A.   INTRODUCTION

During troubled economic times, it is sometimes tempting for corporations, both not-for-profit and for-profit, to ignore their statutory obligations to remit certain amounts to the Crown in favour of meeting other financial obligations. However, corporations and their directors and officers who do so place both the organization and themselves at significant risk.[1] Contrary to a widely held misconception that directors’ liability does not apply to directors of not-for-profit corporations, the Canada Revenue Agency (“CRA”) has recently reaffirmed that the liability for source deductions applies to all directors in both profit and not-for-profit organizations.[2]

There are a large number of federal and provincial statutes that establish specific offences and penalties for acts and omissions committed by directors and officers of corporations. The reasoning behind imposing this direct liability on corporate directors and/or officers for the corporation’s failure to abide by certain statutory requirements is that in order for the corporation to feel the full weight of the law, directors and officers must be exposed to the same liability of the corporation. This Charity Law Bulletin explores the basis for director’s liability for unremitted source deductions and G.S.T pursuant to federal legislation[3] in the context of the recent  CRAtechnical interpretation.

B.   DIRECTOR’S LIABILITY

Liability risks for directors of charitable and not-for-profit corporations can arise at common law and by statute. One of the directors’ common law duties includes ensuring that the corporation acts in accordance with the law, which includes remitting source deductions to the government and complying with other regulatory requirements. If the corporation does not do so, the directors can be held personally liable. A director can be held personally liable for his or her own actions or inactions, as well as jointly and severally with the other members of the board of directors. Jointly and severally means that should a director be found liable, he or she can recover from the other directors. Provided that the directors act with reasonable care, prudence and diligence in the circumstances, the directors can be seen as discharging his or her duty and escape liability. In particular, the director should take action to remedy the problem when becoming aware it, take steps to prevent future occurrence, and to seek advice from management and appropriate professionals.

During troubled economic times, directors need to be particularly aware of several statutory sources of liability including the Income Tax Act, Excise Tax Act, Canada Pension Plan Act and the Employment Insurance Act.

Section 227 of the Income Tax Act (“the ITA”)[4] provides that where

Under the ITA, directors are jointly and severally liable to pay all employee income tax deductions, as well as any interest and penalties related thereto, that the corporation has failed to remit to CRA. The liability of directors in this regard continues for two years after a director ceases to be a director.

Similarly, section 323 of the Excise Tax Act (the “ETA”)[5] imposes joint liability on a director with respect to a corporation’s “net tax” remittances and refunds. It provides that where

Section 21.1(1) of the Canada Pension Plan Act[6] states that

Section 46.1 of the Employment Insurance Act[7] states that if

Generally, to discharge the liability created by these statutes, a director must be able to show that he or she took positive action in seeing that the corporation complied with the statutory requirements. If the director can show that they exercised the degree of care, diligence and skill that a reasonably prudent person would exercise in the same circumstances, then they may not be found personally liable for any failures of the corporation to comply with its statutory obligations., The appropriate standard of care is discussed below in the context of the  Wheeliker and Rancourt decisions.

C.   WHO IS A DIRECTOR?

While it is clear that individuals who are properly appointed as directors will be exposed to liability, de facto directors and, in certain circumstances, officers may also be found liable. Affirming CRA’s Information Circular 89-2R,[8] the Tax Court of Canada has indicated that de facto directors are also exposed to potential liability.[9]  De facto directors are generally senior officers, employees, and others who are not legally appointed as directors of the corporation, but who nevertheless perform the functions that directors would perform, e.g. direct the affairs of the corporation, whether or not they have represented themselves as directors to any third party.

Resigning as a director may not avoid liability, but the resignation will trigger the beginning of limitation period. For ITA and ETA purposes, a director remains liable for up to two years from the day he or she ceases to be a director. This essentially means that a director may be found liable for statutory amounts that were not remitted during his or her term, provided that the director is assessed for these amounts within the two-year period following his or her resignation. This does not mean that a director will be held liable for unremitted statutory amounts that arise after his or her resignation, provided that the director’s resignation was done in accordance with the by-laws of the organization, the resignation was properly recorded, and the director ceased to be involved in the organization to the degree necessary to eliminate the possibility of being considered to have remained a de facto director.

D.   THE WHEELIKER DECISION

In Wheeliker v. Canada,[10] the Federal Court of Appeal reviewed the issue of the standard of care for directors. This case involved volunteer directors of a not-for-profit corporation who were held personally liable for income tax the corporation owed to Revenue Canada. The directors were aware of the failure of the corporation to remit the sums, in some cases for up to a year, before the corporation was put into bankruptcy.

The Court found that the directors were liable for the sums due because they did not exercise the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances under subsection 227.1(3) of the ITA. Justice Letourneau commented that the standard of care was no less rigorous for a director of a non-profit corporation than for a director of a corporation run for profit. He wrote that the application of the standard of care is a subjective one. This means that, as of learning of the financial difficulties of the Corporation or its failure to remit, all the directors were under a positive duty to address the problem and to prevent a failure to make future remittances.

This case requires directors of non-profit organizations to take positive steps to ensure that source deductions are remitted in order to escape liability. A failure to meet the standard of care will result in personal liability.

E.   RANCOURT V. QUEEN, 2008TCC285

In Rancourt v. The Queen,[11] the issue was also about whether the standard of care was met by a director of a non-profit corporation. Unlike the Wheeliker decision, the director in this case was found to have discharged her duty.

In Rancourt, the corporation’s activities involved distributing shows and operating a performance hall and bar under the name “L’Espace Alizé”. The corporation failed to pay the amounts of net GST that it was required to remit under the ETA. The Minister of Revenue sought to have Rancourt, one of the directors, to be held liable for the outstanding amount and assessed accordingly. The Court found that for someone with limited business and management experience similar to that of Rancourt, actions by the corporation including the appointment of a new accountant,  indicated that the decisions made by the directors were the ones needed to redress the corporation’s financial situation and ensure that the GST remittances were paid. Rancourt met the standard of care by doing what a reasonably prudent person would have done in comparable circumstances.

The decisions in Wheeliker and Rancourt confirm that the standard of due diligence required is the same regardless of the nature of the corporation.[12] The standard of care that provides a defence for the director is one of exercising the degree of care, diligence and skill that a reasonable prudent person would have exercised in comparable circumstances.

F.   STEPS TO PREVENT LIABILITY

The case law provides guidance on what it views as the due diligence required to escape director’s liability for unremitted statutory amounts. As the Wheeliker decision explains, once directors become aware of the failure of the corporation to remit source deductions, the directors bear a positive duty to take action to remedy the existing failure as well as to prevent future occurrences.[13]  Directors also have a positive duty to ensure that statutory remittances are made and particular should be taken during troubled economic times to ensure that these remittances are not being ignored.