Directors' Liability for HST Debts Is Important Consideration
When was the last time you made a list of your various corporate directorships and asked the question "Do I want to be a director on this company or should I formally resign?". Did you ask this question when HST implementation in Ontario and British Columbia occurred on July 1, 2010? If not, why not? The potential liability for unremitted HST or penalties for HST errors is now 13% (Ontario, New Brunswick, Newfoundland) or 12% (British Columbia) or 15% (Nova Scotia) plus penalties and interest. There is a lot more money from your director pocket at stake.
Are you a de facto or de jure director? Persons who are formally a director under provincial or federal corporations laws may be assessed by the Canada Revenue Agency (CRA). In addition, persons who are not formally directors, but who take on the roles of directors (without the formal directors' resolution) may be considered by the CRA to be a director too and assessed as a director. Have you taken steps to demonstrate that you do not intend to be a director of a company where you do not wish the CRA to place the "director" name tag on your jacket (and wallet)?
Do you have all the paperwork for your past directorships and resignations? If the CRA came knocking on your door today to collect GST and/or HST owed by a company in respect of which you were a director years ago, could you prove that you resigned as a director and that the company actually filed the paperwork with the relevant governmental authority? Do you know if the company filed the documents with the relevant governmental authority? Do you know if the company updated the information in the CRA's database concerning your resignation as a director? Can you still reach the individuals who asked you to be a director of the company?
Taking on the role and responsibilities as a director of a corporation involves significant obligations, not the least of which is vicarious liability for certain GST/HST (and income tax, Ontario retail sales tax and other taxes) obligations of the corporation, should it become fail to make remittances or become insolvent.
Subsection 323(1) of the Excise Tax Act (Canada) provides that:
If a corporation fails to remit an amount of net tax ... or pay an amount as required ... , the directors of the corporation at the time the corporation was required to remit or pay as the case may be, the amount are jointly and severally or solidarily, liable, together with the corporation, to pay the amount and any interest on, or penalties relating to, the amount."
There are a number of limitations on director's liability, including:
1) the person being assessed is a former director of the corporation and ceased to be a director more than 2 years before the assessment;
2) the director or former director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in similar circumstances;
3) the Minister has not taken certain steps to recover from the corporation as required by subsection 323(2) of the Excise Tax Act.
We are seeing more director's liability assessments by the CRA (and other governmental authorities) in the current economic climate. Some companies have decided to pay demanding creditors over the CRA. Some companies have declared bankruptcy. Some companies have been sold. Some companies have let paperwork slide while trying to stay above water. Some of the CRA calls are to individuals who thought they ceased to be a director years ago --- the CRA is digging into old collection files and seeing what can be collected now.
It is time to reconsider whether the the good intentions of the past (becoming a director of a corporation) may lead you into the poorhouse or dent your retirement savings. for more information, please contact Cyndee Todgham Cherniak (a sales tax lawyer) at 416-760-8999.
Cyndee Todgham Cherniak is counsel to and in affiliation with the International Trade Law and the Tax Law (Commodity Tax
