Overview
In a recent decision, the Federal Court of Appeal clarified the rules concerning the manner in which directors need to resign their position with a corporation. Subsection 227.1 of the Income Tax Act deals with director’s liability and the consequences that corporate directors may face, when the corporation, of which they are a director, fails to deduct, withhold, remit, or pay certain amounts of money held in trust for the Crown. Since there is a limitation period of two years after the director last held that position in the corporation, the timing of resignation may become vital when dealing with the Canada Revenue Agency.
The facts in Cliff v. Canada, 2022 FCA 16, are quite simple: in 2001, Steven Cliff incorporated Cliff Crucibles Inc. under the Ontario Business Corporations Act. Steven and his wife Robin Cliff were the shareholders of the corporation and signed documents appointing themselves as the corporation’s directors effective May 18, 2001. The corporation was dissolved in 2013 and the Minister of National Revenue assessed Robin and Steven, as directors of Cliff Crucibles Inc., for tax liabilities of the corporation under the Excise Tax Act and the Income Tax Act.
Robin immediately objected to the assessment, claiming that since the beginning she made it clear that her appointment as a director of the corporation was to be only for a limited period. To this point, she asserted that on the day she signed the documentation to become a director, she told her husband that she wanted to be removed from that position. During her testimony in Court, Robin affirmed that she resigned the day that she signed the documents necessary to be appointed as a director and that she believed her oral statement constituted her resignation.
Further, the accountant’s assistant prepared a “Form 1 – Initial Return/Notice of Change,” indicating that Robin’s directorship ceased on December 12, 2003, with a copy of the document placed in the corporation’s minute book. However, despite the accountant recalling that Form 1 was submitted to the Ontario Ministry of Consumer and Commercial Relations, there was no other evidence as to when Form 1 was sent to the Ministry nor anything in the records of the Ministry reflecting the change. One thing was certain: no written resignation was ever received by the corporation.
Under the Ontario Business Corporations Act, the resignation of a director must be in writing and conveyed to the corporation in order to be effective. Section 121(2) of the Act states that “A resignation of a director becomes effective at the time a written resignation is received by the corporation or at the time specified in the resignation, whichever is later.” Importantly, almost identical wording is used in the Federal Canada Business Corporations Act and in The Corporations Act of Manitoba, except the operative time in these statutes is the later of when a written resignation is sent (not when it is received) or at the time specified in the resignation.
In interpreting this provision, the Tax Court relied on the decision in Canada v. Chriss, 2016 FCA 236, finding that a personal signature of a director was required in order for the resignation to be effective. The lack of signature in Form 1 meant that Robin remained a director of the corporation.
The Federal Court of Appeal found that the Tax Court misinterpreted the decision in Chriss. Chriss involved a party claiming that a resignation was effected by a letter, but the letter was unsigned by the director. The Court in Cliff compared a letter without a physical signature as in Chriss to an email resting in the draft folder and never sent.
The Court held in Cliff that the caselaw does not require all resignations to have a personal, physical signature to be effective. For instance, a director could also resign via email or text. For a resignation to be effective, there can be no ambiguity regarding whether a written resignation has been received by the corporation, and there must be certainty as to the effective date.
The Court found in Cliff that it did not need to consider whether a signature was necessary or not, on the facts of that case. Form 1 was not a resignation directed to the corporation, but a form of communication from the corporation to the Ministry of Consumer and Commercial Relations.
In the words of the Court:
“For a resignation to be effective, there must be evidence that the corporation received a written resignation confirming that the appellant has resigned. While Form 1 may reflect something that may have happened, it is not a substitute for a written resignation.”While Cliff was decided in the context of the Ontario Business Corporations Act, the decision of the Federal Court of Appeal may be applicable to companies incorporated under both federal and Manitoba companies’ legislation. The relevant wording of all three statues is quite similar.
In a time when the corporate world is moving further and further away from the requirements of physical signatures, the decision in Cliff follows that mindset. Cliff provides that a director’s resignation may not necessarily need a “wet ink” signature to be valid. Non-conventional methods of communication, such as emails or text messages, may be acceptable means to convey the intention of a director to resign from their position, so long as the resignation is validly communicated to the corporation.
That said, the decision in Cliff demonstrates the need for a director to clearly communicate the director’s resignation to the corporation. The best way to do this likely remains a document, signed in wet ink, that is delivered to the corporation.