As we have blogged here and here, dealing with and appealing Director’s Liability Assessments for GST/HST purposes or source withholding purposes on the Income Tax side is generally an uphill battle. 

The Tax Court’s recent decision in Donaldson v. The King (2022 TCC 159) underscores that a corporation dealing with business down-turns by holding off on paying the CRA its required remittances is a losing strategy!

Background

Section 323(1) of the Excise Tax Act (“ETA”) provides that the directors of a corporation are jointly and severally liable together with the corporation for any amounts of GST/HST that that a corporation fails to remit to the Minister as and when required.  Similarly, section 227(1) of the Income Tax Act (“ITA”) expands this liability to include various source deductions (i.e., for income taxes, and as required under the Employment Insurance Act and the Canada Pension Plan).

Significantly, this is a personal liability which attaches to the individuals who were the directors at the time of the default.  

Due Diligence Defence

Both the ETA and ITA provide directors with a defence for due diligence, but require the director to demonstrate that he or she exercised the “degree of care, diligence and skill” necessary to prevent the failure, that a reasonably prudent person would have exercised in comparable circumstances.  

Here the onus is on the director to make out that defence.

The Donaldson Decision

In Donaldson, the Tax Court considered a director that was also the CEO, and who apparently decided that the corporation should stop GST remittances and only make select income tax remittances, when the Corporation had the cash-on-hand to do so after paying its employees and creditors (the latter group of which had threatened to shut down the business).

In the result, the Tax Court dismissed the taxpayer’s appeal, and held that the due diligence defence was not made out.  In the Tax Court’s view, the course of conduct of the CEO/director’s during the company’s year-long financial crisis did not reflect the exercise of the degree of care, diligence and skill to prevent the company’s failure to remit net tax or source deductions that a reasonably prudent person would have exercised in comparable circumstances.  

In the Tax Court’s view, simply meeting regularly with the Canada Revenue Agency (“CRA”) to deal with arrears of source deductions and GST, after the fact, was insufficient, as the director needed to demonstrate that he had tried to prevent – before-hand – the corporation’s failure to remit source deductions.

Takeaways

When it comes to Director’s Liability Assessments, an ounce of prevention is worth MORE than the pound of the cure: put CRA payments first on the priority list! 

Where Director’s Liability Assessments are instituted, however, legal advice and legal appeals are usually required to successfully defeat them!

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