, had no interest in it as she was busy with other matters and did not ask anyone what her role or duties or responsibilities were. In finding that she had failed to establish the defence under s. 227.1(3) Sarchuk TCJ. found (at p. 799) that "the mere fact that one becomes a director in a family context is not sufficient to permit such director to turn his or her back on the affairs of the company".

Johnstone v. The Queen, 97 DTC 355 (TCC)

Teskey TCJ. was satisfied that in the circumstances the taxpayers (who were passive directors) had appropriately relied upon management and a part-time chartered accountant to make remittances of source deductions and that they had believed that source deductions were being paid. In fact, although the cheques had been prepared, they never had been delivered.

Davies-Edwards v. The Queen, 97 DTC 373 (TCC)

The taxpayer, who was described as being unsophisticated and naive in corporate and business matters, served as a volunteer director of a non-profit child care organization that was dominated by a senior employee who was described as forceful, flamboyant and overwhelming. In finding that the taxpayer satisfied the due diligence defence by co-signing with the other individual cheques that were payable to the Receiver General (but which the other individual then locked in a drawer rather than mailing), Mogan TCJ. stated (at p. 376)):

"Having regard to the Appellant's formal education, lack of business experience and the fact that she co-signed the cheques to the Receiver General, I think she exercised a degree of care to prevent the failure that a reasonably prudent person in her position would have exercised."

Hadad v. MNR, 94 DTC 1847 (TCC)

Christie A.C.J. characterized the failure of a corporation to make sufficient qualifying expenditures in order to eliminate its liability for Part VIII tax as being attributable to an unexpected decline in the price of oil, with the result that the appellant was not liable under s. 227.1(1).

Davies v. The Queen, 94 DTC 1716 (TCC)

The three appellants, became directors of the corporation ("INOVA") in order to provide their expertise in the areas of marketing, production and medical issues. Sarchuk found that it was reasonable for them to rely on the qualified and experienced financial officers who were responsible for the day-to-day operations of Inova because there was no basis for them to question their competence, there was a system in place to ensure that the proper remittances were made, and the actual state of affairs (including overriding the system) was hidden from them. Accordingly, their due diligence defence was established.

Ivezic v. MNR, 92 DTC 1066 (TCC)

In upholding a liability of the taxpayer under s. 227.1 in respect of the corporation's ilure to reduce his Part VIII tax liability through the failure to expend approximately $4 million on qualifying expenditures, he noted that the taxpayer "did not point to any detailed concrete financial plan whereby the objective might have been accomplished" and that he could not "find that the ill-defined scheme for financing the $4 million of research with about $1.6 million in cash plus unknown other assets and liabilities as one in which the Appellant might reasonably have relied".

Myers v. MNR, 91 DTC 72 (TCC)

The taxpayer authorized the payment of the payroll at a time when he anticipated that, notwithstanding great financial pressures, the company would be able to make the remittance on the 15th of the following month. However, in the interim, he was advised to accept the wind-up and receivership of the company, which he did. In the circumstances, he was not responsible for the company's failure to make the required remittance.

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Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(3) 70

Myers v. MNR, 91 DTC 72 (TCC)

The taxpayer authorized the payment of the payroll at a time when he anticipated that, notwithstanding great financial pressures, the company would be able to make the remittance on the 15th of the following month. However, in the interim, he was advised to accept the wind-up and receivership of the company, which he did. In the circumstances, he was not responsible for the company's failure to make the required remittance.

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Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(3) 70

Vogt v. MNR, 91 DTC 1326 (TCC)

The taxpayer exercised the requisite degree of care and diligence when, at a time that he thought that amounts due to the corporation which had been garnished by Revenue Canada were sufficient to discharge overdue source deductions from previous months, he undertook to Revenue Canada to personally secure the funds to pay the source deductions currently coming due and honoured this promise by depositing such funds to the corporation's bank account, notwithstanding that the bank refused to honour a cheque for the current source deductions drawn on that account.

Van Leenen v. MNR, 91 DTC 1265 (TCC)

The taxpayer, who was the president and majority shareholder of the corporation, was found to have been deficient in relying on established administrative procedures for the remittance of source deductions when he knew the corporation was under tremendous financial pressures and "could pay only those creditors who shouted the loudest" (p. 1268). In addition, the taxpayer was unable to establish that he should be relieved of liability on the basis that the Crown should have been more vigilant in collecting the amounts in question from the assets of the corporation.

