Directors’ Liability

 

In our practice on corporate law, clients often seek our advice on the liability of being a director when they are about to be appointed. The most important piece of advice we would render is directors’ potential personal liability to pay taxes owed by the corporation if the corporation failed to do so.  Such taxes include but not limited to corporate tax, source deductions, and G.S.T. and P.S.T. not collected or remitted.

 

The recent case of Scavuzzo et al v. The Queen (2005 DTC 169) demonstrates how aggressive the Canada Revenue Agency (the “CRA”) could become and the lengths it would go to in pursuing the directors for taxes that a corporation failed to pay. The Tax Court blasted the CRA’s aggression and ruled in favour of the directors being assessed.

 

Two important rulings of the Court in Scavuzzo are worth mentioned here:

 

1.                A director has the right to challenge the assessment even if the corporation has not done so.

 

2.                The CRA has no authority to issue “joint assessments” against a company in default and its related companies.

 

The first ruling is important in that there are jurisprudence stating that as directors are in control of a corporation, they have already made the decision not to challenge the assessment on behalf of the corporation and hence they should not be given a second chance to do so. The court in Scavuzzo questioned such assumption and pointed out that in some cases the reasons for the corporation not to challenge the assessment might be the lack of funds and that omission on the part of the corporation should not tie the hands of the directors when their personal assets are at stake.

 

It is striking that in Scavuzzo the CRA did not just go after the corporation in default and its related companies, but also employees of the corporation who were not in control of whether the corporation paid its taxes. One of such employees was actually forced into bankruptcy by the assessment against her. Ironically the CRA subsequently admitted its assessment against her was wrong.

 

The taxpayers in Scavuzzo were vindicated when the court eventually ordered the government, as the losing party, to pay the taxpayers’ legal costs in excess of what a court would normally order. One of the key factors for such cost order was the fact that the CRA pursued one of the individual taxpayers who had resigned his directorship prior to the issuance of the assessment. A jeopardy order was made against the taxpayer based upon an affidavit that failed to disclose that he had resigned as a director. The taxpayer's disability payments (as he diagnosed with serious and life-threatening cancer at the time of the assessment) as well as a boat and other securities were seized. The court used harsh words against the CRA in mentioning these facts.

 

Our firm is experienced in offering advice on the role of a director and on how to take the necessary precautions in avoiding personal liabilities. Further, we are able to advise on the defence available when a director is unfortunately assessed by the CRA for the tax arrears of the corporation.  Should you have any doubts or concerns in this respect, kindly contact one of our lawyers.

 

  

Prepared by Iris Chung

Barrister & Solicitor

Metcalfe, Blainey & Burns, LLP

 

Published in September 2006