The picture that many Canadians have of corporate directors is that of a highly-paid director of a blue-chip multinational, travelling on the company jet to attend directors meetings in exotic locations. While there are certainly corporate directors who fulfill that perception, the reality is most Canadian companies are small or medium-sized owner-managed businesses. In such small operations, it’s not unusual for family members or friends to be asked to become directors of the company—often, when the business is first incorporated. In other instances, someone may agree to sit on the board of a local non-profit organization, as a way of supporting the activities of that organization. While many directors, especially first-time directors of small companies, view their position as purely nominal or honorary, the fact is that taking a position as a corporate director means taking on very real responsibilities. And, no matter what size the company or organization may be, the responsibilities of those directors are the same.
Every Canadian company must meet a variety of reporting, filing, and payment obligations, at both federal and provincial levels. However, the area which most often causes problems for the directors of a corporation is the obligations of that corporation to the Canada Revenue Agency (CRA). The CRA recently updated and re-issued its publication on the obligations and potential liability of corporate directors, and that publication, Information Circular IC89-2R3, is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/ic89-2r3/ic89-2r3-14e.pdf. As outlined in the CRA’s updated release, the obligations of directors generally come down to four questions:
- Who can be held liable?
- What can they be held liable for?
- How can liability be avoided?
- What are the potential consequences where liability is established?
On the first question, the net is cast very, very broadly. Or, in the CRA’s wording, “[T]he statutes do not distinguish between directors, whether active, passive, nominee or outside directors.” Anyone who holds the title of director can face personal liability for the company’s failure to fulfill its obligations to the CRA. It’s a common misconception that a director who is not involved in the affairs of the company—who doesn’t, for instance, attend directors’ meetings, read minutes of the meetings, or sign directors’ resolutions—can’t be held liable for decisions made at meetings he or she didn’t attend or implemented through resolutions of which he or she was unaware. In fact, the opposite is true—not only does a lack in involvement in the affairs of the company generally not absolve a director of potential liability, that very lack of involvement can be seen a evidence of a failure to meet the obligations that come with a position as a company director. And, finally, it’s not even necessary to formally hold a position as director in order to be held liable for company failures—the CRA’s position is that “[O]fficers, employees and others who are not legally appointed or elected as directors, but who perform the functions that directors would perform, may be liable.”
What, then, can directors be held liable for? A company, depending on its size and the industry in which it operates, can have a variety of legal and tax obligations, with the latter usually including the obligation to remit amounts on a regular basis to the federal government. Again, depending on the industry and activities of the corporation, those remittance obligations can involve excise duty, refundable tax for scientific research and experimental development or share-purchase tax credits, or payments to non-residents, and corporate directors can be held liable for a company’s failure to remit any or all such amounts. However, the one remittance obligation common to virtually all companies is that of remittance of employee source deductions. Any corporation which has employees must withhold income tax, Canada Pension Plan contributions, and Employment Insurance premiums from the employees wages, and must remit those amounts, together with any required employer contribution, to the CRA on a regular basis. It’s not surprising, therefore, that the majority of cases in which directors have been held personally liable for a corporation’s failure to remit have involved employee source deductions.
The actual mechanics of making source deductions and remitting them to the CRA on time is a function usually carried out by a company’s payroll department or, in smaller companies, a bookkeeper or accountant. While company directors don’t have to be directly involved in that process, what they must do is to make sure that the company is properly withholding deductions or, in the CRA’s words, they “must make every reasonable effort to ensure that source deductions … are withheld, collected, remitted and paid.” That reasonable effort is also known as a director’s “due diligence” responsibility—the director’s obligation to take the care that a reasonably prudent person would take in similar circumstances to make sure that the corporation deducts, withholds, collects, remits, and pays amounts due on a timely basis.
Numerous court decisions have addressed the question of just what constitutes “due diligence” on the part of a corporate director, and the CRA has summarized that duty, as it relates to corporate remittances, as follows.
To ensure that he or she has fulfilled the due diligence obligation, a corporate director should use methods such as:
- establishing a separate account for withholdings from employees and remittances of source deductions and other amounts owed to the CRA;
- calling on financial officers of the corporation to report regularly on the status of the account; and
- obtaining regular confirmation that withholdings, remittances, or payments have in fact been made during all relevant periods.
In practical terms, a corporate director could fulfill this responsibility by requiring the company employee who looks after source deductions and remittances to set up a separate account in which source deductions are deposited, and to provide a regular report to the Board of Directors, with documentary evidence in the form of receipts and/or statements of account from the CRA, confirming that all source deductions have been made and remitted as required. A director who does so is very likely to be seen to have made all reasonable efforts to ensure that the company is in compliance with its obligations.
Where there is a failure to meet those obligations, however, the CRA will look first to the company to make good on any deficiency. It is only where the company is unable to do so—a judgment against the corporation cannot be realized on, or the company has been dissolved or liquidated, or is bankrupt with no assets to pay its obligations—that the CRA will advise the directors, with a “pre-assessment proposal” that they may face liability for the company’s outstanding debts. A director who receives such a communication from the CRA should respond in writing within the time frame set out in the proposal, outlining the steps which he or she had taken to ensure that the corporation was in compliance with its obligations, and should provide documentary evidence of the steps taken. The CRA will then consider that response before deciding whether to issue an assessment against the director personally for amounts owed by the company to the CRA.
Where the CRA does decide that the directors can be held personally responsible for corporate debts, that liability is “joint and several”, meaning that each director can be assessed for the full amount of any amount owed by the company to the CRA, including penalties and interest—assessments for such debts are not issued on a pro-rata basis.
While a director’s potential liability for amounts owed by the corporation to the CRA is significant, it’s not, fortunately, open-ended. The CRA must issue any assessment against a director within two years of the time that a director resigned his or her position with the company. So, in other words, leaving a position as a company director will not insulate that director from liability for actions or omissions which occurred during his or her time as director. However, any assessment in respect of those actions or omissions must, in order to be valid, be issued by the CRA within two years after the date the director resigned.
Most corporate directors, whether in large, small, or medium-sized companies, will never face the prospect of being held personally liable for amounts owed by the corporation to the CRA. Nonetheless, anyone who agrees to act as a corporate director for a company of any size, or for a non-profit organization, should understand that such a position is never simply a nominal or honorary one. Becoming a corporate director means taking on very real ongoing responsibilities and, as the CRA makes clear in its recent publication, ignorance of those responsibilities will not serve as a defence to any potential personal liability.
