Tax Interpretation Manual: Tobacco Tax Act - General Rulings

TTA - GR.1/R.1 - R.2

1. History Of The Act And 2008 Revision To TIM

R.1 Instructions to Wholesalers and Retailers Upon the Enactment of the Cigarette and Tobacco Tax Act (Revised: 2009/03)

On February 5th, 1971, the Cigarette and Tobacco Tax Act (now the Tobacco Tax Act) came into effect and the Social Services Tax Act (now the Social Service Tax Act) ceased to apply to sales of cigarettes, cigars and tobaccos.

When the Cigarette and Tobacco Tax Act was introduced, each wholesale dealer and each retailer was requested to record and report to the Consumer Taxation Branch an inventory of all cigarettes, cigars and tobacco products in any form (including snuff) on hand on February 5, 1971 and, as of that date, to charge tax on these products at the announced rates (see TTA/Sec. 2/R.1).

Wholesalers: Effective February 5, 1971, the wholesale dealer was responsible for collecting security from each retailer equal to the tax due at retail. In addition, wholesalers were responsible for collecting tax on any direct sales to the consumer (e.g., institutions, organizations, donations, etc.). However, tax was not to be collected on:

• sales to the Government of Canada (became subject to tax April 1, 1983);
• sales of tobaccos shipped by the seller for delivery outside of British Columbia; and
• sales to other wholesalers for resale by them.

Vending machine operators: Operators were requested to make changes to their vending units to bring the new tax into effect on February 5, 1971.

Retailers: All retailers of tobacco were required to obtain a retail dealer's permit, which, under the Cigarette and Tobacco Tax Act (now the Tobacco Tax Act) is a Social Service Tax Act registration. Retailers selling tobacco over the counter, through vending machines or otherwise were requested to:

• begin collecting tax at the new rate on February 5, 1971;
• take an inventory of all tobacco on hand (on February 5, 1971) on which the new tax had not been paid;
• record the above on the Inventory Declaration form provided by the Consumer Taxation Branch and return the original, along with the tax on the inventory, to the Consumer Taxation Branch no later than 30 days after the date the Act came into effect; and
• retain the duplicate copy of the Inventory Declaration form for audit purposes.

Once the Cigarette and Tobacco Tax Act (now the Tobacco Tax Act) came into effect, wholesalers became responsible for the collection of a security equal to the tax from the retailer on each purchase. The retailer then reimbursed itself for the security paid to the wholesaler by collecting the tax from the consumer. This procedure eliminates the necessity for the retailer to record and remit tax collected on tobacco sales each month as occurred under the Social Services Tax Act. However, if a retailer imports tobacco into the province from a non-registered wholesaler who will not collect the tax, the retailer is responsible for the tax. The retailer was advised to contact the branch in Victoria for information as to the procedures to be followed in such situations.

R.2 Concordance for Regulations and 2008 Revision to the TIM (Issued: 2009/03)

In 2008, the Rulings Team of the Ministry of Small Business and Revenue revised the Tax Interpretation Manual (TIM). The portion of TIM dealing with the Tobacco Tax Act had not been updated since approximately the year 2000. There were only a small number of rulings in the TIM for the Tobacco Tax Act.

As a result, the 2008 TIM revision was limited to updating the section numbers of the Act and Regulations, writing entries for provisions that first came in to force after the year 2000, and creating a concordance for the Regulations as it stood in approximately the year 2000 and as it stood in June of 2008. The concordance for the Regulations follows.

