Section 227.1

The taxpayer, who operated several beauty salons, entered into an arrangement (respecting a new beauty salon) which she understood to be a partnership between her and the corporation (“EKO”) of her former employee and that employee’s husband (Mr. Landry) under which she would provide capital and advice and the employee would perform the services. Mr. Landry along with a friend prepared the documents, including a partnership agreement entitled “Partnership Agreement of 0780221 B.C. Ltd.” and having a clause stating that 0780221 B.C. Ltd. (the “Corporation”) was the name of the partnership and that was signed by her and him as “Directors,” but otherwise only dealt with partnership agreement matters. Mr. Landry was under the misapprehension that it was necessary to use a corporation to form a partnership, and consequently he and the taxpayer signed articles of incorporation of the Corporation, each as “incorporator,” in early January 2007. In May 2009, the taxpayer sold her interest in the venture to Mr. Landry for $15,000 and transferred her 50 shares of the Corporation to him. She had no further contact respecting the venture until 2013, when she was contacted by CRA respecting unremitted source deductions and GST of the Corporation, and 2014 when she was assessed under ITA s. 227.1 and ETA s. 323.

Russell J found that although the taxpayer was designated as a first director in the notice of articles, this designation was not valid unless she had provided a written consent to be a director (which was not the case) or she was an “incorporator,” whose definition in the B.C. Business Corporations Act referenced her signing an “incorporation agreement” respecting the company. Notwithstanding the somewhat contradictory elements referred to above, the Partnership Agreement was not an “incorporation agreement,” so that the taxpayer was not a de jure director.

Russell J further found that the taxpayer was not a de facto director, stating (at paras 38, 40):

Jurisprudence reflects that the concept of de facto director should be limited to persons who hold themselves out as directors … . As well, in Perricelli v. R., 2002 GTC 244 (TCC), Justice C. Miller observed that a person could not be considered a de facto director where the person,

…did not believe he was a director and he never thought he had any authority to advise, influence or control, the management or direction of the company.

In this case the Appellant manifestly did not at any time hold herself out as a director of the Corporation. …[S]he engaged in no acts of management … let alone any actions specific to a director.

A taxpayer sold all his shares of a company to his son, resigned as director, but continued to sign most of the cheques due to bank requirements. In rejecting the position of the ARQ that the taxpayer was a de facto director, so that he was liable for unremitted corporate GST under ETA s. 323, Archambault J noted that signing cheques was an officer rather than director core function - so that it could not be said that the taxpayer was usurping the function of the two (legal) directors - and that ETA s. 323 reflected an apparent legislative choice to limit its application to directors.

The taxpayer was the sole director and shareholder of a numbered CBCA corporation that went bankrupt in 2003 with unremitted source-deductions. In 2010, CRA assessed him under s. 227.1 for the source-deductions.

Rip J dismissed the taxpayer's appeal. He rejected the taxpayer's argument that he ceased to be a director when the corporation was assigned to a trustee in bankruptcy in 2003, or when the corporation was expunged from the Quebec business registry in 2005, or when the trustee was discharged in 2007. Kalef establishes that a person does not cease to be a director because of the appointment of a trustee in bankrupcy (para. 11). Neither does removing a corporation from the Quebec business registry; it would be "absolute constitutional anarchy" for a provincial statute to dissolve a federal corporation (para. 12), and being removed from the registry would not have prevented the corporation from carrying on businesses in other provinces (para. 13).

After being approached by the incorporator ("Marney") of a pub, the appellant subscribed $10,000 for shares as a passive investment. He became an authorized signatory and was appointed secretary/treasurer and signed cheques on the basis that two signatories were required, which he would do without any document review - his involvement was minimal. He also signed various banking documents and certificates, as well as a corporate tax return, CRA RC59 business consent form and disclaimer letter in favour of CRA (all without review) showing him as a director. Marney and another individual, who had been named as the initial directors, were struck from the corporate register shortly after the commencement of operations and the name of the name of the common-law wife of Marney ("Richards"), who now was running the operations, was added to the register. However, no directors or shareholder meetings were held, noone was appointed by the shareholder as director. The appellant purchased all the remaining shares of the corporation for $1 from Richards, upon her bankruptcy. The Minster assessed the appellant personally for the corporation's GST and income tax remittance shortfalls under ETA s. 323(1) and ITA s. 227(1).

Rossiter ACJ found that the taxpayer was not so liable. After finding (at para. 37), that the appellant had not become a de jure director, he then found (at para. 39) that "the concept of de facto director ... should be limited to those who hold themselves out as directors" (para. 39), and stated (at para. 44):

[T]he Appellant was a shareholder only. …[H]e did not at any time give his consent to be a director. He did not realize that he was in fact listed as a director with the Corporations Division… until very late and once he did, he took every step possible to have his name struck from the record. He did not… complete any of the required steps to be appointed as a director… . Further, all major decisions relating to the business were made by persons other than the Appellant.

The taxpayer was a director of an Alberta corporation ("cDemo") and a Delaware corporation ("Global"). Both corporations owed Canadian source deductions, and cDemo owed GST collections. Although the taxpayer had resigned as director more than two years before being assessed, Hogan J. found that the taxpayer was not beyond the limitations periods in s. 227.1(4) of the Income Tax Act or s. 323(5) of the Excise Tax Act. He remained a de facto director of each corporation, based on his taking actions in respect of the corporations that only a director could take.

The taxpayer was a de facto director of cDemo because he signed a declaration removing a fellow director from the corporate registry, and he signed a bill of sale of certain of cDemo's assets (with the proceeds being used to pay down the amounts owing).

The taxpayer was a de facto director of Global because he met with a prospective Global client in order to generate a revenue stream. The taxpayer provided CRA with documentation indicating approximately how much revenue Global would obtain from such a deal.

Finally, the taxpayer was a de facto director of each because he continually dealt with CRA on the corporations' behalf regarding the unremitted deductions and GST.

After finding that the taxpayer director had shown due diligence respecting the failure of his corporation to remit GST on one category of its sales, Lamarre J. went on to refer to Gaucher, supra, para. 6:

“It is a basic rule of natural justice that, barring a statutory provision to the contrary, a person who is not a party to litigation cannot be bound by a judgment between other parties.”

She then stated (at para. 43):

I further do not agree with the respondent that the context and purpose of section 323 of the ETA suggest that a challenge by a director of an underlying assessment should not be permitted.

The taxpayer was a corporate director with her husband. When the two separated, the taxpayer believed she had resigned as director. She did not submit a written resignation, a requirement under Alberta's Business Corporations Act. Woods J. noted that while the court will not always require a written resignation, the resignation must nevertheless be communicated to the corporation in some manner, which the taxpayer did not. She was therefore liable under s. 227.1 for the unpaid amounts.

