The May 3, 2011 Tax Court of Canada decision in Snively v. The Queen should serve as a helpful reminder to directors of corporations that they may still be considered to be a director of a corporation for GST/HST assessment purposes even after they have resigned as a director.
The general rule for director's liability is contained in subsection 323(1) of the Excise Tax Act:
If a corporation fails to remit an amount of net tax as required under subsection 228(2) or (2.3) or to pay an amount as required under section 230.1 that was paid to, or was applied to the liability of, the corporation as a net tax refund, 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 solitarily, liable, together with the corporation, to pay the amount and any interest on, or penalties relating to, the amount.
An exception to the general rule is set out in subsection 323(5) of the Excise Tax Act with the effect that a director is not liable for the GST/HST debts of the corporation if the person ceased to be a director more than 2 years ago:
An assessment under subsection (4) of any amount payable by a person who is a director of a corporation shall not be made more than two years after the person last ceased to be a director of the corporation.
There is an exception to the exception to the general rule which results in the director remaining liable for the GST/HST debts of the corporation regardless of the 2 year limitation period. Under corporate laws, the person (individual) may be deemed to be director even if the person has submitted a formal resignation. If the corporation was incorporated pursuant to the Business Corporations Act (Ontario), subsection 115(4) would apply. Subsection 115(4) of the Business Corporations Act (Ontario) provides:
Where all of the directors have resigned or have been removed by the shareholders without replacement, any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director for the purposes of this Act.
The corporations laws of other provinces of Canada may contain similar provisions.
Judge Paris of the Tax Court of Canada makes the point in Snively that the Excise Tax Act does not provide a complete answer to the question of director's liability:
It is well established that, since “director” is not a defined term in the ETA, it is appropriate to look to a corporation’s incorporating legislation for determining whether a person was a director of a corporation at a particular time for the purposes of section 323. ...
As a factual matter, Mr. Snively had been the sole director of the assessed GST/HST registrant. He had resigned as a director and had written a resignation letter to the corporate lawyer of the company. However, after he wrote the resignation letter, he continued to advise the corporation's lawyer on a variety of matters relating to the corporation's wind-up (including, filing the GST/HST notice of objection, filing income tax returns, instructing the book-keeper, etc.). More importantly, a new director was not appointed.
Judge Paris found, as a matter of fact and law, Mr. Snively was deemed to be a director after he officially resigned as a director. This raises the question as to when the limitation period in subsection 323(5) of the Excise Tax Act starts to run (or, in other words, when does a person cease to be a deemed director). This issue is more difficult for a former/deemed director to address from a factual standpoint because the law gives the person a title that the person has tried to reject.
Chief Justice Rip dealt with the difficult question of when a deemed director ceases to act as such was considered in Bremner v. The Queen. In Bremner, Chief Justice Rip held that:
"...just as for a de jure director, a deemed director does not cease to be a director merely because a company’s commercial operations end, because “[d]irectors of corporations have duties that survive cessation of the business previously carried on.”
Chief Justice Rip looked at Business Corporations in Canada – Legal and Practical Aspects by Paul Mattel at paragraph 21-16:
A director who acts as such when the required formalities have not been fully complied with or who continues to act as a director notwithstanding the fact that he has resigned from his position is a de facto director subject to the same liabilities as de jure directors.
As the term implies, a de facto director is considered to be a director if he acts as such by doing acts normally reserved for directors; for example, participating in board meetings, signing board resolutions, making or participating in administrative decisions or decisions to sell, giving instructions in the name of the corporation, representing to third parties that he is a director, etc.
The decision in Bremner was upheld by the Federal Court of Appeal, which said that “a directorship of a person arising by virtue of [subsection 115(4) of the BCA] must be considered to endure at least as long as that person manages or supervises the management of the affairs of the corporation in question."
The actions of the person who is arguing that he/she ceased to be a director are going to be reviewed and considered by the Court in determining whether the deemed director ceased to be a de jure director (director by law). The Court will look for the person to break his/her bond with the corporation by stopping actions of managing and/or speaking for the corporation. Chief Justice Rip wrote in Bremner the following, which provides some guidance:
As any director, a de facto or a "deemed" director will cease to be a director when the shareholders elect his or her replacement or if he or she resigns. Until that time a director remains in office. A de facto and a "deemed" director may also cease to be a director by giving notice to the corporation and actually stop managing or supervising the management of the company...I acknowledge that it may be difficult for a person who is the only shareholder of a corporation to divorce himself or herself from activities normally carried on by a director but if that person is performing functions of a director, he or she is a director.
It is difficult to document the breaking of the bond because a prudent former director of a corporation also wants to to what is necessary to meet the requirements of the due diligence defence in subsection 323(3) of the Excise Tax Act. What a person can and should do (what actions the person should undertake) may only be determined on a case-by-case basis taking into account the factual circumstances of the former director and the type of GST/HST liability.
In the Snively case, the lawyers for Mr. Snively may not have considered whether the underlying assessment itself is one which is covered by the director's liability provisions and may have missed an important legal approach to the issues. Not all types of GST/HST liabilities of a corporation pass to the directors.
The morale of this case is that a director / former director/ deemed director may not be able to walk away from GST/HST liabilities of a corporation without thoughtful and careful planning. For more information, please contact Cyndee Todgham Cherniak at 416-760-8999.