Small Businesses: Be Aware of Blurry Line in Directors’ Liability

While the tax debts of a corporation belong to the corporation and the tax debts of an individual belong to that individual, there are some exceptions to the rules that may blur those lines.

One such exception is for Directors’ Liability which may allow the Canada Revenue Agency (“CRA”) to go after directors and former directors personally for certain categories of corporate debts arising during their watch. The most common are GST/HST and payroll source deductions. (Directors’ Liability does not apply to “plain vanilla” income tax debts).

There are defences to such an assessment, one being a time limitation which goes something like this: If you have ceased to be a director for over two years, you are protected from a Directors’ Liability assessment.

What this means is that if you can show sufficient evidence of your proper resignation as director over two years ago, you are in the clear. No. That’s not what it means at all.

When Directors’ Liability Can Apply to “Non” Directors

The situation is more complicated because Directors’ Liability applies to both de facto and de jure directors. A de jure director can be spotted from a mile away (or anywhere one might have internet access and the ability to pull up a corporate search). This is because a de jure director is someone who has formally been recognized as a director through filings with the corporate registry.

The trouble is those who are not de jure directors may be labelled by the CRA as de facto directors.  To earn this potentially expensive moniker, one must only be considered to be “acting like” a director.  This may include activity such as attending meetings, signing resolutions, participating in business decisions or otherwise portraying yourself as a director to third parties, intentionally or not.

The problem is in small business there may be one or two people wearing many hats, such as employee, manager, officer, shareholder and… yes…director.  So maybe you properly resigned as a director over two years ago and are now just an everyday employee, or maybe you were never a director, just the on-site manager. Either way, your actions today can be used against you to treat you as a director either on a continuing basis, or anew. Even if you separate yourself tomorrow, your protection will not kick in for two years.

What Not To Do

You may think you are in the clear or may not even be aware the corporation you used to be involved with had a GST/HST or payroll source deduction issue on your watch. The taxman may call you up, like they have called my clients up, and asked for your help in explaining some documents, or filing a missed return. Bam! – you receive an assessment in the mail. “But I thought I was free”, “I had resigned over two years ago” or “I never even signed on as a director!” No such luck, when you spoke with the CRA, and helped them out, they made notes and may use them to treat that conversation as you acting like a director, so you became a de facto director, and the two year clock restarted. Tic-Tock. Tic-Tock.

The threshold is low. In one decision that was upheld at the Federal Court of Appeal, a non-director husband of a former director wrote the CRA to effectively tell them to direct any future mail to him instead of his wife. The court held that this statement by the husband was enough to make him a de facto director allowing them to reset the two year clock to assess him personally for corporate GST/HST. Looked at another way, had he ignored the CRA letter to his wife, they would have been out of time to assess him personally.

What does this mean practically? Even if you think you are in the clear, you need to be careful if contacted by the CRA about a corporation you used to have involvement with. While this may go against your impulse to be a “good citizen” and help the CRA do its job, you must balance that with the potential personal harm that may come of it. I have explained to a Collections Officer more than once, that while my client would like to help them out, they simply cannot because of the current application of the law around being labelled a de facto director. In these situations, the prudent course would be to have a tax lawyer acting as an intermediary.

 

Tags: Article; Jeff S. Glasner; Tax; Tax Disputes