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Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) 76

Pidskalny v. MNR, 91 DTC 1046 (TCC)

The appellant, who became director merely to accommodate his brother's needs and suggestions, who had no real economic interest in the corporation, who had no knowledge of the rights, responsibilities and obligations of a director and who was totally uninvolved with management or operations of the corporation, was not liable on the basis of s. 227.1(3). However, for purposes of s. 227.1(4), his resignation more than two years prior to the assessment of the Minister was ineffective due to a failure to deliver the resignation to the head office of the corporation in compliance with s. 154(2) of the Company Act (B.C.).

MacArthur v. MNR, 91 DTC 957 (TCC)

At the closing of a sale of his shares of a corporation carrying on a restaurant business, the taxpayer tendered a resignation which was to become effective upon acceptance by the board of directors (which never occurred). The intent was that he would remain as a director until the new owner received approval from the Nova Scotia Liquor Licence Board. The taxpayer, who did not thereafter participate in any directors' meetings or in management decisions, was absolved from responsibility for the subsequent failure of the corporation to make remittances given that at the date he signed his resignation he "ceased to be a de facto Director of the Company and thereafter was not even in a position to exercise due care, diligence and skill in dealing with payroll deductions" (p. 960).

Byrt v. MNR, 91 DTC 923 (TCC)

The taxpayer failed to meet the due diligence defence given that he chose to ignore various "disturbing actions" of the president of the corporation which indicated that he was not totally trustworthy. In addition, the taxpayer was estopped from proving that he had resigned as director on January 24, 1985, which was more than two years prior to an assessment of him on May 6, 1987, given that the taxpayer initially had represented to the Minister that he had resigned on August 1, 1985 and the Minister had relied upon this representation. Various Charter arguments also were rejected.

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Tax Topics - General Concepts - Estoppel 153

Sheremeta v. MNR, 91 DTC 867 (TCC)

The taxpayer, who was a school teacher, became the sole director of the corporation to accommodate her husband, who was unable to be a director himself because of a judgment against him. She had nothing to do with the company. Margeson J. found her not to be liable on the basis that she did not know and should not have known under the circumstances that she was a director; she did not know her responsibilities as a director and did not deliberately turn a blind eye to those responsibilities; and was without control during the relevant periods of time.

Collins v. MNR, 91 DTC 819 (TCC)

The taxpayer believed that his corporation had an arrangement with the T-D Bank whereby the bank would finance the gross payroll costs (including employee source deductions) of an electrical services contract. The bank, however, refused to pay the required source deduction. Nonetheless, the taxpayer decided that the contract would be completed, given that it was profitable. This decision was found to be reasonable, with the result that the taxpayer was not liable.

Perry v. MNR, 91 DTC 696 (TCC)

In 1981 the taxpayer sold all his shares of the corporation in consideration for a secured debenture of the corporation, but remained on as a passive (and inactive) director. He was advised that the corporation was experiencing some financial difficulties, offered to come into the office for a few days to help with administration in order that the other director could promote sales, wrote a cheque to the Receiver General for source deductions that had then come due, which then bounced because, unbeknownst to him, the corporation had exceeded its credit limit. In these circumstances, he had met the required standard. In addition, following the decision in Currie v. MNR, 91 DTC 197, he was not responsible for the current month's source deductions which were not due until May 15 of the following month.

Noonan v. MNR, 91 DTC 416 (TCC)

Unlike her co-directors, who were accountants and experienced businessmen and who were involved in the business of the corporation, the taxpayer established the due diligence defence on the bases that she was not involved in the corporation, apart from a 12.5% shareholding in the corporation she was little more than an employee, and she did not know that she was a director.

Golfman v. MNR, 90 DTC 1863 (TCC)

A legal advisor to the corporation, who prior to becoming director examined the financial statements and received assurances that there were no arrears of source deductions, and who resigned immediately upon finding out that the corporation was in arrears, and who until that time had solid reasons for believing that the corporation was not in financial difficulties, had exercised the requisite degree of care, diligence and skill under s. 227.1(3).

Deschènes v. MNR, 90 DTC 1342 (TCC)

Proulx J. quoted with approval (at p. 1344) the following passage from Emshwiller v. U.S., 565 F. (2d) 1041:

"We are not insensitive to the dilemma faced by the manager of an insolvent corporation who is making an earnest effort to keep the business on its feet. Should he choose to refrain from paying net wages, he runs the risk of losing employees with the business; should he choose to pay net wages, he runs the risk of being unable to pay over those withheld. Despite the difficulty of this choice, there is no basis for allowing a responsible person to choose that course which disables him from meeting his tax obligation by preferring those with wage claims."

