A December 11, 2017, Tax Court of Canada case examined whether a taxpayer was liable for unpaid income taxes of the corporation of which he was a director. CRA’s assessment was based on the assertion that the taxpayer was a legal representative of the corporation and had distributed assets of the corporation without having first obtained a clearance certificate from CRA.
A clearance certificate essentially confirms that the corporation has paid all amounts of tax, interest and penalties it owed to CRA at the time the certificate was issued. Legal representatives that fail to get a clearance certificate before distributing property may be liable for any unpaid amounts, up to the value of the property distributed.
The Court examined whether the taxpayer was a legal representative and personally liable for the corporation’s unpaid taxes. The definition of a legal representative does not specifically include directors, despite naming many other persons (e.g. a receiver, a liquidator, a trustee, and an executor). While a director could become a receiver or liquidator for a corporation, carrying out the usual activities of a director, such as declaring dividends, would not result in the director being a “legal representative”.
A director could become a legal representative where:
- additional powers beyond directorship have been legally granted or, if not legally granted, were available and assumed;
- these additional powers allowed the legal representative to legally and factually dissolve (wind-up) and liquidate the corporation; and
- by virtue of these powers, the director liquidated the assets of the corporation.
In this case, no such legal powers had been conferred or exercised. The taxpayer was not considered to be the corporation’s legal representative. Also, the corporation had not been dissolved. As such, the taxpayer was not personally liable for unpaid corporate income taxes.
Action Item: If you are a director and legal representative of a corporation, ensure that you are properly protected if distributing assets.
The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional. No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents.
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