Pobody’s Nerfect: Director Liability for Corporate Remittances

By Matthew Canzer
Categories: Blog, Tax

When a company’s financial situation becomes turbulent, it might be tempting for directors to ensure that creditors are paid before remitting source deductions (i.e. income taxes, GST, employment insurance premiums, and Canada Pension Plan contributions) to the government.

To discourage this reprioritization of the company’s resources, directors can be held personally liable for the corporation’s statutory remittances. A due diligence defence is available; however it will not be enough for a director to have simply relied on a bookkeeper without asking questions.

The standard to be applied is an objective one, but perfection is not required.[1] The test is whether the Director`s actions were those of a reasonably prudent person in similar circumstances. The Director must establish that they were specifically concerned with the tax remittances and that they actively tried to prevent a failure by the corporation to remit as required.[2] The focus of the due diligence defence is on the degree of care, diligence and skill exercised in preventing a failure to remit.[3] The assessment of the director’s conduct begins when it becomes apparent to the director, acting reasonably with due care, diligence and skill, that the corporation is entering a period of financial difficulty.[4]

Consider two recent decisions of the Tax Court of Canada on this fact-driven issue.

Roitelman v. The Queen, 2014 TCC 139 chronicles one director’s success at shaking off the corporation’s failures to remit.

In this case, the director had hired a bookkeeper whose duties included ensuring remittances were made. Simply relying on an employee would not have been enough on its own, because a director`s duty cannot be entirely delegated.[5] However the director had trained and supervised the bookkeeper, who was qualified and somewhat experienced, so it was reasonable for him to rely on her. The director supervised the bookkeeper closely at first, and then trusted her to follow his instruction in remitting amounts to the CRA. Once the director’s supervision was reduced, however, remittances stopped and the bookkeeper intentionally hid these failures from her boss. She also hid correspondence from CRA, so the director was being kept in the dark about his bookkeeper’s failure to follow his instructions.

The Court concluded:

The Appellant has met the burden of establishing that he took proactive steps to prevent the Corporation’s failure to remit and, therefore, he demonstrated the degree of care, diligence and skill required to prevent the failures that a reasonably prudent person would have exercised in comparable circumstances. Despite his actions, he was thwarted in his attempts to ensure compliance by the actions of the bookkeeper.

Compare that case with the facts in Maddin w The Queen, 2014 TCC 277, where the director was held personally responsible for the corporation’s remittance obligations.

As in Roitelman, one of the three directors of the company claimed that he relied on his bookkeeper to ensure that government remittances were being made, and since the bookkeeper did not alert him to the company’s failings he assumed that all was being remitted as required. The Court did not accept this defence because, in these circumstances, much more was required of him.

First, the director had previously served as director of the company’s predecessor, which had remittance problems of its own. The director must have been alive to potential for remittance noncompliance. Second, the director attended at the business premises two or three times per week. This contradicted his claim to be a mere consultant, and indicated that he was more of an owner-manager. Third, the director had a “trusting and longstanding” relationship with the company’s initial bookkeeper and as such would have received a frank answer to any questions regarding remittances, had such questions been asked. Fourth, the director was advised that the new bookkeeper failed to understand the bookkeeping system.

Taking these facts into account, the Court concluded that the director’s due diligence defence failed because “a director is not entitled to rely upon his expectations independent of reasonable inquiry and assessment in the circumstances.”[6] The director had been concerned with all aspects of the company’s financial health, except for whether remittances were being made. The director didn’t know about the corporation’s failings, because he did not want to know.

As these cases demonstrate, it is imperative that a director’s due diligence defence be properly articulated. If you are a director and the Canada Revenue Agency has contacted you proposing to assess you for the corporation’s failed remittances, contact a member of our tax dispute team for advice and representation without delay.

Matthew Canzer can be contacted at 250-869-1122 or canzer@pushormitchell.com

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[1] Roitelman v. The Queen – 2014 TCC 139 at para 31.

[2] The Queen v Buckingham, 2011 FCA 142 at paras 38, 52.

[3] Roitelman v. The Queen, 2014 TCC 139 at para 23.

[4] Balthazard v R, 2011 FCA 331 at para 32.

[5] Kaur v The Queen, 2013 TCC 227 at para 18.

[6] Maddin w The Queen, 2014 TCC 277 at para 33.