June 09, 2010

About the Author

  • Jeff Pniowsky

    Jeff focuses his practice in the areas of tax litigation and dispute resolution in the tax audit and appeals process, tax advisory services, and complex commercial litigation.

    jdp@tdslaw.com
    (204) 934-2586

Personal Tax Liability Looms

The recent decision of the Tax Court in Williamson v. The Queen is a good reminder of the personal obligations directors have under the Income Tax Act (ITA) for remitting employee source deductions and the potential harsh consequences for failing to live up to those obligations. In Williamson, the director’s company had entered into a banking arrangement with another company to pay certain amounts on behalf the other company due to the other company’s credit problems. These amounts included payroll payments for the other company’s employees. In a prior decision of the Tax Court, the Appellant’s company was found to be a deemed employer of these employees by virtue of the payment arrangement and so was required to remit the source deductions. Ultimately, the Appellant was assessed personally as a director pursuant to subsection 227.1(1) of the ITA .

The director relied on the “due diligence defence” under subsection 227.1(3) of the ITA claiming she believed her company to be a bank for the other company, not an employer, and that she “exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.” However, the Court noted the significant legal hurdle she had in establishing due diligence since she was an inside director who was actively involved in the business, and that ignorance of a director’s potential liability under the ITA is no defence. Justice Hershfield relied on the following quote from the Soper decision of the Federal Court of Appeal which summarized a director’s positive duty to act under the ITA:

In my view, the positive duty to act arises where a director obtains information, or becomes aware of facts, which might lead one to conclude that there is, or could reasonably be, a potential problem with remittances…

Put another way, if there’s smoke, a director better check for fire. Unfortunately for the unsuspecting director, sometimes the smoke is not so easily seen.


DISCLAIMER:
This article is presented for informational purposes only. The content does not constitute legal advice or solicitation and does not create a solicitor client relationship. The views expressed are solely the authors’ and should not be attributed to any other party, including Thompson Dorfman Sweatman LLP (TDS), its affiliate companies or its clients. The authors make no guarantees regarding the accuracy or adequacy of the information contained herein or linked to via this article. The authors are not able to provide free legal advice. If you are seeking advice on specific matters, please contact Keith LaBossiere, CEO & Managing Partner at kdl@tdslaw.com, or 204.934.2587. Please be aware that any unsolicited information sent to the author(s) cannot be considered to be solicitor-client privileged.

While care is taken to ensure the accuracy for the purposes stated, before relying upon these articles, you should seek and be guided by legal advice based on your specific circumstances. We would be pleased to provide you with our assistance on any of the issues raised in these articles.