What is my risk as a director of a corporation?

Director’s liability

Being a director of a corporation carries a lot of responsibility, as well as a certain level of risk. The harshest penalty available in our society — criminal sanction — can befall a director if he or she acts fraudulently or negligently. This reflects Parliament’s view that, under subsection 227.1(3) of the Income Tax Act, directors must “exercise the degree of care and skill that would be exercised by a reasonably prudent person in comparable circumstances.”

At common law, judges had long held that a director was to be judged according to his or her particular knowledge and experience. But that old common law standard of subjective liability was seen as insufficient protection for the public. To protect the public generally and shareholders specifically, Parliament decided to impose a higher standard, holding directors to the standards imposed on comparable professionals. So, Parliament created objective liability through the insertion of subsection 227.1(3) into the Act.

This had the effect of raising the standards of directors to the level of the reasonable, professional director who shares the characteristics (education, experience etc.) of the one under scrutiny.

To avoid liability, then, a director need only show that he or she acted the way a reasonably prudent individual in similar circumstances would have acted. That means a director is justified in trusting his or her officials to execute their duties according to corporate policies — if a reasonable person in that position would not have grounds for suspicion.

Generally, a director will be personally liable only if he or she assists the corporation in committing an offence or is grossly negligent in his or her dealings for the company. So, the director needs to participate actively in the offence.

Even if the corporation is not prosecuted or convicted for an offence, the director can still be held liable. If the corporation has committed an offence under the Act and the director participated with knowledge in some way in the commission of that offence, then the two elements of culpability are established. A director may be convicted, but only if it is established he or she had the mens rea (that is, the “guilty mind”).

Directors may also be liable for gross negligence, which is a greater departure from the errant behaviour associated with regular negligence. In Venne v The Queen (1989), the court stated: “Gross negligence must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not.”

Parliament and the courts have made it clear directors have a lot of responsibility and are subject to immense liability if they act fraudulently or negligently. The goal is to ensure shareholders have adequate protection, but it is also a balancing act — no one wants to dissuade professionals and those with business experience from becoming directors.

Greer Jacks is updating jurisprudence in the EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.

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