In R. v. Buckingham, 2011 FCA 142, the Federal Court of Appeal clarified many legal issues surrounding the liability of directors of a corporation for their corporation’s tax transgressions. It is a widely-known principle that a director can be held personally liable for the conduct of a corporation, including failing to remit, deduct, or withhold tax owed by the corporation. Often, a due diligence defence is available for a director to avoid personal liability. In Buckingham, the Federal Court of Appeal discussed the following three issues:
- In relying on a due diligence defence, is a director’s standard of care, diligence and skill an objective standard?
- Does the standard under the Income Tax Act apply differently than under the Excise Tax Act?
- Is it a successful defence to argue that “the efforts of directors are focused on curing failures to remit rather than towards preventing such failures”?
1. Is a director’s standard of care, diligence and skill an objective standard?
When dealing with a director’s personal liability issues, both the Canada Business Corporations Act and the Income Tax Act stipulate that directors must exercise the degree of care, diligence and skill “that a reasonably prudent person would have exercised in comparable circumstances.”Looking closely at the language used by the Legislature, the Court of Appeal concluded that it is indeed the objective standard that should be applied.
2. Does the standard under the Income Tax Act apply differently than under the Excise Tax Act?
The Tax Court’s previous finding that a different standard should be applied when one deals with the unremitted GST/HST as opposed to employment source deductions, was overturned. The trial judge in the previous decision had decided that the failure to remit GST/HST is different in nature from the failure to remit source deductions because the amount of the source deduction is not funded by a third party where the GST/HST amount to be remitted is “the money held in trust for the Crown.” Reversing the decision rendered by a trial judge, the Court of Appeal concluded that the legislative provisions were drafted similarly; thus the provisions should be applied similarly.
3. Is it a defence to argue that “the efforts of directors [were] focused on curing failures to remit rather than towards preventing such failures”?
Lastly, the Court of Appeal found that the due diligence defence is not available to directors who finance their corporation’s activities with Crown monies on the expectation that the failures to remit could eventually be cured. In other words, the Court of Appeal determined that the current provisions of the Income Tax Act relating to the due diligence defence should be interpreted to say that a director should strive to prevent the failure to remit in the first place rather than to cure the failure by not remitting the GST/HST or source deduction amount.
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