Before finding that the taxpayer was a de facto director of a corporation that had never been organized on the basis that the taxpayer along with the other major shareholder were the directing minds of the corporation, Paris J. stated (at pp. 3551):

"... where a corporation operates without having been properly organized and the only director of record plays no part in running the corporation, those persons who take it upon themselves to direct the affairs of the company may be held to be de facto directors, whether or not they have explicitly represented themselves as directors to any third party. The essential question is whether those individuals have, in fact, taken on the role of director of the corporation."

Webb J. found that, to the extent that the taxpayer's appeal pertained to the New Brunswick Income Tax Act, that portion of the taxpayer's case should be heard by the New Brunswick Queen's Bench and not the Tax Court of Canada. He stated (at para. 6):

No jurisdiction is granted to this Court under the Tax Court of Canada Act to hear appeals on matters arising under any provincial income tax statute.

The appellant was found to be a de facto director and, therefore, subject to the application of s. 227.1 of the Act and s. 323 of the ETA given that the registration of the corporation showed him as a director, he completed ETA forms as a director, he failed to withdraw such filing after he was notified he had been recorded as a director, and he participated as director in opening up a bank account for the company.

Bowman A.C.J. found that the taxpayer's appointment as president of a failing business corporation, which entailed broad management powers, did not make the taxpayer a director or de facto director for the purpose of liability for the corporation's unremitted source deductions under s. 227.1(4) of the Income Tax Act or s. 323(5) of the Excise Tax Act. The question whether a de facto director could be liable for remittance failures had not previously been considered. Bowman A.C.J. found that a de facto director could be liable, but that "one must be very careful about what one means by the expression 'de facto director'." He stated (at paras. 29-30):

There is a lengthy and learned discussion of de facto directors at pages 408 to 411 in Mr. Wegenast's leading text on corporate law Canadian Companies. I cite only a short passage from page 411 which is, I think, useful in this case (footnotes omitted):

There must, however, have been something more than a mere usurpation of office. There must have been something to justify outsiders in assuming that the person or persons in question had been duly elected or were acting with the concurrence of the shareholders, for the doctrine of de facto directors is merely an application of the doctrine of estoppel or "holding out."

...

I am inclined to think that the concept of de facto director may have evolved in some degree since Mr. Wegenast wrote the above in 1931. However one wishes to define de facto director — either as one who occupies, whether by usurpation or default, the role of director or one in whose election there is some defect — it is clear that Mr. Mosier was not one of those.

The uncle of the taxpayer was found to be a de facto director as described under s. 1(1) of the Business Corporations Act (Ontario). Accordingly, the Minister would have been entitled to pursue the uncle as a director.

Because the taxpayer and other alleged directors of a non-profit corporation did not hold any shares of the corporation contrary to the requirements of the Companies Act (Nova Scotia), they were not de jure directors of the corporation. Furthermore, a provision of the Companies Act providing that a director "includes any person occupying the position of director by whatever name called" connoted "the concept of having the title of director rather than simply behaving like a director" (p. 1114) and did not have the effect of including persons who may have been de facto directors at common law. Accordingly, the taxpayer was not a director for purposes of s. 227.1.

The taxpayer, who acquired all the shares of a private company, was found not to become a director of the corporation for purposes of s. 227.1 given that he made very sure that he was never elected to the position of director, and he never held himself out as a director.

An assessment of the appellant under s. 227.1 which referred to unpaid deductions, interest and penalties payable by the corporation in respect of notices of assessment of the corporation dated on specified dates for the period that the appellant was director of the corporation was found to satisfy the requirement that the appellant be in a position when he read the notice of assessment "to know - or to be capable of knowing - the date or dates the corporation failed to remit so that he may consider whether he was director at the time of the failure by the corporation". The appellant was not only director of the corporation at the relevant times but was the person at the corporation who was responsible for remitting source deductions to the Receiver General. He knew, when he received the notice of assessment, the date that he resigned as director.

The taxpayer were the director of a corporation (the "Corporation") which was the general partner of a limited partnership, and he also was a limited partner. In 1984, when the limited partnership business was not going well, the limited partners advance moneys with instructions that only the net wages of employees were to be paid. He was assessed under s. 227.1 following the bankruptcy of the limited partnership and the Corporation,

In rejecting a submission that it was not limited partnership and not the Corporation who was the payor of the wages of the limited partnership employees, so that the Corporation itself was not responsible for withholding, and so that the directors were not liable, Lamarre Proulx TCJ found that, as general partner, the Corporation had the powers and duties to manage, control, and administer and operate the business and affairs of the limited partnership and that "the Corporation did in effect carry on these managerial duties" (p. 632). Accordingly, the Corporation was the payor of the salaries and wages of the employees and was obligated by s. 153(1) to withhold and remit the source deductions. Furthermore, the provisions of s. 227.1(1) of applied to the directors so that (as the taxpayer did not submit a due diligence defence) he was liable.

The individual appellant (“Demers”) was a director at all relevant times of a corporation that owned and operated a minor professional hockey team that played in the Ligue Nord-Americaine de Hockey from 2004 to 2008. It had been treating its players (and other staff) as employees rather than independent contractors for Quebec health tax purposes in accordance with the views of the ARQ which had been expressed to the League. However, in 2006, it commenced to treat them as independent contractors in order to reduce operational costs. The players did not register for GST/QST purposes or invoice for their services, and refused to sign a written contract (which did not reflect the realities of how the team continued to be operated), and the only substantive change made was that the team manager was incorporated. The ARQ assessed Demers under the relevant Quebec equivalent of s. 227.1 given that the team owner had been wound up without remitting source deductions.

After finding that the players in fact were still employees, so that the ARQ assessments of the team owner for failure to remit were well founded, Cotnam JCQ next dealt with the due diligence defence of Demers under the equivalent of ITA s. 227.1(3), which was based on the proposition that he had been advised by his tax advisor, Ms. Rochette (who was also his wife and a director of the team owner) that the players were independent contractors. In rejecting this defence, Cotnam JCQ noted that the views of Ms Rochette were based on factually incorrect matters that could have been readily checked by her, including that the players could play for other teams, that they had their own tools and that the team did not reimburse the players for their expenses, and also noted that Ms. Rochette had not consulted the jurisprudence. Cotnam JCQ also rejected the supposed reliance of Demers on a CRA finding that the players were independent contractors, as this CRA view had been taken after the decision was made to cease withholding and remitting source deductions.

Bouchard JCA found no reviewable error in these findings.

