Published on November 3, 2011
Posted in: Blog
Taxes. Nobody likes them, but we all have to pay them, and for some directors a recent decision out of the Tax Court of Canada in Snively v. The Queen may mean continued liability even after resignation. This decision serves as a caution for directors of corporations that continue to manage the affairs of a corporation after resignation.
Under subsection 323(1) of the Excise Tax Act, a director of a corporation is personally liable for the failure of his or her corporation to remit GST/HST. There is an exception to this rule, however, under subsection 323(5) of the Excise Tax Act which protects directors from personal liability where they have ceased to be a director of the corporation for two or more years.
But what does it mean to cease being a director? According to the court’s decision in Snively, resignation as a director alone may not suffice. In finding Donald Snively, a former director, personally liable for the failed tax remittances of a corporation he had previously resigned from, the court looked to the definition of “director” found in subsection 115(4) of Ontario’s Business Corporations Act. This subsection states that where a corporation has no directors, an individual may be deemed to be a director where he or she manages or supervises the management of a corporation. In effect, this subsection creates a sort of exception to the exception, which can leave some directors vulnerable to liability irrespective of their resignation as a director.
This exception to the exception, then, raises the issue of when the limitation period in subsection 323(5) of the Excise Tax Act begins to run? Or, put another way, how does a deemed director cease to act as a director? Citing a previous court decision, the court in Snively indicated that a deemed director may cease to act as such “by giving notice to the corporation and actually stop managing or supervising the management of the company.” Managing or supervising the management of the company includes such things as participating in board meetings, signing board resolutions, approving and signing income tax returns, making or participating in administrative decisions or decisions to sell, or giving instructions in the name of the corporation.
What does this mean for directors of corporations in those provinces with deemed director provisions similar to Ontario? The answer is simple, liability will continue until the director sufficiently distances himself or herself from the corporation. This, however, may prove problematic for a number of corporations where one individual wears the many hats of shareholder, director, and officer. In that case, it will be difficult, if not impossible, for a shareholder to ever be fully insulated from the liability normally imposed on a director. The solution may be to ensure corporations are properly wound up to avoid any lingering incidents of management, and, of course, to properly remit GST/HST.
If these issues relate to your corporation, you will be well served to obtain legal advice in advance of making any corporate changes. Counsel can guide you through the implications of the options available to you and alert you to any risks.