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.  

In Koskocan, the Appellant sold all of his shares and resigned as a director of a pizzeria for which he had previously acted as president, director, and sole shareholder. Provincial authorities were advised of this resignation and the fact that the Appellant’s son and daughter-in-law were appointed as directors and would be taking over the management and operation of the pizzeria.

Despite the resignation, the Appellant remained legally responsible for the pizzeria’s line of credit and bank accounts due to his son’s poor credit rating. He also remained the account holder of record on certain utilities and continued to sign cheques and even a 2010 GST return on behalf of the pizzeria.

Approximately nine years after his resignation as a director, Revenue Québec assessed the Appellant under section 323 of the ETA as a de facto director who was liable for GST that the pizzeria failed to remit from January 1, 2007 to December 31, 2010.

The Revenue Québec decision was appealed to the TCC.

The TCC confirmed that while subsection 323(1) of the ETA imposes liability on both de jure and de facto directors, it does not extend liability to senior officers or managers, so a determination of whether a person is a de facto director requires an analysis of a corporation’s power structure. In performing this analysis the TCC stressed that a finding of de facto directorship should not be made lightly.

In its decision, the TCC rejected Revenue Québec’s assertion that the Appellant was a de facto director simply because he had signing authority over chequing accounts. The TCC held that this argument ignored the fact that it is common for officers and employees to have signing authority on behalf of a corporation. The TCC also noted that Revenue Québec’s position conflicted with CRA directive RCD-95-12 which indicated that the authority to sign cheques for a corporation does not make an individual a de facto director.

Under the circumstances, the TCC concluded that the Appellant was not a de facto director. In fact, the TCC held that the evidence did not even support a finding that the Appellant was acting as a manager of the pizzeria, as that function was being done by his son. 

The decision in Koskocan is quite welcome as it seems to clarify the types of activities that an individual can perform after resigning as a de jure director without being deemed a de facto director. That said, instead of a broader trend, it is possible that the TCC’s reluctance to find that the Appellant’s activities were sufficient to label him a de facto director may have simply been driven by the facts of the case. It will be interesting to see how courts apply this decision in the future.

In any event, it is still strongly recommended that resigning directors promptly file their resignations with the proper authorities and remove themselves from all management activities in their former corporations. Failure to do so will leave a director that has resigned vulnerable to a finding of de facto directorship and the corresponding liability for unremitted GST/HST and source deductions.

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