The most basic thing about a corporation is that a corporation (or an incorporated company) is a legal entity separate and apart from those who own that company (its shareholders), and those who govern the company (its directors). And because corporations are separate legal entities, they can do all sorts of things that individuals can do including entering contracts, selling products, hiring employees, borrowing money, racking up debt and going broke.
But the debts and liabilities of the company are not the debts and liabilities of its owners or directors (unlike partnerships or proprietorships where the debts of the partner or proprietor are personal debts).
There are exceptions to this, of course. Banks rarely lend money to corporations without a personal guarantee involved, so the principals will have incurred personal liability to banks and other creditors under the guarantee if their company cannot pay the debt. And the courts can 'pierce the corporate veil' and find personal liability in circumstances where there is fraud committed by directors of the corporation.
More common are the numerous federal and provincial statutes that impose personal liability on the directors of the company in situations ranging from environmental damage to the failure to pay tax, and tax liability for directors and former directors is what I want to discuss today; particularly, the fact that a former director, by the very act of co-operating with Canada Revenue Agency (CRA), can become a de facto director again, and become exposed to unexpected tax liabilities.
CRA has the right pursue directors and former directors personally for certain categories of corporate tax debts arising during the time they were directors. 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 a CRA assessment against a director of a company that didn't pay its source deductions or GST/HST; one being a time limitation which provides that if you have ceased to be a director for over two years, you are protected from a director's liability assessment.
What this should mean is that if you can show sufficient evidence of your proper resignation as director over two years ago, you cannot be found liable by CRA for the unpaid GST/HST and source deductions the corporation should have paid.
Vancouver tax lawyer Jeff Glasner says this isn't quite how it works, however, because directors' liability applies to both de facto and de jure directors. A de jure director is someone who has formally been recognized as being a director through proper filings with the respective corporate registry (based on a signed consent to act as a director, and a resolution appointing that person as a director).
But even those who are not de jure directors can be labelled by the CRA as de facto directors. One can be a de facto director in circumstances where one is 'acting like' a director. This may include activity such as attending company meetings, signing resolutions, participating in business decisions or otherwise portraying oneself as a director to third parties, intentionally or not. It could also mean co-operating with CRA to help deal with an old corporate liability.
In one decision that was upheld at the Federal Court of Appeal (Charles Bremner v. Her Majesty the Queen), a non-director husband of a former director wrote the CRA to 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 from a period years back when they also considered him to be a de facto director. Considered another way, had he ignored the CRA letter to his wife, they would have been out of time to assess him personally.
The problem in the small business context is there may be one or two people wearing many hats, such as employee, manager, officer, shareholder and director. And even though he or she may have resigned as a director over two years ago, the requisite filing was made in the corporate registry confirming the resignation and the person is now just an employee, one could be labelled a de facto director. Or perhaps a person was a director until two years ago, but is still involved with the company because she's the wife of a director. Or perhaps the person was never a director, but rather, the on-site manager of the company.
Unfortunately, it's clear from the Bremner decision that your actions today can be used against you to characterize you as a director either on a continuing basis, or anew. Even a phone call to the CRA to help explain a document relating to unpaid source deductions, or GST by a company you resigned as a director of four years ago, can lead the agency to deem you a de facto director.
So even if you think you are in the clear because you resigned as a director more than two years earlier, you need to be careful if contacted by the CRA because the very act of co-operating may expose you to personal liability.
While this may go against your altruistic impulse to be a good citizen and to help the CRA do its job, you must balance that with the potential personal harm that may come of it. Mr. Glasner tells me how he deals with CRA in these cases: "while my client would like to help you out," he says, "I simply cannot because of the current state of the law."
Tony Wilson is a franchising, licensing and intellectual property lawyer at Boughton Law Corp. in Vancouver, he is an adjunct professor at Simon Fraser University (SFU), and he is the author of two books: Manage Your Online Reputation, and Buying a Franchise in Canada. His opinions do not reflect those of the Law Society of British Columbia, SFU or any other organization.
Tony Wilson