Director’s Liability for Tax and the Due Diligence Defence
By Bobby B. Solhi* and Michael Thomson
In a recent decision from the Tax Court of Canada (TCC) in Roitelman, the taxpayer successfully appealed director liability assessments issued by the Minister for his 2006 and 2007 taxation years in respect of outstanding income tax, EI premiums, and CPP contributions in the amount of $143,916.11 that were owed by a corporation for which he acted as director.
Director not Liable for Tax – Appeal Allowed
The Court held that the taxpayer met his burden and established that he undertook proactive steps to prevent the Corporation’s failure to remit tax and, therefore, he demonstrated the degree of care, diligence and skill required to prevent the failures that a reasonably prudent person would have exercised in similar circumstances.
Brief Overview of Facts
The underlying tax debt was assessed against Roy’s Electric Company (the “Corporation”), a company in the business of commercial electrical contracting, installations and service. The taxpayer, its director, had previously operated similar businesses without any history of non-compliance.
Instalment remittances were initially prepared by the taxpayer, Mr. Roitelman. The taxpayer later hired a bookkeeper to handle administrative duties. The bookkeeper had limited experience but the taxpayer provided her with training on the job while their company accountant also helped with direction.
The taxpayer could not directly supervise the bookkeeper while traveling, which amounted to 50% of his time. He observed that the bookkeeper was competent and could handle her duties without direct supervision while the taxpayer was away on business. However, there would a few occasions where the bookkeeper had missed remittance for which the taxpayer addressed by increasing his supervision of her until such time as the remittances were made in a timely manner. He would then revise his supervision of her accordingly.
The bookkeeper’s remittance practices continued to worsen and after receiving two letters from the Minister in May 2007, the taxpayer lost confidence in her and eventually started to look for a replacement. The bookkeeper left the company for unrelated reasons in December 2007. It was later that the taxpayer discovered that the bookkeeper had two remittance cheques in the amount of approximately $13,000 that had been signed by the taxpayer but “hidden” in the bookkeeper’s office. There were also provincial sales tax returns that had been signed but not forwarded.
The Minister later issued seven assessments to the Corporation for non-remittance of tax together with interest and penalty charges.
The Minister argued that the taxpayer did not take positive steps or actions that would have prevented the failure of the Corporation to remit the taxes and, therefore, he cannot avail himself of the due diligence defence. Rather, the Minister contended that the steps taken by the taxpayer occurred after the Corporation had failed to remit its taxes in order to cure those failures.
The Court reviewed the leading authorities on director liability for tax in Buckingham and Peoples, where the Court summarized the due diligence defence as follows:
… Parliament did not require that directors be subject to an absolute liability for the remittances of their corporations. Consequently, Parliament has accepted that a corporation may, in certain circumstances, fail to effect remittances without its directors incurring liability. What is required is that the directors establish that they were specifically concerned with the tax remittances and that they exercised their duty of care, diligence and skill with a view to preventing a failure by the corporation to remit the concerned amounts.
In other words, the test provides that in order for a director to successfully rely on the due diligence defence, he or she must have taken active steps to prevent a failure to remit and not merely to have taken steps to remedy the failure after its occurrence.
The Court also cites authority for the position that corrective measures undertaken by a director after the errors have occur can establish that the director exercised due diligence: Balthazard v. The Queen.
The Court also commented that while the hiring of the bookkeeper was a poor business decision by the taxpayer, it was not for the Court to make such an ex-post facto conclusion.
In all, the taxpayer was determined to have been thwarted in his attempts to ensure tax compliance by what the Court described as fraudulent and deceitful behavior by the bookkeeper.
Roitelman adds to the jurisprudence on director liability for tax in Canada and the due diligence defence that may be available.
The Court provides further clarity on the application of the “objective standard” in determining whether a director exercised due diligence and could avoid personal liability for corporate tax debts.
*Bobby B. Solhi is a partner with TaxChambers LLP, a boutique tax law firm in Toronto, Canada. Bobby can be reached at firstname.lastname@example.org. The views and opinions are those of the author and do not necessarily represent the views and opinions of TaxChambers LLP. The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser.
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