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

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

Latest Department of Justice Guidance for Evaluating Corporate Compliance Programs in Criminal Investigations

Posted by Jon Elliott on Tue, May 23, 2017

Earlier this year, the US Department of Justice (DOJ) Fraud Section issued additional enforcement guidelines to US Attorneys, entitled “Evaluation of Corporate Compliance Programs.” DOJ’s US Attorneys perform these evaluations to weigh whether and how severely an organization might be charged for illegal conduct by directors, officers, or other employees. But individuals may be committing crimes to further the organization’s goals (remember Volkswagen’s recent use of fraudulent means to defeat emission requirements), or for their own purposes despite organizational efforts. For readers in organizations that aren’t encouraging criminal behavior, these guidelines provide important guidance to the design (and implementation) of effective compliance programs.

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Tags: directors, directors & officers, Corporate Governance, corporate social responsibility, Business & Legal, Accounting & Tax, Environmental, Environmental risks, Audit Standards

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

EEOC Issues New Enforcement Guidance on Retaliation

Posted by Jon Elliott on Tue, Oct 04, 2016

The Equal Employment Opportunity Commission (EEOC) administers and enforces most national anti-discrimination laws. As part of these responsibilities, EEOC issues formal regulations, and a host of less formal guidance documents – some directed to employers, some to employees, and/or some to the agency’s own personnel. In August 2016, EEOC reissued EEOC Enforcement Guidance on Retaliation and Related Issues (“the Guidance”), describing its approach to situations where employees claim they’ve suffered retaliation for asserting rights against discrimination under the laws EEOC administers, or even just for questioning workplace rules and situations.

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

New Rules For Labor Law Compliance By Federal Contractors

Posted by Jon Elliott on Thu, Sep 22, 2016

In July 2014, President Obama issued Executive Order (EO) Number 13673, establishing a series of reporting and procedural requirements for federal contractors, inducing them to provide “Fair Pay and Safe Workplaces” to their employees. Some requirements are specific in the EO, while others were left for clarification by revisions to the Federal Acquisition Regulation (FAR), for contracts subject to these requirements. (I blogged about the EO here). None became effective in 2014, but instead they have awaited the FAR revisions. The revised FAR has been issued effective October 25, 2016, for appropriate contracts issued by the Department of Defense (DoD), General Services Administration (GSA) and National Aeronautics and Space Administration (NASA). The new requirements will be phased in, covering contracts and subcontracts for goods and services greater than $50 million immediately, and those greater than $500,000 effective April 25, 2017.

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Tags: Employee Rights, Employer Best Practices, EEOC, directors & officers, OSHA