In Maddin v. The Queen (2014 TCC 277), the taxpayer was a director of a corporation in the marble and granite industry (the “Corporation”) which failed to remit nearly $300,000 of source deductions related to salaries, wages and other remuneration paid to employees. The sole issue before the Tax Court was whether the taxpayer could make out a due diligence defence under subsection 227.1(3) of the Income Tax Act (Canada).
The evidence established that the taxpayer intended to play a limited advisory role in the Corporation. Mr. Barker, another director, was in charge of managing the daily operations of the Corporation. However, the Tax Court also noted the following additional facts:
- The taxpayer was in the office 2-3 days a week;
- The taxpayer was familiar with the Corporation’s business structure, its banking operations and the accounting systems;
- The taxpayer executed various letters on behalf of the Corporation;
- The taxpayer had a close relationship with the initial bookkeeper and communicated with her generally throughout the period at issue;
- When a new bookkeeper (the mother of another director) was hired, the taxpayer was aware that she did not necessarily understand the bookkeeping systems; and
- The taxpayer knew of the Corporation’s financial difficulties.
Ultimately, the Tax Court held that these factual circumstances should have prompted Mr. Maddin to inquire into the financial health of the Corporation. Mr. Maddin did not exercise the appropriate standard of care, diligence and skill required of a director to avoid being held personally liable for the unremitted source deductions.
This case is another reminder that the Courts will, in general, hold directors to a relatively high standard of conduct. In order to successfully argue a due diligence defence, directors involved in the business must take active steps to inquire into the financial state of affairs and communicate regularly with staff to obtain reports that source deductions are being remitted in a timely manner.