Director Liability: De Facto Director

Posted on July 15th, 2024 in Domestic Tax

Directors can be personally liable for payroll source deductions (CPP, EI, and income tax withholdings) and GST/HST unless they are duly diligent in preventing the corporation from failing to remit these amounts on a timely basis. Individuals can be personally liable as directors for up to two years after their resignation.

A July 19, 2023, French Court of Quebec case reviewed whether the taxpayer had resigned as a director of a corporation, thereby protecting the individual from personal liability of the corporation’s failure to remit $22,418 in QST and $38,479 of source deductions. The taxpayer argued that she resigned in writing on the day the corporation declared bankruptcy. Revenu Québec (RQ) argued that even if the taxpayer had resigned, she continued acting as a dire

Taxpayer loses

The Court found that even after the taxpayer allegedly resigned, she continued to carry on the duties of a director. For example, she signed an income tax return for the corporation, authorized the corporation’s accountant to discuss matters with RQ, had conversations with RQ regarding collection activities but did not disclose that she was allegedly no longer a director, and sent two $500 cheques to RQ in an attempt to settle the corporation’s tax debts.

The Court also reiterated previous jurisprudence that found that a director who has resigned must inform the Minister of their resignation during exchanges of correspondence relating to the company’s tax debt and those relating to the liability of directors. While the Court’s comment was specific to the Quebec Companies Act, the Court stated that it did not believe the rules were different for corporations under other provinces or the federal act.

The Court also stated that just because a corporation is bankrupt, the director does not lose their status as a director.

Ensure that allowances paid to employees meet the strict conditions for being tax-free to avoid a surprise tax bill for the recipient.

Download

Article originally published in: Tax Tips & Traps 2024 Second Quarter – Issue 146.