If a company is revived, are former directors liable for unpaid GST again?

Introduction: Director GST Liability After a Company Is Dissolved and Revived

David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm.

The Tax Court of Canada decision in Maragos v. The King deals with an important issue in tax law and corporate law: when a person stops being a director of a company for the purpose of personal tax liability. The case focuses on whether a former director can still be held responsible for a corporation's unpaid GST after the corporation has been dissolved and later revived.

Background facts

Anastase Maragos was a director of a corporation called Salmon's Linen Supply Inc. The company was incorporated under the Canada Business Corporations Act (CBCA). In 2018, the corporation was dissolved because it failed to file its required annual returns. At that point, the corporation legally ceased to exist.

After the dissolution, the Canada Revenue Agency (CRA) had the corporation revived and attempted to collect outstanding GST debts from it. When those efforts failed, the Minister assessed Mr. Maragos personally under the director's liability provisions of the Excise Tax Act. Mr. Maragos appealed this assessment.

The main legal question was simple but important: when did Mr. Maragos last cease to be a director? This mattered because the law only allows the CRA to assess a director within two years after the person stops being a director.

The Parties' Arguments

Mr. Maragos argued that he ceased being a director when the corporation was dissolved in July 2018. Since the tax assessment was issued in May 2021, more than two years later, he claimed it was too late.

The CRA took a different view. It accepted that he ceased being a director when the company was dissolved, but argued that the revival of the corporation automatically made him a director again. According to this argument, he only ceased to be a director when he later resigned, which would keep the assessment within the two-year limit.

The Court's Analysis

Justice Graham approached the issue using the standard method of statutory interpretation: textual, contextual, and purposive analysis.

1. Textual analysis

The judge examined the relevant CBCA provision dealing with corporate revival. The law says that a revived corporation is restored "as if it had not been dissolved," but it does not specifically mention directors.

Because the provision is silent about directors, the Court found the text ambiguous. It could support either side's interpretation.

2. Contextual analysis

The Court then looked at the broader corporate law context. Under the CBCA, a corporation must have at least one director, but there are several situations where a corporation may temporarily have none. For example, all directors might resign or become disqualified. In those cases, shareholders simply elect new directors.

This showed that the law already expects situations where a corporation has no directors. Therefore, it is reasonable to conclude that a revived corporation may start without directors, leaving shareholders to appoint new ones.

The Court also noted that automatically reinstating former directors could conflict with other provisions of the CBCA. For instance, the law requires a person to consent before becoming a director. If revival automatically reinstated directors without their knowledge, this requirement would be violated.

3. Purposive analysis

Finally, the Court considered the purpose of the relevant laws. The revival provision exists to preserve the corporation's legal continuity, not necessarily the continuity of its directors.

More importantly, the Court examined the purpose of limitation periods. Limitation periods exist to provide certainty, protect against stale evidence, and encourage the government to act diligently. If directors were automatically reinstated upon revival, the limitation period could effectively be extended indefinitely.

The Court found that this would undermine the entire purpose of limitation periods.

De Facto Director Issue

The CRA also argued that Mr. Maragos became a "de facto" director after the corporation was revived. A de facto director is someone who acts like a director even if not formally appointed.

However, the Court found no evidence that Mr. Maragos performed any director-like functions after the dissolution. The company had no assets, employees, or operations at that time. Simply receiving mail from the tax authority was not enough to make him a de facto director.

Decision of the Court

The Tax Court concluded that Mr. Maragos ceased to be a director when the corporation was dissolved in July 2018. He was never reinstated as a director after the revival, nor was he a de facto director.

As a result, the two-year limitation period expired in July 2020, well before the tax assessment was issued in May 2021. The appeal was allowed.

Significance of the Case

This case clarifies that, under the CBCA, directors of a dissolved corporation are not automatically reinstated when the corporation is revived. It also reinforces the importance of limitation periods in tax law.

The decision protects former directors from indefinite liability, especially in cases where the government delays taking action. It emphasizes that the purpose of limitation periods is to create certainty and fairness, not to give the tax authority unlimited time to pursue claims.

Overall, Maragos v. The King is an important reminder that corporate revival does not automatically revive personal liability for former directors. It also shows the Court's willingness to interpret statutes in a way that respects both corporate law principles and the policy goals behind limitation periods.

Canadian taxpayers who serve as corporate directors should closely monitor the legal status of their companies and be aware of limitation periods for director's liability. The court in Maragos v. The King confirmed that a director ceased to be liable once the corporation was dissolved and the two-year limitation period expired, even though the company was later revived.

Directors should therefore keep proper records of resignation or dissolution dates, including formal written resignation and acceptance by the Corporation, as these timelines can be critical in limiting personal exposure to corporate tax debts and defending against late assessments by the CRA.

David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm and is a Certified Specialist in Taxation Law who has completed the CICA in-depth tax planning course. He appears regularly in print, radio and TV and blogs extensively.  

With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, cryptocurrency traders, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax audit representation and tax litigation. Visit www.Taxpage.com and email David at david@taxpage.com.

Read the original article in full on Mondaq. Author photo courtesy Rotfleisch & Samulovitch P.C. Title image: iStock id 172740677. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.