A Director is Deemed Resigned upon Corporate Dissolution
Director Liability - Joint and Several Liability for a Corporation's Tax Debt
Director liability for unremitted employee source deductions, GST/HST, or Retail Sales Tax, is a common legal issue in the practice of Tax Law. These matters are routinely disputed with a Notice of Objection and/or appeal to the Tax Court of Canada. But what about Director liability for a dissolved corporation?
Under the Excise Tax Act, Income Tax Act, or Ontario’s Retail Sales Tax Act (among others), a director of a corporation can be personally assessed for certain tax arrears of the corporation. However, the assessment has to be issued within 2 years of the taxpayer ceasing to be a director otherwise it is invalid.
A common and simple scenario is that a director resigns with a resignation letter to the corporation as required per subsection 121(2) of Ontario’s Business Corporations Act, RSO 1990, c B.16. However, a Notice of Change is not filed with the Ministry of Government Services and therefore Canada Revenue Agency (“CRA”) does not have a record of the resignation and starts the process to assess the taxpayer personally.
Normally, warning letters of a potential assessment, along with the opportunity to submit a due diligence defence, are sent to the taxpayer by CRA. Prior to the Notice of Reassessment, a letter to CRA advising of the resignation and submitting a Notice of Change to the Ministry usually resolves the issue.
Corporate Dissolution and the 2-year Resignation Period
But what if the director has not formally resigned yet the corporation has been dissolved? Does the dissolution start the 2-year countdown for a Director liability assessment by CRA?
In Priftis v. The Queen, 2012 TCC 414 (CanLII), the taxpayer was assessed personally for unremitted Canada Pension Plan (CPP) deductions over several taxation years. The Notices of Reassessment were issued per subsection 227.1(1) of the Federal Income Tax Act, reproduced below, within the 2-year limitation period established under subsection 227.1(4):
(1) Liability of directors for failure to deduct — Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or 135.1(7) or section 153 or 215, has failed to remit such an amount or has failed to pay an amount of tax for a taxation year as required under Part VII or VIII, the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amount are jointly and severally, or solidarily, liable, together with the corporation, to pay that amount and any interest or penalties relating to it…
(4) Limitation period — No action or proceedings to recover any amount payable by a director of a corporation under subsection (1) shall be commenced more than two years after the director last ceased to be a director of that corporation.
The corporation was dissolved on July 15, 2008, and the Notices of Reassessment were dated July 15, 2010. The appellant argued that CRA should have assessed him on July 14, 2010, and that he was no longer director as of the date of the dissolution of the corporation.
Director Liability - No Longer a Director the Day the Corporation was Dissolved
According to Angers J. of the Tax Court of Canada, the “appellant [was] correct in saying that he ceased to be a director on the day that the Corporation was dissolved…” He relied on the Federal Court of Appeal decision in Aujla v. Canada, 2008 FCA 304 (CanLII), [2009] 3 FCR 93, in which an involuntarily dissolved corporation was reinstated by the government and it was unsuccessfully argued that the directorships continued upon restoration.
In Aujla, the Crown contended that “because the Company was dissolved as a consequence of its failure to file annual reports, and because they never formally resigned, the [appellants] never ceased to be directors.” According to the Federal Court of Appeal, the “Crown’s proposition that the Aujla brothers did not cease to be directors when the Company was dissolved on March 5, 1999, because the dissolution occurred involuntarily…cannot be accepted.”
Link to CRA’s Information Circular IC89-2R3 Directors’ Liability
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