What is a Defacto Director’s Liability Assessment?
A Defacto Director is someone who acts as a director, but is not a director on paper.
Directors of a corporation can be found jointly and severally liable for certain tax debts of a corporation under section 227.1 of the Income Tax Act and 323 of the Excise Tax Act. Directors’ liability arises in one of two ways, either in fact or in law. For more background material on this distinction, and on director’s liability, feel free to consult our blog post that discusses the topic at greater length.
It is possible to become a de facto director by accident, without knowing or recognizing this designation at the time of dealing with the corporation. Officers, employees, and those whom are not legally appointed or elected but who perform the functions that directors would perform, may be liable. It is imperative that individuals are vigilant and careful in their dealings with struggling corporations, as well as, those that are known to be failing to remit GST/HST or their payroll source deductions.
Defending Against a CRA Director’s Liability Assessment
All directors whether deemed such or those validly elected to the position can use procedural defences to protect against the assessment of liability. Furthermore, de facto directors can use the due diligence defence to prove that they acted responsibly and with due diligence, allowing the director to avoid liability. As well, there is a statutory limitation under section 227.1(3) of the Income Tax Act. This limitation on assessment protects any individual from being assessed on the basis of directors’ liability if they ceased to be a “de facto director” more than two years prior to assessment. The only other way to avoid being deeming such is to prove via the common law that one’s actions should not deem them a director.
Defacto Director Tax Court Cases
There is a test established by jurisprudence to determine whether one’s actions arise to the level of de facto director. As well, the Tax Court of Canada found for a Taxpayer not being de facto director on the grounds of documentary evidence alone.
In Mosier v. The Queen, 2002 GTC 28, a case where the taxpayer was deemed not to be a de facto director, the Tax Court of Canada Court heavily weighed documentary evidence. Specifically, the court relied on evidence which indicated that the powers and duties of the taxpayer were very extensive. The Court ultimately held that the taxpayer was not a de facto director as only the power and responsibility of running the day-to-day operation of the corporation were conferred to the taxpayer, but the power to participate in pure directorial acts was not.
As well, there is not a single factor which determines whether someone is a de facto director. Instead, the courts consider, as in Soper v. The Queen, a number of different non-exhaustive indicators to determine whether an individual is a de facto director:
- Whether the individual has been signing documents as a director;
- Whether the individual has been signing tax returns;
- Whether the individual has been attending director’s meetings;
- Whether the individual introduces themselves to third parties as a director;
- Whether the individual signs directors’ resolutions; and
- Whether the individual plays a significant role in supervising the management of the company or otherwise controlling the company.
If you have received a pre assessment letter threatening de facto director’s liability, or an assessment for Director’s Liability, we strongly recommend giving us a call. If found to be a director, you may be held liable for enormous amounts of money due to unpaid GST/HST or source deductions even when it was not your fault. The process can be quite complicated, with many moving parts that are time sensitive, so it is best to have legal counsel helping you navigate through it. Don’t delay, contact us for a free consultation today!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.