While many businesses face an unprecedented economic crisis, every director of a corporation must know that they are jointly and severally liable for the tax debts of said corporation, including source deductions/GST/QST.[1]
Indeed, the rule is that directors of a bankrupt corporation are jointly and severally liable for the corporation’s tax debts[2] and consequently, they may be held personally liable for said tax debts[3].
The reason is quite simple: any person who deducts, withholds, or collects any amount under a tax statute is deemed to hold it in trust for the State, separate from their assets and own funds, and for the purpose of remitting it to the State according to the terms and within the time limits provided by a tax statute[4].
“The fiduciary duty of a director of an agent corporation toward tax authorities intensifies as soon as serious cash flow difficulties arise.[5]”
However, every informed director must know that “this joint and several liability does not apply to a director who acted with the degree of care, diligence, and skill that a reasonably prudent person would have exercised in comparable circumstances, or who, in those same circumstances, could not have known of the omission referred to in that section, or that it was not imposed two years following the date on which the director ceased to hold office[6].”
What is a director “who acted with the degree of care, diligence, and skill that a reasonably prudent person would have exercised in comparable circumstances”?
First, the Quebec Court of Appeal in the Gilbert case[7] confirmed that “the degree of care, diligence, and skill required of a director does not depend on their personal skills, knowledge, and abilities[8].”
To do so, the Court will objectively analyze the director’s failure to remit to the Agence du revenu du Québec the taxes and source deductions, taking into account the context in which the director found themselves at the time of the omission.[9]
Therefore, “the standard of diligence expected of a director does not vary according to their personal characteristics; their conduct must be compared to that of a reasonably prudent and diligent director, while taking into account the context existing at the time of the corporation’s omissions[10].”
This “examination of the director’s objective conduct begins when it becomes evident to them, acting reasonably, with the required care, diligence, and skill, that the corporation is entering a period of financial difficulties.”[11]
Furthermore, it is incumbent upon the director who invokes the due diligence defense[12] to demonstrate by preponderant evidence that they acted with a reasonable degree of care, diligence, and skill in the circumstances, or that they could not have known of the omission in question[13].
From the foregoing, it emerges from case law that to succeed with the due diligence defense, the director must at a minimum demonstrate that they were concerned with the corporation’s tax remittances and that they took concrete measures to prevent failures to remit.[14]
In other words, a diligent director must[15]:
- Obtain information;
- Implement reliable control mechanisms to prevent tax omissions;
- Participate in these mechanisms, whether to supervise, investigate, or make corrections;
- Cease the business’s activities or resign when they no longer have a reasonable expectation that continuing operations will prevent a tax omission.
In conclusion, a director may be held jointly and severally liable for the corporation’s tax debts, and context is fundamental in assessing diligent conduct.
Since we are in a time of unprecedented health crisis and since each case is a specific case that must be studied in light of the facts, it would be important to consult a lawyer before bankruptcy to know your rights.
References
[1] Section 323 Excise Tax Act, R.S.C. 1985, c. E-15, section 227.1 Income Tax Act, and others.
[2] Section 24.0.1 TAA;
[3] Section 24.0.1 para. 1(b) Tax Administration Act, CQLR c. A-6.002
[4] Section 20 para. 1 TAA;
[5] Canada v. Buckingham, 2011 FCA 142, para. 64;
[6] Section 24.0.2 TAA;
[7] Gilbert v. Agence du revenu du Québec, 2018 QCCA 1792
[8] Id. para. 30;
[9] Id.
[10] Custodio v. Agence du revenu du Québec, 2020 QCCQ 444, para. 28;
[11] Beaudouin v. Agence du Revenu du Québec, 2020 QCCQ 1036, para. 59;
[12] Section 24.0.2 TAA;
[13] Montplaisir v. Agence du revenu du Québec, 2016 QCCQ 721, para. 26;
[14] Custodio v. Agence du revenu du Québec, 2020 QCCQ 444, para. 33;
[15] Stéphane ROUSSEAU, Gabriel FAURE and Nadia SMAILI, La responsabilité civile des administrateurs (2013-2014) 45 R. D. Ottawa 441 to 494;