The appellant (“Delia”) had been the sole shareholder and director of a corporation (“Motostar”) engaged in a recreational vehicle sales business. All the accounting and tax returns were handled by an experienced accounting employee in consultation with an accountant at Motostar’s accounting firm. Following the dissolution of Motostar, the ARQ commenced a GST/QST audit. With the exception of one very small item, the ARQ auditor was satisfied with all the items reviewed other than an adjusting entry to the account for QST on sales, which debited that account for $12,631. The former Motostar accounting personnel were unable to substantiate this entry or provide documentary support.

In finding that Delia would be liable under an assessment made of him for the above amount plus interest under the Quebec equivalent of ITA s. 227.1 (s. 24.0.1 of the Tax Administration Act) but for the due diligence defence (under s. 24.0.2), Cameron JCQ found that Delia had taken reasonable steps “in establishing and maintaining a reliable accounting system” (para. 122), that the allegedly erroneous entry only “accounted for around 2.4% of the total gross QST … generated annually on sales” (para. 123) and (at para. 125):

…[T]he inability of those at Motostar to substantiate with precision the entry does not in any way establish a lack of diligence, care or skill on the part of the director who had entrusted the accounting and the handling of the tax returns to them.

The appellant invested $15,000 in the shares of a company (“9209’) that opened a small restaurant in December 2010. Although the appellant was one of the four directors, he took no part in the management or direction of the restaurant, which was in the hands of the wife (Sophie Paul) of a highly regarded restauranteur. He did not receive any information that the operation was in financial difficulty before the restaurant closed in April 2012.

After reviewing the federal and Quebec jurisprudence on directors' due diligence defence, Massol JCQ found that the appellant had established a due diligence defence under the Quebec equivalent of s. 227.1(3), stating (at paras. 88-89, TaxInterpretations translation):

[T]he liability of a director is not engaged until the time that the corporation commences, to the knowledge of the director, a period of financial difficulty such that the corporation cannot meet its obligations or, worse, begins to favour some creditors to the detriment of the fisc.

In this case, the evidence indicated that, during a relatively short period of time, the appellant was duped by his partners and he was unaware that the corporation was having financial difficulties … .

Smith J found that the taxpayer was required to take active efforts to pursue the timely remittance of the corporate GST net tax rather than relying on his CFO once he became aware of the corporation’s financial difficulty, which did not occur in this case.

The individual appellant (“Demers”) was a director at all relevant times of a corporation that owned and operated a minor professional hockey team that played in the Ligue Nord-Americaine de Hockey from 2004 to 2008. It had been treating its players (and other staff) as employees rather than independent contractors for Quebec health tax purposes in accordance with the views of the ARQ which had been expressed to the League. However, in 2006, it commenced to treat them as independent contractors in order to reduce operational costs. The players did not register for GST/QST purposes or invoice for their services, and refused to sign a written contract (which did not reflect the realities of how the team continued to be operated), and the only substantive change made was that the team manager was incorporated. The ARQ assessed Demers under the relevant Quebec equivalent of s. 227.1 given that the team owner had been wound up without remitting source deductions.

After finding that the players in fact were still employees, so that the ARQ assessments of the team owner for failure to remit were well founded, Cotnam JCQ next dealt with the due diligence defence of Demers under the equivalent of ITA s. 227.1(3), which was based on the proposition that he had been advised by his tax advisor, Ms. Rochette (who was also his wife and a director of the team owner) that the players were independent contractors. In rejecting this defence, Cotnam JCQ noted that the views of Ms Rochette were based on a factually incorrect matters that could have been readily checked by her, including that the players could play for other teams, that they had their own tools and that the team did not reimburse the players for their expenses, and also noted that Ms. Rochette had not consulted the jurisprudence. She then stated (at paras. 187, 206, TaxInterpretations translation):

Mr. Demers, in his capacity of director, could not blindly rely on an opinion whose assumptions were clearly incomplete. He knew the functionings of the Team and the realities of the League. …

Mr. Demers is an experienced director. Nothing permitted him to believe that the cosmetic changes made to the structure of the Corporation sufficed to change its tax obligations and to terminate its obligations to collect and remit the source deductions for personnel.

However, the assessment of Demers was statute-barred as having been made beyond the four-year prescription period as the ARQ had not established carelessness or neglect of the Corporation or Demers.

The appellant, a professional engineer, had three related companies (the "Three Companies") which entered into a contract with a developer to design and build mechanical systems for a condominium project. The developer deferred payments several times, in spite of collection actions taken, causing significant cash flow issues by January 2007. However, the Appellant decided that the Three Companies should continue their work under the contract. He stopped paying remittances, expecting that the developer would pay the amounts owed to the Three Companies, relying on the fact that the developer required an engineer’s certificate before the building could be occupied and on the Three Companies’ ability to place a lien on the Happy Valley property. In June 2007, the Three Companies stopped working on the Happy Valley Resort project. They filed a default notice under the Happy Valley Contract and executed a lien on the project. Notwithstanding these actions, the Three Companies were not been able to collect the amounts owed to them by the developer.

Consistent with Buckingham, D’Arcy J dismissed the taxpayer's appeal in the main, on the basis of s.227.1(3) of the Income Tax Act and s.323(3) of the Excise Tax Act. The belief that a remittance failure will be corrected in the future does not constitute due diligence (para. 32).

After finding that the taxpayers had resigned in 2001, notwithstanding that written resignation forms were not signed by them, so that 2008 assessments of them under s. 227.1 were not permitted (see the summary under s. 227.1(4)), Boyle J went on to find (at para. 32) that in the case of one of the taxpayers, her failure to take any action respecting source deduction remittances was reasonable as her belief, that she had resigned, was "entirely reasonable" even if the resignations were not legally effective, stating (at para. 30):

If the knowledgeable and experienced lawyers representing the parties could so credibly argue the point armed with authorities…it is entirely reasonable to think that an average non-lawyer Canadian would reasonably think she had resigned… ."stated (at para. 25) that "the OBCA specifies that a resignation be written but not that it be signed" and noted (at para. 22) that "all of the directors, officers and principals of the company understood the wives were resigning at that time" which "means that the company clearly understood they resigned."

However, this alternative finding was not applicable to the second taxpayer as she was not aware that her oral resignation had been communicated to legal counsel to be evidenced in writing.

A further alternative submission that there also was an "economic necessity" for the company to pay its only source of financing in priority to making source deductions was rejected.

The appellant hired, through his corporation, a bookkeeper whose responsibilities included payroll remittances, which enabled him to do the essential travel he needed to carry on the corporate business. After having trained the bookkeeper, the appellant on a number of occasions discovered lapses in the corporation's remittances - then he would supervise her closely and then "step back" based on the situation now apparently having been remedied. After her subsequent departure, he discovered that she had not sent cheques and documentation as instructed, had failed to bring deficiency notices to the appellant's attention, and had even attempted to erase sensitive financial information when she quit.

