Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation’s failure to deduct and remit source deductions (including withholding to non-residents and payroll source deductions) or GST. Directors may also be jointly and severally liable for unpaid wages under employment legislation.
This makes it very important to determine when a director has resigned.
In the recent case of Canada v. Chriss ("Chriss"), the Federal Court of Appeal found that an intention to resign, as expressed by two directors to their husbands who instructed the corporation’s lawyer to prepare the resignation, and as demonstrated by an unsigned resignation in the lawyer’s file, did not satisfy the necessary preconditions of an effective resignation in the Ontario Business Corporations Act.
Under the Ontario Business Corporations Act a director’s resignation is only effective at the later of when the resignation is received by the corporation and the effective date. The Alberta Business Corporations Act contains a similar provision.
Therefore, to be effective, a resignation must be signed and delivered to the corporation’s registered office. We recommend that the resigning director ensure the resignation is also properly recorded in the corporation’s minute book and a change of directors is appropriately filed with Corporate Registries.
In an arm’s length sale with lawyers involved, this is likely to be done correctly. The previous directors will not want to be liable for the actions of the arm’s length new directors for a corporation they no longer have any connection to. However, in the normal course of business for a small closely held corporation, sometimes these formalities can be forgotten (especially when the directors do not deal at arm’s length). For example, when one spouse resigns and another continues to be a director as in this case or a child takes over for a parent.
For the taxpayers in Chriss, this failure to properly comply with the formalities meant they were found to be jointly and severally liable for income tax withholdings the corporation was responsible for after they believed they had resigned. If you are planning to resign or believe you have already resigned as a director, it is important to make sure the proper steps are taken.