http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/180612/index.do
Canada v. Chriss (September 22, 2016 – 2016 FCA 236, Stratas, Near, Rennie (author) JJ. A.).
Précis: The Tax Court decision was blogged earlier on this site under the name Gariepy v. The Crown. The nub of the issue before the Tax Court was whether unsigned directors’ resignations prepared by a corporation’s external lawyers were effective to prevent liability for unpaid corporate remittances. The Tax Court held that they were on the facts of the case. The Federal Court of Appeal reversed that decision in a clear policy decision. A bright line test was necessary and unsigned resignations did not, in the Court of Appeal’s opinion, meet such a test. The Crown’s appeal was allowed with costs in both the Court of Appeal and the Tax Court.
Decision: The facts are set out succinctly in the Tax Court decision:
[5] George Chriss, husband of the Appellant Sally Anne Chriss, and Derek Gariepy, husband of the Appellant Donna Gariepy, together carried on the business of 105. They had previously carried on business together in another corporation, CG Industries (“CGI”), which ended up insolvent and leaving significant unremitted withholdings to CRA. They sought insolvency related advice in respect of CGI’s demise from their corporate counsel, Gowling Lafleur Henderson LLP (“Gowlings”).
[6] It was decided by the husbands to start a very similar business afresh in 105 which was a corporation Gowlings had earlier incorporated for George Chriss but which had remained inactive until then. Aware of the two year potential liabilities attaching to the demise of CGI, the husbands chose to have their wives alone be the directors and officers of 105 when it was reorganized prior to becoming active in 1999. It is maintained by the husbands that they believed that was best given the advice as they understood it from Gowlings. Obviously, there had been a misunderstanding as this does not make sense. I do not believe that Gowlings would have recommended that the wives become directors.
[7] The wives had never been involved in CGI’s business and did not intend to be involved in the operations of their husbands’ new company. They did not want to become directors but agreed to their husbands’ requests and became directors of 105. From the inception, it was intended by the Chrisses and the Gariepys that the wives would be removed from the board after the two year period the husbands were concerned about had past.
[8] In 2001, nearing the expiry of the intended period for the wives to be on the board, the husbands decided it was indeed time to get the wives off the board of directors and have themselves appointed directors of 105. The wives were in agreement with this.
[9] To this end, Mr. Chriss, who managed the business affairs of 105 while Mr. Gariepy attended to sales, contacted Gowlings shortly thereafter to advise of the change of directors. At this point in time, Gowlings was owed a significant sum in respect of the prior business dealings involving Mr. Chriss and Mr. Gariepy and CGI. After a follow-up call from Mr. Chriss, Gowlings prepared written resignations for the Appellants in September 2001.
The Tax Court held that the unsigned resignations were effective. The Court of Appeal in what was clearly a policy decision disagreed, holding that a “bright line” test was necessary:
[12] Many laws attach liability to former directors within a certain period of time after resignations; see, for example, Employment Standards Act, 2000, S.O. 2000, c. 41, Part XIV.2. So too does the Income Tax Act subsection 227.1(4) of which provides a two-year limitation period on actions for recovery of amounts owing by directions. The two years is triggered by the date of resignation.
[13] This limitation period demands, for its application, precision in the date of resignation. If a director has resigned, the Crown may no longer be able to look to the director for unremitted taxes, and other directors may have to absorb the director’s share of such liability. Further, there is a two-year limitation period which constrains the Minister’s ability to initiate proceedings against directors for unremitted source deduction.
[14] It is thus self-evident that the status of directors must be capable of objective verification. Reliance on the subjective intention or say-so of a director alone would allow a director to plant the seeds of retroactive resignation, only to rely on it at some later date should a director-linked liability emerge. The facts of this case illustrate why subsection 121(2) of the OBCA has been drafted the way it is: the dangers associated with allowing anything less than delivery of an executed and dated written resignation are unacceptable.
[15] There was no “written resignation received by the corporation” within the meaning of subsection 121(2). Unsigned letters of resignation with no effective date, were found in the solicitor’s file, thus, the judge erred in concluding that the intention of the respondents’ to resign satisfied the necessary preconditions of an effective resignation.
The Court of Appeal also rejected the respondent’s alternative arguments based on reasonable belief in the efficacy of the resignations and due diligence.
Thus the Crown’s appeal was allowed with costs in both the Court of Appeal and the Tax Court.