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Ron Davis

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Dangerous Assumptions Leave Directors Liable For Unpaid Taxes

Posted by Ron Davis on Thu, Sep 14, 2017

The Tax Court of Canada ruling in Sud v. Canada (2017 TCC 106), reinforces the saying “a little knowledge is a dangerous thing” for directors trying to mitigate their personal liability for tax remittance risk. Arun Sud was advised to incorporate his courier business by his employer for tax reasons. He incorporated 1186271 Ontario Inc. (the “Corporation”) under the laws of Ontario on June 21, 1996, and operated the business as its sole director and shareholder until it ceased operations in August, 2005. GST collected was owed for the period from January 1, 2003 to December 31, 2005. In November 2006, the Corporation was assessed for unpaid GST and it filed an appeal of the assessment in the Tax Court. In February of 2010, a consent agreement was filed with the Court in which the Corporation was to pay $36,363.28. This amount was never paid.

On August 1, 2014, Sud was assessed $17,298.32 of the Corporation’s unremitted GST as the Corporation’s director and he filed his appeal to the Tax Court. He argued that he had not acted as the Corporation’s director since it had ceased operations in 2005 and that the assessment in 2014 was outside the two-year limitation period for assessing director’s liability in s. 323(5) of the Excise Tax Act. He also argued that since no annual corporate returns had been filed since 2005, he believed the Corporation would be automatically dissolved after two years. In fact, the Ministry of Finance of Ontario by Notice of Dissolution effective October 24, 2016, dissolved the Corporation, at which point its certificate of incorporation was cancelled.

The Tax Court noted that the two-year limitation in the Excise Tax Act only begins to run after a person “last ceased to be a director,” and therefore, the question was whether Sud ceased to be a director before the date of his assessment. It held that that issue was determined by the rules in the applicable corporate statute, which, in Ontario, would occur on the director’s death, resignation, removal or disqualification. The Court held that the first and the latter two rules were not applicable in this case. The Ontario rule regarding resignation required the corporation must receive a written resignation in order to constitute an effective resignation. Sud had never submitted such a resignation.

The Court rejected the argument that Sud had ceased to be a director because the Corporation had ceased operations, relying on an earlier decision, Bremmer v. R., (2007 TCC 509), finding that a director’s duties continue after the corporation ceases operations. The Court also noted that even if Sud had submitted a written resignation, it may not have been effective because the Ontario statute required the corporation have at least one director, so in order for Sud to resign, another director would have had to be appointed or elected. Accordingly, the Court dismissed Sud’s appeal.

In another decision by the Tax Court of Canada, Grant v. Canada (2017 TCC 121), Christopher Grant, a director of RII Holdings Inc. (the “Corporation”) was found liable for unremitted source deductions, interest and penalties of $ $66,865.44. The Corporation that had made the deductions had become bankrupt and its assets were taken over by a bankruptcy trustee August 1, 2006. The assessment against Grant as a director was made in May 2012. Grant claimed that he had ceased to be a director when the Corporation became bankrupt and the bankruptcy trustee assumed control of its assets in 2006, well beyond the two-year limitation period for assessing directors after they cease being directors.

The Court held that bankruptcy did not terminate a director’s status as a director of the bankrupt corporation, despite control being asserted by the trustee. The Court held that the only legislation governing how a director ceases to hold office is the relevant corporate legislation, in this case the Ontario Business Corporations Act (OBCA), which requires a written resignation be received by the corporation in order for a director to effectively resign. As no resignation had been submitted, the Court found that Grant was still a director and able to be assessed for the liability for the source deductions.

These decisions, once again illustrate that individuals serving as corporate directors, need legal advice about the avenues available to mitigate their personal liability risks. Corporate law statutes have various requirements that must be met if an individual wishes to effectively resign their directorship. Relying on common sense understandings, as Sud and Grant apparently did respectively, regarding the effect of ceasing to file the corporation’s annual reports, or the effect of corporate bankruptcy, may lead to unanticipated liability for that individual. For further information on the risk mitigation strategies with respect to tax liability, see Canadian Directors’ Liability, Chapter 5, “Liabilities Relating to Taxation Law,” Section 2, Subsection a.2, “Ceasing to be a Director.”