Campbell J found (at para. 32) that the appellant "could not reasonably have known or be expected to have known that the bookkeeper would engage in fraudulent and misleading actions." After noting that the due diligence standard takes the personal circumstances of the subject into account, she observed (at para. 29) the "backdrop" of the appellant's need to be away from the office frequently at construction sites.

The taxpayer directed a tavern business whose main clientele were university students. Payroll and GST/PST remittances were handled by his general manager (Hughes). The taxpayer co-signed all expense cheques on a weekly basis, and also conferred with Hughes on a weekly basis about how the business was doing. In mid-August, CRA advised him that the corporation had GST remittance failures beginning in June. Hughes advised him that she made an arrangement to pay the arrears in instalments. In early September, he was also informed of payroll remittance failures, and of PST remittance failures. He injected $22,000 of his own capital into the business, but it was used mainly to replenish inventory.

C. Miller J. found that the taxpayer was liable for the remittance failures from August until the business closed in November, given that the taxpayer had deliberately collected payroll deductions and sales tax and not remitted those amounts.

Before August, however, the taxpayer had no reason to suspect that the corporation's remittance obligations were not being met, and he had been reasonably prudent in keeping abreast of the corporation's finances, relying principally on Hughes to keep him informed and keep the business in order. C. Miller J. stated (at para. 32):

The assessment of a director's conduct prior to deemed or actual knowledge of financial difficulties should simply not be as demanding. I agree with the Respondent that a director should ask specific questions about remittances during a period of financial difficulties. I do not believe though that such a level of diligence is required up to that point in determining the director's due diligence.

Boyle J. found that the taxpayers did not have a due diligence defence for unremitted source deductions and GST collections because, regardless of their earnest efforts to restore their corporation's fortunes and their forthright dealings with CRA, the fact remained that they deliberately chose to float their business with the unremitted amounts. Boyle J. stated (at para. 23):

Given the specific wording of [ss. 227.1(3) of the ITA and 323(3) of the ETA] and the Federal Court of Appeal's comments in Buckingham, it appears somewhat difficult to imagine circumstances in which an informed and active owner-manager and director of a corporation will not be liable for unremitted employee source deductions and unremitted GST amounts.

Boyle J. acknowledged that an attempt to restore a company's fortunes may be enough to establish due diligence in exceptional circumstances, but the present case did not entail such circumstances (para. 21).

Angers J. found that the taxpayer, who was a director of two corporations forming part of a related group, was liable for unremitted income tax source deductions of those two corporations, but not for a period starting with the initial remittance failures. During that period, it became apparent that the group was in financial difficulty, and the taxpayer hired a chief financial officer, a lawyer and a chartered accountant to assist him with the financial crisis. He also made the payment of taxes a priority - he refused to have certain accounts receivables applied to pay suppliers in priority to the remittance obligations. Although payroll remittance failures did indeed arise, the corporations had overpaid GST/HST remittances as a result of poor advice, and the overpayment amounts would have covered the remittance obligations. The taxpayer was liable for subsequent remittance failures because of the finding that his attention was no longer directed towards avoiding such failures.

In October 2000, a newly-incorporated corporation of of the taxpayer (the "Corporation") acquired all the assets of a bankrupt truck repairs company ("Beverley") in which the taxpayer had invested as well as continuing to retain the services of Beverly's manager who, in turn, continued to some extent to be overseen by a business associate of the taxpayer. The assets of the Corporation were sold later a year later.

Woods J. found that the taxpayer was liable under s. 227.1(1) for the unremitted source deductions of the Corporation in 2001, and that he had not satisfied the due diligence defence in s. 227.1(3). The report of the trustee in bankruptcy that there had been substantial source deduction failures by Beverley should have put the taxpayer on notice that his close attention to source deduction compliance by the Corporation was required. Furthermore, he did not take any action following being informed by CRA in March 2001 that the Corporation already had source deduction arrears, other than having one meeting with the manager and the business associate. Respecting a submission that the taxpayer had not been informed of a director's obligations in this area, Woods J. stated (at para. 42) that "unless there is satisfactory evidence that a director sought advice as to his legal obligations as a director, ignorance is not sufficient to bring the director within the so-called due diligence defence."

The taxpayer was a corporate director with her husband. When the two separated, the taxpayer erroneously believed she had resigned as director. She was liable under s. 227.1(1) for the corporation's failure to remit employee deductions. Woods J. ruled that she could not make out a due diligence defence under s. 227.1(3). At para. 24: "the appellant was an experienced business person and she was aware that her husband had a history of ignoring remittance obligations. Even though the appellant was not actively involved in the day-to-day activities of [the corporation], she had an obligation to take some action to prevent the remittance failures."

The two taxpayers were the father and sister of the controlling shareholder ("Tony") of the corporations in question. In finding that they were not liable under s. 227.1, MacArthur, J. concluded that the father, who had limited abilities and business knowledge, reasonably relied on his son to apprise him of his duties and obligations as a director when they arose, and that the sister, who was only a director on paper, acted reasonably in relying on an undertaking given by Tony (which he breached) that if the corporations in question were activated, she would get out as a director.

MacArthur J. accepted testimony that the taxpayer had resigned as director early in 2002 notwithstanding that the only copy of the written notice of resignation was mislaid and not found until the taxpayer was assessed under s. 227.1, and that notice was not filed in the minute book or communicated to the Ontario Corporations branch. Accordingly, the Minister was barred from assessing the taxpayer under s. 227.1 more than two years after the resignation in respect of remittance obligations arising after the resignation.

In commenting on the statutory fiduciary duty of directors under s. 122(1)(b) of the Canada Business Corporations Act, the Court indicated that the characterization in the Soper case of the similar standard in s. 227.1(3) of the Income Tax Act as an "objective subjective" standard would lead to confusion, and that the Court preferred to describe the standard as an objective standard in order to make it clear "that the factual aspects of the circumstances surrounding the actions of the director or officer are important in the case of the s. 122(1)(b) duty of care, as opposed to the subjective motivation of the director or officer, which is the central focus of the statutory fiduciary duty of s. 122(1)(a) of the CBCA".

The failure of the company to remit source deduction was due to an unforeseen supervening event (the arbitrary improper refusal of a major customer to pay amounts due by it to the company), and it was unreasonable of CCRA to take the position that the taxpayer, as sole director of the company, had showed a lack of due diligence when he failed to terminate the business upon the commencement of cash flow problem. Accordingly, the due diligence defence was made out.

Beaubier TCJ applied the six tests in Attorney General of Canada v. McKinnon (FCA), No. A-421-98 to find that the appellant failed to establish the due diligence defence.

The taxpayer, who was nominally the director of a company dominated by his uncle (the uncle having been found to be a de facto director) was found to have satisfied the defence under s. 227.1(3) because he was powerless to do anything given such domination.