Champeval v. MNR, 90 DTC 1291 (TCC)

The taxpayers successfully appealed against assessments under s. 227.1 on the ground that the corporation's bank alone determined which of the corporation's cheques would be honoured (on the basis of whether the cheques exceeded the credit line set by it for the corporation). In addition, one of the taxpayers had sought to pay source deductions through post-dated cheques, most of which the bank refused to honour.

Swertz v. MNR, 90 DTC 1056 (TCC)

By virtue of s. 91 of the Business Corporations Act, the appointment of a receiver-manager by the CIBC rendered the appellant powerless to do anything to alter the receiver-manager's decision not to remit source deductions. Accordingly, the appellant was not liable.

McCullough v. MNR, 89 DTC 446 (TCC)

Revenue Canada assessed a co-director (Mr. Sandrin) of the taxpayer for $27,000 in respect of unpaid source deductions, garnished this amount, and then repaid Mr. Sandrin this amount after Mr. Sandrin successfully lobbied his Member of Parliament. Bonner J. held that because the payment by one joint and several debtor discharges the other, a reassessment of the taxpayer under s. 227.1 for the same amount could not stand. "The section is spent when it has served its purpose by putting the Minister in funds .... I cannot see how the original [company] liability was in some mysterious way revived simply because the Minister choose to reimburse Mr. Sandrin."

Merson v. MNR, 89 DTC 22 (TCC)

The company's failure to remit source deductions was attributed to the unexpected refusal of the de facto receiver of the company to authorize payment of the amount of the source deductions, which decision was not communicated to the company's sole director. "A director has an obligation to be aware of what is happening within the corporation ... However, when all reasonable measures are taken and these measures have been successful in the past, he may reasonably be expected to rely on the measures in the future."

Beutler v. MNR, 88 DTC 1286 (TCC)

The taxpayer and his co-director made a deliberate decision not to make remittances on time because of cash flow difficulties, and did not keep the source deductions in a separate trust bank account. When the gravity of the situation was realized and they attempted to ensure the payment of Revenue Canada, it was too late.

Cybulski v. The Queen, 88 DTC 1531 (TCC)

The taxpayer submitted his resignation as an officer and director on May 1, 1984, and was effectively shut out from the company after that point. The resignation arguably was ineffective by virtue of s. 119(2) of the Business Corporations Act, 1982, which provides that no director named in the articles shall be permitted to resign unless a successor is appointed.

The taxpayer was not liable for source deductions which the corporation failed to remit on 15 September 1984, 15 October 1984, and 15 January 1985. "Parliament established an exonerating standard of conduct the presence of which is to be determined in particular cases by the actual relevant facts and not by fixing to a taxpayer knowledge of a somewhat esoteric point of corporation law that in reality is probably not within the actual knowledge of a good number of legal practitioners ... It may well be that a taxpayer would not take positive steps in some circumstances and still be correctly regarded as having 'exercised' that degree of care, diligence and skill expected of a reasonably prudent person ..."

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Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(4) 167

Edmondson v. MNR, 88 DTC 1542 (TCC)

The taxpayer, who was "completely unaware of a director's duties," when he realized that Revenue Canada had made a demand of the company for arrears in remittances insisted, before injecting $40,000 into the company in order to pay off the arrears, on being made a co-signer on all cheques and in having his daughter placed in the position of bookkeeper. The principal of the company foiled these precautions by hiding in his desk remittance cheques that had been signed by the taxpayer.

These actions of the principal were fraudulent, and a director is not to be held responsible for fraud of his co-directors unless he has expressly or impliedly authorized it.

Fancy v. MNR, 88 DTC 1641, [1988] 2 CTC 2256 (TCC)

When a small excavating company of which the taxpayer and has wife were directors and officers began encountering cash flow difficulties, the bank to which it had made a general assignment of its receivables as security, began monitoring all cheques issued by it and only authorizing certain specified payments. The bank refused to authorize the issuance of a cheque to cover the remittance of the source deductions for August 1982, and the company thereafter ceased operations.

Couture, C.J. found that the taxpayer and his wife were "entangled in a legal network which had its origins when the company began its operations and assigned its receivables to the bank, a situation that legally restrained their control over its cash flow as long as it owed money to the bank. They were conscious of the company's obligations under the Act and of their respective personal liability and ... under the prevailing circumstances they exercised the degree of care, diligence and skill referred to in s. 227.1(3)". The proposition advanced by the Crown, that the appellants in order to avoid personal liability should have ceased operations when the company entered into financial difficulties, did not reflect the true intent of the legislation.

