Reconsidering Directors’ Resignations in Cliff v Canada
By: Josiah Davis
Once you become the director of a corporation, it is harder than you think to resign. Specific steps must be taken in order to resign from the board of directors in a way that complies with the law. This article provides the steps for resigning and explains the tax consequences to individuals whose resignations do not comply with the most recent legal guidance.
Directors ought to know that if the Canada Revenue Agency is unable to collect GST/HST remittances or employee source deductions from a corporation, its next step is to seek payment from the directors. Directors can protect themselves from such collection actions by resigning from a corporation and ceasing to be involved in the corporation’s affairs. Fortunately, the CRA has only two years from the date of a director’s resignation to take collection action against him or her. As a result, properly submitting a resignation is the best way for directors to protect themselves against a corporation’s tax liabilities.
The best practice for submitting a resignation is for a director to sign a resignation with a clear effective date and then mail that letter to the corporation’s registered office through registered mail. There can be no doubt that the corporation has received the resignation and that there is a clear date of resignation. Individuals should keep both a copy of the letter and a copy of the proof of delivery in case that the CRA tries to collect on the corporation’s outstanding HST remittances or source deductions owed by the corporation.
The Federal Court of Appeal (the “FCA”) has recently provided guidance on what does and does not constitute a legally effective resignation. In Cliff v Canada, the appellant intended to resign but did not communicate the resignation to the corporation in writing. Instead, she told her co-director to remove her as director. In addition, the corporation’s accountant was instructed to update the records of the Ministry of Government and Consumer Services by submitting a “Form 1: Initial Return/Notice of Change.” The Form 1 is used to report a change in the corporation’s information on file with the Ministry. The FCA, however, clearly stated that submitting a Form 1 to the Ministry does not constitute an effective resignation. Nor does an oral statement to an accountant or fellow director. Instead, the resignation must be in writing, must have an effective date, and must be received by the corporation.
Directors should follow best practices when resigning in order to comply with the court’s guidance. Even if directors think that a corporation has no outstanding tax liabilities, a future audit may reveal otherwise.
 Cliff v Canada, 2022 FCA 16, aff’ing docket Nos. 2017-22(GST)G; 2016-5465(IT)I per Rossiter CJ [Cliff].