When a business is not doing well and the directors are concerned that they will be left with its liabilities, the directors should consider whether it makes sense to resign. This article discusses whether a director can avoid certain liabilities by resigning.
Liability
Directors of a corporation are jointly and severally liable with the corporation for certain taxes under Canada's Income Tax Act (ITA) and Excise Tax Act (ETA). However, a director is only liable if they were in office during the time in which the corporation was required to deduct, withhold, remit or pay such tax.
Both the ITA and ETA provide for a due diligence defence – a director is not liable if the director can prove they exercised due diligence to ensure the corporation was deducting, withholding, remitting or paying its taxes.
The Canada Revenue Agency (CRA) is required to first go to the corporation to attempt to collect the required tax, and only after the CRA has done this, can they look to the directors to collect the taxes.
The CRA must also initiate a proceeding against the director within two years after the director ceases to be a director.
Therefore, if a director resigns, they avoid future tax liabilities, but remains liable (subject to the defences noted above) for taxes the corporation was required to deduct, withhold, remit or pay during their term.
Directors have similar liability for amounts payable under the Canada Pension Plan and Employment Insurance Act.
Resigning
Since a director's liability is limited to amounts the corporation was required to deduct, withhold, remit or pay while the director was in office, and there is a two year limitation period from the date the director ceased to be a director, it is important to properly resign as soon as possible. A resigning director must ensure they meet the technical requirements for resigning, including providing notice to the corporation, complying with all requirements under the applicable legislation and updating the public records.
De facto director
An individual should be careful of being a "de facto director," meaning having the responsibilities and duties of a director without the actual title. If an individual is performing the duties of a director, even though they are not formally a director or has resigned, they may incur the same liabilities as a director noted above.
Last director standing
What happens if all of the former directors resign and you are now the sole remaining director? The former directors will still be liable for the time period in which they were directors, unless it has been two years since they resigned. You may be solely liable for (1) future tax liabilities after your fellow directors' dates of resignation, and (2) for tax liabilities that the CRA fails to collect within 2 years following your fellow directors' dates of resignation.
Key lessons
At the end of a term or if you no longer wish to be a director, it is important to resign as soon as possible to: (1) stop future liabilities, (2) start the 2 year limitation period and (3) to avoid being the last director standing. When resigning, you must ensure that it is done in writing and delivered to the registered office of the corporation and that you do not continue in any "director-like" duties after resignation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.