I would like to share a quote with you from a recent GST case, Arsic v. The Queen. In this case, the Canada Revenue Agency (CRA) was pursuing a director of a corporation for the GST debts of the corporation. In these circumstances, the director may raise the due diligence defence, which prevents the CRA from shifting the corporation's GST liability (plus penalties and interest) to the director.
Justice Diane Campbell wrote:
In the end, I must attempt the difficult task of determining what a reasonably prudent person should have done or would have done in circumstances comparable to those in this appeal. It remains a question of fact tempered with a good dose of even-handed common sense. It is always easy to criticize the choices of a taxpayer when armed with the benefit of hindsight."
This quote will be helpful to directors. The judge is making it clear that the auditor did not use common sense when assessing the director for the liabilities of the corporation. She accepted the due diligence defence and allowed the appeal. The end result is that the director did not have to pay the assessment relating to the GST debt of the corporation.
More importantly, the quote should help directors. Directors must ask themselves what would the Court expect a reasonably prudent director to do? What should I do to show the Court that I tried to prevent the corporation from getting into GST/HST trouble? I often use the white hat / black hat analogy. The taxpayer needs to help the Court see that they always were the good guy wearing the white hat. The director must not wear a black hat and engage in questionable behaviour. In Court, the bad facts may (will likely) come out.