Section 323 of the Excise Tax Act (Canada) permits the Canada Revenue Agency to assess a director of a corporation the unpaid and unremitted goods and services tax (GST) / harmonized sales tax (HST) assessed against a corporation if the corporation does not pay the GST/HST debt. In Boles v. The Queen, a director, Mr. Boles, was assessed $23,000.
The facts are not succinctly summarized at the start of the case. It appears that in the 1990s, two men operated a number of businesses together. Mr. Clark at some point became the primary owner of the company and Mr. Boles what bought out. However, Mr. Boles completed paperwork to stay on as a director of the corporation that was the operating business. He may or may not have forgotten about the paperwork he had signed. Mr. Boles was not involved in the day-to-day management of the corporation. Mr. Clark died at some point. The CRA assessed Mr. Boles for the GST debts of the corporation. The case does not say whether the CRA attempted to collect the tax debt from the estate of the deceased director.
Mr Boles fought the assessment saying that he did not realize that he was a director of the company and had asked, while Mr. Clark was alive, to cease to be a director. The Tax Court of Canada confirmed the assessment after finding that Mr. Boles (1) was a director of the tax debtor corporation, (2) did not cease to be a director of the tax debtor corporation, and (3) did not exercise due diligence to prevent the tax debt. The Tax Court also awarded costs to the Crown. In the end, Mr. Boles must pay the $23,000 and costs.
Judge Boyle writes a short decision. He summarizes the law at the beginning of the case:
"The most recent pronouncement on the scope of director’s liability for unremitted GST or income tax withholdings and upon director’s possible defences thereto are set out by the Federal Court of Appeal in its recent decision in Canada v. Buckingham, 2011 FCA 142, dated April 21, 2011. In Buckingham the Federal Court of Appeal confirmed that the scope of the director’s liability provisions is potentially broad and far reaching in order to effectively move the risk for a failure to remit by a corporation from the fisc and Canadian taxpayers generally to the directors of the corporation, being those persons legally entitled to supervise, control or manage the management of its affairs. The Court also confirmed that a director seeking to be exculpated for having exercised reasonable care, diligence and skill must have taken those steps “to prevent the failure” to remit and not to cure it thereafter. Further, the standard of care, diligence and skill required is overall an objective standard. Specifically, the Court wrote:
38 . . . Stricter standards also discourage the appointment of inactive directors chosen for show or who fail to discharge their duties as director by leaving decisions to the active directors. Consequently, a person who is appointed as a director must carry out the duties of that function on an active basis and will not be allowed to defend a claim for malfeasance in the discharge of his or her duties by relying on his or her own inaction. . .
. . .
40 . . . In order to rely on these defences, a director must thus establish that he turned his attention to the required remittances and that he exercised his duty of care, diligence and skill with a view to preventing a failure by the corporation to remit the concerned amounts.
52 Parliament did not require that directors be subject to an absolute liability for the remittances of their corporations. Consequently, Parliament has accepted that a corporation may, in certain circumstances, fail to effect remittances without its directors incurring liability. What is required is that the directors establish that they were specifically concerned with the tax remittances and that they exercised their duty of care, diligence and skill with a view to preventing a failure by the corporation to remit the concerned amounts."
What is more interesting in Boles v. the Queen is the short hind-sight being 20/20 comment:
- "... once one is a director, legal steps must be complied with to cease to be a director and Mr. Boles did not make any inquiry or attempt to do that. Apparently, he did not even send a confirmation letter to Mr. Clark asking for him to have the paperwork prepared to remove him as a director."
Note to all the directors out there, follow-up is important.
The more significant lesson is that a business partner may die and the surviving directors may be required to pay GST/HST debts. The surviving directors should ask questions of the executors the estate of the deceased director and document their due diligence activities.