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Federal Tax - Liability of Corporate Directors. Bresse Syndics Inc. v. Canada
In Bresse Syndics Inc. v. Canada (Fed CA, 2021) the Federal Court of Appeal considered the test for control of a corporation for the ITA:[20] The issue at the core of this case is whether the TCC judge could conclude that a public corporation, in this case Public CO2, exercised de jure or de facto control over the appellant during the year at issue such that it was not a CCPC within the meaning of subsection 125(7) of the Act.
[21] The application of legal tests of control to the facts in issue raises a question of mixed law and fact that does not justify our intervention except in instances where a palpable and overriding error has been made, absent an extricable question of law (Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235 at paras. 8, 26-37).
A. Legal framework
[22] The de jure and de facto control tests both aim to determine who controls the composition of a corporation’s board of directors and therefore the corporation itself (Buckerfield’s Limited v. Minister of National Revenue, 64 DTC 5301 [Buckerfield’s Limited]; Silicon Graphics at para. 67). The exercise of either of these types of control by Public CO2, if applicable, disqualifies the appellant from the CCPC status.
[23] The difference between these two tests is limited to the range of factors that can be considered in determining who controls a given corporation (McGillivray at paras. 47-48). The law is well settled that de jure control lies in the hands of those who have the power to appoint the board of directors. As a general rule, these are the majority shareholders. However, certain documents can modify or restrict their power. Thus, the de jure control analysis deals with any internal restriction—in the corporation’s articles of incorporation or in a unanimous shareholder agreement—on these shareholders’ power to elect the board of directors or to limit the ability of the board of directors to manage the affairs of the corporation (Duha Printers (Western) Ltd. v. Canada, 1998 CanLII 827 (SCC), [1998] 1 S.C.R. 795 [Duha Printers] at paras. 36-37, 85).
[24] De facto control, on the other hand, is a more recent concept that was introduced in the Act in 1988 with the addition of subsection 256(5.1). It is determined on the same basis as de jure control but allows for factors that are external to the corporation to be taken into account (Duha Printers at para. 55; Silicon Graphics at para. 66). As this Court held in McGillivray, the influence required to ground a finding of de facto control must come from "“legally binding or enforceable arrangements”" (McGillivray at paras. 33, 48). Although this approach was enlarged in 2017 by the adoption of subsection 256(5.11), the facts in this case occurred before it took effect. It is therefore necessary to abide by the more stringent approach propounded in McGillivray. . Duque v. Canada
In Duque v. Canada (Fed CA, 2020) the Federal Court of Appeal confirmed that when a corporate director is personally responsible for defaulted corporate taxes, that the director may appeal the underlying corporate tax assessment:A. Right to Challenge Underlying Assessment
[16] Section 323 of the ETA provides that a director of a corporation is liable for any net tax that such corporation has failed to remit under subsection 228(2) of the ETA. Subsection 228(2) of the ETA provides for the remittance of net tax, if the net tax is a positive amount. The net tax is generally the difference between the tax collectible / collected and the input tax credits of that person (subsection 225(1) of the ETA).
[17] In this appeal, Mr. Duque is indirectly challenging the assessment of net tax payable under the ETA that was issued against the Corporation. Since the Corporation did not object to the assessment that was issued against it, that assessment is not the assessment that is under appeal.
[18] In Gaucher v. The Queen, 2000 D.T.C. 6678, [2000] F.C.J. No. 1869 (QL), this Court held that a taxpayer who is assessed under section 160 of the Income Tax Act for the tax debt of another person, can challenge the assessment that was issued against that other person.
[19] In Scavuzzo v. Canada, 2005 TCC 772, [2005] T.C.J. No. 620 (QL), Bowman, ACJ (as he then was), in paragraph 10, extended this principle to assessments of director's liability under section 227.1 of the Income Tax Act and section 323 of the ETA. In Abrametz v. The Queen, 2009 FCA 70, [2009] G.S.T.C. 43, this Court did not specifically address the issue of whether a director, who is assessed for unremitted net tax of a corporation, could challenge the assessment of that corporation. However, this Court implicitly applied this principle by allowing an appeal of a director arising from an assessment issued against him under section 323 of the ETA for the unremitted net tax of a corporation on the basis that the underlying assessment of the corporation was flawed.
[20] In my view, it should be explicitly stated that a director, who has been assessed personally for unremitted net tax of a corporation, should be able to challenge the underlying assessment of net tax payable by that corporation. A director should not be held personally liable for more unremitted net tax, penalties and interest than what should properly have been assessed against that corporation. . Ahmar v. Canada
In Ahmar v. Canada (Fed CA, 2020) the Federal Court of Appeal summarized the liability of a corporate director for defaulting taxes (here, HST) of the corporation, and how they might avoid personal liability if they exercise due diligence:[15] In accordance with subsection 323(1) of the Excise Tax Act, corporate directors are jointly and severally liable with the company for any net taxes, penalties or interest that the company fails to remit. Directors are not, however, absolutely liable for a company’s tax debts: Canada v. Buckingham, 2011 FCA 142, 417 N.R. 178 at paras. 47 and 52; Balthazard, above at para. 30. Nor do directors have to take every conceivable step possible to avoid companies defaulting on their tax obligations: Moriyama v. Canada, 2005 FCA 207, 337 N.R. 243 at para. 19, leave to appeal to SCC refused, 31069 (15 December 2005); Balthazard, above at para. 32(d). A director will be able to avoid personal liability if the individual can establish that he or she exercised the degree of care, diligence and skill to prevent the failure to remit that would be exercised by a reasonably prudent person in comparable circumstances: see subsection 323(3) of the Excise Tax Act and Buckingham, above at para. 33.
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[23] The Tax Court further found that Mr. Ahmar was clearly aware of Strong Forming’s tax obligations, its financial difficulties and his potential personal liability for the company’s tax debts. Instead of using some of the company’s revenues to satisfy its tax obligations, however, the Court found that Mr. Ahmar made the conscious decision to have Strong Forming defer payment of its HST debt, and to use these revenues to satisfy other obligations in the hopes of turning the company’s financial position around. As the Tax Court observed, this was precisely the situation that confronted this Court in Buckingham, above.
[24] As this Court observed in Buckingham, where a company is facing financial difficulties "“it may be tempting to divert these Crown remittances in order to pay other creditors and thus ensure the continuation of the operations of the corporation”". The Court held, however, that this was precisely the mischief that section 323 of the Excise Tax Act sought to avoid. This Court went on in Buckingham to state that the defence under section 323 "“should not be used to encourage such failures by allowing a due diligence defence for directors who finance the activities of their corporation with Crown monies on the expectation that the failures to remit could eventually be cured”": both quotes from para. 49.
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