Insights & Articles
Director’s Resignation Must Be Written and Signed
Recently, the Federal Court of Appeal has reversed a decision of the Tax Court of Canada in the cases of Chriss and Gariepy. The facts were fairly simple in that the taxpayers, G & C were former directors of a company (“105”) whose affairs and business was managed and operated by their respective husbands.
Between 2000 and 2005, 105 failed to remit over $500,000 (including penalties and interest) of tax withholdings.
In 2008, CRA assessed the taxpayers under the director liability provisions of the Income Tax Act (Canada) (the “Act”).
The taxpayers maintained that they had resigned as directors more than two years before the issuance of the assessments under appeal, thereby eliminating any liability in their capacity as directors for the unremitted withholdings. There were further alternate arguments, neither of which are important for our purposes.
Somewhat interestingly, the reason that the two taxpayers were named as directors was a consequence of the failure of a previous business carried on by their respective husbands. As a result of that insolvency, the husbands were unavailable to act as directors of 105.
Quite clearly, in starting a similar business afresh, 105 required directors and their spouses who were not subject to previous insolvency proceedings were logical choices.
The wives were neither involved in the previous business, nor were they involved in the fresh business carried on by 105.
From the beginning, it was always intended that once the husbands’ exposure for the debts and liabilities of the previous company had expired, that their respective wives would resign as directors of 105 and the husbands would take their place.
In 2001, nearing the expiry of the intended period for the wives to be on the board, the husbands decided it was indeed time to get them off the board as directors and have themselves appointed.
As a consequence, one of the husbands instructed legal counsel to advise of the change of directors. Written resignations for the taxpayers in September of 2001, were prepared by counsel.
Although the resignation documents were prepared, they were not signed, were never dated and never left the lawyer’s offices. The solicitors subsequently sought instructions as to the date the resignations were to be effective but no instructions were received. Several months later, one of the taxpayers instructed a lawyer at a different firm to prepare resignation documents solely for herself.
The Trial Judge ultimately concluded that the preparation of the draft letters of resignation, combined with the fact that the respondents verbally communicated to their husbands that they were tendering their resignations, resulted in an effective resignation.
The Court of Appeal determined that the trial judge erred in concluding that the undated, unsigned resignation document constituted an effective resignation. Indeed, the Court referred to the very clear provisions of subsection 121(2) of the Ontario Business Corporations Act which provides as follows:
“A 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.”
In the case under appeal, no written resignation was received by the corporation, nor was any effective date specified in the unsigned document which was prepared.
The Court of Appeal then went on to review the reasons underlying the need for certainty in regard to the resignation of the directors. The Court of Appeal referred to various statutes which limit liability to former directors to a certain period of time after their resignations (usually 2 years). The limitation period applicable in these circumstances is triggered by the date of resignation.
Accordingly, any uncertainties surrounding the date of resignation may well lead to an undesirable level of uncertainty and, furthermore, may give the ability to, perhaps, retroactively argue that a resignation occurred at a prior date simply because it was discussed.
Reasonable Belief in Having Resigned
Having failed on the formal resignation argument, an alternate argument was advanced. A due diligence defence by a director is available and may, in appropriate circumstances, be grounded in the reasonable belief that the director had effectively resigned. This was a conclusion reached in respect of one of the two appellants.
However, the Federal Court of Appeal also discussed this issue and found that the standard applied by the Trial Judge was far too low.
In these circumstances, the Court found that the belief that a person has resigned must be predicated on requirements much more closer to compliance with the written, dated and delivered document requirements of the applicable corporate legislation.
In other words, to allow a subjective intention to govern the circumstance would, in the words of the Court “significantly undermine corporate governance”. The Federal Court of Appeal held that in order to find the existence of a due diligence defence based upon a reasonable belief regarding resignation, the circumstances related to the purported resignation must approximate or be very close to the legal requirements.
It is quite clear that any circumstances short of a signed, written, dated resignation which is delivered to the corporation will not likely comply with the requirements of the Act and, accordingly, will not trigger the commencement of the two year limitation period upon which a director may rely on in escaping director’s liability for withholdings and other statutory amounts.
If you have any questions about this or any other tax matters, please contact Keith Trussler or Linda Smits.