Directors Escape Personal Liabilities

Subsection 227.1 of the Income Tax Act and subsection 323 of the Excise Tax Act provide that the directors of a corporation will be personally liable for their corporation’s failure to remit employee withholdings and GST.

The Honourable Justice Patrick Boyle quoted his own reasons for judgment in Deakin v. The Queen (2012) and the reasons of the Federal Court of Appeal in Canada v. Buckingham (2011) and other decisions to stress the importance of the personal liabilities directors face and the social and political reasons why they must take such responsibility, however in Gariepy v. The Queen (2014) TCC 254 the court ultimately allowed the appeal and the appellants escaped over half a million dollars of liabilities, to the detriment of all Canadians.

The husbands of the appellants together carried on the business of an Ontario numbered company called 1056922 Ontario Ltd. (“105”). The two were previously involved with CG Industries (“CGI”), a company that went insolvent leaving significant unremitted withholdings to Canada Revenue Agency (“CRA”).

The main issue in the case was whether or not the appellants had effectively resigned as directors of 105 in 2001. If so, they would be availed from the personal liability that is imposed on directors for unremitted deductions under the Income Tax Act and the Excise Tax Act because of the two year limitation period applicable to such liability. The appellant’s also proffered alternative defences, including the due diligence defence.

The appellants succeeded in satisfying the requisite tests for valid resignation in 2001 and therefore could not be held liable for the unremitted amounts. The difficulty with this case is that, as Justice Boyle noted, there were “very serious” credibility issues pertaining to the appellants and their husbands.

Notwithstanding the fact that the resignations put into evidence were unsigned, admittedly prepared in preparation for trial and not the original documents, nor reprinted versions thereof, the resignations were effective because “the communication of the resignations was entirely clear at each step, consistent with the resigning directors’ desires and intentions, understood and accepted by the company, communicated by George Chriss for the benefit of the resigning directors (one of whom was his wife of many years who entrusted in him all business matters) and on behalf of the company, to the company’s counsel who then prepared the written documents that reflected exactly what was needed for the corporate minute book.”

The resignation documents never left Gowlings office, but the Ontario Business Corporations Act (OBCA) only specifies that a resignation need be written to be effective, but not that it be signed.

The strength of the language used by Justice Boyle at the outset of his reasons for judgment made it seem as though the directors of 105 would have to pay for the unremitted amounts. Justice Boyle quoted his reasons given in paragraph 24 of Deakin in their entirety when he spoke of Canadian directors not remitting employee deductions or GST:

“They are doing so contrary to clear law and it appears appropriate as a policy matter that Parliament has legislated clearly that they will generally be responsible for such decisions and the loss resulting from them. In essence, if a corporation and its directors choose to unilaterally “borrow” from Canadian taxpayers and the public purse, Canadians get the benefit of security akin to personal guarantees of the directors.”

Unfortunately however, the weaknesses of the applicable legislation were highlighted when the appeals were allowed and the directors entirely availed of their responsibilities. This was so despite contradictory testimony from the appellants and their husbands, irreconcilable inconsistencies between the appellant’s legal counsel, the appellants, and their husbands surrounding the resignations, and a general scarcity of evidence altogether. Justice Boyle was certainly apprehensive to allow the appeals, but was begrudgingly forced to by the OBCA.

Greer Jacks is updating jurisprudence in EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.