The taxpayer (who was a highly educated civil engineer with extensive business and management history and the controller and general manager of the corporation, had agreed with the other executives, in the face of the refusal of the Royal Bank of Canada to not fund source deductions, to continue carrying on business in the hope that future business would eventually solve the corporation's cash flow problems. Because the taxpayer had allowed the corporation to continue on this basis and had done nothing tangible to prevent its failure to remit, he failed to establish the due diligence defence.

The taxpayers were liable for failures of the corporation to remit source deductions during the period between the time of appointment of a monitor by the Quebec Superior Court pursuant to the Companies' Creditors Arrangement Act and the effective date of bankruptcy of the corporation given that "the appellants could have exercised real influence over the company's activities even though, ultimately, the monitor may have had the final authority except in the event of a court action" (p. 1153) and, that during this period, the taxpayers "attitude towards these remittances was one of indifference and even carelessness" (p. 1154).

Before going on to find that the taxpayers, who were alleged by the Crown to be directors of a non-profit corporation, had established the defence in s. 227.1(3), O'Connor TCJ. found (at p. 1119) that the standard demanded of volunteer directors of non-profit corporations was not as rigorous as the standard applied to directors of normal corporations run for profit.

Unlike the two other taxpayers (who were liable given their active involvement in the business), the third taxpayer "was an elderly man of minimal education who had virtually no idea what was going on ... and could not have influenced the course of events" (p.865) and, accordingly, was not liable.

The taxpayer, who was a nurse, testified that she knew nothing about the restaurant business of her son's corporation, had no interest in it as she was busy with other matters and did not ask anyone what her role or duties or responsibilities were. In finding that she had failed to establish the defence under s. 227.1(3) Sarchuk TCJ. found (at p. 799) that "the mere fact that one becomes a director in a family context is not sufficient to permit such director to turn his or her back on the affairs of the company".

Teskey TCJ. was satisfied that in the circumstances the taxpayers (who were passive directors) had appropriately relied upon management and a part-time chartered accountant to make remittances of source deductions and that they had believed that source deductions were being paid. In fact, although the cheques had been prepared, they never had been delivered.

The taxpayer, who was described as being unsophisticated and naive in corporate and business matters, served as a volunteer director of a non-profit child care organization that was dominated by a senior employee who was described as forceful, flamboyant and overwhelming. In finding that the taxpayer satisfied the due diligence defence by co-signing with the other individual cheques that were payable to the Receiver General (but which the other individual then locked in a drawer rather than mailing), Mogan TCJ. stated (at p. 376)):

"Having regard to the Appellant's formal education, lack of business experience and the fact that she co-signed the cheques to the Receiver General, I think she exercised a degree of care to prevent the failure that a reasonably prudent person in her position would have exercised."

Christie A.C.J. characterized the failure of a corporation to make sufficient qualifying expenditures in order to eliminate its liability for Part VIII tax as being attributable to an unexpected decline in the price of oil, with the result that the appellant was not liable under s. 227.1(1).

The three appellants, became directors of the corporation ("INOVA") in order to provide their expertise in the areas of marketing, production and medical issues. Sarchuk found that it was reasonable for them to rely on the qualified and experienced financial officers who were responsible for the day-to-day operations of Inova because there was no basis for them to question their competence, there was a system in place to ensure that the proper remittances were made, and the actual state of affairs (including overriding the system) was hidden from them. Accordingly, their due diligence defence was established.

In upholding a liability of the taxpayer under s. 227.1 in respect of the corporation's ilure to reduce his Part VIII tax liability through the failure to expend approximately $4 million on qualifying expenditures, he noted that the taxpayer "did not point to any detailed concrete financial plan whereby the objective might have been accomplished" and that he could not "find that the ill-defined scheme for financing the $4 million of research with about $1.6 million in cash plus unknown other assets and liabilities as one in which the Appellant might reasonably have relied".

The taxpayer authorized the payment of the payroll at a time when he anticipated that, notwithstanding great financial pressures, the company would be able to make the remittance on the 15th of the following month. However, in the interim, he was advised to accept the wind-up and receivership of the company, which he did. In the circumstances, he was not responsible for the company's failure to make the required remittance.

The taxpayer authorized the payment of the payroll at a time when he anticipated that, notwithstanding great financial pressures, the company would be able to make the remittance on the 15th of the following month. However, in the interim, he was advised to accept the wind-up and receivership of the company, which he did. In the circumstances, he was not responsible for the company's failure to make the required remittance.

The taxpayer exercised the requisite degree of care and diligence when, at a time that he thought that amounts due to the corporation which had been garnished by Revenue Canada were sufficient to discharge overdue source deductions from previous months, he undertook to Revenue Canada to personally secure the funds to pay the source deductions currently coming due and honoured this promise by depositing such funds to the corporation's bank account, notwithstanding that the bank refused to honour a cheque for the current source deductions drawn on that account.

The taxpayer, who was the president and majority shareholder of the corporation, was found to have been deficient in relying on established administrative procedures for the remittance of source deductions when he knew the corporation was under tremendous financial pressures and "could pay only those creditors who shouted the loudest" (p. 1268). In addition, the taxpayer was unable to establish that he should be relieved of liability on the basis that the Crown should have been more vigilant in collecting the amounts in question from the assets of the corporation.

The appellant, who became director merely to accommodate his brother's needs and suggestions, who had no real economic interest in the corporation, who had no knowledge of the rights, responsibilities and obligations of a director and who was totally uninvolved with management or operations of the corporation, was not liable on the basis of s. 227.1(3). However, for purposes of s. 227.1(4), his resignation more than two years prior to the assessment of the Minister was ineffective due to a failure to deliver the resignation to the head office of the corporation in compliance with s. 154(2) of the Company Act (B.C.).

At the closing of a sale of his shares of a corporation carrying on a restaurant business, the taxpayer tendered a resignation which was to become effective upon acceptance by the board of directors (which never occurred). The intent was that he would remain as a director until the new owner received approval from the Nova Scotia Liquor Licence Board. The taxpayer, who did not thereafter participate in any directors' meetings or in management decisions, was absolved from responsibility for the subsequent failure of the corporation to make remittances given that at the date he signed his resignation he "ceased to be a de facto Director of the Company and thereafter was not even in a position to exercise due care, diligence and skill in dealing with payroll deductions" (p. 960).

The taxpayer failed to meet the due diligence defence given that he chose to ignore various "disturbing actions" of the president of the corporation which indicated that he was not totally trustworthy. In addition, the taxpayer was estopped from proving that he had resigned as director on January 24, 1985, which was more than two years prior to an assessment of him on May 6, 1987, given that the taxpayer initially had represented to the Minister that he had resigned on August 1, 1985 and the Minister had relied upon this representation. Various Charter arguments also were rejected.

