Audit, Compliance and Risk Blog

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

Federal Agencies Making First Annual Civil Penalty Inflation Adjustments

Posted by Jon Elliott on Tue, Sep 12, 2017

Nearly all regulatory laws provide for civil – and sometimes even criminal – penalties for noncompliance. Penalty amounts (“XXX dollars per day of violation” for example) are typically adopted as part of the original legislation. But over time, the relative sting of these penalties declines with inflation. To counteract the possibility that less painful penalties will be less effective incentives for compliance, U.S. federal law has directed most agencies to make periodic “cost of living” adjustments to maximum available civil penalty levels (there are no provisions for standing periodic adjustments to criminal penalties).

How Did These Requirements Work During 1990-2016?

The first version of this approach was enacted by the Federal Civil Penalties Inflation Adjustment Act of 1990, which directed the President to report annually on any adjustments made under existing statutory authority, and to calculate what such adjustments would have been if more agencies had the authority to make them.

Congress amended the Act in 1996 to require most agencies to make inflation adjustments every four years, but precluding adjustments to penalties under the following:

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Tags: Business & Legal, OSHA, Environmental, EPA, directors, directors & officers

$600,000 Awarded in Blog Libel Case

Posted by Eric Robinson on Thu, Sep 07, 2017

If bloggers and other social media posters need a reminder that they can be held accountable for their online musings, a $600,000 jury verdict against an online poster in Georgia is such an example.

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

US Department of Justice Reining in Supplemental Environmental Projects

Posted by Jon Elliott on Tue, Sep 05, 2017

For many years, federal and state environmental enforcement agencies have been willing to negotiate settlements in which defendants agree to conduct “supplemental environmental projects (SEPs)” as a way to reduce formal penalties for the noncompliance that led the agency investigation and enforcement. Proponents see SEPs as a way to promote environmental and health values by encouraging defendants to undertake projects that wouldn’t occur otherwise in order to reduce or eliminate civil and/or criminal liability. Opponents see them as rogue efforts in which prosecutors substitute their own judgment for the statutory and regulatory directives that are supposed to guide their actions.

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Tags: Environmental risks, Environmental, EPA

Safety: It's Not All About You

Posted by Tanya Conole on Tue, Aug 29, 2017

What if I told you that safety wasn’t about you? That the ‘safety starts with you’ mantra no longer applies? What would you think? How would you act? Could this even be true?

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Tags: Health & Safety, Training, Transportation

What’s In Your Janitor’s Closet? New York Seeks More Information

Posted by Jon Elliott on Tue, Aug 22, 2017

Even workplaces with very limited chemical use probably use cleaning supplies. If these supplies are bought in typical retail packaging intended for consumer use, the employer and employees may lack ready access to chemical content information beyond that on the labels. That’s because the Hazard Communication Standard (Hazcom) administered by the U.S. Occupational Safety and Health Administration (OSHA) exempts consumer products in their final form for consumer use, unless worker use is greater than that by typical consumers.

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Tags: Health & Safety, OSHA, California Legislation, Environmental risks, Environmental, EHS, Hazcom

International Business Group Recommends Climate-Related Financial Disclosures

Posted by Jon Elliott on Tue, Aug 15, 2017

As governments worldwide consider expanding requirements to manage greenhouse gas (GHG) emissions and moderate climate change, private sector groups are mobilizing to craft voluntary reporting and management activities – which might shape or even avoid future governmental mandates. In May, the 32 international business leaders on the Financial Stability Board’s (FSB’s) Task Force on Climate-related Financial Disclosure issued recommendations for climate-related financial disclosures by public companies worldwide. The Task Force reported these recommendations to the Group of 20 (G-20) leaders at last month’s meeting in Hamburg – the G-20 finance ministers and central bankers had asked FSB in 2015 to commission the Task Force.

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Tags: SEC, Greenhouse Gas, ghg, climate change

California Extends and Amends its Greenhouse Gas Cap-and-Trade Program

Posted by Jon Elliott on Tue, Aug 08, 2017

Since 2012, California has administered a “cap-and-trade” program, setting total greenhouse gas (GHG) emission limits from selected major emitting sectors and creating tradeable emission permits and offsets to provide flexibility and encourage innovation. The program was created under authority of the state’s 2006 “AB 32” legislation, which focuses on reducing statewide GHG emissions by 2020. This authority would have expired in 2020, but new legislation extends the program until 2030. In order to secure enough votes for the extension, legislative leaders and Governor Brown agreed to statutory changes in this program and related air quality programs.

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Tags: California Legislation, Environmental risks, Environmental, Greenhouse Gas, ghg, cap-and-trade

CASL Private Right of Action Delayed: Enforcement by CRTC Continues

Posted by STP Editorial Team on Tue, Aug 01, 2017

By Ryan J. Black, Janine MacNeil, Sharon E. Groom, Lyndsay A. Wasser, Rohan Hill

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Tags: Business & Legal, International, Internet, Canadian, casl

Major Changes to Ontario’s Employment and Labour Laws Pending

Posted by STP Editorial Team on Tue, Jul 25, 2017

By Kate Dearden

On May 30, 2017, the Ontario government announced its intention to introduce The Fair Workplaces, Better Jobs Act, 2017. This legislation would include significant amendments to the Employment Standards Act, 2000 (ESA) and the Labour Relations Act, 1995 (LRA).

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Tags: Employer Best Practices, Employee Rights, Canadian