Quantz v. MNR, 88 DTC 1201 (TCC)

The director of a private manufacturer of caskets who concentrated on manufacturing and marketing, was faulted by Goetz J. for not at least enquiring about the amounts owing to the Receiver General and for not giving instructions to anyone to ensure payment even after a Revenue Canada auditor brought the arrears to his attention. He failed to meet the requisite standard.

Fraser v. MNR, 87 DTC 250 (TCC)

A director of a private company was responsible for the manufacturing side of the business and the two other directors (the president and treasurer) were responsible for financial and other matters. When he became aware that a Revenue Canada collections official was raising a "ruckus" about income tax arrears he was told by the other two that they were taking care of the problem. He did not make further enquiries or take further action. He failed to meet the due diligence standard. S.227(3) "does not assist those whose only excuse is that others had a better opportunity to prevent failure than they did." Although he was unaware of the requirements of ss.153 and 227, s. 227.1 does not impose liability only on those who are aware of its requirements.

Administrative Policy

88 C.R. - "Director's Liability"

The director is required to take positive steps to ensure the corporation remits source deductions (which may include establishing controls and monitoring compliance with those controls), and has special responsibilities when the corporation is in financial difficulty.

88 C.R. - F.Q.5

A director may be able to protect himself by putting forward a resolution for the requisite controls, then having it recorded that he was out-voted.

88 C.R. - F.Q.6

There should be evidence in the minute book of the director tabling, as an objective, the obtaining of a guarantee from the corporation's bankers that cheques covering the required remittances will clear upon presentation.

88 C.R. - F.Q. 8

The onus of proof that due diligence has been exercised always rests with the directors.

87 C.R. - Q.77

the obligation to administer appropriate controls applies equally to directors of small private corporations and major public ones.

87 C.R. - Q.78

every effort is made to collect the amounts owing from the corporation prior to considering assessment under s. 227.1. Head Office and perhaps Justice, review the director's submission.

87 C.R. - Q.81

there is no distinction between active and outside directors.

86 C.R. - Q.86

RC does not distinguish between active and passive directors.

86 C.R. - Q.87

each director is first given an opportunity to make written submissions

IC 89-2 "Directors' Liability - Section 227.1 of the Income Tax Act"

Articles

Fien, "Directors' Liability and Indemnifications, Section 160 Assessments and Ordinary Course of Business Provisions", 1992 Conference Report, c. 53.

Fulcher, "Section 227.1 of the Income Tax Act and the Director's Duty of Care in BCA Jurisdictions: Some Lessons From the Corporate Governance Debate of the Last Twenty-Five Years", Canadian Petroleum Tax Journal, Spring, 1992, p. 17.

Moskowitz, "Directors' Liability: An Update", 1991 Conference Report, c. 47.

Heinrich, "Judicial Response to Director's Liability and Crown Garnishment Priorities", 1991 British Columbia Tax Conference, Volume 1.

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Tax Topics - Income Tax Act - Section 224 - Subsection 224(1.2) 0

Moskowitz, "Directors' Liability under Income Tax Legislation and Other Related Statutes", 1990 Canadian Tax Journal, p. 537.

Subsection 227.1(4) - Limitation period

Cases

Canada v. Chriss, 2016 FCA 236

a written resignation must be signed and delivered to the corporation to start the two-year s. 227.1(4) period running

The two taxpayers (Mrs. Gariepy and Mrs. Chriss) were appointed as the two directors of an Ontario corporation ("105") which was run by their husbands. In 2001, the taxpayers expressed to their husbands their desire to resign as directors, and corporate counsel prepared written resignations on the instructions of Mr. Chriss. However, the resignation forms were never provided to the taxpayers. Several months later another lawyer, Mr Caroline, prepared another set of resignation documents for Mrs. Gariepy, which were also not executed.

Rennie JA found that the taxpayers had not resigned in 2001, stating (at paras 9, 13 and 14):

…In the absence of the communication of a written resignation to the corporation, a resignation is not effective. …

[A] limitation period demands, for its application, precision in the date of resignation. If a director has resigned, the Crown may no longer be able to look to the director for unremitted taxes, and other directors may have to absorb the director’s share of such liability. Further, there is a two-year limitation period which constrains the Minister’s ability to initiate proceedings against directors for unremitted source deduction.

