• Does CRA have to Proof Due Diligence?
  • June 4, 2012 | Author: Aaron Rodgers
  • Law Firm: Miller Thomson LLP - Montreal Office
  • With its decision in Barrett v. The Queen1, the Federal Court of Appeal effectively shut down a potential technical defense for directors faced with joint and several liability for unpaid taxes.

    Directors are jointly and severally liable with defaulting corporations for GST, deductions at source and withholding taxes. A due diligence defense is available where directors can persuade the courts that appropriate steps were taken to prevent the default, but this defense turns on its facts and the courts have been quite strict in its application.

    Another avenue of defense, largely unexplored, is to argue that the Crown failed to meet the conditions required before a director could be assessed.

    Sections 227.1 of the Income Tax Act ("ITA") and 323 of the Excise Tax Act ("ETA") establish the joint and several liability of directors for taxes not remitted2. Subsection 2 of each of these sections provides that a director is not liable "unless" one of three conditions is met:

    • A writ of execution must be returned unsatisfied (in whole or in part);

    • The corporation is dissolved or has commenced liquidation or dissolution proceedings and a claim has been proved; or

    • The corporation is bankrupt and a claim for the amount has been proved within six months of the bankruptcy.

    Attempts to argue the insufficiency of the proof of claim were rejected in Matossian3, even though the decision in Port Chevrolet4 seemed to support the argument.

    Now the Federal Court of Appeal has rejected the argument that returning a writ of execution unsatisfied requires reasonable efforts to collect on the part of the CRA. That thesis was accepted by the Tax Court but overturned by the Court of Appeal.

    Mr Barrett had been a director of a corporation which ceased operations in 1995. The CRA’s efforts to collect moved slowly. The debt was certified in the Federal Court in October 1998. The sheriff was directed to execute the writ in October 2000 and the writ was returned unsatisfied in November 2000. The assessment was issued on September 8, 2003. Despite this pace, and the appellant’s testimony that there were ample assets to satisfy the debt in 1995, the Tax Court rejected the submission that the Minister could have recovered the taxes had it acted diligently:

    [13] Whether or not the company had enough assets to cover the GST liability if the Minister had moved to seize corporate assets in 1998 does not affect the Appellant’s liability, nor does the fact that collection efforts were slow. It must be recalled that it is the company’s obligation to pay the liability and the Appellant’s obligation as director to see to it that the liability is paid. There is no doubt that the period in question was a very difficult one in the Appellant’s life but that does not change his responsibilities as director.5

    The Tax Court then held that reasonable execution efforts, including a search for a bank account, had to be completed by the CRA before the writ of execution was returned. It relied on a passage from then Chief Justice Bowman in Miotto v. The Queen6, to conclude that the CRA, as creditor, had some obligation to take reasonable steps to collect.

    The Federal Court of Appeal disagreed, noting that "nothing in the text of the provision imposes any requirement on the Minister to take reasonable steps to search for the assets of the corporate debtor". The same was said of the Federal Courts Act, Federal Courts Rules and the provincial rules of procedure. The court was fortified in its conclusion by the observation that if a corporation has assets, directors who are liable may claim against it and are entitled to any preference the Crown enjoyed (ETA ss. 323(7) & ITA ss 227.1(6)). Finally, the Court concluded that the decision Miotto did not establish an obligation on the CRA other than the public law duty of good faith.

    In light of the Tax Court’s conclusions concerning collection efforts and the time between the failure to remit and the assessment, one might conclude that the CRA is poorly placed to evaluate the "due diligence" of directors.

    1 2012 FCA 33.

    2 Section 24.0.1 of the Quebec’s Tax Administration Act is substantially the same.

    3 Matossian v. The Queen, 2005 TCC 21 affirmed in Amyot v. Canada, 2006 FCA 55

    4 Port Chevrolet Oldsmobile Ltd. (Re), 2004 BCCA 37

    5 2010 TCC 298.

    6 2008 TCC 128.