When Does Director's Liability Arise To Support Section 160 Assessment?

• Published date: 26 May 2020
• Author: Mr John Sorensen
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Tax, Directors and Officers, Trials & Appeals & Compensation, Income Tax
• Law Firm: Gowling WLG

The Queen v. Colitto

The Queen v Colitto¹ addressed the combined effect of two provisions that create third party liability for someone's tax debts, namely:

1. subsection 160(1)² (joint and several liability in connection with a non-arm's length property transfer from the tax debtor for less than fair market value ("FMV"); and
2. subsection 227.1(1) (director liability for corporate failure to deduct, withhold, remit or pay certain amounts).

Colitto is the first case decided by the Federal Court of Appeal ("FCA") to consider the timing for director liability arising under subsection 227.1(1) for purposes of subpara. 160(1)(e)(ii).³ Paragraph 160(1)(e) is a key part of section 160 that sets out limiting factors that would reduce or eliminate liability: liability is limited to the lesser of:

(1) the amount by which the property's FMV, when it was transferred, exceeded the FMV of the consideration;⁴ and

(2) the total of all amounts the transferor was liable to pay under the ITA in or in respect of the taxation year in which the property was transferred or any preceding year.

Obviously, if the transferor did not have a liability in or in respect of the year that the property was transferred (or leading up to that year), no liability can flow through to a transferee.

A review of the facts illustrates the timing question: Domenic Colitto was a director and shareholder of a corporation that failed to remit source deductions between February and August, 2008 and his failure to exercise due diligence was conceded. In May, 2008, while the corporation was in default of its remittance obligations, he transferred his 50% interest in each of two properties to his wife Caroline for nominal consideration. The total value of the property interests was approximately $228,750. In October, 2008, the Canada Revenue Agency ("CRA") assessed the corporation for its unremitted source deductions, plus interest and penalties totalling $631,554 and no notice of objection was filed. A certificate was registered in Federal Court and while the Sheriff was directed to enforce the debt, it remained unsatisfied. Consequently, in March, 2011, the CRA assessed Mr. Colitto personally as a director. Again, no notice of objection was filed. Much later, in January, 2016, the CRA assessed Mrs. Colitto in connection with the property transfer. She filed notices of objection and later appealed to the TCC.

The TCC allowed the appeal and vacated the assessments against Mrs. Colitto. The TCC's reasoning...