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Directors’ liability for source deductions

There are statutory liabilities which explicitly attach to directors. Directors’ liability for remitting employee withholding tax is the most common one.

The recent melt-down of the world-wide equity markets may have a negative impact on charities which are (were?) fortunate enough to have substantial investments, particularly where income from those investments is used to fund the charitable activities on an ongoing basis.

But if there is a cash squeeze, directors should be aware that there are limits as to what can be done to conserve cash.

Those readers who have followed the subject in these pages over the years know that we have taken the position that most directors of incorporated charities have little to be concerned about vis a vis personal liability. But we have always had the caveat that there are many statutory liabilities which explicitly attach to directors, the most common but not the only one, being personal liability for remitting employee withholding tax. If the charity has not met its obligations, directors can be personally liable because of explicit statutory provisions.[1]

An internal ruling letter[2] of a few years ago published by the CRA confirms this position.

The issue came up when a CRA auditor queried CRA rulings. She had a file where she intended to assess the directors of a not-for-profit corporation for its failure to remit trust funds. The directors had retained legal counsel, who was of the view that directors’ liability does not apply to directors of a not-for-profit corporation.[3]

As explained below, directors of a corporation are liable, notwithstanding that the corporation is not-for profit.

“Whether a director of a not-for-profit corporation is liable for the above-referenced amounts was the issue in Wheeliker v. R., [1998] 1 C.T.C. 2021 (T.C.C.); rev’d in [1999] 2 C.T.C. 395 (F.C.A.), and in Rancourt v. R., [2008] G.S.T.C. 120 (T.C.C.). In both decisions, the courts made it clear that a director cannot escape liability by virtue of the nature of the corporation.

In Wheeliker, the Court held that directors of a not-for-profit corporation were liable. In reaching its decision, the Court examined the object of the legislation, and concluded that it was to make the directors of a corporation ultimately accountable for the remittance of the above-mentioned amounts, and that such accountability could not depend on whether the corporation was a for-profit or a not-for-profit corporation. The Court also stated that the word “directors” was unrestricted and unqualified, and by using the word in that vein, Parliament intended it to cover all types of directors, and it follows, all types of directors.

In Rancourt, the Court echoed similar remarks, in stating that the applicable standard of care, the so-called due diligence defence, was no different whether it was applied in the case of a director of a non-profit organisation or in the case of a director of a business corporation.”

As is true of so many of the ruling letters, this one reflects “trite law” though obviously some people who should have known better did not.

If the financial melt-down were to continue, directors and their advisers should be well aware that failure to remit withholding taxes is an offence for which directors are potentially personally liable. At all meeting of directors we are among those who believe that direct queries should be addressed to staff to ensure withholding taxes are paid. If assurances are given and payment has not been made, due diligence by directors may be sufficient to avoid personal liability.

We might also note that most director liability insurance policies will not cover liability of this type. Read your policies!

By Arthur Drache, Drache Aptowitzer LLP


[1] There may also be personal liability for unpaid wages of employees and for environmental fines amongst other items.

[2] 2008-0295631I7

[3] The adviser clearly hasn’t a clue about the decided cases. Perhaps the lawyer is a volunteer?

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Drache Aptowitzer LLP

Tax and Charity Lawyers at Drache Aptowitzer LLP
Drache Aptowitzer LLPis one of Canada’s foremost experts in the law related to charities and non-profit organizations. Their team of bloggers is led by Adam Aptowitzer LLB. He is a lawyer practicing in the areas of charity and tax law. He is a member of both the bars of Alberta and Ontario. He has been speaking and writing on the topic of charity law for several years and been published in numerous publications including the Canadian Taxpayer, the Canadian Fundraiser and the Not-for-Profit News and has been cited as an expert in many publications including the National Post.Read more here
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