While it might seem easy, it is startling to see how much trouble directors get into because of an ineffective resignation. The purpose of this blog piece is to explain why directors must clearly resign and how they can do that.
1. The Importance of an Effective Resignation
The two most common sources of personal liability for directors of charities and other not-for-profit (NFP) corporations are undoubtedly in respect of (a) unremitted source deductions; and (b) unpaid employee wages. In both cases, directors are exposed to full (i.e., joint and several) liability for the amount of the claims that accrue and are unpaid on their watch. That is, directors are not liable for missed payments that predate the time when they joined the board. Nor are they liable for missed payments that accrue after they have ceased to be directors. Further, in most cases, a statutory limitation period starts to run from the moment an individual ceases to be a director.
2. Key Liability Regimes
What follows is a brief description of some of the liability regimes that most commonly affect directors of NFP corporations:
- Directors of a corporation that fails to deduct or remit employee payroll deductions under the Income Tax Act (together with any related interest and penalties) are jointly and severally liable for the unremitted payments unless a director can establish a due diligence defence. However, the Canada Revenue Agency (CRA) cannot issue an assessment against an individual more than two years after he or she stopped being a director. Thus, a director's resignation is important not only to cut-off exposure to liabilities that accrue after he or she leaves the board but also to start the limitation period running for liabilities that accrued on her watch.
- Directors of a corporation that fails to deduct or remit premiums (EI) under the Employment Insurance Act (together with any related interest and penalties) and contributions (CPP) under the Canada Pension Plan (together with any related interest and penalties) are jointly and severally liable for the unremitted amounts unless a director can establish the same due diligence defence. In both cases, the same two-year limitation period runs from the time the individual ceased to be a director.
- Directors of a corporation that fails to pay net harmonized sales tax (HST) or net goods and services tax (GST), as applicable, under the Excise Tax Act (together with any related interest and penalties) have the same joint and several liability for the unremitted net tax irrespective of whether the HST or GST was collected by the corporation. Again, a due diligence defence applies as well as the two-year limitation period running from the date that the individual ceased to be a director.
- Directors of a corporation incorporated under the Canada Not-for-profit Corporations Act (CNCA) or the Ontario Corporations Act (OCA) are jointly and severally liable to the employees of the corporation for all debts not exceeding six months wages payable to each employee for services performed for the corporation while they were directors. Liability includes vacation pay for not more than 12 months and unreimbursed expenses incurred by the employee. A two-year limitation period applies under the CNCA running from the time when the individual ceased to be a director. Liability under the OCA is also subject to a two-year limitation period; however, this period runs from the time when the employee knew or should have known that he or she had a claim against for unpaid wages (which in most cases would be the date that payment was due).
3. Giving an Effective Resignation
To reduce a director's exposure to liability for payroll taxes, EI premiums, CPP contributions, HST/GST remittances and employee wages, vacation pay and reimbursable expenses, it is important that a director give an effective resignation.
An effective resignation should be:
- set out in a letter or other document in writing;
- signed by the director; and
- delivered to the corporation.
A resignation should generally be given unconditionally. The resignation can simply state: "I hereby resign as a director of ABC Society effective immediately". While a resignation can be given conditionally (such as by stating that it is effective upon acceptance by the members or remaining directors or upon appointment of a replacement director), the problem is that the condition may never be met or may be met long after delivery of the resignation, prolonging the directorship and creating uncertainty as to when the resignation became effective.
While there is case law suggesting that, in an appropriate circumstances, a resignation need not be signed, it is always best to sign the resignation so that the evidentiary record is clear.
Delivery to the corporation should be multi-channel. As a minimum, delivery should be made to the registered office of the corporation and to the board chairperson and the secretary. However, sending the resignation to the corporation's solicitor (and some or all of the remaining board members) may also be wise. Difficulties arise when a resignation is sent to only one individual who happens to be a volunteer. Years later, no one may have a record of whether any resignation was sent or, if so, when. A director who resigns should keep both an electronic copy of the transmission and a hard copy for his or her own file.
Upon receipt of a resignation, the corporation is required to file a notice of change of directors within 15 days. Under the CNCA, the current list of directors is available on Industry Canada's website. A director who has resigned should check to make sure that his or her name has been removed. Many directors have been assessed by CRA (or sued by an employee) solely on the basis of out-of-date information in the public domain.
Finally, a director who resigns must actually discontinue his or her involvement so as not to be found to be a de facto director.