Tax & Trade Blog

A recent case has hopefully clarified a huge issue for so called "derivative assessment" of directors and other person potentially at risk for a corporate taxpayer's tax liability.

The recent decision of the Federal Court of Canada (the “FC”) in Canada v. Toronto Dominion Bank, 2018 FC 538, (“TD Bank”) could make it much more difficult for business owners to get personal loans and mortgages.

Subsection 223(1)of the Excise Tax Act (ETA) requires registrants to disclose sufficient information to their customers in respect of their customers’ GST/HST liabilities by indicating on any invoices/receipts issued to customers the net-of-tax price and the GST/HST thereon or if prices are on a tax-included basis, noting this on invoices/receipts issued to customers. 

Where a sales contract is silent with respect to the obligation to pay the GST/HST, disputes often arise as to whether the quoted price is tax-extra or tax-included. 

A recent case is a good example of the general disposition of Courts to conclude that where contracts are silent, GST/HST will generally still be payable!

Section 224 of the Excise Tax Act (ETA) allows a supplier who has remitted GST/HST collectible from, but as yet unpaid by, a recipient, to sue the recipient for the tax remitted as if it were a debt owed to the supplier.  

There has been little case law or helpful interpretative materials from the CRA on this provision.

A recent case seems to clarify that where a supplier fails to charge and collect the GST/HST initially, the two-year limitation period on such a claim runs from the time that the supplier pays same to the CRA when assessed for the unremitted GST/HST.

Under section 323 of the Excise Tax Act (“ETA”), directors of a corporation are personally liable for a corporation’s unremitted GST/HST. There is no definition of “director” in the ETA, but section 323 has been found to apply to individuals who are formally registered as directors (i.e. de jure directors) and individuals who are not formally registered as directors but in effect carry out the same duties and make the very same decisions as directors (i.e. de facto directors).

The Canada Revenue Agency’s (“CRA”) formal policy on Directors’ Liability, including its position on de jure vs. de facto directors, is outlined in IC89-2R3. However, the ETA itself does not provide any guidance on when an individual who has formally resigned from de jure directorship ceases to be a de facto director for the purposes of section 323 liability. As such, whether or not a director who has resigned but continues to be involved in corporate activities can be deemed a de facto director of a corporation is a factually complicated issue that the Tax Court of Canada (“TCC”) has frequently been asked to answer.

The relatively recent decision in Koskocan c. La Reine, 2016 CCI 277 (“Koskocan”) stands for the proposition that it is possible for a former director to remain involved in a business (and even perform some tasks that one may associate with a de jure director) without rising to the level of a de facto director.  

After the recent decision of the Federal Court of Appeal (“FCA”) in Canada v. Callidus Capital Corporation, 2017 FCA 162 (“Callidus”), any secured creditors dealing with debtors that also have CRA issues, should immediately seek professional advice about the implications of this case before acting on their security interests to seize funds or property.

The reason for this gratuitous advice follows!

Subject to a few narrow exceptions, there are special income tax and GST/HST provisions giving the CRA super-priority to certain tax amounts in the possession of a tax debtor.  Specifically, unremitted GST/HST and unremitted income tax withholdings are both subject to a “deemed trust” in the hands of the taxpayer under special provisions in Excise Tax Act (ETA) and the Income Tax Act (ITA).   When funds or property of a tax debtor are paid over or seized by a tax debtor’s secured creditors that deemed trust remains intact, and the CRA holds a “super-priority” over those funds and that property.

In the past, secured creditors took the position that these rules and the “super-priority” disappeared on the subsequent bankruptcy of a debtor.

However, the Federal Court of Appeal in Callidus held that a tax debtor’s bankruptcy does not extinguish the Crown’s deemed trust over assets that were received or obtained by a secured creditor prior to the tax debtor’s bankruptcy.   More importantly, the FCA confirmed that secured creditors in these situations remained personally liable to the CRA for the tax debtor’s unremitted GST/HST and unremitted source withholdings, up to the value of the assets received or realized upon.

The recent Auditor General Report is not good news for the Canada Revenue Agency (CRA).

The CRA has nine call centres located across Canada that are supposed to provide taxpayers with timely and accurate information about their taxes, credits and benefits.

Based on the Auditor General of Canada’s report, however, a taxpayer calling the CRA is more likely to get blocked than to speak to a live agent, and when reaching a live agent, often has a fairly good chance of obtaining incorrect information.

Not good news at all, if you are the CRA.

The CRA has a mandate to improve compliance of GST/HST registrants and to encourage GST/HST registrants to meet their filing requirements.  As part of its commitment to this mandate, the CRA will be implementing changes to its current processes.

Gail Baker v The Queen (2016 TCC 120), illustrates the extent to which s. 160 of the Income Tax Act can apply. The decision shows that a taxpayer’s debts may be imposed on his or her inheritors to the extent of any unpaid tax debts at the time of the transferor’s death, even though tax avoidance was not a motivating factor for a transfer of property and the inheritors were unaware of the potential tax liability involved.

When things go awry in one’s business or personal affairs, taxes often get neglected. The Canada Revenue Agency (CRA) does not forget about these tax obligations, however, and has extensive collections powers available to it, including “directors liability” assessments which can transform corporate tax debts into personal tax debts of the affected directors.

The question that many directors and affected personal taxpayers often ask is whether these personal tax debts can be avoided on personal bankruptcy.

The answer is that “it depends”. Recent case law has been swinging toward forcing substantial payments by bankrupts where there are taxes owing to the CRA, as was seen in a recent British Columbia Supreme Court decision in Re Van Eeuwen [2012] GSTC 142.