Concordance of Regulations

Regulation Numbering in 2008	Regulation Numbering in 2000 (approx. year)
1	1
2	1.1
3	2
3(2)	3
4(1)	3.1
4(2)	3.2
4(3)
4(4)
4(5)	3.3(2)
4(6)	4(8)
5(1)
5(2)
6(1)	3.3(1)
6(2)
6(3)	3.3(2)
6(4)
6(5)
6(6)
6.1
6.2
6.3	3.3(1)
6.4
6.5
7
8(1)	13.1(3)
8(2)
8(3)
8(4)
8(5)
8(6)	3.11(a)
8(7)
8(8)	13.1(4)
8(9)
9(1)	24(1)
9(2)
9(3)	20
10(1)	13.1(5)
10(2)	13.1(6)
10(3)	13.1(7)
10(4)	13.1(8)
11(1) – (2)	3.4(1) – (2)
11(3) – (9) loosely	4(1) – (7)
11(10) – (11)	13.1(1) – (2)
11.1
12	5
13(1)	6(1)
13(2)	6(1.1)
13(3)	6(2)
13(4)	6(3)
13(5)	6(4)
13(6)	6(7)
14	7
15	8
16	9
17	10
18	11
19	13
20	14
21	15
22	16.1
23	17
24	18
25	19
26	21
27	21.1
28	22
29	23
30	24
31
32
33	24.2
34	26
35	25>>

TTA - GR. 3/Int. - R.7

3. Exempt Sales Under The Indian Act (Canada)

Interpretation (Revised 2009/03)

The personal property of an Indian or band situated on reserve is exempt from tax by Section 87 of the Indian Act (Canada). Under the Constitution, the federal government has exclusive legal jurisdiction over Indians and lands reserved for Indians. The province cannot tax the personal property, including tobacco, of Indians or Indian Bands situated on or delivered to a reserve.

Provincial tobacco tax legislation does not expressly define the tax treatment of exempt sales to Indians and bands. The province administers sales to exempt consumer through the exempt sale retail dealer (ESRD) program provided in the Tobacco Tax Act and its regulations.

R.1 Historical Tobacco Tax Agreements (Revised: 2009/03)

From July 1987 to September 30, 1991: Procedures for providing a tobacco tax exemption for Indians were established July 1987. The band council entered into a formal agreement with the Ministry to restrict exempt sales to Indians. The established an allocation of exempt tobacco based on 10 cigarettes per day per Indian resident on the reserve. The branch authorized the wholesaler designated by the band to supply tobacco without collecting an amount equal to the tax due (security). The band could sell the tobacco themselves or designate a retailer on the reserve to sell exempt to Indians.

This system provided a means of delivering the exemption to Indians while controlling potential abuse by limiting the quantity of exempt tobacco available in the province. If exempt tobacco was sold to non-Indians, the abuse was limited to small quantities and had minimal impact on provincial revenue or on local non-Indian retailers. If abuse took place, the branch could reduce the allocation of exempt tobacco for that reserve.

Effective October 1, 1991: All allocation agreements were discontinued, as a result of the Tseshaht Band's successful challenge of the allocation system, and replaced with a system permitting Indian retailers on reserve lands to purchase unrestricted quantities of exempt tobacco products for resale to Indians.

The Tseshaht Indian Band (Port Alberni) sought a declaration that the system of imposing a limited allocation on tax-free gasoline purchases and the refund system for delivering the tobacco tax exemption was outside provincial jurisdiction. (The Tseshaht Band had opted for a refund system with respect to tobacco products instead of an allocation agreement).

The Supreme Court of British Columbia held registered Indians and Indian bands have an unrestricted right to buy fuel and tobacco on Indian Reserves. The court ruled the tobacco tax refund and fuel tax allocation systems were an infringement on this right and were outside provincial jurisdiction. The right to purchase unlimited amounts of fuel and tobacco was held to apply equally to Indians purchasing for their own consumption and to Indian retailers purchasing for resale.

Effective June 25, 1992, the Court of Appeal of British Columbia overturned the lower court's decision and ruled the exemption provided under the Indian Act (Canada) does not apply to retailers purchasing for resale. Therefore, restrictions could be placed on the amounts of tobacco retailers purchase for resale. The band did not appeal this decision to the Supreme Court of Canada, so the decision stands as binding authority.

This decision provided a legal basis for the province to return to an allocation system for delivering the tobacco (and fuel) tax exemption.

