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". The existence of the first indicator is fairly well established in the authorities and, by and large, appears to have developed without much resistance even if its outer parameters are still somewhat unsettled. The meaning and boundaries of the second indicator, however, remain effectively unexplored in the cases coming out from the Tax Court. Accordingly, there is a risk--not yet seriously grappled with in the authorities--that an individual could be held to be a director-in-fact of a company by virtue of a mixture of self-representation and circumstance.
This article will strive to explore the factual salience of these types of factors. A helpful frame is offered by two fairly recent decisions rendered by the Tax Court, MacDonald v The Queen (6) and McDonald v The Queen. (7) Intriguingly, the Tax Court's decisions in these cases may have inadvertently revealed some of the underlying doctrinal strains generally running through the authorities. MacDonald, for one, can be read as illustrating the difficulty caused by a lack of clarity as to the parameters that the courts bring to bear in evaluating the facts of the individual case, and perhaps even more importantly, to the process followed in ascribing greater significance to particular factors. On the other hand, McDonald, seemingly a more typical case in the canon of de facto directors' liability, may yet offer some hints as how to reconcile the seemingly disparate authorities on the topic.
This near namesake duo of cases might have prompted--but did not--the overdue judicial examination of the scope of the de facto director doctrine. This article therefore begins in Part II with some perspective on the facts of both cases, a proper appreciation of which is unavoidable in any discussion of whether a directorship-in-fact could be said to have arisen in the context of those facts. In Part III, the article considers the origins of the de facto director in Canadian tax law before looking for guidance from the UK company law authorities (which deal with an analogous concept). In Part IV, the Canadian tax cases taking up the prospect of a de facto director are then examined for what they suggest about the scope of the doctrine. Finally, the difficulty posed by a case like MacDonald is reconsidered in light of the authorities. The article concludes in Part V that the de facto director doctrine is ripe for a restatement of sorts, one that is likely to present a cautious if principled expansion of the concept drawing on a purposive interpretation of the directors' liability provisions. After all, being found by a court to be a director-in-fact implies the presence of at least some factual indicator of one's directorship. So, while holding out is decidedly relevant, it would seem to make sense to assimilate the factor into a more holistic evaluation of the circumstances alongside the "acting as a director" factor. Together, the presence of holding out could be expected to soften--but not to eliminate--the need for factual underpinning to an individual's acting as a director.
II BEING HELD OUT AS A DIRECTOR: DOES IT MATTER? WHEN?
The facts of, and holding rendered in, MacDonald and McDonald are discussed below. It is perhaps worth pondering in advance, however, why it is that the Tax Court's decision in McDonald somehow seems so comfortably given. In a recent article published for a tax audience, one author considers de facto directorships with an eye to explicating the various factors that the courts have looked to in evaluating whether an individual has served as a corporation's director-in-fact. (8) A range of illustrative factual indicators emerges: Performing the functions of a director ("a person who performs acts that only a director can perform") and the individual's "indispensability" to the corporation on the one hand; on the other, a realization that one can serve as a very senior manager or executive for a corporation without stepping over the notional line into a factual directorship. As important as these broad classifications may be for the particular case that comes before a court, however, it is rather interesting that they can be wholly conceived of in terms of the first overall indicator introduced above, namely that the individual is "acting as a director". For instance, the author also observes that, in some cases, an individual's former role as a company director may act as a tainting factor for the present determination as to the individual's factual directorship. And, equally instructively, the author discusses how an individual might make moves to cease to be a de facto director. (9) But all of this kind of discussion begs the larger question, one more searching of corporate legal theory than of the practicalities of tax administration: What about the relative import of the second such overall factor, "being held out as a director"? (10) As it happens, MacDonald sets up this discussion rather instructively.
MACDONALD V THE QUEEN
As the central issue in MacDonald was whether the taxpayer was a de facto director of the company Great Canadian Pub Inc. ("GCPI"), it is worth taking careful note of the facts as reported in the informal procedure decision by Associate Chief Justice Rossiter (as he was then) for the Tax Court. GCPI operated a bar in Moncton from October 2007 to December 2009. Prior to the bar's opening, GCPI's incorporator, a Mr Marney, gave a presentation to a group of potential investors including the taxpayer Mr MacDonald. The taxpayer became a shareholder of the company, investing some $10,000. At the time of making the investment, the taxpayer did not know Mr Marney. Mr Marney and his spouse Ms Richard managed GCPI as its principals; the taxpayer held down a full-time job and was not employed by the company." Indeed, the taxpayer was not at all involved with GCPI's day-to-day operations. At first, the only "requirement" from the taxpayer was his $10,000 investment. Nevertheless, shortly after the bar's opening, Mr MacDonald became an authorized signatory on GCPI's bank account, meaning that he could sign cheques for the company. The taxpayer explained that, in his mind, he only had such authority because two different people were required to have signing authority. (12)
Not long after the bar's opening, Mr MacDonald--along with Mr Marney and Ms Richard--was asked by some...