Director Liability & Resignation
Under certain circumstances, directors of a corporation can be held personally liable for the tax arrears of a corporation. This is referred to as director liability and one defense is that the Canada Revenue Agency (“CRA”) must assess a director within 2 years of resignation. Hence, disputes regarding whether or not a director resigned properly and when are common.
Subsection 121(2) of Ontario’s Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”) provides that a “resignation of a director becomes effective at the time a written resignation is received by the corporation or at the time specified in the resignation, whichever is later [emphasis added].” Accordingly, pursuant to the legislation, for a resignation to be effective, it must be both in writing and received by the corporation.
Cliff v. Canada, 2022 FCA 16 - Is a Form 1 Notice of Change sufficient to establish director resignation?
In the Federal Court of Appeal (“FCA”) decision in Cliff v. Canada, 2022 FCA 16 (CanLII) [Cliff] the issue was if, and when, the taxpayer resigned from the corporation. Was a Form 1 Notice of Change (“Form 1”) filed with the government effective evidence of a resignation?
A Form 1 Notice of Change is an information document filed in Ontario with the Ontario Business Registry. It’s purpose is to update the government record with changes such as director resignations. In Cliff, the taxpayer and her husband were appointed as directors on May 18, 2001. She testified that she orally resigned on the same day.
The only written document referencing her resignation was a Form 1 prepared by the corporation’s accountant, which indicated that the taxpayer’s director role commenced on September 4, 2003, and ended on December 12, 2003. A copy of the form was placed in the corporation’s minute book, and the accountant claimed to have submitted it to the government, although this could not be confirmed.
Is a Form 1 Notice of Change a written resignation for the purposes of OBCA ss. 121(2)?
The taxpayer argued that subsection 121(2) merely requires written evidence of a resignation, not that the resignation itself must be in writing, and that Form 1 constituted sufficient written evidence. The FCA rejected this argument, explaining at para. 15:
Form 1 is not a resignation; rather, it is a notice entitled ‘Initial Return/Notice of Change’. Nor is it a communication to the corporation; rather it is a communication from the corporation to the Ministry of Consumer and Commercial Relations… While Form 1 may reflect something that may have happened, it is not a substitute for a written resignation.
The FCA ultimately held that Form 1 did not satisfy the requirement under ss. 121(2). According to the decision in Cliff, while a signature is not a strict requirement under ss. 121(2), a written resignation must be received by the corporation to be effective. Oral resignations and documents that merely evidence a resignation, such as Form 1, are insufficient. However, as per para. 11, “a director may resign via email or text…”
Canada v. Chriss, 2016 FCA 236 - Does the resignation have to be signed?
According to the FCA in Cliff, the decision in Canada v. Chriss, 2016 FCA 236 (CanLII) [Chriss] did not establish a general rule that a resignation must be signed to be valid. The FCA explained at para. 11:
The ratio of Chriss is that where the decision to resign is to be communicated by means of a letter, signed by the director, it must be signed to be effective. Chriss does not require that all resignations must have a personal, physical signature to be effective. A director may resign via email or text, for example. The facts of Chriss may be analogized to an email containing a resignation, but resting in the draft folder, never sent. Whatever factual circumstances arise, there can be no ambiguity regarding whether a written resignation has been received by the corporation, and there must be certainty as to the effective date.
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