The taxpayer, who was a school teacher, became the sole director of the corporation to accommodate her husband, who was unable to be a director himself because of a judgment against him. She had nothing to do with the company. Margeson J. found her not to be liable on the basis that she did not know and should not have known under the circumstances that she was a director; she did not know her responsibilities as a director and did not deliberately turn a blind eye to those responsibilities; and was without control during the relevant periods of time.

The taxpayer believed that his corporation had an arrangement with the T-D Bank whereby the bank would finance the gross payroll costs (including employee source deductions) of an electrical services contract. The bank, however, refused to pay the required source deduction. Nonetheless, the taxpayer decided that the contract would be completed, given that it was profitable. This decision was found to be reasonable, with the result that the taxpayer was not liable.

In 1981 the taxpayer sold all his shares of the corporation in consideration for a secured debenture of the corporation, but remained on as a passive (and inactive) director. He was advised that the corporation was experiencing some financial difficulties, offered to come into the office for a few days to help with administration in order that the other director could promote sales, wrote a cheque to the Receiver General for source deductions that had then come due, which then bounced because, unbeknownst to him, the corporation had exceeded its credit limit. In these circumstances, he had met the required standard. In addition, following the decision in Currie v. MNR, 91 DTC 197, he was not responsible for the current month's source deductions which were not due until May 15 of the following month.

Unlike her co-directors, who were accountants and experienced businessmen and who were involved in the business of the corporation, the taxpayer established the due diligence defence on the bases that she was not involved in the corporation, apart from a 12.5% shareholding in the corporation she was little more than an employee, and she did not know that she was a director.

A legal advisor to the corporation, who prior to becoming director examined the financial statements and received assurances that there were no arrears of source deductions, and who resigned immediately upon finding out that the corporation was in arrears, and who until that time had solid reasons for believing that the corporation was not in financial difficulties, had exercised the requisite degree of care, diligence and skill under s. 227.1(3).

Proulx J. quoted with approval (at p. 1344) the following passage from Emshwiller v. U.S., 565 F. (2d) 1041:

"We are not insensitive to the dilemma faced by the manager of an insolvent corporation who is making an earnest effort to keep the business on its feet. Should he choose to refrain from paying net wages, he runs the risk of losing employees with the business; should he choose to pay net wages, he runs the risk of being unable to pay over those withheld. Despite the difficulty of this choice, there is no basis for allowing a responsible person to choose that course which disables him from meeting his tax obligation by preferring those with wage claims."

The taxpayers successfully appealed against assessments under s. 227.1 on the ground that the corporation's bank alone determined which of the corporation's cheques would be honoured (on the basis of whether the cheques exceeded the credit line set by it for the corporation). In addition, one of the taxpayers had sought to pay source deductions through post-dated cheques, most of which the bank refused to honour.

By virtue of s. 91 of the Business Corporations Act, the appointment of a receiver-manager by the CIBC rendered the appellant powerless to do anything to alter the receiver-manager's decision not to remit source deductions. Accordingly, the appellant was not liable.

Revenue Canada assessed a co-director (Mr. Sandrin) of the taxpayer for $27,000 in respect of unpaid source deductions, garnished this amount, and then repaid Mr. Sandrin this amount after Mr. Sandrin successfully lobbied his Member of Parliament. Bonner J. held that because the payment by one joint and several debtor discharges the other, a reassessment of the taxpayer under s. 227.1 for the same amount could not stand. "The section is spent when it has served its purpose by putting the Minister in funds .... I cannot see how the original [company] liability was in some mysterious way revived simply because the Minister choose to reimburse Mr. Sandrin."

The company's failure to remit source deductions was attributed to the unexpected refusal of the de facto receiver of the company to authorize payment of the amount of the source deductions, which decision was not communicated to the company's sole director. "A director has an obligation to be aware of what is happening within the corporation ... However, when all reasonable measures are taken and these measures have been successful in the past, he may reasonably be expected to rely on the measures in the future."

The taxpayer and his co-director made a deliberate decision not to make remittances on time because of cash flow difficulties, and did not keep the source deductions in a separate trust bank account. When the gravity of the situation was realized and they attempted to ensure the payment of Revenue Canada, it was too late.

The taxpayer submitted his resignation as an officer and director on May 1, 1984, and was effectively shut out from the company after that point. The resignation arguably was ineffective by virtue of s. 119(2) of the Business Corporations Act, 1982, which provides that no director named in the articles shall be permitted to resign unless a successor is appointed.

The taxpayer was not liable for source deductions which the corporation failed to remit on 15 September 1984, 15 October 1984, and 15 January 1985. "Parliament established an exonerating standard of conduct the presence of which is to be determined in particular cases by the actual relevant facts and not by fixing to a taxpayer knowledge of a somewhat esoteric point of corporation law that in reality is probably not within the actual knowledge of a good number of legal practitioners ... It may well be that a taxpayer would not take positive steps in some circumstances and still be correctly regarded as having 'exercised' that degree of care, diligence and skill expected of a reasonably prudent person ..."

The taxpayer, who was "completely unaware of a director's duties," when he realized that Revenue Canada had made a demand of the company for arrears in remittances insisted, before injecting $40,000 into the company in order to pay off the arrears, on being made a co-signer on all cheques and in having his daughter placed in the position of bookkeeper. The principal of the company foiled these precautions by hiding in his desk remittance cheques that had been signed by the taxpayer.

These actions of the principal were fraudulent, and a director is not to be held responsible for fraud of his co-directors unless he has expressly or impliedly authorized it.

When a small excavating company of which the taxpayer and has wife were directors and officers began encountering cash flow difficulties, the bank to which it had made a general assignment of its receivables as security, began monitoring all cheques issued by it and only authorizing certain specified payments. The bank refused to authorize the issuance of a cheque to cover the remittance of the source deductions for August 1982, and the company thereafter ceased operations.

Couture, C.J. found that the taxpayer and his wife were "entangled in a legal network which had its origins when the company began its operations and assigned its receivables to the bank, a situation that legally restrained their control over its cash flow as long as it owed money to the bank. They were conscious of the company's obligations under the Act and of their respective personal liability and ... under the prevailing circumstances they exercised the degree of care, diligence and skill referred to in s. 227.1(3)". The proposition advanced by the Crown, that the appellants in order to avoid personal liability should have ceased operations when the company entered into financial difficulties, did not reflect the true intent of the legislation.

The director of a private manufacturer of caskets who concentrated on manufacturing and marketing, was faulted by Goetz J. for not at least enquiring about the amounts owing to the Receiver General and for not giving instructions to anyone to ensure payment even after a Revenue Canada auditor brought the arrears to his attention. He failed to meet the requisite standard.

