De facto directors

An individual, even though not elected as a director by a corporation’s shareholders or shown as such in government records, can still be held liable for unremitted source deductions as a de facto director.

In Hartrell v. The Queen, 2006 TCC 480, Justice Paris wrote:

However, in circumstances such as those in this case, where a corporation operates without having been properly organized and the only director of record plays no part in running the corporation, those persons who take it upon themselves to direct the affairs of the company may be held to be de facto directors, whether or not they have explicitly represented themselves as directors to any third party. The essential question is whether those individuals have, in fact, taken on the role of director of the corporation.

After reviewing business records and correspondence that showed the appellant was intimately involved in the operation of the business, the Court concluded that he was a de facto director and therefore liable for unremitted source deductions (unless he could prove due diligence).

Of course, active involvement in a business by itself is usually not enough to engender liability for source deductions: after all, the officers of a corporation are also actively involved in its business affairs, but the Income Tax Act does not impose liability on them. C.f. Mosier v. The Queen, [2001] G.S.T.C. 124, 2002 G.T.C. 28, 2001 CanLII 829 (T.C.C.). Perhaps the Court was influenced by evidence that the appellant and the other investors in the business consistently referred to themselves as partners. (Unfortunately for the appellant, he and one of his “partners” started fighting, and they began communicating only in writing, much to the delight, no doubt, of the CRA auditor.) Of course, “partners” of a corporation (its shareholders) are not liable for source deductions either. C.f. Netupsky v. The Queen, [2003] G.S.T.C. 15, 30 B.L.R. (3d) 46, 2003 G.T.C. 591, 2002 CanLII 2289 (T.C.C.).

One wonders what the result would have been if the corporation had been properly organized and the appellant had not consented to act as a director. It seems likely that the CRA would have assessed only the corporation’s legal directors. In our experience, the CRA, when trying to collect a corporation’s unremitted source deductions, simply downloads the corporation’s public records that list its directors and then assesses the person listed who is the easiest to find.

Lawyers, by the way, can perhaps breath a sigh of relief that neither the CRA nor the Tax Court judge seemed to give much consideration to the liability of the only legal director of the corporation, the lawyer who acted as its incorporating director.