Astle v. The King: The Tax Court Finds that a Director’s Text Message Is Not a Resignation

Facts

In 2014, Mr Astle decided to invest in a craft brewery and restaurant operation in British Columbia. He became a shareholder of Brew Street Craft and Kitchen Ltd. (“Brew Street”) and agreed to join the company’s board of directors, signing a consent to act as director and officer. The taxpayer invested $50,000 for a 10% share interest in Brew Street. Brew Street’s principal was an experienced pub operator. After two of Brew Street’s other directors left the company in 2016, the company’s principal asked the taxpayer to serve as a temporary director until a long-term replacement could be found (with both the principal and taxpayer apparently overlooking that the taxpayer had already signed on as director).[1]

The taxpayer began to take on more responsibility at this time, attempting to set up regular directors’ meetings. He also loaned Brew Street some $10,000 to cover operating shortfalls. However, by January 2017, the taxpayer was concerned that he had not been receiving the financial records he had requested for the company. He also became aware that Brew Street’s principal had opened up another bar nearby and it appeared that the principal had redirected funds from Brew Street to his new venture.[2]

By October of 2017, the taxpayer had become aware of unremitted GST along with some unremitted provincial sales tax. In his minutes recorded at the October 2017 directors’ meeting, the taxpayer noted that the principal’s new venture owed Brew Street some $180,000 and that these funds would be used to pay the GST and PST arrears. However, shortly after the directors’ meeting, Brew Street fell behind in paying its payroll processor. The taxpayer was not aware of this at the time, as he understood the company’s employees were being paid. The taxpayer left payroll to the company’s principal and had no reason to believe that the required remittances were not being made.[3]

In November, Brew Street’s principal asked the taxpayer to invest further funds into the company. The taxpayer answered that he was uncomfortable doing so given the issue of Brew Street funds having been redirected to the new venture. The taxpayer asserted, in a text message, that he was “done with it all”, that the company should be sold, and that all of the required taxes paid from the proceeds.[4]

At this point, nothing seems to happen until June 2018 when Brew Street’s corporate counsel had some email correspondence with the taxpayer about selling his shares. At that time, the company’s lawyer asked the taxpayer if he wanted to resign as director. After discussing the wording of the resignation, the taxpayer signed a resignation as director and officer of Brew Street on June 26, 2018 with stated immediate effect.[5]

In his testimony at the Tax Court, the taxpayer explained that following his November 1, 2017 text exchange with Brew Street’s principal, he had assumed the company would take the necessary steps to record his resignation and transfer his shares. Instead, the taxpayer said he first learned that these steps had not been taken when he followed up with the company’s lawyer in June 2018.[6]

On December 11, 2019, the CRA assessed the taxpayer for Brew Street’s payroll source deductions for 2017 and the period of 2018 up to May 31, 2018. (The CRA had attempted to obtain the funds from the corporation but had been unsuccessful in doing so.)[7]

Timeliness of Director’s Liability Assessment

The main issue in Astle is whether the two-year limitation period for assessing a company director had been met under subsection 227.1(4) of the Income Tax Act, RSC 1985, c. 1 (5th Supp.). Under the Income Tax Act, a taxpayer cannot be assessed for his or her derivative liability as a corporation’s director more than two years after the person last ceased to be a company director.[8]

Writing for the Tax Court, Justice Wong began her analysis by turning, quite correctly, to British Columbia’s corporate law as setting the legal basis for the taxpayer’s valid resignation from a B.C. company. British Columbia’s Business Corporations Act, SBC 2002, c. 57, reads as follows:

When directors cease to hold office

128 (1) A director ceases to hold office when

(a) the term of office of that director expires in accordance with

(i) this Act or the memorandum or articles, or

(ii) the terms of the director's election or appointment,

(b) the director dies or resigns, or

(c) the director is removed in accordance with subsection (3) or (4).

(2) A resignation of a director takes effect on the later of

(a) the time that the director's written resignation is provided to the company or to a lawyer for the company, and

(b) if the written resignation specifies that the resignation is to take effect at a specified date, on a specified date and time or on the occurrence of a specified event,

(i) if a date is specified, the beginning of the specified date,

(ii) if a date and time is specified, the date and time specified, or

(iii) if an event is specified, the occurrence of the event.

