The Income Tax Act (Canada) (the “Act”) provides that directors of a corporation, including a not-for-profit corporation, are liable for income tax, employer contributions, interest, penalties, and certain other amounts that the corporation may owe to the Canada Revenue Agency (the “CRA”) where the corporation, for whatever reason, does not pay. Directors are normally liable for such amounts that become due while they are directors. However, the Act also provides that the CRA can legally pursue directors for the purpose of recovering such amounts for a period of two years after a director resigns from a corporation. A recent Tax Court of Canada decision highlights the importance of properly documenting a director’s resignation in order to ensure that the clock starts running on that two-year period during which a director remains liable for amounts even after he or she resigns from the corporation.
In Achim Bekesinski v. Her Majesty the Queen (2014 TCC 245), a director of a corporation was assessed for a total amount of $447,546.08 that was owed by the corporation to the CRA for unremitted income tax and other amounts for the corporation’s taxation years ending 2001, 2002, and 2003. The director appealed the assessment to the Tax Court on the basis that he had resigned as a director of the corporation in 2006 and the assessment was raised in 2010, which was beyond the two-year limitation period during which the CRA was permitted to assess the director after he had resigned.
The Minister of National Revenue (the “Minister”) argued before the Tax Court, on behalf of the CRA, that the director had not ceased to be a director of the corporation in 2006 because the director’s resignation was backdated and therefore was not an authentic document evidencing his resignation. The Minister’s position was based on the fact that the director did not contact the CRA to inform it that he had resigned from the corporation until 2011, which was after the director found out that he owed amounts to the CRA on behalf of the corporation. In other words, the Minister was alleging that upon discovering that he owed the amounts, the director had created a document to say that he had resigned from the corporation some years before in order to avoid liability. The CRA had a forensic document expert test the director’s resignation letter for authenticity by a process known as “ink date testing”; however, the expert’s report was not permitted to be introduced into evidence as a result of failing on a technical rule. As a result (perhaps luckily for the director in this case), the report was not considered by the Court in making its decision.
The central issue in this case was whether the director had presented sufficient evidence to refute the Minister’s assertion that the resignation was not authentic. However, since there was no documentary evidence to corroborate the director’s resignation and no expert report to support the Minister’s position, the Court held that it could only base its decision on the credibility of the witnesses in the case. In assessing the witnesses’ credibility, the Court looked for inconsistencies and weaknesses in each of their testimonies. Notably, the only witnesses who testified before the Court were the director himself, his spouse, the director’s corporate lawyer, and a representative from the CRA.
The Court held that the director’s explanation for not disclosing his resignation to the CRA at an earlier date was highly suspicious. In addition to this, neither the director’s spouse nor his corporate lawyer had clear recollections of exactly what had happened and when the resignation had in fact taken place. The representative who testified on behalf of the CRA could only point to conversations that showed that the director had informed the CRA of his resignation after the CRA had commenced legal actions against him. In other words, there was a significant lack of documentary evidence on both sides.
However, despite the lack of documentary evidence, the fact that there were no obvious gaps in the testimony of the director’s witnesses lead the Court to conclude that it had no choice but to find that the director had successfully refuted the Minister’s assertion that the resignation was backdated. Thus, the director was not liable for the unpaid taxes and remittances. The judge who decided the case stated that it was his personal belief that the director had fabricated the resignation, but that his hands were tied since the CRA had not put together a strong enough case against the director.
If the CRA had put together a stronger case (for example, if the CRA’s expert report had been introduced into evidence and the conclusion of that report had been that the resignation was fake), then the result may not have been so favourable for the director in this instance. The director’s evidence was that he had never informed anyone of his resignation and none of his witnesses had any recollection of the resignation letter being prepared, signed, or properly stored by the corporation in its records.
This case should be a reminder to directors of charities and non-profit organizations of the importance of both contemporaneously and properly documenting their resignation from a corporation in order to possibly avoid any liabilities that could arise under the Act after the end of their term on a board.