On March 15, 1993, the branch advised all band and tribal councils that an allocation system was being re-established. After contacting each band, allocations were established for each reserve. If no agreement could be reached, the branch established allocations for existing ESRDs.

Allocations for each reserve were based on the on- and off-reserve population of status Indians before October 1, 1991. The allocation amount could be adjusted based on historical sales, proximity to urban areas, and other factors. The reserve's allocation was divided among ESRDs on the reserve based on historical and projected sales, and the size of the market area.

The Ministry currently grants allocation increases where an ESRD can show that they have followed the guidelines for recording sales, and the limits for making retail sales (see R.3), and they still do not have sufficient stock to match their legitimate demand for exempt products.

R.2 Exempt Sale Retail Dealers (Revised: 2009/03)

See Bulletin TTA 001, Exempt Sales Made by Retail Dealers.

Effective March 1, 1992, a permit system for tobacco retail dealers who purchase and sell tax-exempt tobacco products was established under B.C. Reg. 30/92.

Effective November 1, 1993, B.C. Reg. 339/93 established the following criteria for an ESRD.

• A person who sells exempt tobacco must hold an ESRD permit
• An ESRD permit may be restricted to authorize only one place of business at which tobacco may be sold exempt;
• A person may only hold one ESRD permit at one time; and,
• An ESRD must obtain from the consumer, information, specified by the director, showing that the consumer is entitled to purchase exempt tobacco.

For the purposes of the exemption under the Indian Act (Canada), an ESRD must record the purchaser's name, Certificate of Indian Status card number, and the quantity of tobacco purchased. The purchaser must then sign the record. The ESRD submits the completed forms with the monthly return.

Issuing Permits

The director may refuse to issue an ESRD permit where there are enough existing dealers to serve a particular market area.

ESRD permits may be issued to the band itself, to individuals on the reserve, or both.

If there is an existing ESRD on a reserve and the branch receives a request from a person to be an ESRD, then the director will consider the following factors in determining if an additional ESRD permit should be issued.

• The on- and off-reserve market area and population to be served;
• The proximity of the applicant to any current ESRD on the reserve and neighbouring reserves;
• Whether the existing ESRD is selling its allocation;
• The results of the branch inspector's visit with the ESRD applicant to review policy and procedures and to ensure ESRD criteria will be met;
• The wishes of the band; and
• Any other relevant criteria, on a case by case basis. For example, since mid-1994, the branch has considered whether a new applicant offers a service or convenience not offered by other, local ESRDs.

ESRD permits may be revoked if the dealer fails to meet the conditions of the permit or contravenes any requirement or condition of the Act.

R.3 Retail Sales (Revised: 2009/03)

The ESRD permit only authorizes the holder to make retail sales.

Before May 1, 2000 there was no legislative provision defining a retail sale. Administrative guidelines were established to define what constituted a retail sale as opposed to a wholesale sale. Under these guidelines, the maximum amount of tobacco acceptable as a retail sale under usual circumstances was 5 cartons per customer per day, to a maximum of 15 cartons per month (5/15 limit). Sales in greater quantities to a single purchaser were considered to be wholesale sales. However, the Ministry had suggested to ESRDs that a more realistic guideline of 2 cartons per customer per day, to a maximum of 8 cartons per month (2/8 limit) for exempt sales.

Effective May 1, 2000, limits were established in the Regulations of a maximum of 400 grams (2 cartons) of cigarettes per day, to a maximum of 1600 grams (8 cartons) per month. ESRDs cannot sell more than this quantity of cigarettes to a customer.

ESRDs should not make frequent sales of 1 or 2 cartons per sale because this is not a reasonable pattern of retail tobacco sales. Most sales should consist of a small number of packages of cigarettes or loose tobacco, consistent with an individual's personal use. This is the sales pattern of many ESRDs throughout British Columbia.

If an ESRD frequently makes sales by the carton, and the sales are made to the same customer, the branch may consider these to be sales to persons who are purchasing for other than their own consumption or use. Because ESRDs are only authorized to make retail sales, the ESRD permit may be suspended or cancelled in these circumstances and an assessment may be issued.