A director of a private company was responsible for the manufacturing side of the business and the two other directors (the president and treasurer) were responsible for financial and other matters. When he became aware that a Revenue Canada collections official was raising a "ruckus" about income tax arrears he was told by the other two that they were taking care of the problem. He did not make further enquiries or take further action. He failed to meet the due diligence standard. S.227(3) "does not assist those whose only excuse is that others had a better opportunity to prevent failure than they did." Although he was unaware of the requirements of ss.153 and 227, s. 227.1 does not impose liability only on those who are aware of its requirements.

The deceased (Gagné) was assessed less than two years after the registry under the Act respecting the Legal Publicity of Enterprises (Quebec) (the “ALPE”) showed him as ceasing to be the director of his majority-owned corporation. A few days before the hearing of the appeal by his estate, its notice of appeal was amended to allege inter alia that Gagné had never been a director (given that the proper corporate procedures had not been followed for his appointment, including his consenting to such appointment. and there being an absence of any resolution appointing him) – an argument never made by Gagné.

Before dismissing the estate’s appeal, LeBlanc JA noted the rebuttable presumption under s. 62 of the ALPE as to the accuracy of the registry, and that the absence of a resolution appointing Gagné should be given little weight given the absence of corporate records since before his mooted appointment as director. He further stated (at para. 49, TaxInterpretations translation):

In the context of this case, the problem is that the Estate is seeking to exploit a governance defect that the principal never even raised when, on more than one occasion, he had ample opportunity to do so.

The taxpayer, Ms. Penate, was the sole director and shareholder of a roofing company that fell behind in its GST/HST remittances. Campbell J found (para. 18):

There is no evidence that any GST/HST remittances were diverted to assist with the business activities. It was simply a matter of not being able to collect from many contractors as a female-run subtrade unless Ms. Penate agreed to return sexual favours for payment of the Company’s completed subcontracts.

Campbell J stated that these constituted “exceptional circumstances and facts” (para. 18) which allowed her to conclude that the taxpayer could avail herself of the due diligence defence – so that the appeal was allowed.

After a construction company (Strong Forming) began to run out of money, its sole shareholder, director and officer (Mr. Ahmar) decided that Strong Forming would stop making HST remittances, but that it would continue on with another construction contract using revenues that came in and money contributed by Mr. Ahmar – before Strong Forming had to cease operations. In affirming that Mr. Ahmar had not made out the due diligence defence to director liability for failure to remit, Mactavish JA stated (at paras 23 and 24):

… 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. …

… This Court … in Buckingham … state[ed] 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”… .

Similarly to ITA s. 227.1(4), ETA s. 323(5) indicates that a director’s assessment under ETA s. 323 is invalid if made more than two years after the individual ceased to be a director.

Bocock J accepted the taxpayer’s evidence that he had resigned by written letter of resignation “delivered” to the corporation (e.g., to his wife as the other director) more than two years before the s. 323 assessment, so that such assessment was invalid. He found that it was not contrary to this conclusion that the taxpayer (or corporation) had not filed a notice of change under the Corporations Information Act, and that the directors’ register (in the corporate minute book) was not fully updated to reflect the change.

In March 2010, two companies of which the taxpayer was the director were assigned into bankruptcy and a receiver and receiver manager (EY) was appointed pursuant to s. 243 of the Bankruptcy and Insolvency Act. The taxpayer thereafter was denied access to the head office and could only do so when EY asked him to assist with receivables.

Smith J found that (at para 70):

… I conclude that the Appellant did not cease to be a de jure director (MacDonald v. The Queen, 2014 TCC 308, para. 30) and as such, is not entitled to rely on subsection 323(5) of the ETA.

The taxpayer was the director of a corporation that made an assignment in bankruptcy on August 1, 2006. In 2012, he was assessed pursuant to s. 227.1 respecting the corporation’s failure to remit source deductions in 2004 to 2006.

In rejecting the taxpayer’s submission that the Minister had failed to assess him “with all due dispatch,” contrary to s. 152(1) of the Act, Smith J stated (at paras. 19-20):

A plain reading of the words “at any time” [in s. 227(10)] suggests there is no limitation period for the issuance of a notice of assessment against a director, save for the two year limitation period… .

… [T]he words “with all due dispatch”, as set out in section 152(1)…, have no bearing on this analysis.

In also rejecting the taxpayer’s submission that he had ceased to be a director in 2006 as all the assets and undertaking of the corporation had devolved to the trustee in bankruptcy, so that the two-year limitation period precluded the Minister’s assessment, Smith J stated (at paras. 24-26):

…Kalef…found that Mr. Kalef had not ceased to be a director by virtue of the appointment of a trustee in bankruptcy… .

I ,… find that the Appellant’s situation is in fact typical of most directors of bankrupt companies. More importantly, I note that the assessment … relates to amounts due … which arose prior to the date of bankruptcy.

… I conclude that the Appellant was still a director of the Corporation when the Notice of Assessment was issued in May 2012.

The appellant (Ms. Marra”) became a director of a company, Sani-Clean, on her husband’s request. He had financed the company, but day to day operations were carried out by another director (“Manankil”), whose wife did the book keeping. The Marras caused Sani‑Clean to sue Manankil for misappropriating company funds, and Manankil left Sani-Clean. Mr. Marra urged Ms. Marra to call their lawyer and lawyer for Sani‑Clean (“Polsinelli”) to discuss resigning. As there were no remaining active directors, Posinelli advised her to submit her resignation to him in writing, which she did on January 7, 2007. He did not file a notice of resignation with the Ontario Ministry of Government and Consumer Services and did not file the letter in the minute book, which was maintained by another lawyer. Ms. Marra was assessed under ETA s. 323(1) and ITA s. 227.1(1) in January 2013.

After noting (at para. 42) that s. 121(1) of the OBCA required a resignation to be received by the corporation before it became effective, Rip J. stated (at paras. 52-53), in accepting Ms. Marra’s submission (at para. 46) that “it would be useless to send the letter of resignation to a director against whom you have taken legal action or to a director who had absolutely no involvement with the company:”

This is not necessarily a question of whether Mr. Polsinelli is agent of Sani‑Clean; it is a question of wanting to resign as director and sending the letter of resignation to the person who has any remaining responsible connection with Sani‑Clean and, in the circumstances, that was Mr. Polsinelli, Sani‑Clean’s lawyer.

Ms. Marra’s letter of resignation as director of Sani‑Clean was effective as at the date it was received by Mr. Polsinelli.

Accordingly, the assessments were barred by the two-year limitations in ITA s. 227.1(4) and ETA s. 323(5).

The appellant contended that he had resigned as director in 2006, so that an assessment under s. 227.1(1) in 2010 was out of time. The Minister's forensic evidence to establish that the resignation had been backdated had been disallowed in a prior hearing.

