publication date: Oct 12, 2012
author/source: Ryan M. Prendergast
On August 27, 2012, the Tax Court of Canada released its
decision in Martin, J. v. The Queen
which discusses director liability in relation to GST/HST and payroll remittances
owing under the Excise Tax Act
and Income Tax
Although it concerned a director of a for-profit
corporation, the decision applies equally to the directors of nonprofits and
charities concerning what due diligence they need to evidence to avoid the
application of penalties under the ETA or ITA during economic downturns.
The appellant in this case, James Martin, was appealing an
assessment against him as the sole director/shareholder of a group of share
capital corporations. Mr. Martin had been assessed by the Canada Revenue Agency as the director of these corporations for not
having submitted payroll contributions, employee deductions and GST
Perform, prove due
The only issue before the court in this decision was whether
or not the due diligence defence available under the both ITA and ETA to the
statutory liability for remittances was available to the appellant. Briefly
speaking, a director, including a director of a nonprofit or charity, is not liable for remittances where he or she
exercised the degree of care, diligence and skill to prevent the failure to
remit that a reasonably prudent person would have exercised in comparable
The court applied the 2004 Supreme Court of Canada decision
of Peoples Department Stores Inc. (Trustee of) v. Wise, which stated that an examination of the care,
diligence and skill that a
reasonably prudent person exercised requires an analysis of the circumstances.
The court recognized that the appellant and his group of companies took on a
contract much larger than they had experience with in the past, and that
reasonable efforts were made through consulting with legal and financial
advisors to address the liability for remittances.
Accordingly, the court allowed the appeal of the assessments, in part, and referred
them back to the Minister for reassessment.
How to create evidence
The decision reminds directors to prove that although they
were aware of the financial difficulty that brought about the failure to make
the remittances to the government, they exercised their duty of diligence, care
and skill that a reasonably prudent person would in their circumstances.
Directors of charities and not-for-profits are reminded of
the importance of paying CRA before any other liability. In this regard, it is
recommended that the directors put safeguards in place through staff reminders
or creating checklists to review at meetings in order to ensure that these
statutory liabilities are being fulfilled.
Ryan M. Prendergast is an associate practicing charity
and not-for-profit law with Carters Professional Corporation, and can be
reached at firstname.lastname@example.org.