In Gariepy v. the Queen (2014 TCC 254), the Tax Court considered (i) whether two directors had effectively resigned from their positions, and (ii) if not, whether the directors were duly diligent in seeking to prevent the failure of the company to remit source deductions.
In Gariepy, the two directors argued that they were not liable under subsection 227.1(1) of the Income Tax Act (Canada) (the “Act”) for $500,000 in unremitted source deductions of 1056922 Ontario Limited (the “Corporation”) on the basis that they had resigned as directors more than two years prior to the assessment. In the alternative, the two directors put forth a due diligence defence.
The two appellants were the only directors of the Corporation, but it was in fact managed and operated by their husbands. After approximately two years, the husbands decided it was time for their wives to cease to be directors and have themselves appointed. One of the husbands – Mr. Chriss – contacted the Corporation’s law firm to advise of the change of directors.
There was conflicting or confused testimony presented in the 10-day hearing of the appeals, but the Tax Court held that there was sufficient evidence that the two directors had resigned in 2001 and the limitation period in subsection 227.1(4) of the Act had passed – even though written resignations prepared by a corporate law firm had not been signed by either of the directors.
The Tax Court examined e-mails between the parties and their lawyers, corporate records, and minute books and determined that there was sufficient documentary and oral evidence to demonstrate the resignations were “meaningfully communicated” to the Corporation in 2001. The resignations were valid and effective as of the date the resignations were prepared by the corporate law firm. Although the Court noted serious credibility issues by both directors with respect to the resignations, it was held that these credibility issues were not relevant to decide the merits of the case but would be relevant to determining any cost awards.
The Tax Court noted that this conclusion was consistent with the Court’s earlier decisions in Perricelli v. The Queen (2002 GSTC 71), Walsh v. The Queen (2009 TCC 557), Corkum v. The Queen (2005 TCC 755), Irvine v. M.N.R. (91 DTC 91), and Cybulski v. M.N.R. (88 DTC 1531).
Although the above finding was sufficient to dispose of the appeals, the Court went on to discuss the directors’ alternative argument – whether it was nonetheless reasonable for the directors to think they had resigned and, if so, whether their complete failure to act or concern themselves with the company’s affairs during the non-remittance periods could support a due diligence defence.
On this alternative argument, the Tax Court came to different results for the directors. The Tax Court held that one of the directors – Mrs. Chriss – reasonably relied on her husband and the corporate law firm that her resignation was valid. Conversely, the Tax Court held that for the other director – Mrs. Gariepy – it was not reasonable for her to think that she had ceased to be a director. For Mrs. Gariepy, the evidence did not support a finding that she asked for, was advised of, or was otherwise aware that Mr. Chriss had been asked to or did contact a law firm to advise of the resignations.
Gariepy provides a reminder of the importance of meticulous record-keeping for directors when they resign from their positions. A signed resignation letter would have obviated the need for a lengthy proceeding, and would have clarified at the outset the potential liability of the directors for the company’s unremitted source deductions.