… Reliance on the subjective intention or say-so of a director alone would allow a director to plant the seeds of retroactive resignation, only to rely on it at some later date should a director-linked liability emerge. The facts of this case illustrate why subsection 121(2) of the OBCA has been drafted the way it is: the dangers associated with allowing anything less than delivery of an executed and dated written resignation are unacceptable.

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Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(3) director must verify that she has resigned 256

Gariepy v. The Queen, 2014 TCC 254

unsigned written resignations were effective

The two taxpayers (Mrs. Gariepy and Mrs. Chriss) were appointed as the two directors of an Ontario corporation ("105") which was run by their husbands. In 2001, the husbands decided that it was time for them to replace their wives as directors, and corporate counsel prepared written resignations on the instructions of Mr. Chriss. However, the resignation forms were never provided to the taxpayers, perhaps because legal accounts were unpaid.

In finding that the taxpayers had resigned in 2001, so that 2008 assessments of them under s. 227.1 were not permitted, Boyle J stated (at para. 25) that "the OBCA specifies that a resignation be written but not that it be signed" and noted (at para. 22) that "all of the directors, officers and principals of the company understood the wives were resigning at that time" which "means that the company clearly understood they resigned."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(3) reasonable belief in resignation constituted a due diligence defence, "economic necessity" defence rejected 228

Létourneau v. Canada, 2012 DTC 5044 [at 6777], 2011 FCA 354

The trial judge found that the taxpayer was a director of a business corporation when its remittance failures arose in 2001 and 2002, despite her having submitted a written resignation in 1999. The trial judge's findings had two bases. The first was that the sole director who replaced the taxpayer had no business expertise, and would automatically sign any document at the request of the corporation's principal shareholder. The second was that there was evidence that the corporation's records had been amended in 2002 to retroactively remove the taxpayer as director as of 1999.

The Court overturned the trial judge's findings. The business expertise of the taxpayer's replacement director had no bearing on the validity of the taxpayer's resignation. At best, it proved that the principal shareholder was a de jure director of the corporation. There was also no reason to conclude that the amendment of the corporate records was anything but an attempt to accurately reflect what had in fact happened - namely, that the taxpayer had ceased to be a director in 1999.

Butterfield v. The Queen, 2009 DTC 1382 [at 2108], 2009 TCC 575, aff'd 2011 DTC 5005 [at 5510], 2010 FCA 330

In rejecting the taxpayer's argument that he ceased to be a director by virtue of an assignment in bankruptcy by the corporation in question, C. Millar, J. stated (at para. 7) that "case law is very clear and well established, that an assignment in bankruptcy does not trigger a director ceasing to be a director".

Re Blackwater Marine Inc., 2010 DTC 5087 [at 6877], 2010 BCSC 340

CRA sought to have a BC corporation, that had been dissolved, restored and its sole director restored as of the date of the dissolution in order to be able to pursue remedies for unpaid taxes and unremitted source deductions against the corporation and the individual.

The requested restoration for the corporation was granted, but not that for the individual's status as director, as the application was brought more than two years after the date of dissolution and there would be potential prejudice to a due diligence defence of the individual under s. 227.1 - as well as putting in jeopardy his compliance with a four-year non-compete agreement.

The Queen v. Kalef, 96 DTC 6132 (FCA)

The taxpayer did not cease to be a director of an Ontario corporation for purposes of the two-year limitation period in s. 227.1(4) when a trustee in bankruptcy was appointed and took control of the corporation's assets to the exclusion of its directors, given that he did not resign or otherwise cease to be a director in accordance with s. 121 of the Business Corporations Act (Ontario).

The Queen v. Wellburn, 95 DTC 5417 (FCTD)

Although under the B.C. Company Act, the appointment of a receiver-manager of the corporation did not cause individuals to cease to be directors, they ceased to be directors when they delivered a written notice of resignation to the receptionist at the law firm at which the registered office of the corporation was maintained, who then placed the resignation notice directly in the company's records without informing a lawyer.

