Don’t Tax the Messenger: Cliff v. Canada and Valid Director’s Resignations

The recent case of Cliff v. Canada (“Cliff”) highlights how important it is that a corporate director properly and legally cuts ties with a corporation from which he or she wishes to resign.[1] A valid resignation is essential because, unless and until one is made, corporate directors are responsible for many of their corporation’s source deduction obligations and GST/HST liabilities, among others.

Under the Income Tax Act, directors are responsible for their corporation’s source deduction obligations when certain types of payments are made, such as salaries, wages, and other types of employee remuneration.[2] The payroll withholding obligation covers the employee’s payroll tax, and is in addition to similar EI and CPP withholding obligations which are outside the scope of this article.

When these amounts are paid, the corporation is required to withhold a percentage of that payment and remit it to the Canada Revenue Agency. Directors are liable to pay these amounts if their corporation fails to pay them, along with associated interest and penalties.

If the corporation fails to withhold these amounts in the first place, then its directors are liable to a penalty of either 10% or 20% of the amount that was supposed to be withheld, depending on their level of culpability.[3]

Under the Excise Tax Act, directors are also responsible for their corporation’s liability to pay GST/HST.[4] If the corporation fails to pay these amounts, then its directors are personally responsible for them and for any associated interest or penalties. 

The Canada Revenue Agency cannot, however, look to a director for these amounts if more than two years have passed since they ceased to be a director.[5] Therefore, in order to avoid these liabilities, it is important that a former director ensures that they have properly resigned.

The question of when someone has resigned as a corporate director was recently raised in the Court decision in Cliff. Cliff concerned an Ontario corporation than had been dissolved with outstanding GST/HST and source deduction liabilities. The Canada Revenue Agency had assessed the appellant in this case for these liabilities, on the basis that she was a director of that corporation. The only issue in dispute was whether the appellant had resigned as a director more than two years before those tax assessments were made.

The legislation at issue in Cliff was subsection 121(2) of the Ontario Business Corporations Act, which states that the “resignation of a director becomes effective at the time a written resignation is received by the corporation or at the time specified in the resignation, whichever is later.”

It was not disputed that, on May 18, 2001, the appellant became a director of the subject corporation which she owned with her husband. The appellant claimed that she gave a verbal director’s resignation to her husband later that same day. Her husband then informed the corporation’s accountant of the resignation by telephone.

The accountant subsequently prepared a “Form 1 – Initial Return/Notice of Change”, which is used to notify Ontario’s Ministry of Consumer and Commercial Relations (now know as the “Ministry of Government and Consumer Services”) that there has been a change to the directors of a corporation. A copy of that form was placed in the corporation’s minute book. The accountant also claims to have submitted the form to the Ministry, although this could not be verified.

Crucially, no written resignation was ever sent to and received by the corporation itself.

At the Tax Court of Canada, the Judge ruled that the appellant’s resignation was ineffective because the Form 1 was not signed. This was appealed to the Federal Court of Appeal, which rendered its judgment in Cliff.

The Court of Appeal overturned the Tax Court’s decision, and ruled that the appellant had failed to resign her directorship because there was no evidence that the corporation had received a written resignation. The accountant’s Form 1 was not legally a resignation but a notice, and it was not a communication to the corporation, but was instead a communication from the corporation to the Ministry of Consumer and Commercial Relations.

The takeaway from this case is that nothing short of a written resignation to a corporation will relieve a director from their corporation’s source deduction and net tax liabilities, provided that such resignation is sent more than two years prior to the Canada Revenue Agency’s assessment. Oral resignations, and documents which only evidence a resignation, are insufficient. 

It is worth remembering that directors can escape liability in these situations by demonstrating that they acted with due diligence at all times while they were a director. More coming on that issue in an upcoming article.

This article was written by member of the Tax Law Team at McKenzie Lake. If you require assistance with a Tax Law matter or wish to speak to a lawyer at McKenzie Lake Lawyers LLP, please call (519) 672-5666.

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[1] Cliff v. Canada, 2022 FCA 16 (CanLII).

[2] Income Tax Act, s 227.1(1).

[3] Income Tax Act, s 227(8); Storrie v. Minister of National Revenue [1996] 2 C.T.C. 2596; CRA Views, Tech Interp, 9810975 — Director’s liability for employer — corporation’s failure to withhold.

[4] Excise Tax Act, s 323(1).

[5] Excise Tax Act, s 323 (5); Income Tax Act, s 227.1(4).