As an agent for the minister, an ESRD must take reasonable steps to ensure it makes only retail sales. For example, if individuals in a group each request 2 cartons, it is unlikely that they are purchasing the tobacco for their own use. In such situations it would be reasonable for the ESRD to limit sales to 1 or 2 packages per customer.

Where a customer legitimately requires more than the 2/8 limit for personal use or consumption, the customer can make a request to the Ministry. The person making the request will be required to provide any details to the Ministry to ensure that the request is reasonable in the circumstances.

The 2/8 limit is a maximum limit on sales to the same customer. Sales at this limit should only occur in isolated cases when a purchaser requires a greater-than-normal quantity for his/her own use and consumption. For example, persons may purchase 2 cartons if they will not have access to an ESRD for a length of time.

If the request is approved, the Ministry will assign an approval number that is valid for only that purchase. The ESRD must record this approval number on the sales schedule beside the particular purchase.

R.4 Limitations on Exemptions (Revised: 2009/03)

Indian retailers are not exempt from the requirement to collect and remit tax on off-reserve sales or sales to non-Indian customers. Indian retailers on reserve are subject to the same requirements under the Tobacco Tax Act as other tobacco retailers. They must be registered with the Ministry and must collect tax on all sales to non-Indians, provide documentation in support of all tax-exempt sales, and report and remit tax collected on a monthly basis.

Corporations and cooperatives with Indian shareholders or Indian organizations incorporated under the Society Act do not qualify as Indians. Purchases by such organizations are subject to tax even if they are located on an Indian reserve and the sale takes place on reserve or designated land.

R.5 Tobacco Marking (Revised: 2009/03)

See Bulletin TTA 006, British Columbia's Tobacco Marking Program.

In 1993, the province implemented a tobacco marking system. Under this system, all tobacco products intended for taxable retail sales in British Columbia must bear the province's unique mark. The mark indicates that the tobacco products have been purchased in the province through the legitimate wholesale-retail chain. The marking system is intended to deter retailers and individuals from purchasing and selling untaxed cigarettes. It also assists enforcement officers in distinguishing legitimate tobacco products from smuggled tobacco products.

Initially, all tobacco intended for exempt sale in the province, including tobacco sold to native Indians, was intended not to bear the province's unique mark. However, as a result of concerns expressed by First Nations, the province has allowed First Nations consumers to make exempt purchases of marked tobacco. BC Reg. 176/94 amended the regulations on June 16, 1994 to support this policy.

R.6 Indian Status (Revised: 2009/03)

Persons without Indian status under the Indian Act (Canada) are required to pay provincial tobacco tax on purchases of tobacco products, even if the sale occurs on a reserve. This includes Métis people, Inuit people, and aboriginal people from the United States because such persons are not "Indians" as defined in the Indian Act (Canada). Métis cards, produced and issued by the Métis Confederation, do not signify Indian status and cannot be used to claim the exemption.

R.7 Tax Implications of the Nisga'a Final Agreement (Issued: 2000/01, Revised: 2009/03)

See the Ministry's April 2008 notice, Nisga'a Citizens and Provincial Taxes Effective June 1, 2008.

TTA - GR. 4/Int.

4. The GST And Tobacco Tax

Interpretation (Revised: 2009/03)

The federal GST was introduced on January 1, 1991. Under the Excise Tax Act (Canada), provincial taxes are included in the amount to which GST applies. The Excise Tax Act provides an exception to this general rule for taxes imposed under prescribed provincial legislation.

The Tobacco Tax Act is not a prescribed act under the Excises Tax Act. Therefore, tobacco tax is included in the amount to which GST applies.

