Corporate Director Unsuccessfully Relies on the Defence of Due Diligence

Burnett Tax Court of Canada Decision

Burnett v. HMK 2022 TCC 99

Tax Court of Canada Case Summary

This is a typical director’s liability case, where the director Gregory Burnett (“Mr. Burnett”) argued he was duly diligent in respect of his duties as director of Noble Cut Diamonds Ltd (“Noble Cut”). The Tax Court of Canada (“TCC”) disagreed and found the director liable for unremitted source deductions.

Director’s Story

Mr. Burnett worked as a capital markets advisor in the years at issue. He focused on financing and structuring transactions for new businesses. He had quite a bit of experience acting as a director of multiple corporations over three decades.

Mr. Burnett was appointed director (as well as treasurer and secretary) of Nobel Cut in 2010. Noble Cut carried on a diamond-cutting business in Vancouver with approximately four employees. Noble Cut had three directors in total, who met monthly. No minutes of these meetings exist. At these meetings, Mr. Burnett indicated that he regularly asked one of the other two directors to confirm the currency of payroll source deductions.

Mr. Burnett did not have access to Noble Cut’s bank accounts and was not a signing officer. Mr. Burnett thought of himself as an outside director with no involvement in Noble Cut’s business operations.

Noble Cut’s lack of reliable books and records became apparent when Mr. Burnett tried (in vain) to retrieve the requisite corporate information in order to retain an accounting firm to prepare audited financials, which were required in order to take Noble Cut public.

Noble Cut Problems

In the spring of 2012, it became clear that there were serious problems with Noble Cut’s books. One director resigned, and the remaining two ceased Noble Cut’s business operations. The company retained an accountant to recover Noble Cut’s assets to sell to recompense corporate investors.

Mr. Burnett testified that later in 2012 the CRA wrote to him indicating that payroll deductions had not been remitted and that he may become liable as a director for those amounts.

The two director’s liability assessments at issue related to payroll source deductions which Noble Cut failed to remit to the Minister in the 2011 and 2012 taxation years.

The only issue was whether Mr. Burnett was duly diligent, or in other words, did Mr. Burnett exercise the degree of care, diligence and skill to prevent the failure to remit that a reasonably prudent person would have exercised in comparable circumstances.

Decision & Analysis

Mr. Burnett’s position was that he had acted in a diligent manner by asking at the director’s meetings whether the tax remittances were up to date. The Crown disagreed, arguing that Mr. Burnett’s “check-the-box” question asked at the director’s meetings was inadequate to meet the conditions of the due diligence defence.


The TCC agreed with the Crown and found that Mr. Burnett had not been duly diligent. The TCC in actuality found that Mr. Burnett “…essentially exercised no degree of care, diligence and skill to prevent CNCD’s failures to remit. The request at each meeting for update as to the CNCD’s payroll remittances was simply, in Mr. Burnett’s own words, a “check the box” exercise for him.”[1]

The TCC questioned why Mr. Burnett did not ever pick up the phone to call the CRA to confirm whether payroll remittances were current.  Exercising no significant degree of care diligence and skill is directly at odds with the FCA in the Buckingham decision[2], wherein the Court specified that for the due diligence defence to apply, directors must “establish that they were specifically concerned with the tax remittances and exercised their duty of care, diligence and skill with a view to preventing a failure by the corporation to remit the concerned amounts”.[3]

In the TCC’s view, a diligent director would have asked for documentary proof of payroll remittances. And if they did not get it, then the next step would be to call the CRA and ascertain whether the relevant remittances were up to date.

Was Burnett an Outside Director?

The TCC did not substantively entertain the argument that Mr. Burnett was an outside director, and therefore not liable. In the TCC’s view, the Buckingham decision is clear that the “objective standard” of the test for judging the conduct of directors promotes more attentiveness of directors in general.

Relying on paragraph 38 of the Buckingham decision:

Consequently, a person who is appointed a director must carry out the duties of that function on an active basis and will not be allowed to defend a claim for malfeasance in the discharge of his or her duties by relying on his or her own inaction.

The TCC further found that Mr. Burnett was not in fact an ‘outside’ director, because:

  • Noble Cut was a small start-up corporation without the formalized internal structuring of large corporations;
  • Burnett was also the treasurer and secretary of Noble Cut;
  • Burnett was pre-occupied with concern for the lack of auditable financial records, which is an internally oriented corporate focus;
  • Burnett was involved in the hiring and paying of accountants for their work in respect of Noble Cut; and
  • Burnett wrote to the CRA using Noble Cut letterhead as late as 2016.


The key takeaway in this decision is that the Court expects directors to actually reach out to the CRA to determine the status of required remittances. Another key takeaway is that parties may experience difficulty gaining traction in Court with the ‘outside’ director argument.

[1] Burnett Decision, para. 54.

[2] R. v. Buckingham, 2011 FCA 142

[3] Burnett Decision, para. 58.