Director’s Liability Assessment Struck Down by Tax Court of Canada

Tran v. Her Majesty the Queen 2021 TCC 51

Tran Decision Here.

Summary

A corporate director was found not to be liable under the director’s liability provisions of the Income Tax Act due to the demolition of a key assumption with no further evidence to support that assumption proffered by the Crown.

Did the Director resign?

In 1999, The Appellant, a computer programmer, was appointed a director of Karora Technologies Canada Inc. (“Karora”) a start-up corporation with which he had recently begun employment. As in many directors’ liability cases, the Appellant testified that he was not involved with Karora’s financial management.  He did not attend any director’s meetings and had no real contact with Karora’s professional advisors. In point of fact, Karora was controlled by Peter McBride, who also sat as a director, CEO, and president.  Mr. McBride testified to this at the hearing of the appeal.

In 2001, Karora began experiencing problems. The evidence was that Karora Summit Technologies Inc., a USA corporation, (“Karora USA”) was the only customer of Karora, that Karora never invoiced Karora USA for services rendered, that Karora USA sporadically made payments to Karora to pay Karora’s expenses, and that in 2011, Karora USA paid Karora’s employees.

On October 18, 2011, the Appellant sent an email to Mr. McBride, terminating his employment with Karora. The Appellant’s position was that the email and a subsequent phone call served as his directorial resignation.  Importantly, Neither Karora nor the Appellant registered the resignation with the proper authorities.

The Appellant alleged that there was nothing that he could have done to prevent Karora’s failure to remit because he had no control over Karora’s operations or funds and therefore was duly diligent.

Decision & Analysis

The Court first quickly determined that the email and the call to Mr. McBride did not constitute a resignation for the purposes of subsection 227.1(4) of the Income Tax Act. The email did not explicitly mention that the Appellant intended to resign as a director of Karora.

The main issue became one of onus.  Specifically, the Appellant argued that he did not have access to Karora’s financial records nor the Minister’s grounds for assessing Karora, and he should not therefore bear the onus to prove the assessments incorrect. Rather, the Minister should bear the onus of proving that the correctness of that assessment.

The Court did not accept this position.  Mr. McBride testified on behalf of the Appellant.  Not only had it already been established that he controlled the corporation, but he also produced bank statements, T4’s and other relevant records at the hearing.  In the Court’s view, the Appellant was able to challenge the underlying assessment.

The  Court reiterated a principle from Paris J’s decision in Andrew v. HMQ[1], which is that the onus to prove the underlying assessment does not automatically shift to the Minister.  In fact, it will only shift to the Minister in circumstances where facts concerning the underlying assessment are exclusively or peculiarly within the knowledge of the Minister.

The Court found that the facts relating to Karora’s underlying assessment were not exclusively or peculiarly within the Minister’s knowledge, and that therefore the onus was not reversed.

Taxpayer Succeeds

Despite there being a) no proper resignation and b) no shifting of the onus to the Minister, the Appellant prevailed in the appeal.  The Minister made the following assumption of fact[2]:

Karora failed to remit source deductions and related penalties and interest as and when required by the Income Tax Act, the Canada Pension Plan, and the Employment Insurance Act, as set out in Schedule A to this Reply.

As in most director’s liability Replies, Schedule A includes the exact amounts.  The Appellant challenged the assumption on the basis that the underlying assessments were based on T4’s prepared by Mr. McBride, and Mr. McBride testified that those T4’s were inaccurate. The T4s relied upon by the Minister “…did not accurately reflect the salaries that were actually paid to the employees. They also did not reflect the timing of when the payments were received by the employees. In some cases, employees were paid in a different year than what was listed on the T4s. Employees were also often paid different overall amounts than were listed on the T4s.”[3]

Since Mr. McBride’s testimony was corroborated by bank statements, the Court ultimately accepted the Appellant’s position that Karora’s assessment overstated Karora’s tax liability.  This meant that the assumption above had been demolished by the Appellant.  Since the Crown did not lead any evidence to the contrary, the Court could not reduce the underlying assessment to its proper amount.  The Appellant therefore was entirely successful in his appeal.

Takeaway (important tax litigation principles)

The Court relied on the reasoning in House v Canada[4],  for the critically important onus principles applicable in tax cases:

  1. The burden of proof in taxation cases is that of the balance of probabilities.
  2. With regard to the assumptions on which the Minister relies for his assessment, the taxpayer has the initial onus to “demolish” the assumptions.
  3. The taxpayer will have met his initial onus when he or she makes a prima facie case.
  4. Once the taxpayer has established a prima facie case, the burden then shifts to the Minister, who must rebut the taxpayer’s prima facie case by proving, on a balance of probabilities, his assumptions.
  5. If the Minister fails to adduce satisfactory evidence, the taxpayer will succeed.

Since the Crown did not satisfy #5 above, the appeal was allowed with costs payable by the Respondent.

by Amit Ummat About

[1] 2015 TCC 1.

[2] Found at paragraph 16 of Tran v HMQ 2021 TCC 521 (“Tran”).

[3] Tran Paragraph 18.

[4] 2011 FCA 234.