In contrast, the Social Service Tax Act is a prescribed act under the Excise Tax Act. GST does not apply to social service tax (PST) imposed under the Social Service Tax Act when the following conditions are met:

1. the PST is calculated as a percentage of the value or price of the property or service;
2. the PST is payable by the recipient of a supply of the property or service;
3. the PST is not included in the value or price of the property or service for purposes of calculating any other tax under the Social Service Tax Act in respect of that property or service; and
4. the total of the rates of all taxes imposed under the Social Service Tax Act in respect of the property or service and calculated as a percentage of the value or price of the property or service does not exceed the greater or 12 percent or the general PST rate plus 4 percent.

In most PST situations, the above test is met and GST does not apply to the PST. However, GST applies to the PST-included price of the propane because PST on propane is calculated on the volume of the propane and not on its value.

TTA - GR. 5/Int.

5. Sales To The Government Of Canada

Interpretation (Revised: 2009/03)

Under the Constitution, the province cannot tax the lands or property of the federal government and vice versa. On top of this inter-jurisdictional immunity, the Regulations expressly once exempted the federal government from provincial tobacco tax.

Effective April 1, 1983, British Columbia and the Federal Government entered into a reciprocal taxation agreement, under which each agreed to pay the taxes of the other. In light of the reciprocal taxation agreement, the regulation exempting the federal government from provincial tobacco tax was repealed effective April 20, 1983.

TTA - GR. 6/R.1

6. Exempt Sale Retail Dealers

R.1 History (Revised: 2009/03)

For a current explanation of the exempt sale retail dealer permit program, see Bulletin TTA 001, Exempt Sales Made by Retail Dealers (ESRDs).

British Columbia enacted a permit system for tobacco retail dealers for the valid purchase and sale of tax-exempt tobacco products by OIC 30/92, effective March 1, 1992.

The Regulations were amended by B.C. Reg. 339/93, effective November 1, 1993.

R.2 Persons Appointed as ESRD's (Revised: 2009/03)

Only persons authorized by the director may sell tax-exempt tobacco at retail in British Columbia. Authorized dealers must hold a valid ESRD permit and may only sell tax-exempt products in a retail sale to eligible purchasers. Retailers who may be issued an ESRD permit include retailers who make the following sales:

• Tax-exempt sales to a status Indian purchasing on a reserve (See GR. 3),
• Tax-exempt sales to members of the diplomatic and consular corps,
• Tax-exempt sales by ship's chandlers on commercial vessels operating in out of province waters, or
• Tax-exempt sales in duty free shops.

TTA - GR. 7

7. Business Number

Interpretation: (Issued:2003/12, Revised: 2009/03)

Bill 36, the Business Number Act, received Royal Assent on October 23, 2003. The regulations (Order in Council number 1012) became effective on October 24, 2003.

The Business Number Act establishes the adoption of the federal business number as the common business identifier for British Columbia businesses, authorizes the present and future partners to collect, disclose, and manage information required to assign and to maintain business numbers, and establishes the information system, the BC Hub.

The regulations authorize the inclusion of registrants under the SSTA, HRTA and TTA in the business number process by designating the enactments that are subject to the provisions of the Business Number Act and prescribing the specific business information that may be collected, disclosed and managed to administer the business number process.

The purpose of these changes is to provide businesses with a single point where information can be simultaneously registered with multiple levels of government and to reduce the government cost of errors and duplicated entry.

TTA - GR.8/R.1

8. Directors Liability

R.1 Collection Cycle Flowchart and Decision Points [Effective January 1, 2005] (Issued: 2005/02)

DIRECTOR'S LIABILITY COLLECTION CYCLE

Corporate taxpayer fails to collect or remit taxes, or pay security

Issue Assessment against corporation as usual

Expiry of legal notice period

Collection action taken against corporation as usual

Corporate tax debt for amounts not collected or remitted or security not paid remains unpaid after a triggering event and collection action

File reviewed to determine that imposition of director's liability is appropriate • All reasonable collection action against corporation has been exhausted (please refer to Decision Point 1: Exhausting Reasonable Collection Action) • It is cost-effective to pursue directors