See Also

Tozer v. The Queen, 2018 TCC 56

bankruptcy did not result in constructive cessation of directorship

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 (at para 70):

… 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.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(5) taxpayer did not cease to be a de jure director when displaced by receiver on the corporation’s bankruptcy 219
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(3) taxpayer did not take active efforts (which required more than delegation) until some time after he became aware of the corporations’ financial difficulty 324
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(3) ETA due diligence defence required active efforts once financial difficulty apparent 46

Grant v. The Queen, 2017 TCC 121

corporate bankruptcy did not cause the taxpayer to cease to be a director/“due dispatch” requirement inapplicable to director’s assessment

The taxpayer was the director of a corporation that made an assignment in bankruptcy on August 1, 2006. In 2012, he was assessed pursuant to s. 227.1 respecting the corporation’s failure to remit source deductions in 2004 to 2006.

In rejecting the taxpayer’s submission that the Minister had failed to assess him “with all due dispatch,” contrary to s. 152(1) of the Act, Smith J stated (at paras. 19-20):

A plain reading of the words “at any time” [in s. 227(10)] suggests there is no limitation period for the issuance of a notice of assessment against a director, save for the two year limitation period… .

… [T]he words “with all due dispatch”, as set out in section 152(1)…, have no bearing on this analysis.

In also rejecting the taxpayer’s submission that he had ceased to be a director in 2006 as all the assets and undertaking of the corporation had devolved to the trustee in bankruptcy, so that the two-year limitation period precluded the Minister’s assessment, Smith J stated (at paras. 24-26):

Kalef…found that Mr. Kalef had not ceased to be a director by virtue of the appointment of a trustee in bankruptcy… .

I ,… find that the Appellant’s situation is in fact typical of most directors of bankrupt companies. More importantly, I note that the assessment … relates to amounts due … which arose prior to the date of bankruptcy.

… I conclude that the Appellant was still a director of the Corporation when the Notice of Assessment was issued in May 2012.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 227 - Subsection 227(10) “due dispatch” not required for director’s assessment 117
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(2) - Paragraph 227.1(2)(c) failure of CRA to timely send proof of claim to the right trustee was not fatal (s. 227.1(2)(c) is directory) 364

Marra v. The Queen, 2016 DTC 1028 [at 2696], 2016 TCC 24

two years for a director’s derivative assessment ran from handing a resignation to the company’s lawyer, who did nothing with it

The appellant (Ms. Marra”) became a director of a company, Sani-Clean, on her husband’s request. He had financed the company, but day to day operations were carried out by another director (“Manankil”), whose wife did the book keeping. The Marras caused Sani‑Clean to sue Manankil for misappropriating company funds, and Manankil left Sani-Clean. Mr. Marra urged Ms. Marra to call their lawyer and lawyer for Sani‑Clean (“Polsinelli”) to discuss resigning. As there were no remaining active directors, Posinelli advised her to submit her resignation to him in writing, which she did on January 7, 2007. He did not file a notice of resignation with the Ontario Ministry of Government and Consumer Services and did not file the letter in the minute book, which was maintained by another lawyer. Ms. Marra was assessed under ETA s. 323(1) and ITA s. 227.1(1) in January 2013.

After noting (at para. 42) that s. 121(1) of the OBCA required a resignation to be received by the corporation before it became effective, Rip J. stated (at paras. 52-53), in accepting Ms. Marra’s submission (at para. 46) that “it would be useless to send the letter of resignation to a director against whom you have taken legal action or to a director who had absolutely no involvement with the company:”

This is not necessarily a question of whether Mr. Polsinelli is agent of Sani‑Clean; it is a question of wanting to resign as director and sending the letter of resignation to the person who has any remaining responsible connection with Sani‑Clean and, in the circumstances, that was Mr. Polsinelli, Sani‑Clean’s lawyer.

Ms. Marra’s letter of resignation as director of Sani‑Clean was effective as at the date it was received by Mr. Polsinelli.

Accordingly, the assessments were barred by the two-year limitations in ITA s. 227.1(4) and ETA s. 323(5).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(5) two years for a director’s derivative assessment ran from handing a resignation to the company’s lawyer, who did nothing with it 143

Bekesinski v. The Queen, 2014 DTC 3604 [at 1169], 2014 TCC 245

appellant, who likely backdated resignation, was plausible enough to demolish assumptions

The appellant contended that he had resigned as director in 2006, so that an assessment under s. 227.1(1) in 2010 was out of time. The Minister's forensic evidence to establish that the resignation had been backdated had been disallowed in a prior hearing.

