Audit, Compliance and Risk Blog

Tax Court Holds Unsigned Resignation Effective

Posted by Ron Davis on Mon, Mar 23, 2015 Tax Court of Canada reviewed the requirements for a directors’ resignation to be effective in the context of potential personal liability for the corporation’s failure to remit source deductions under the Income Tax Act in determining that a resignation document prepared by corporate counsel was sufficient, even though the directors never saw the document (Gariepy v. The Queen, 2014 TCC 254). In this case, Donna Gariepy and Sally Chriss agreed to act as directors of 1056922 Ontario Limited (“105”) at the urging of their husbands, Derek Gariepy and George Chriss, the actual managers of 105. The directors’ husbands had been directors of CG Industries (CGI) that had become insolvent and owed significant unremitted source deduction amounts to the Canada Revenue Agency (CRA).

The husbands had resigned their directorships in CGI and wished to carry on a similar business with a new corporation, but were concerned about their personal liability as directors under the Income Tax Act for CGI’s unremitted source deductions. Pursuant to s. 227.1(4) of the Income Tax Act, the CRA had two years from their resignations to commence proceedings to collect these amounts from the husbands, so they believed that appointing their wives as directors for the first two years would insulate their new business against these claims. Previously, 105 had been incorporated for George Chriss by Gowlings Lafleur Henderson LLP (“Gowlings”), CGI’s corporate counsel, but 105 remained inactive until it was decided to use it for the new business.

In 2001, two years had passed since the husbands had resigned as CGI directors, and it was decided that the wives should resign as 105’s directors, with the husbands being appointed in their stead (Gariepy, para. 8). George Chriss contacted 105’s corporate counsel, Gowlings, to advise them of the intended change. Shortly thereafter, Gowlings prepared written resignations for Donna Gariepy and Sally Chriss. However, at the 10-day trial of the CRA’s claim against both wives, Gowlings was unable to locate or access all of the documents in the matter and the court concluded that there was not sufficient credible evidence on a balance of probabilities that the resignation documents had ever left Gowlings’ offices or had ever been signed by the wives (Gariepy, para. 25).

Nevertheless, the court concluded that the wives’ resignations were effective because:

  • The expressed intention of the wives and husbands was that the wives would resign two years after the husband’s resignations as CGI directors.

  • The two wives clearly communicated their intentions to resign at the two year mark to the corporation by expressing that intention to the corporation’s principals, their husbands.

  • All of the directors, officers and principals understood that the wives were resigning at that time, which meant the corporation understood they resigned.

  • George Chriss communicated the directors’ intention to resign to Gowlings’ 105 corporate counsel.

  • Gowlings prepared the written documents to make the resignations effective, which if they had been dated and signed would certainly have erased all doubt as to the wives’ resignations.

  • Their was no evidence that there was any reason for the wives not to sign them or that they changed their minds and asked Gowlings not to send the documents (Gariepy, para. 22).

The court found that the resignations were clearly communicated to the corporation because they were known to all of its principals and communicated to the corporation’s counsel, who drew up written documents required for the corporate minute book and that these facts meant the resignations of Donna Gariepy and Sally Chriss were valid and effective (para. 23). Since they had resigned more than two years before the CRA commenced collection proceedings against them, they were not personally liable for the unremitted source deductions. Although the written resignations were not signed, the Court said that the Ontario Business Corporations Act only required that a resignation be in writing, and that a written resignation, “meaningfully communicated to the company” was acceptable to the court (para. 24).

Directors who are resigning should ensure they comply with the requirements of the applicable corporate legislation to make their resignations valid and effective.

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About the Author
Ronald Davis is an associate professor of law at the Faculty 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. He was awarded a Social Sciences and Humanities Doctoral Fellowship in support of his graduate research and he obtained his Doctor of Juridical Science degree in 2004 at the University of Toronto. While pursuing graduate work at the University of Toronto, he co-authored Director and Officer Liability in Corporate Insolvency, which was published in 2002.
Ronald joined the Faculty of Law at UBC in 2003 and teaches corporate law, law and economics, trust law and pension law. He has published articles on pension law, corporate governance and insolvency law and has presented a number of papers on these topics both nationally and internationally.

photo credit: resignation letter, written via photopin (license)

Tags: Corporate Governance, Business & Legal, Employer Best Practices, Accounting & Tax, Employee Rights, Canadian