“Checking the Box” not enough to avoid director’s liability for outside director

January 17, 2023 | Carolyn S. Inglis

A decision of the Tax Court of Canada has provided further insight into the duties of an “outside” director who wishes to rely on the due diligence defence to avoid a director’s liability assessment under the Income Tax Act (the “Act”).

In Burnett v The Queen (2022 TCC 99), the taxpayer was assessed pursuant to section 227.1 of the Act for unremitted payroll source deductions of Canadian Noble Cut Diamonds Ltd. (“CNCD”), of which he was a director. The taxpayer, who had previously been a director of numerous private and public corporations, viewed himself as an outside director, and did not have access to CNCD’s bank account and was not a signing officer.

The taxpayer testified that at each board meeting he asked another director, who was president of CNCD and led its daily operations, about whether payroll source remittances were current. The response was always to the effect that all was up to date and there were no concerns.

The taxpayer submitted that, as an outside director, it was sufficient for purposes of the due diligence defence that he “checked the box” at each directors’ meeting by enquiring as to the status of the payroll remittances. The taxpayer testified that, given the number of employees of CNCD, he hadn’t considered the payroll material, relative to the cash flows and assets of the business, and that it wasn’t on his radar.

The Court found that simply asking the “check the box” question did not constitute an effort to prevent the failure to make the remittances on a timely basis, but merely asked whether or not such failure had already occurred. The evidence showed that CNCD was unable to generate reliable books and records that would allow audited financial statements to be generated by its accountants. According to the Court, a “reasonably prudent person” in such circumstances, given this “red flag”, would have sought documentary proof of payroll remittances, and absent same would have contacted the Canada Revenue Agency directly to ascertain whether remittances were current.

The Federal Court of Appeal decision in Buckingham (2011 FCA 142) found that the focus of the due diligence provisions is “clearly on the prevention of failures to remit”. As the Tax Court found in Burnett, an after-the-fact inquiry will not prevent the failure from occurring, and therefore falls short of the standard set by Buckingham. The decision in Burnett provides a useful reminder of the obligations an “outside” director who wishes to demonstrate due diligence, and the active steps that should be taken by such directors when faced with similar red flags regarding a corporation’s remittances.

Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s Corporate Tax Group.


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