22 July 2014

It's good to cooperate with the government, but be careful!

Here is a (somewhat extreme, but it does happen) scenario:
  • The board of directors has had a dust-up, and everyone resigns.
  • The CRA (or another regulatory agency) sends a letter inquiring about a certain matter.
  • Even though you may never have been a director, you inform the agency that you will be dealing with it.
Not so fast! That simple, friendly act could get you into a lot of trouble down the road.

Canadian corporations statutes have certain provisions defining who a "director" can be. S. 109 of the Canada Business Corporations Act, for example, states it this way:
(4) If all of the directors have resigned or have been removed without replacement, a person who manages or supervises the management of the business and affairs of the corporation is deemed to be a director for the purposes of this Act.
(5) Subsection (4) does not apply to

(a) an officer who manages the business or affairs of the corporation under the direction or control of a shareholder or other person;
(b) a lawyer, notary, accountant or other professional who participates in the management of the corporation solely for the purpose of providing professional services; or
c) a trustee in bankruptcy, receiver, receiver-manager, sequestrator or secured creditor who participates in the management of the corporation or exercises control over its property solely for the purpose of the realization of security or the administration of a bankrupt’s estate, in the case of a trustee in bankruptcy.
To put it succinctly, "a person who manages or supervises the management of the business and affairs" would be held to be a de facto director of the corporation. In Bremner v. Canada, 2009 FCA 14, the husband of an ex-director advised the CRA to forward any correspondence concerning a company to his attention. That was enough to attract a notice of assessment under s. 323 of the Excise Tax Act for liability of unpaid taxes! While the husband had once been a director, but had resigned some time before, this definition could catch someone who has never held such a position.

S. 227.1 of the Income Tax Act attracts similar liability, and various other federal and provincial statutes contain onerous provisions for directors of companies that fail to honour their liabilities. This must be seriously addressed in setting up governance policies for any organization, and it definitely requires help from your legal counsel.

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