The Minister had not pleaded backdating - only that the appellant had continued as a director – nor did she plead lack of due diligence. Accordingly, explanations of the appellant which were plausible were sufficient to demolish the Minister's assumptions notwithstanding that "in all likelihood, the Appellant backdated the Resignation" (para. 45). The appeal was allowed.

The taxpayer was the sole director of a corporation which had, under another person's management, failed to remit source deductions. Upon learning of the failures, she took measures that culminated in the sale of the corporation to a third party on 7 July 2006, but her notice of assessment for director's liability was dated 16 July 2008, i.e., just over two years later. The relevant terms of the contract were:

7.1 The seller shall resign from her position as President, Secretary and Director of the corporation on the date of this agreement;

7.2 This resignation is accepted by the corporation on the date of this agreement and shall be effective on the date of the corporation's next articles of amendment;

Lamarre J found that the taxpayer's limitations period ran not from 7 July 2006, but from 18 July 2006 when the articles of amendment were signed. Section 108 of the Canada Business Corporations Act provides that a resignation is effective on the later of the date of delivery (i.e. when the agreement was signed) and the date specified in the resignation (i.e. when the articles were amended, which turned out to be on 18 July 2006).

The Minister assessed a director on 15 July 2010 for unremitted CPP amounts of a corporation that was dissolved on 15 July 2008. Angers J. found that, under s. 27(5) of the Interpretation Act, the two year limitations period commenced on the day after the taxpayer ceased to be a director, and therefore 15 July 2010 was just within the limitations period. The taxpayer's appeal was granted on other grounds.

The taxpayer had satisfied the requirement that there have been "meaningful communication with the corporation" of his decision to resign when he signed a letter of resignation as the sole director of the corporation in question and placed it with the company records (but without filing it in the minute book). Furthermore, his actions following the cessation of operations of the corporation and such resignation, of forwarding correspondence to the company accountant and authorizing the accountant to carry on discussions with CRA officials, did not cause him to be a de facto director following his resignation. The taxpayer's appeal was allowed.

A written resignation of the taxpayer as sole director of the corporation dated more than two years before his assessment under s. 227.1 was found to have been fabricated after the fact. However, even if he had resigned on the date of the purported letter, he would have continued to be a director under s. 115(4) of the Business Corporations Act (Ontario) (which stipulates that "any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to be a director" following that person's resignation), given that after the date of the purported resignation he continued to hold himself out as the director of the corporation and continued to do various acts such as meeting with CRA and giving them post-dated cheques.

The taxpayer was liable under s. 227.1 in respect of the failure of a corporation of which he was a director to withhold on various amounts paid to non-residents of Canada under Regulation 105. Boise J. stated (at p. 124) that "I do not consider that simply having the company hire a payroll company to process the payments is sufficient to establish due diligence on his part."

The taxpayer was not liable with respect to the second of two periods of time during which the corporation failed to make source deductions given that the other major shareholder of the corporation had precipitously refused to make any further contributions of money to the corporation at a point during the playing season for the corporation (which ran a soccer team) at which the taxpayer was powerless to prevent the failures to remit.

Although two of the taxpayers had signed documents resigning as officers and directors, these documents were not formally filed with the corporation or accepted by a responsible officer of the corporation or by the board of directors, the provisions of s. 119 of the Business Corporations Act (Ontario) were not complied with in that as first directors they were not replaced by anyone on the board, there was no resolution of the corporation reducing the number of board members, and the two individuals, in fact, continued to attend board meetings. Accordingly, the purported resignations were not effective or complete.

The two-year limitation period commenced running at the time of the appointment of a receiver-manager notwithstanding that the taxpayer still retained certain vestigial powers as a director.

The decision of the directors of a corporation, following its filing of a proposal under the Bankruptcy Act, to discontinue its business operations did not result in any restriction on their powers and, accordingly, did not cause the two-year period referred to in s. 227.1(4) to commence running.

The issuance of a notice of reassessment was a "proceeding" for purposes of s. 227.1(4), with the result that the making of such a reassessment on the second anniversary of the date of resignation of the taxpayer as a director was permissible for purposes of s. 227.1(4). However, the taxpayer met the due diligence defence given that the failure of the operation's banker to honour the monthly remittance cheque was unexpected, and the taxpayer resigned shortly thereafter.

In finding that the two-year limitation period commenced running when the corporation was deemed to make an assignment in bankruptcy and a receiver-manager was appointed, with the result that the corporation ceased to have any capacity to dispose of or otherwise deal with this property (pursuant to s. 50(5) of the Bankruptcy Act) and the directors ceased to have the authority to exercise their powers (pursuant to s. 91 of the Business Corporations Act (Ontario)), Bonner J. stated (p. 877):

"The directors of a corporation which has lost the capacity to dispose of or deal with corporate property are not the sort of persons who are the target of section 227.1."

When a receiver-manager was appointed, the taxpayer ceased to be a director for purposes of s. 227.1(4) by virtue of s. 73 of the Companies Act (N.S.), which provided that in such event "the powers of the directors of the company that the receiver-manager is authorized to exercise may not be exercised by the directors until the receiver-manager is discharged".

Following the continuance of a corporation under the Alberta Business Corporations Act, there was a failure to have the appellant consent to continue to act as a director of the corporation. Therefore, in light of subsection 100(6) of the Alberta Business Corporations Act, which provides that a person who is elected or appointed as a director and who refuses or fail to consent to act as a director shall be deemed not to have been elected or appointed as a director, the appellant was found not to be liable under s. 227.1.

The taxpayers ceased to be directors for purposes of s. 227.1(4) upon the appointment of a receiver manager notwithstanding that the taxpayers did not resign until later, and that they continued on as employees of the company. S.110 of the Company Act (B.C.) provided:

"Where a receiver manager is appointed, the powers of the directors and officers of the corporation cease with respect to that part of the undertaking for which he is appointed until he is discharged."

The taxpayer submitted his resignation as an officer and director on May 1, 1984, and was effectively shut out from the company after that point. The resignation arguably was ineffective by virtue of s. 119(2) of the Business Corporations Act, 1982, which provides that no director named in the articles shall be permitted to resign unless a successor is appointed.

The taxpayer was not liable for source deductions which the corporation failed to remit on 15 September 1984, 15 October 1984, and 15 January 1985. "Parliament established an exonerating standard of conduct the presence of which is to be determined in particular cases by the actual relevant facts and not by fixing to a taxpayer knowledge of a somewhat esoteric point of corporation law that in reality is probably not within the actual knowledge of a good number of legal practitioners ... It may well be that a taxpayer would not take positive steps in some circumstances and still be correctly regarded as having 'exercised' that degree of care, diligence and skill expected of a reasonably prudent person ..."