by Stevan Novoselac & John Sorensen
In our article, “The CRA is not a Bank – Director’s Liability in an Age of Economic Uncertainty”,1 we strongly warned corporate directors to make sure that source deductions, GST/HST, employee EI premiums and employee CPP contributions are remitted to the Crown and not used as operating funds, regardless of whether the corporation has cash flow problems. This is because a corporation’s failure to remit these amounts makes directors personally liable for the default, if:
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By Eric Koh of Gowling Lafleur Henderson LLP
Introduction
A director of a corporation is personally liable under subsection 323(1) of the Excise Tax Act1 (“ETA”) for the failure of the corporation to remit goods and services tax (“GST”). However, subsection 323(5) imposes a time limit on this liability whereby a director will not be held liable for unremitted GST two or more years after ceasing to be a director. Unfortunately, the Tax Court of Canada’s (“TCC”) decision in Snively v. The Queen 2 (“Snively”) makes it more difficult for an individual to rely on subsection 323(5). Indeed, this decision may have broader ramifications on directors’ liability in general, and beyond the ETA. According to the TCC, an individual may still be a deemed director of a corporation even after formally resigning from that position.
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By Barry J. Reiter of Bennett Jones LLP
Directors’ and officers’ insurance contracts are often riddled with clauses that, while seemingly reasonable and well-intentioned, can lead to bizarre court decisions
Previous columns [Ed.: In Lexpert magazine.] have discussed how directors’ and officers’ insurance programs are “just contracts.” Although the exercise may seem surreal, in circumstances in which the actual insurance policies are typically not available for months after they have been purchased, courts apply normal contract interpretation principles to insurance programs, seeking to discern the “intentions of the parties.” You must, therefore, insist upon receiving your policy documents and you should read them carefully.
An example of what can happen otherwise is illustrated by “insured vs. insured” clauses, which find their way into virtually every D&O policy form in the first instance. These provisions state that there is no insurance coverage in a lawsuit brought by a person or company potentially insured under the policy against anyone else also named in the policy. The purpose of these clauses is
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By Wayne D. Gray of McMillan LLP
On June 23, 2009, Bill C-4, the Canada Not-for-profit Corporations Act received Royal Assent. The new Act is important governance legislation in its own right but will doubtless exert an influence far beyond those corporations that will incorporate or continue under it. Just as the CBCA exerted a powerful influence on the shape of provincial and territorial laws governing business corporations in the years immediately following its implementation in 1975, this new federal Act is bound to exert an equally strong (if not more profound) influence on provincial and territorial not-for-profit corporate law reform in the years ahead.
This article reviews the types of not-for-profit corporations to which the new Act will apply, summarizes the rules differentiating soliciting and non-soliciting corporations, describes some of the new governance provisions, analyzes possible problem areas and suggests workaround solutions to these problems, draws implications from the implicit governance regime imported into the new Act and outlines the process for continuing to the new Act.
Download the full article here.
A recent discussion with colleagues revealed that many are unaware of the issues that may arise when advising clients whether to declare corporate dividends, including in the case where there exist negative retained earnings.
From the viewpoint of an insolvency practitioner, the picture is quite clear.
A trustee of a bankrupt corporation is permitted to make an application in court to recover against the directors where the corporation has, within the year prior to bankruptcy, redeemed or
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by Douglas J. Powrie and Stephanie Wong of Borden Ladner Gervais LLP
The Canadian courts have recently considered appeals of several cases in which the Crown has invoked the general anti-avoidance rule (GAAR) to challenge tax avoidance transactions. In Lehigh Cement, the Crown was unable to apply the GAAR because it could not meet its burden of establishing the taxpayer’s abusive tax avoidance in the context of planning that had interest paid (free of withholding tax) to an arms-length bank in respect of principal owed to an affiliated corporation. In Collins & Aikman, the Crown was similarly unable to meet its burden in seeking to apply the GAAR to
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On October 6, 2010, in Seier v. The Queen, the Tax Court of Canada provided us with one more example of a lender and corporate director who must pay the GST and payroll withholdings arrears of a failed business.
In this case, a lender, by realizing on his security, becomes the sole director and shareholder of the borrower corporation. He then fails to monitor the corporation’s compliance with the various GST and payroll tax requirements. As a result, the corporation accumulates in these accounts $60,000 outstanding for which the lender, as corporate director, is assessed.
The Court’s decision is instructive since it paints a picture of absentee management that is common and likely found within your own experience.
Lenders (who upon a liquidation are liable for such debts out of the proceeds) and directors (who are directly liable for such debts) must have monitoring systems in place to limit this risk.
I suggest that some combination of the following could be used to reduce risk:
- Use of a third-party payroll service, with all remittances to be made by the service.
- All payroll and GST/HST assessments and statements are forwarded for review immediately upon receipt.
- An independent accountant is engaged by the lender/director for periodic review of underlying calculations with the accountant’s fees reimbursed by the corporation.
- The lender’s/director’s own bookkeeper/accountant provides this periodic review.
If you are using any of these controls, or some other one, please share it by clicking on “Leave a comment” at the top of this post.
The following is excerpted from “Directors’ and Officers’ Duties and Liabilities“, August, 2010, by Robert E. Milnes and Kathleen M. Ritchie of Gowling Lafleur Henderson LLP.
Practical Suggestions for Complying With Duties and Minimizing Liability
To comply with a director’s or and officer’s duties, and to minimize liabilities, the following rules should be followed:
1. Directors and officers should avoid any conflict of interest, which includes self-dealing of any kind, particularly in respect of share transactions that are motivated by knowledge acquired as an insider.
2. Directors and officers should be aware of the terms of the articles and by-laws of the corporation and should be able to verify, in general terms on an on-going basis, that the corporation’s business and affairs are being managed in accordance with any restrictions contained in such documents.
3. Directors and officers of corporations in regulated industries
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In Fairbanx Corp. v. Royal Bank of Canada, the Ontario Court of Appeal considered a contest between two registrations under the Personal Property Security Act (Ontario) (“PPSA“): a registration made by Fairbanx to perfect its purchase of accounts receivable from the bankrupt debtor and a registration made by Royal Bank of Canada (RBC) in respect of security for a loan to the debtor. While Fairbanx filed first and would therefore normally have ranked ahead of RBC, it made a mistake in recording the debtor’s name in its PPSA financing statement. The debtor’s correct legal name was “Friction Tecnology Consultants Inc.”, spelling “Tec[h]nology” without the “h”.
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By Colleen McMullin of Gowling Lafleur Henderson LLP
Under the Canada-U.S. Income Tax Convention (the “Treaty”), a corporation resident in the United States may be taxed in Canada where its activities give rise to a “permanent establishment”.
If a U.S. corporation is deemed to have a permanent establishment in Canada, the U.S. corporation will be subject to Canadian tax return filing obligations and will be required to pay tax to the Canada Revenue Agency (“CRA”) on business profits attributable to that permanent establishment.
A permanent establishment is generally defined to include either a fixed place of business (e.g. an office, branch, place of management, factory, etc.) or a dependent agent who habitually exercises the authority to conclude contracts on behalf of the U.S. corporation. Furthermore, a recent addition (effective January 1, 2010) to the Treaty provides that a U.S. corporation may be deemed to have a Canadian permanent establishment if it either:
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Directors must always ensure that the proper source deductions from payroll are withheld and then remitted. Under the Income Tax Act 227.1(1) directors who were in office at the time that
