The Uncertain Scope of the De Facto Director Doctrine

By Studniberg, Brian | University of Toronto Faculty of Law Review, Winter 2017 | Go to article overview

The Uncertain Scope of the De Facto Director Doctrine


Studniberg, Brian, University of Toronto Faculty of Law Review


  I   INTRODUCTION: WHAT IS THE PLACE OF A CORPORATION'S             71       DIRECTOR-IN-FACT?  II   BEING HELD OUT AS A DIRECTOR: DOES IT MATTER? WHEN?            73        I. MacDonald v The Queen                                      74       II. McDonald v The Queen                                       77 III   WHO IS A DE FACTO DIRECTOR?                                    79       I. The Foundational Canadian Authorities                       79       II. The UK Jurisprudence                                       84  IV   BEING HELD OUT AS A DIRECTOR: IS IT A PRIMARY OR               87       SECONDARY FACTOR?        I. Parsing the Guidance Provided by the Canadian Authorities  87       II. MacDonald Revisited                                        92   V   CONCLUSION: DIRECTORSHIP BY ESTOPPEL?                          97 

I INTRODUCTION: WHAT IS THE PLACE OF A CORPORATIONS DIRECTOR-IN-FACT?

Directors' liability cases have for some time been a regular release in the jurisprudence emerging from the Tax Court of Canada in income tax and GST/HST matters. An important--and perhaps still under-acknowledged--subset of these cases deals with individuals who are alleged to be de facto directors of a corporation. As a whole the jurisprudence has been less than thorough in providing guidance to taxpayers (and to tax administrators) as to when a person has become a director-in-fact of a corporation. When does a person become a factual director of a corporation?

The issue is especially acute in smaller businesses. This is not surprising in itself, as a very large share of the tax cases raising the liability of a company's de jure directors feature closely-held corporations. The business setting in which many private companies operate and, perhaps more significantly, the ways in which they are administered and go to market, may contribute to an appreciably greater risk of establishing de facto directorships. There are, after all, more than 1.5 million "small enterprise" corporations that currently exist in Canada. (1)

This matters because the Tax Court has had little reservation in recent years from giving voice to a concern that the Canada Revenue Agency (the "CRA") as the tax collector has erred in not fully pursuing the derivative liability assessments levied on all of a company's directors for the corporation's failure to remit such taxes as payroll source deductions and GST/HST, as required by law. As the Court has expressly noted, since the scope of potential liability includes both de jure and de facto directors, it is a mistake for the CRA to refrain from collecting tax "on behalf of the people of Canada" where possible, particularly as not pursuing all of a company's directors may mean that the amount of the tax liability ultimately goes unsatisfied in whole or in part. (2) Meanwhile, there is a provision in both the Income Tax Ac? (the "ITA") and the Excise Tax Act (4) (the "ETA") providing for a director who has satisfied a claim to seek contribution from the other directors who were liable for the claim. One would expect, then, that the CRA would vigorously seek to make sure that the corporation's unremitted tax has been paid by someone, and if that person is not a director de jure then he or she may well be a director de facto. (5) Unsurprisingly, then, the issue does come up in practice and, judicial nudges aside, a tax authority motivated by concerns over the perceived fairness of both the incidence of and avoidance of tax liability would be expected to place greater emphasis on such additional attempts at tax collection.

And yet there is surprisingly little Canadian commentary on the subject of de facto directorships. As noted below, the tax cases have considered some combination of two broad factors as constituting the essential basis for a finding of de facto directorship: namely, what might be referred to as "acting as a director" and "being held out as a director". …

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