The Cross-Border Biotech Blog

Biotechnology, Health and Business in Canada, the United States and Worldwide

How *Not* to Cut Back

Hat tip to Paul Carenza

In difficult economic times, managing cash flow is key to survival. However, a recent case serves as a reminder that corporate directors in Canada are exposed to personal liability for the corporation’s unremitted source deductions for income tax, EI and CPP, as well as GST collected, unless the director has exercised appropriate due diligence to ensure the corporation respects its obligations.  (We’ll stipulate that EI and CPP are more relevant in the Biotech context than income tax and GST, which require … well, income and sales; but still…)

Here’s how the court set out the test:

The test to be applied for Mr. Hochhausen to be exculpated under subsection 227.1(3) is the objective test of a reasonably prudent person. Mr. Hochhausen’s particular knowledge and experience in accounting and business, his knowledge of Mr. Sutherland’s group of companies, and his knowledge of past tax problems make up part of the comparable circumstances to be considered. In order to succeed in his defence, Mr. Hochhausen must show that he exercised the degree of care, diligence, and skill that a mythical, reasonably prudent person would have exercised in circumstances comparable to those Mr. Hochhausen found himself in.

The court found that Hochhausen, a CA by profession, did exercise appropriate due diligence for an outside director:

  • He had regular meetings with management, including review of the company’s accounts;
  • He specifically asked for and received assurances that withholding remittances were made and answers were corroborated by the company’s accounting records prepared by its staff accountant (although it was later revealed that the reports had been falsified);
  • There was no evidence that the staff accountant was previously suspected of being incompetent, deceptive, or complicit with any prior tax arrears of companies in the group;
  • Upon finding out that he had been misled and deceived about the status of employee withholding remittances, he promptly resigned (although the court implies that he could have remained as a Director if the company had cleaned up its arrears and he had taken further steps to assure future payments were being made).

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2 responses to “How *Not* to Cut Back

  1. Pingback: Wendesday Brain Dump: January 28 « The Cross-Border Biotech Blog

  2. Pingback: From Here to Osgoode and Back Again « The Cross-Border Biotech Blog

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