Under section 227.1 of the Income Tax Act ("ITA"), the Minister of National Revenue (the "Minister") may hold a corporation's director personally liable for unpaid source deductions, including GST/HST and payroll tax, as well as any interest or penalties related to those amounts. In general, there are three commonly used defences against director's liability assessments: the due diligence defense, the two-year limitation period on assessing a director after proper resignation, and a challenge to the underlying assessment for the corporate tax arrears. While a successful application of the due diligence or limitation period defence will absolve all liability from the director, the courts have historically referred challenges to the underlying assessment back to the Minister for reconsideration based on adjustments raised and justified in the course of the dispute.
In the Tax Court’s recent decision of Tran v. The Queen 2021 TCC 51 [Tran] (judgment found here: https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/511340/index.do), the Appellant raised all three defences to dispute his director’s liability. Although the Appellant’s arguments on due diligence and resignation were ultimately unsuccessful, the Tax Court agreed with his arguments for challenging the underlying corporate assessment. Interestingly, the Appellant’s challenge was, in the Tax Court’s view, sufficient to justify allowing the appeal in full, which is a departure from most other director’s liability cases where a challenge to the underlying assessment was raised.
Background
The Appellant is a computer programmer who had a longstanding employment history with Mr. Peter McBride ("McBride"). In 1999, the Appellant joined Karora Technologies Canada Inc. ("Karora"), a start-up venture created, in part, by McBride, who was the CEO, President and Secretary of Karora and controlled all aspects of the business. On December 15, 1999, the Appellant was appointed as a director of Karora.
In 2001, Karora had only one customer: Karora Summit Technologies Inc. (“Karora USA”), a related entity who was also owned by McBride. While Karora USA was a customer, Karora never invoiced Karora USA for services rendered and Karora USA would sporadically pay for Karora’s business expenses. Beginning in 2011, Karora USA paid for Karora’s employees with its payment appearing to come directly from McBride (acting as Karora USA) to the employees of Karora.
In 2005, Karora was assessed by the Minister for a failure to remit source deductions. This prompted all of Karora’s directors, with the exception of McBride and the Appellant, to resign out of fear of a potential director’s liability assessment.
On October 18, 2011, the Appellant sent two emails and called McBride, stating that the Appellant wished to terminate his employment with Karora. Despite this resignation, the Appellant continued to perform software development work on a part-time basis as a subcontractor with Karora.
On June 9, 2016, the Appellant was assessed under section 227.1 of the ITA for director’s liability in relation to Karora’s failure to remit total source withholdings of $305,390.15 under the ITA, and Canada Pension Plan (“CPP”), and Employment and Insurance Assistance (“EIA”) obligations, for the 2008 through to 2014 taxation years. On August 18, 2017, the Minister confirmed the assessment.
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