The Minister had not pleaded backdating - only that the appellant had continued as a director – nor did she plead lack of due diligence. Accordingly, explanations of the appellant which were plausible were sufficient to demolish the Minister's assumptions notwithstanding that "in all likelihood, the Appellant backdated the Resignation" (para. 45). The appeal was allowed.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus unspecific pleadings were more readily demolished, improbable allegations treated with greater care 185

Bohbot-Gagnon v. The Queen, 2013 DTC 1185 [at 998], 2013 TCC 128

resignation with subsequent effective date

The taxpayer was the sole director of a corporation which had, under another person's management, failed to remit source deductions. Upon learning of the failures, she took measures that culminated in the sale of the corporation to a third party on 7 July 2006, but her notice of assessment for director's liability was dated 16 July 2008, i.e., just over two years later. The relevant terms of the contract were:

7.1 The seller shall resign from her position as President, Secretary and Director of the corporation on the date of this agreement;

7.2 This resignation is accepted by the corporation on the date of this agreement and shall be effective on the date of the corporation's next articles of amendment;

Lamarre J found that the taxpayer's limitations period ran not from 7 July 2006, but from 18 July 2006 when the articles of amendment were signed. Section 108 of the Canada Business Corporations Act provides that a resignation is effective on the later of the date of delivery (i.e. when the agreement was signed) and the date specified in the resignation (i.e. when the articles were amended, which turned out to be on 18 July 2006).

Priftis v. The Queen, 2013 DTC 1030 [at 141], 2012 TCC 414 (Informal Procedure)

The Minister assessed a director on 15 July 2010 for unremitted CPP amounts of a corporation that was dissolved on 15 July 2008. Angers J. found that, under s. 27(5) of the Interpretation Act, the two year limitations period commenced on the day after the taxpayer ceased to be a director, and therefore 15 July 2010 was just within the limitations period. The taxpayer's appeal was granted on other grounds.

Walsh v. The Queen, 2009 DTC 1372, 2009 TCC 557

The taxpayer had satisfied the requirement that there have been "meaningful communication with the corporation" of his decision to resign when he signed a letter of resignation as the sole director of the corporation in question and placed it with the company records (but without filing it in the minute book). Furthermore, his actions following the cessation of operations of the corporation and such resignation, of forwarding correspondence to the company accountant and authorizing the accountant to carry on discussions with CRA officials, did not cause him to be a de facto director following his resignation. The taxpayer's appeal was allowed.

Moll v. The Queen, 2008 DTC 3420, 2008 TCC 234 (Informal Procedure)

A written resignation of the taxpayer as sole director of the corporation dated more than two years before his assessment under s. 227.1 was found to have been fabricated after the fact. However, even if he had resigned on the date of the purported letter, he would have continued to be a director under s. 115(4) of the Business Corporations Act (Ontario) (which stipulates that "any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director" following that person's resignation), given that after the date of the purported resignation he continued to hold himself out as the director of the corporation and continued to do various acts such as meeting with CRA and giving them post-dated cheques.

Hamilton v. The Queen, 2007 DTC 121, 2006 TCC 603

The taxpayer was liable under s. 227.1 in respect of the failure of a corporation of which he was a director to withhold on various amounts paid to non-residents of Canada under Regulation 105. Boise J. stated (at p. 124) that "I do not consider that simply having the company hire a payroll company to process the payments is sufficient to establish due diligence on his part."

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 105 - Subsection 105(1) withholding not reduced if no substantive liability 159

Hartrell v. The Queen, 2006 DTC 3548, 2006 TCC 480

The taxpayer was not liable with respect to the second of two periods of time during which the corporation failed to make source deductions given that the other major shareholder of the corporation had precipitously refused to make any further contributions of money to the corporation at a point during the playing season for the corporation (which ran a soccer team) at which the taxpayer was powerless to prevent the failures to remit.

Schultheiss v. The Queen, 97 DTC 863 (TCC)

Although two of the taxpayers had signed documents resigning as officers and directors, these documents were not formally filed with the corporation or accepted by a responsible officer of the corporation or by the board of directors, the provisions of s. 119 of the Business Corporations Act (Ontario) were not complied with in that as first directors they were not replaced by anyone on the board, there was no resolution of the corporation reducing the number of board members, and the two individuals, in fact, continued to attend board meetings. Accordingly, the purported resignations were not effective or complete.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(3) 49

Crossley v. MNR, 91 DTC 827 (TCC)

The two-year limitation period commenced running at the time of the appointment of a receiver-manager notwithstanding that the taxpayer still retained certain vestigial powers as a director.