Specialty Technical Publishers (STP) has just published an update to its publication Directors' Liability in Canada and provides a variety of single-law and multi-law services, intended to facilitate clients’ understanding of and compliance with requirements. These include:

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About the Author
Ronald Davis is an associate professor emeritus at the Peter A. Allard School of Law, University of British Columbia. He obtained his Bachelor of Laws degree from the Faculty of Law, University of Toronto in 1990, graduating as that year’s silver medalist. He was called to the Ontario Bar and practiced law in Toronto for 10 years before returning to graduate studies at the University of Toronto. 

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Tags: Canadian, directors, directors & officers, Accounting & Tax

BC Securities Commission Addresses Allegations of Fraud Against Real Estate Developer

Posted by Ron Davis on Thu, May 04, 2017

In Re Hornby Residences Ltd. (2017 BCSECCOM 17), the British Columbia Securities Commission had to determine whether a real estate development corporation and its principal had violated the BC Securities Act s. 57(b) prohibition against fraud in connection with the issuance of a security when the funds invested were used to pay the principal and other corporations controlled by the same principal, Brendan James Schouw. Schouw was a real estate developer and the sole director of Hornby, and of Grace Residences Ltd. and Homer Residences Ltd. Schouw was also connected with Drake Residences Ltd., although the Commission was not provided with information about its directors and officers.

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Tags: Business & Legal, Canadian, SEC, Corporate Governance, directors & officers

Appeal Court Rejects Intention to Resign Reasoning in Directors’ Tax Liability

Posted by Ron Davis on Tue, Feb 07, 2017

The Federal Court of Appeal granted the Crown’s appeal from a Tax Court decision excusing two directors from liability for unremitted income tax deductions because there was evidence of their subjective intention to resign as directors (Gariepy v. Canada, 2016 FCA 236). Donna Elizabeth Gariepy and Sally Anne Chriss were directors of 1056922 Ontario Ltd. (“105”), a company whose affairs and business was managed by their respective spouses. The spouses had previously operated another company that had become insolvent and owed significant amounts to the Canada Revenue Agency. The spouses were aware that they could be liable as directors of the previous company for a two year period and prevailed on Gariepy and Chriss to become 105’s directors for those two years, despite their lack of involvement in the previous company and their reluctance to act as directors.

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Tags: Canadian, directors, directors & officers, Business & Legal

Corporation’s Failure to Bid on Project Does Not Excuse Director

Posted by Ron Davis on Wed, Dec 21, 2016

A recent appeal before the Manitoba Court of Appeal highlights the strictures placed on directors with respect to corporate opportunities. In Matic v. Waldner (2016 MBCA 60), the dispute concerned the opportunity to bid on a construction project for one of Manitoba’s First Nations. Ante Matic (Matic) and Paul Waldner (Waldner) agreed to purchase Springhill Lumber Wholesale Ltd. (Springhill) from its previous owners, with Waldner having a 70% interest, and Matic having a 30% interest and acting as Springhill’s general manager. Springhill’s main customers were First Nations, primarily in northern Manitoba. In addition to supplying construction material, Springhill would sometimes also act as general contractor for construction projects for the First Nations.

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Tags: directors & officers, Canadian

Ontario Court Rejects Employee’s Claim That Director Owed Duty of Care to Employee

Posted by Ron Davis on Thu, Oct 27, 2016

The Ontario Psychological Association is a not-for-profit voluntary association that aims to advance the practice and science of psychology through advocacy and education. Charlotte (Carla) Mardonet was hired by the Association in 1990 to manage its affairs and administer its finances and money. In Ontario Psychological Assn. v. Mardonet (2016 ONSC 4528 (Ont. S.C.J.)), the Court granted the Association’s motion to strike the part of Mardonet’s counterclaim alleging that the Association and its officers and directors owed Mardonet a “duty of care and a fiduciary duty which they breached as a result of their failure to provide her with the supervision, management, support and guidance that was part of their responsibility” and claiming full indemnity and contribution from the directors for any amounts that Mardonet might be liable to the plaintiff. The defendant’s counterclaim was issued in response to the plaintiffs’ lawsuit alleging the defendant had “misappropriated the funds [$1.6 million] and converted them to her own benefit and the benefit of her family members and friends,” with the assistance of her immediate family.

