In a June 22, 2017 Tax Court of Canada case(Grant vs H.M.Q., 2014-1399(IT)G), at issue was whether the director of a corporation could be held liable for $66,865 in unremitted source eductions, related penalties, and interest six years after the corporation went bankrupt. The taxpayer presented various defenses.

2017-10 OWNER-MANAGER REMUNERATION DIRECTOR LIABILITY – CORPORATE BANKRUPTCY

 In  a  June  22,  2017  Tax  Court  of  Canada  case(Grant  vs  H.M.Q.,  2014-1399(IT)G),  at  issue  was whether the director of a corporation  could be held liable  for  $66,865  in  unremitted  source  eductions, related  penalties,  and  interest  six  years  after  the corporation went bankrupt. The taxpayer presented various defenses.

Two-Year Limitation

According  to  IC89-2R3,  Director’s  Liability,  CRA  must  issue  an assessment against the director within two years from the time they last ceased to be a director.  The taxpayer argued that since he was forced  off  the  property  and  denied  access  by  the  Trustee  in bankruptcy more than two years before the assessment he would not be liable. However, the Court determined that only once one is removed as director  under the governing corporations act  will such liability be absolved.  In  this  case  (under  the  Ontario  Business  Corporations  Act), bankruptcy  does  not  remove  directors  from  their  position.  As  the taxpayer  never officially ceased to be a director, the two-year period had  not  commenced  and,  therefore,  had  not  expired  at  the  date  of assessment.

Due Diligence

Liability can be absolved  if the director  can show due diligence.  In this case the director argued that  he was waiting for large investment tax  refunds  to  fund  the  liability  and  also  entered  into  a  creditor proposal so as to enable the corporation to continue in order to pay off the liability. However, the Court noted that diligence was required to prevent non-remittance rather than simply diligence to pay after the fact.  As  there  was  insufficient  proof  to demonstrate diligence  at the prevention stage, this argument was also unsuccessful.

With All Due Dispatch

The taxpayer argued that the issuance of the assessment 6 years after bankruptcy was inordinate  and unreasonable, thereby contravening the requirement to assess with  all due dispatch  (Subsection 152(1)).The  Court,  however,  found  that  this  requirement  related  to  the assessment  of  a  filed  tax  return  or  objection  as  opposed  to  the assessment of director liability.  In particular, the provision  governing the charging of director liability provides that “The Minister may at any  time  assess  any  amount  payable”  (Subsection  227.1(1)).Therefore, this defense was also unsuccessful.Technical  arguments  were  also  made  relating  to  the  bankruptcy procedure; however, the same result was reached in those cases as well. The Minister’s assessment of liability to the director was upheld.