Buckingham

For those of us who defend director liability cases, R v Buckingham, 2011 FCA 142, is a must-read.

The following are the highlights of the case.

1. For the purposes of the due diligence defence to a director-liability assessment for both source deductions and GST/HST assessments, the objective standard set out in Peoples Department Stores Inc.(Trustee of) v Wise, 2004 SCC 68, [2004] 3 S.C.R. 461, has replaced the so-called “objective subjective” test set out in Soper v R, 1997 CanLII 6352 (FCA), [1998] 1 F.C. 124.

2. The consequences of this “new” standard, according to the FCA, are as follows (and are worth quoting at length):

[38] This objective standard has set aside the common law principle that a director’s management of a corporation is to be judged according to his own personal skills, knowledge, abilities and capacities: Peoples Department Stores at paras. 59 to 62. To say that the standard is objective makes it clear that the factual aspects of the circumstances surrounding the actions of the director are important as opposed to the subjective motivations of the directors: Peoples Department Stores at para. 63. The emergence of stricter standards puts pressure on corporations to improve the quality of board decisions through the establishment of good corporate governance rules: Peoples Department Stores at para. 64. Stricter standards also discourage the appointment of inactive directors chosen for show or who fail to discharge their duties as director by leaving decisions to the active directors. Consequently, a person who is appointed as a director must carry out the duties of that function on an active basis and will not be allowed to defend a claim for malfeasance in the discharge of his or her duties by relying on his or her own inaction: Kevin P. McGuinness, Canadian Business Corporations Law, 2nd ed. (Markham, Ontario: LexisNexis Canada, 2007) at 11.9.

[39] An objective standard does not however entail that the particular circumstances of a director are to be ignored. These circumstances must be taken into account, but must be considered against an objective “reasonably prudent person” standard. As noted in Peoples Department Stores at paragraph 62:

The statutory duty of care in s. 122(1)(b) of the CBCA emulates but does not replicate the language proposed by the Dickerson Report. The main difference is that the enacted version includes the words “in comparable circumstances”, which modifies the statutory standard by requiring the context in which a given decision was made to be taken into account. This is not the introduction of a subjective element relating to the competence of the director, but rather the introduction of a contextual element into the statutory standard of care. It is clear that s. 122(1)(b) requires more of directors and officers than the traditional common law duty of care outlined in, for example, Re City Equitable Fire Insurance, supra [[1925] 1 Ch. 407].

[40] The focus of the inquiry under subsections 227.1(3) of the Income Tax Act and 323(3) of the Excise Tax Act will however be different than that under 122(1)(b) of the CBCA, since the former require that the director’s duty of care, diligence and skill be exercised to prevent failures to remit. In order to rely on these defences, a director must thus establish that he turned his attention to the required remittances and that he exercised his duty of care, diligence and skill with a view to preventing a failure by the corporation to remit the concerned amounts.

3. The standards of care required with respect to unremitted GST/HST and unremitted source deductions do not differ. All of the amounts collected by a corporation for these purposes are paid by third parties (customers and employees) to satisfy their liabilities under the various statutes. All of these amounts are deemed to be held in trust by the statutes. In particular, “the liability of the directors under subsection 227.1(1) [of the ITA] is not conditional on the existence of sufficient cash in the corporation to pay the remittances of employee source deductions, quite the contrary.” [¶ 45]

4. The court reiterated the following (without overruling R v McKinnon, 2000 CanLII 16269 (FCA), [2001] 2 FC 203 (C.A) 2000 DTC 6593 sub nom. Worrell v R [2001] 1 CTC 79):

[49] The traditional approach has been that a director’s duty is to prevent the failure to remit, not to condone it in the hope that matters can be rectified subsequently: Canada v. Corsano, 1999 CanLII 9297 (CAF), [1999] 3 F.C. 173 (C.A.) at para. 35, Ruffo v. Canada, 2000 D.T.C. 6317, 2000 CanLII 15199 (FCA), [2000] 4 C.T.C. 39 (F.C.A.). … The defence under subsection 227.1(3) of the Income Tax Act and under subsection 323(3) of the Excise Tax Act should not be used to encourage such failures by allowing a due diligence defence for directors who finance the activities of their corporation with Crown monies on the expectation that the failures to remit could eventually be cured.

5. “A director of a corporation cannot justify a defence under the terms of subsection 227.1(3) of the Income Tax Act where he condones the continued operation of the corporation by diverting employee source deductions to other purposes.” (¶ 56)

In a previous post, I pointed out that naive but well-meaning family members who become directors of corporations to help out the entrepreneur in the family might find a sympathetic hearing at the Tax Court if they were assessed for unremitted source deductions or GST/HST. Query whether that is still true in light of Buckingham. All the more reason, then, to exercise caution in making a spouse, sibling or parent a director because “that’s what the bank wants” or whatever.