Directors Liability for Unremitted Retail Sales Tax: Danso-Coffey v Ontario
On March 9th, 2010, the Ontario Court of Appeal (“ONCA”) released its decision in Danso-Coffey v Ontario, 2010 ONCA 171. The case deals with an individual who is named a director of a corporation without her consent or knowledge.
Danso-Coffey was owned and incorporated by Ms. Danso-Coffey’s brother. Without her knowledge, she was named one of the directors of the company. She had no involvement with the company. In 2004, Ms. Danso-Coffey’s brother filed for bankruptcy. On May 15, 2006, the Minister assessed Ms. Danso-Coffey for unremitted retail sales tax of $64,020 on the basis that she was a director of the company.
The Minister made this assessment pursuant to section 43 of the Retail Sales Tax Act, RSO 1990, c R-31 [RSTA]. Section 43 of the RSTA provides that when a bankrupt corporation has failed to remit taxes, the directors of the corporation are jointly and severally liable with the corporation to pay the tax. Furthermore, section 43(3) of the RSTA recognizes a due diligence defence for directors where they are not subjected to any liability if they exercise the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances.
The application judge held that Ms. Danso-Coffey could not be lawfully assessed as a director under section 43 of the RSTA. A person’s consent is required in order for the appointment of the person as a director to be valid. Because she never gave her consent and was named director without her knowledge, she was never a director. The judge further held that the RSTA is not a sufficiently comprehensive code. Thus, it does not oust the court’s jurisdiction to grant declaratory relief. Nothing in the RSTA would prevent the court from exercising its inherent and statutory jurisdiction to grant declaratory relief. The application granted Ms. Danso-Coffey relief from payment of tax arrears, stating that it would be “unfair not to do so.” The Minister appealed this decision.
The ONCA Decision and Legal Principles
The ONCA allowed the Minister’s appeal for declaratory relief, and in doing so, reinforced a number of corporate and tax law principles that an individual may want to keep in mind when deciding whether to act as a director of a corporation.
(a) There Is a Presumption of Accuracy for Any Information Provided on a Tax Return as Deemed by Statute
Section 2(1) of the Corporations Information Act, RSO 1990, c C.39 [CIA], requires corporations to file an initial return, which includes the names and addresses of directors. The Minister is authorized to certify that “that a person named in the certificate on the date or during the period specified in the certificate is shown on the records of the Ministry as a director, officer, manager or attorney for service of the corporation named in the certificate” (section 19(c) of the CIA).
There is a presumption that any information contained in any return or notice filed under the CIA is accurate. Due to unnecessary administrative expenses involved in checking the information in each return, it is reasonable to presume that the information provided is accurate and error-free. However, the Minister has the discretion to issue an assessment of the tax return as a regulating mechanism to monitor any transgressions.
(b) Minister Has the Discretion to Issue Assessment Notwithstanding the Presumption of Accuracy
The Minister claimed to have relied upon this presumption of accuracy. The return filed by the corporation stated that Ms. Danso-Coffey was the director of the corporation. Ms. Danso-Coffey provided explanations for this error in the return. Nonetheless, as per section 18(7) of the RSTA, the Minister was not bound by the information provided by Ms. Danso-Coffey and had the discretion to issue an assessment. This discretion must be exercised reasonably and not arbitrarily or capriciously. In this case, the Ontario Court of appeal disagreed with the application judge and held that the assessment was within the mandate and authority of the Minister, and thus, was lawful.
(c) Limitation to Superior Court’s Inherent Jurisdiction
The Ontario Court of Appeal held that although the Superior Court retains jurisdiction to grant declaratory relief, “this was not an appropriate case for the court to exercise its jurisdiction.” The Ontario Court of Appeal looked at the purpose and wording of the RSTA, which was held to be a “revenue raising mechanism” and an “important policy tool”.
Additionally, it held that the Superior Court’s inherent jurisdiction is not to be exercised in a vacuum. It is “not limitless. If the legislative body has not left a functional gap or vacuum, then inherent jurisdiction should not be brought into play.” The court further stated that the RSTA was a complete code with no functional gap, so the Superior Court should not have exercised its jurisdiction.
In essence, the Court of Appeal held that any disputes concerning the validity of a tax assessment has to be resolved within the RSTA, without resorting to a declaration by the Superior Court. The court allowed the appeal with respect to the application judge’s declaration that the respondent is not liable for the company’s retail sales tax arrears, reinstating the Minister’s decision.
(d) Directors in Name Must Bear in Mind that They May Be Held Personally Liable for Payment of Tax Arrears If the Company Goes Bankrupt
As stated earlier, the statute requires a corporation to file an initial return setting out the names and addresses of the directors of the corporation. The Minister has the authority to assume that any information provided on the tax return is accurate. Furthermore, section 262(3) of Ontario’s Business Corporations Act, RSO 1990, c B.16 [OBCA], provides that a director named (i) in the articles, (ii) in the most recent return or (iii) in the notice filed under the CIA is presumed to be the director of the corporation. The latter two are most relevant to our current discussion.
These presumptions validate the common sense rule of verifying all information provided in the return and the notices to keep them error-free and accurate. Acting as a “figurehead” director for a relative or a friend can have negative repercussions, upon insolvency or bankruptcy of the corporation, leaving an unwitting and innocent individual personally liable for someone else’s mistakes and errors in judgment. Serious thought and consideration must be given with respect to the feasibility and validity of the corporation in the long term before accepting a position as a director of a corporation.
(e) Directors Have a Due Diligence Defence to Avoid Liability Under the Act
But, all is not lost for directors. Section 43(3) of the RSTA places a duty to exercise a degree of care, diligence and skill to prevent the failure to collect and remit taxes. The courts concluded that a director can raise a due diligence defence to avoid liability. Contrary to the application judge’s decision, the Ontario Court of Appeal concluded that the due diligence defense is not limited to proving that the directors took all reasonable steps, but further includes a reasonable mistaken belief in the facts.
The courts cited R v London Excavators & Trucking Ltd (1998), 40 OR (3d) 32, which laid out the defense of due diligence as having one of two forms: “(1) holding a reasonable belief in a mistaken set of facts, and (2) taking all reasonable steps to avoid the offending event.” In this case, Ms. Danso-Coffey was reasonably mistaken in her belief. This extension of the due diligence defence to mistaken belief in tax remittance cases dealing with director’s liability has various implications for the Minister and the directors. It seems like a logical extension of the test, especially in this situation, because it favors those individuals who become liable for huge sums of money due to a mistake or an error.
(f) Other Defences Available
The court also laid out other defences available to defendants in this position, including:
(1) If the name of a person has been wrongly entered or retained in the registers or other records of a corporation, any aggrieved person may apply to rectify the records under section 250(1) of the OBCA.
(2) The person may also obtain recourse under section 248 of the OBCA, which is the oppression remedy.
(3) As a last resort, any individual can seek an exemption pursuant to s. 9(1) of the RSTA which provides:
If, owing to special circumstances, it is deemed inequitable that the whole amount of tax imposed by this Act be paid, the Minister may, with the approval of the Lieutenant Governor in Council, exempt a purchaser from payment of the whole or any part of such tax.
However, the court was quick to emphasize that this is a last resort remedy and should only be used when all other avenues have been exhausted.