Gascon Fiscalité Taxation

The board of directors is responsible for the management of the legal person or, as the case may be, for the supervision of the management performed by the officers to whom the directors have delegated their powers. Ensuring the good governance of the corporations or the non-profit organizations relies, therefore, on the directors. With the COVID-19 crisis, the governance performed by the directors has to be increased.

They have to ensure that the legal person takes the additional necessary measures to:

  • respect the directives of public authorities
  • protect the health of its employees, clients and the public
  • ensure the survival of its business
  • plan the restart of its operations when feasible

What are the duties and liabilities of the directors?

In addition to the governance, the directors also have fiduciary duties and their personal and joint liability may, thus, be engaged.

1 – Civil liability

The first source of liability of the directors is their civil liability originating from their duties under the Civil Code of Québec and with the constitutive Act of the legal person. These provide that the directors have to act personally, within the limits of their powers, with care, diligence, honesty and loyalty, in the best interest of the legal person.

Moreover, Québec’s Business Corporations Act (C.Q.L.R. c. S-31.1) and the Canadian Business Corporations Act (R.S.C., 1985, c. C-44), provide for the personal liability of the directors, namely but not limited to, in the following instances:

  • Unpaid salaries of the employees: the directors are liable for six months of unpaid salaries of the employees of the corporation, including any remuneration, commissions, overtime, vacation pay, union dues, employment insurance benefits and statutory deductions.
  • Illegal dividends: the directors may be held liable if they declare dividends although they have reasonable grounds to believe that the corporation may not or will not be able to pay its liabilities as they become due.
  • Loans to shareholders: the liability of the directors may be engaged if the corporation makes loans to its shareholders while the corporation is insolvent.
  • Existing debts at winding-up: under certain circumstances, the directors could be held personally liable when winding-up a corporation that has debts.

2 – Penal liability

Numerous laws, like the Act respecting occupational health and safety (C.Q.L.R. c. S-2.1), provide for the penal and personal liability of directors for certain offences. A conviction under such laws may result in a fine or even imprisonment in some cases.

3 – Statutory liability

In general, with criteria varying from law to law, and some possible exemptions, tax deductions or levies to be made by corporations may give rise to statutory and personal liability of directors.

Due to the COVID-19 crisis, many companies are facing the prospect of insolvency or bankruptcy or having cash flow problems.

Should there be a default of payment, a bankruptcy or insufficient assets according to the liquidation of the legal person, the directors may be personally liable for the various deductions at source, the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) and Québec Sales Tax (QST) owed by the legal person, as described in subsection 323 (1) of the Excise Tax Act (Canada) (R.S.C. (1985), c. E-15) and to section 24.0.1 of the Tax Administration Act (Québec) (R.S.Q. c A-6.002).

As such, on March 27, 2020, the federal government announced that taxpayers will be entitled to defer the remittance of GST and HST until June 30, 2020. Similarly, the deadline to file QST returns and make QST remittances have been deferred until June 30, 2020, for QST remittances due between March 27, 2020, and June 1, 2020.

These measures are intended to allow businesses that may currently be unable to meet their GST and HST, and QST filing and remittance obligations to defer such obligations until June 30, 2020.

However, an important caveat is required. In the Ahmar c. Canada, 2020 CAF 65, decision rendered on March 25, 2020, the Federal Court of Appeal stated that a director who does not exercise the degree of care, diligence and skill that would have been exercised by a reasonably prudent person in comparable circumstances, by allowing corporate funds to be applied to satisfy other obligations of the corporation, instead of satisfying standing tax liabilities, in the hopes of turning the company’s financial position around, would be in error. It is therefore crucial that directors should be wary of not allowing GST, HST or QST collected, from being used to finance the corporation’s operations during the present crisis despite their remittance being deferred to June 30, 2020.

The unprecedented health crisis associated with COVID-19 increases the risk that directors could be held personally liable. An inadequate governance and control of the company’s activities by the directors could constitute breaches of their duties and engage their personal.

Thus, the directors must monitor and guide the management of the legal person in the management of this crisis. It is recommended that the directors seek professional advice, to set up or delegate to a committee the responsibility of overseeing the management of current events. It is also advisable to ensure that an assessment of the scope of the risks generated by COVID-19 on the strategy, operations and financial health of the legal person is made to ensure that the appropriate measures are implemented.

By Mélanie Masson