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Tags: directors, directors & officers, Canadian, Employee Rights, Employer Best Practices

Director Who Decided Not To Be Involved In Business, Still Liable For Employees’ Unpaid Wages

Posted by Ron Davis on Tue, Jul 19, 2016

Mensa Williams was listed as a director in the incorporation documents for Ambrosia Elite Corp., a company run by his brother, Admin. Ambrosia was incorporated in 2007, but did not actively conduct its retail clothing business until 2008. Ambrosia became insolvent in 2014, leaving its employees with unpaid wage claims. The unpaid wage claims were pursued under Ontario’s Employment Standards Act, 2000 (ESA), and when those claims were unsatisfied, an order to pay was issued to Ambrosia’s directors including Mensa Williams.

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Tags: directors, directors & officers, Employee Rights, Employer Best Practices, Business & Legal

Director’s Liability Insurance Does Not Cover Personal Guarantee Given By Director

Posted by Ron Davis on Thu, Jul 14, 2016

In Great American Insurance Co. v. Ramsoondar (2016 ABQB 73), the Alberta Court of Queen’s Bench was asked to declare that a director and officer liability insurance policy did not cover the losses claimed against Fredy v. Ramsoondar pursuant to a personal guarantee he granted to Faunus Group Inc. (FGI), a client of United Protection Services Inc. (UPSI). UPSI was a wholly owned subsidiary of United Protection Services Group Inc. (UPSG), and UPSG obtained a director and officer liability policy from Great American Insurance Co., and listed Ramsoondar as its chief financial officer on the policy.

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Tags: Canadian, directors, directors & officers, Insurance, Insurance Claims

Super Priority Charge Over Insolvent Corporation’s Assets Despite Existing Insurance Coverage

Posted by Ron Davis on Tue, Mar 01, 2016

The Ontario Superior Court of Justice issued an initial order in an insolvency proceeding under the Companies’ Creditors Arrangement Act (CCAA) providing a $3.1 million director’s charge even though the directors were covered by an existing D&O liability insurance policy and indemnities from the company (Re P.T. Holdco Inc., 2016 ONSC 495). The CCAA proceedings involved various corporate entities involved in the Primus telecommunications service business in Canada and the United States. Primus’ business was failing and it had arranged to sell its business to another company and wished to use the CCAA to finalize the sale and distribute the sale assets while its creditors were stayed from enforcing their claims.

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Tags: Corporate Governance, Insurance, Canadian, directors, directors & officers

Attempt to Make Directors Liable for Alleged Defamation in Newspapers Rejected

Posted by Ron Davis on Mon, Nov 23, 2015

In Kent v. Postmedia Network Inc. (2015 ABQB 461), the Alberta Court of Queen’s Bench granted a summary judgment application by Paul Godfrey and Gordon Fisher, two directors of Postmedia Network Inc., and dismissed the defamation claims against them by the plaintiff, Arthur Kent. Kent claimed he had been defamed in a 2008 article written by Don Martin and published in the Calgary Herald and National Post and continuing to be available on various websites maintained by Postmedia. The article at issue was published while Kent was a candidate in the Alberta provincial election and he claimed it contained false and defamatory statements that were intended to have readers infer that Kent’s career as an international correspondent was insubstantial, he was unworthy of public trust and confidence, his election campaign was incompetent and he lacked support from both his campaign team and political party. In the course of the litigation leading up to the motion for summary judgment, Kent had both Fisher and Godfrey served with a Notice of Intention to bring an Action setting out the basis for his claim of defamation and seeking removal of the article from websites. Neither Fisher nor Godfrey sought the removal of the article from those websites.

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Tags: Corporate Governance, Canadian, directors

Director Found Liable for Transferring Assets

Posted by Ron Davis on Tue, Sep 01, 2015

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Tags: Corporate Governance, Business & Legal, Canadian