Posted: February 17, 2010
Written by: Bradley Madison
American author Napoleon Hill said “A quitter never wins and a winner never quits.“
I beg to differ.
Directors of corporations can be personally liable, under many pieces of legislation, for failure to deduct and remit amounts for many things, including federal and provincial income taxes, retail sales taxes, GST, Canada Pension Plan and employment insurance.
For example, section 227.1 of the Income Tax Act makes directors liable to deduct and remit certain tax amounts. But liability does not run forever. Happily for former directors, subsection 227.1(4) imposes a limitation period of 2 years on a former director’s liability commencing when he or she “last ceased to be a director…”
When does that happen? Generally, the limitation clock starts running when all the formalities of resignation are completed or when a corporation is dissolved (bankruptcy or receivership does not start the clock). However, if the Canada Revenue Agency (the “CRA“) reassesses a corporation that has been dissolved (whether voluntarily or otherwise) it may apply for a court order to revive the corporation. Revival itself appears to be insufficient to renew a former director’s liability unless the court order expressly states as much (see Federal Court of Appeal decision of Aujla).
But if a director has not properly resigned and filed notice of the resignation with the provincial corporate registry, there is a line of cases that holds the 2 year limitation period clock never started running!
The good news is there are some opposing cases so, at present, the law is muddled. Because of the uncertainty however, CRA could go after a number of former directors of corporations that have long ceased to exist.
There is also a rather peculiar catch-22 here. Those former directors who never gave notice of their resignation to their Provincial Corporations Registry are now not in a position to file the forms necessary to resign (in the eyes of the CRA) since in the eyes of the Provincial Corporations Registry, a dissolved company has no directors!
What can we take from this? To ensure you win this battle with CRA… quit!