Introducing the New Directors’ Liability Classifier

Aug 24, 2017

We are excited to introduce Tax Foresight’s new classifier: Directors’ Liability. The Directors’ Liability Classifier assesses a director’s liability by evaluating whether the due diligence defence is available, pursuant to s. 227.1(3) of the Income Tax Act or s. 323(3) of the Excise Tax Act.An analysis of a recent case in this area, Helgesen v. Canada, 2017 FCA 21, follows. To try your own, login to Tax Foresight hereHelgesen v. Canada, 2017 FCA 21Helgesen was a director and 50% shareholder of a corporation that failed to remit the required payroll deductions to the Canada Revenue Agency. He contributed his own money to the corporation and provided personal guarantees for its credit policy and bank account. In addition, he was an experienced businessman who had owned other businesses and properties. While he was involved with the financial side of the business, the day-to-day operations were overseen by the other director, Pyle.

Pyle indicated to Helgesen that the business was doing well. However, Helgesen was later contacted by the CRA. The CRA explained to him that the corporation had failed to remit payroll deductions and that he might be liable for the remittance failure as a director. In response, Helgesen contributed more money to the corporation but did not ensure it was used to pay the remittances.

Eventually, Helgesen did begin to ask Pyle regularly whether the remittances were being paid. However, he did nothing to verify Pyle’s assurances and the remittance problems continued. Because of Pyle’s history of dishonesty, the court held that Helgesen’s reliance on Pyle along was insufficient to make out a due diligence defence. Because all of the other requirements were met for liability, Helgesen was held liable as a director.

Tax Foresight Case Analysis

  • Tax Foresight correctly predicted with 86% confidence that Helgesen was not duly diligent.
  • If Helgesen had checked the corporation’s bank accounts to ensure remittances were actually made, Tax Foresight predicts he would have been duly diligent with 60% confidence.
  • If Helgesen did not have his experience in business and as a director, Tax Foresight predicts with 60% confidence that he would not have been duly diligent.

Directors’ Liability Insights

  • 35% of due diligence cases for directors’ liability have resulted in a finding that the director was duly diligent.
  • Of the directors who were involved in day-to-day management, 24% were duly diligent. Of those who were not, 50% were duly diligent.
  • Each time you run our Directors’ Liability Classifier, you apply the entire body of case law to your client’s situation.

Want to make sure you are considering all the new directors’ liability cases when you give your advice? Tax Foresight reflects the newest case law and takes every case into account when providing its prediction.