Tax Court of Canada Sides with Resigning Director in Contentious Directors’ Liability Case on the Basis of Indirect and Verbal Evidence

This article was prepared with the assistance of summer student Cole Shrimpton.

Corporate directors who resign from their positions without providing adequate written evidence of that resignation to the corporation and its directors could face substantial tax liabilities. However, one director in Ontario was able to satisfy the necessary evidentiary requirements to avoid a hefty tax bill in a recent Tax Court of Canada decision.

Zvilna v The Queen, 2022 TCC 50 (Zvilna), concerned Ugis Zvilna, the former director of a corporation that owed taxes to the Canada Revenue Agency (CRA). The CRA raised directors liability assessments against Zyilna on September 30, 2015, for unpaid source deductions from the company’s 2009 taxation year. Zvilna could not provide written proof of his resignation from the corporation, but the Tax Court of Canada nevertheless held that his resignation was valid per the technical requirements, exempting him from tax liability.

This case is an example of how the Tax Court of Canada may, in certain circumstances, rely on indirect and verbal evidence to support a director’s resignation. The case is also an example of how directors may be surprised to learn that their resignation from a corporation can be a contentious issue.

Directors May Be Liable for a Corporation’s Tax Bill

If a corporation owes tax and the CRA fails at collecting it, the CRA’s next step is to assess the directors of the corporation for the tax owing. Directors liability can extend to unremitted GST/HST, source deductions, and certain withholding taxes.

A common protective strategy for directors is to resign, which is typically executed in writing according to the applicable corporate law statute. (For example, the relevant legislation in Saskatchewan is The Business Corporations Act.)

Once a director resigns, subsection 227.1(4) of the Income Tax Act creates a two-year limitation period after which the CRA may no longer assess a director (or former director) for tax liability of the corporation.

Zvilna argued that he had resigned as a director of the corporation more than two years before the tax assessments at issue in his case. The relevant statute in Zvilna was the Business Corporations Act (Ontario), subsection 121(2) of which requires a director to resign in writing for the resignation to be effective.

Indirect Proof of Resignation

Zvilna’s resignation from the corporation could not be proved to the court directly. However, its existence was proved indirectly, satisfying the court through uncontroverted verbal testimony that he had resigned in writing and left the company in the control of his ex-wife (the other director) at a meeting sometime between Thanksgiving of 2004 and prior to 2006. The court found that during that meeting, the Appellant left the resignation documents with his wife. The court also relied on certain language contained in a signed separation agreement from 2011 which contemplated his resignation as a director of the corporation in question.

Although the court found that 2011 separation agreement was not itself sufficient to constitute a written resignation under the Business Corporations Act (Ontario), Justice Jorré was satisfied that he had resigned in writing and had left the resignation with another director, representing valid resignation in accordance with the Business Corporations Act (Ontario).

Since Zvilna’s resignation took place more than two years before the tax assessments at issue, he was not liable for the tax the corporation owed the CRA.

Technical Requirements for Director Resignation

In Saskatchewan, subsection 103(2) of The Business Corporations Act states that resignation from a corporation must be done in writing.

While you may believe you have walked away from a corporation for good, an effective resignation requires formal steps to be taken. Being a director (even one who is uninvolved and unaware) of a corporation that owes taxes can represent a significant risk of tax liability for the director.

The taxation group at MLT Aikins is well-equipped to advise you on the resignation process necessary to protect corporate directors from tax liability. Contact us to learn more.

 Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.