Tax Liabilities for Directors of Corporate Businesses

Due to the economic pressures caused by the COVID-19 crisis, many businesses are struggling to make ends meet. This presents particular challenges for directors of those corporate  businesses who must be vigilant regarding their corporate tax liabilities, as well as employee withholding and GST withholding liabilities that can pass from the business to themselves personally or even to family members or non-arm’s length  business partners.

The Federal Court of Appeal decision of Canada v. Colitto, 2020 FCA 70, released earlier this year, clarified an aspect of the transfer of tax liability that is especially important for directors to remember.  The FCA concluded that a director’s personal liability under the Excise Tax Act  s. 323 /and the Income Tax Act s. 227.1 for the tax debts of the corporate tax debtor starts immediately after the corporate default.

This is an important timing point, because once the director’s liability crystallizes, those directors become classified as “tax debtors” themselves, and are thereafter precluded themselves  from attempting to “creditor-proof” themselves by, for example, disposing of assets for less than fair market value to a wife or child, prior to the CRA’s technical issuance of the directors’ liability assessment.

Say for example Mrs. Jones acts as director of her company and due to the COVID-19 crisis, the company has been struggling financially and has accumulated unpaid employee remittances. In order to ensure her family will have enough cash to ride out the crisis even in the event her personal assets are put at risk, Mrs. Jones transfers cash from her personal bank account or perhaps her interest in the family home to her husband, Mr. Jones,  for no-consideration. If the CRA is unable to collect the tax payable from the company or Mrs. Jones they can also pursue Mr. Jones for the tax payable up to the amount of the value of the cash or property given to him.

As such, directors of struggling businesses should be wary when considering shifting assets to a related party as it could put those assets at risk in the event of certain unpaid tax bills. If you find yourself considering any creditor proofing steps you should also consider the implications of BC’s fraudulent conveyance and fraudulent preference legislation. Moving to “creditor-proof” assets comes with many risks, and any directors considering such moves should consult one of our tax lawyers to understand the obligations they have and the issues they may encounter.