Nagy v. MNR, 91 DTC 993 (TCC)

The decision of the directors of a corporation, following its filing of a proposal under the Bankruptcy Act, to discontinue its business operations did not result in any restriction on their powers and, accordingly, did not cause the two-year period referred to in s. 227.1(4) to commence running.

Larocque v. MNR, 91 DTC 899 (TCC)

The issuance of a notice of reassessment was a "proceeding" for purposes of s. 227.1(4), with the result that the making of such a reassessment on the second anniversary of the date of resignation of the taxpayer as a director was permissible for purposes of s. 227.1(4). However, the taxpayer met the due diligence defence given that the failure of the operation's banker to honour the monthly remittance cheque was unexpected, and the taxpayer resigned shortly thereafter.

McConnachie v. MNR, 91 DTC 873 (TCC)

In finding that the two-year limitation period commenced running when the corporation was deemed to make an assignment in bankruptcy and a receiver-manager was appointed, with the result that the corporation ceased to have any capacity to dispose of or otherwise deal with this property (pursuant to s. 50(5) of the Bankruptcy Act) and the directors ceased to have the authority to exercise their powers (pursuant to s. 91 of the Business Corporations Act (Ontario)), Bonner J. stated (p. 877):

"The directors of a corporation which has lost the capacity to dispose of or deal with corporate property are not the sort of persons who are the target of section 227.1."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) 21

Hawkins v. MNR, 91 DTC 648 (TCC)

When a receiver-manager was appointed, the taxpayer ceased to be a director for purposes of s. 227.1(4) by virtue of s. 73 of the Companies Act (N.S.), which provided that in such event "the powers of the directors of the company that the receiver-manager is authorized to exercise may not be exercised by the directors until the receiver-manager is discharged".

DeWitt v. MNR, 90 DTC 1027 (TCC)

Following the continuance of a corporation under the Alberta Business Corporations Act, there was a failure to have the appellant consent to continue to act as a director of the corporation. Therefore, in light of subsection 100(6) of the Alberta Business Corporations Act, which provides that a person who is elected or appointed as a director and who refuses or fail to consent to act as a director shall be deemed not to have been elected or appointed as a director, the appellant was found not to be liable under s. 227.1.

Perri v. MNR, 89 DTC 723 (TCC)

The taxpayers ceased to be directors for purposes of s. 227.1(4) upon the appointment of a receiver manager notwithstanding that the taxpayers did not resign until later, and that they continued on as employees of the company. S.110 of the Company Act (B.C.) provided:

"Where a receiver manager is appointed, the powers of the directors and officers of the corporation cease with respect to that part of the undertaking for which he is appointed until he is discharged."

Cybulski v. The Queen, 88 DTC 1531 (TCC)

The taxpayer submitted his resignation as an officer and director on May 1, 1984, and was effectively shut out from the company after that point. The resignation arguably was ineffective by virtue of s. 119(2) of the Business Corporations Act, 1982, which provides that no director named in the articles shall be permitted to resign unless a successor is appointed.

The taxpayer was not liable for source deductions which the corporation failed to remit on 15 September 1984, 15 October 1984, and 15 January 1985. "Parliament established an exonerating standard of conduct the presence of which is to be determined in particular cases by the actual relevant facts and not by fixing to a taxpayer knowledge of a somewhat esoteric point of corporation law that in reality is probably not within the actual knowledge of a good number of legal practitioners ... It may well be that a taxpayer would not take positive steps in some circumstances and still be correctly regarded as having 'exercised' that degree of care, diligence and skill expected of a reasonably prudent person ..."

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Tax Topics - Income Tax Act - Section 227.1 - Subsection 227.1(3) 167

Administrative Policy

88 C.R. - Q.81

An assessment cannot be made against directors once the corporation has been dissolved for two years.

85 C.R. - Q.13

RC does not distinguish between active and passive directors.

Subsection 227.1(7) - Contribution

Cases

Adams v. Anderson, 2011 ONCA 381

The appellant and respondents were former directors of the same corporation. The appellant was assessed for the corporation's unremitted source deductions and GST and sought contribution from the respondents. The Court dismissed the appeal on the basis that ss. 227.1(7) of the Income Tax Act and 323(8) of the Excise Tax Act allow contribution from other directors only where those directors were liable for the claim. While the respondents were initially assessed for the unremitted amounts, CRA subsequently conceded in a letter that the respondents were no longer directors when the remittance failures arose. The Court found (at para. 10) that the trial judge was required to defer to CRA's determination of the respondents' tax liability.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 323 - Subsection 323(8) 113