What are the Director's Liabilities?
Our finance minister, Louis XIV's observed and stated that "the art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the smallest amount of hissing." The Canada Revenue Agency has recently stepped up it's collection efforts, which has been notable in the increased audits over the last few years and they don't seem concerned over the hissing.
As a corporation this pattern is concerning to it's directors, as they may be held personally liable for any failure to remit tax. These may include GST, Payroll remittances and corporate taxes as well as other. Most sitting directors are aware that they may be potentially liable for these shortfalls, however most are not aware that this liability may exist long after they resign.
Most of Canada Revenue Agency's director tax assessment are challenged on one of two things, due diligence or the two year rule. The former refers to directors that act improperly on behalf of the corporation where tax payments are concerned. The latter provides that former directors cannot be assessed more than two years after they have resigned. The application of the two year rule arises frequently in situations where every director has resigned and no one was replaced. In situations such as these courts have been asked to consider whether another person has acted as a deemed or de facto director.
In other situations, the court has recognized that even after a resignation, an individual may continue to act as a de facto director by performing functions that are typically reserved for directors. These would include giving instructions in the corporations name, making financial and administrative decisions on the corporations behalf. De facto directorship may even be assessed where a former director holds himself out to third parties as a director (although these situation are unusual).
The tax court has observed that there is no fixed rule for determining when de facto director ceases. However, they are looking at the persons course of conduct with relation to the corporation.
Individual directors need to better understand their liabilities and when their potential liabilities end. Professionals should be consulted on a case by case basis to assess risks.