Accordingly, the Tax Court stated that British Columbia law “requires that a director’s resignation be written and provided to either the company or the company’s lawyer”. The Tax Court then continued to note that “[b]usiness efficacy requires that third parties be able to rely on available information as to who the directors of a corporation are,” citing the Federal Court of Appeal’s 2016 decision in Canada v. Chriss.[9] Moreover, “[f]or practical reasons,” the Court added that a person’s status as company director “must be capable of objective verification” rather than turning on a matter of “subjective intent”.[10]

Unfortunately, the Tax Court in Astle does not tie in these policy elements to British Columbia’s corporate law. Chriss, after all, dealt with Ontario’s corporate law which is similar, but not identical, to that of British Columbia’s modernized corporate statute.

For reference, Ontario’s statute says that “A resignation of a director becomes effective at the time a written resignation is received by the corporation or at the time specified in the resignation, whichever is later.” (Business Corporations Act (Ontario), RSO 1990, c. B. 16, s. 121(2).)

Under B.C.’s legislation, then, focusing on the “certainty” sought by looking for factual support for the “time that the director’s written resignation is provided to the company” is arguably supported by the statutory text. However, note that this still does not necessarily provide for “objective verification” in the sense that the director’s act of resignation need not be made in a public instrument.

Perhaps it was the facts of Astle which permitted straightforward application. Considering the taxpayer’s November 2017 text exchange with Brew Street’s principal, the Tax Court explained that the assertion that the taxpayer was “done with it all” was indicative of his subjective intention. However, in circumstances where the taxpayer’s trust in the corporation’s principal deteriorated only gradually, it became difficult to identify when events would have supported a resignation. As the Tax Court noted, this type of uncertainty “would likely exist in nearly every situation” and therefore justifies the need for objective certainty.[11]

Let’s accept that the Tax Court is correct as a policy matter. The problem is that Canada’s corporations statutes could require, but do not, the kind of “objective verification” the courts seem to be seeking. (For in-depth discussion of the point, see the author’s 2023 article on the subject).[12]

After all, a desire for “objective verification” could mean more than one thing. One meaning, a narrower sort, would be that a director’s resignation needs to be reduced to writing in a form that could, for instance, make its way into the company’s minute book. A broader version would be that the resignation also needs to be communicated to the provincial company director registry to allow for public access to the company’s current slate of directors at any given time.

In the Astle case, the Tax Court found that the earliest point when the taxpayer director has provided his written resignation to the company was in June 2018.[13] Evidently the record before the Tax Court enabled it to make this finding. So why then include the discussion of “objective verification”? It would have sufficed for the Tax Court to start and end its analysis with the finding that the November 2017 text message did not constitute a resignation and that the June 2018 signed written statement of resignation with immediate effect did so.[14] Unfortunately for the taxpayer, the former date, if valid, would have fallen outside the two-year limitation period whereas the latter date did not.

A contrast with an earlier British Columbia tribunal decision taking up the effect of the same provision of its company law is illuminating. In Harrison (DNT Enterprises Ltd) (Re.), 2015 CanLII 154214 (B.C. EST), a delegate of the Province’s Director of Employment Standards found that a Mr Harrison was a director of a company that had failed to pay wages to one of its employees. Under a provincial statute, the Delegate issued a determination that Mr Harrison was personally liable for the unpaid wages.[15]

Mr Harrison appealed the delegate’s determination to the Employment Standards Tribunal. There, Mr Harrison established that while he had been the company’s director and shareholder, he had subsequently provided his resignation to the company’s lawyer in conjunction with an attempted transfer of his shares. However, because the company’s lawyer was herself unpaid, the lawyer’s office did not register the removal of the director with the provincial registry.[16]

In the circumstances, the B.C. Employment Standards Tribunal found that Mr Harrison had validly resigned under the B.C. Business Corporations Act as the resignation tendered met the statutory requirements. The Tribunal specifically noted that, as a matter of provincial corporate law, the failure to file the resignation with the public registry does not invalidate its legal force.[17]

Conclusion

Tax authorities understandably seek “objective verification” of a person’s purported resignation as a company director. However, the legal validity of such act of resignation turns on the requirements of the prevailing body of corporate law. Understanding what that law requires ought to involve looking to the guidance (and direction) from the relevant set of authorities.

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