Identify ‘known' directors	Identify individuals to be deemed directors (please refer to Decision Point 3: Deeming a Director)
Confirm time periods when they were directors	Confirm time period when they acted as directors
Confirm amounts owing for periods when they were directors	Confirm amounts owing for periods when they acted as directors
Confirm date they ceased to be a director (please refer to Decision Point 2: Ceasing to be a Director)	Confirm date they ceased to act as a director

Send Requests for Information: • To known directors that may be personally liable • To individuals that they may be deemed directors and may be personally liable

Review responses from known director Issue confirmation that assessment will be raised (As needed please refer to Decision Points 2 & 4: Ceasing to be a Director & Due Diligence)

(please refer to Decision Point 3: Deeming a Director) Review responses from individuals who may be deemed a director Issue determination that individual has been deemed a director Issue notice to corporation that an individual has been deemed a director

Issue assessment against all individuals who were, at the time corporation failed to pay, directors or have been deemed directors NOTE: It is important to assess all directors (known and deemed) rather than only those directors the ministry believes will result in recovery. If the ministry chooses to only assess Director A and not Director B for a specific corporate debt, and then in the future wishes to assess Director B for that debt, the ministry may be barred from raising the assessment.

Issue legal notices as usual

Review due diligence defences for known and deemed directors (please refer to Decision Point 4: Due Diligence)

Continue to review existing and accept new submissions from individuals deemed to be directors refuting determination

Expiry of legal notice period

Collection action as usual taken against directors who have not proved that they acted with due diligence

Tax debt is paid or written off

If collection action against directors results in collection of monies greater than the corporation's debt – proportional refunds to be issued to directors who have contributed monies

Decision Point #1:
Exhausting Reasonable Collection Action

Authority:

The consumer tax statutes provide that a director, or any person carrying out the functions of a director, is not liable under director's liability unless a triggering event has occurred.

Social Service Tax Act: Section 102.1
Hotel Room Tax Act: Section 23.1
Motor Fuel Tax Act: Section 45.1
Tobacco Tax Act: Section 28.1

Discussion:

A director is not liable under director's liability unless one of the following triggering events has occurred:

(a) a certificate has been filed with respect to the amount the corporation is liable to pay;

(b) the corporation has been dissolved or has commenced liquidation or dissolution proceedings in any jurisdiction;

(c) the corporation has, under the Bankruptcy and Insolvency Act (Canada),

(i) made an assignment in bankruptcy,

(ii) filed a notice of intention to make a proposal with the official receiver, or

(iii) made a proposal under Division 1 of Part III of that Act;

(d) a receiving order has been made against the corporation under the Bankruptcy and Insolvency Act (Canada);

(e) the corporation has obtained a court order granting a stay of proceedings under section 11(3) of the Companies' Creditors Arrangement Act (Canada);

(f) the corporation has been or is subject in any jurisdiction to a proceeding of a similar nature to a proceeding referred to in paragraphs(c) to (e).

The intent behind this provision is to ensure that, before director's liability is imposed, all reasonable collection action against a corporation has been exhausted.

To collect debts owed under the consumer taxes a number of collection actions may be taken:

• collection letters demanding payment;
• telephone calls;
• liens on personal property in British Columbia;
• liens on real property in British Columbia;
• registration of Certificate of Indebtedness in British Columbia Supreme Court;
• garnishee of bank accounts;
• garnishee of receivables;
• writs of seizure and sale;
• offsets from provincial government payables;
• liens without judgment on personal and real property in Alberta; and
• judgment in another jurisdiction and taking collection action against assets in that jurisdiction.

Exhausting all reasonable collection action does not require that each of the above actions must be exhausted in all cases before director's liability may be imposed. Rather the standard requires that all possible collection action against a corporation be considered, and those actions which are reasonable must be exhausted.

When determining if reasonable collection action against a corporation has been exhausted, the following factors must be considered:

• where the corporation is incorporated;
• the nature and value of the corporation's assets in British Columbia;
• the nature and value of the corporation's world wide assets;
• the cost of a collection action compared to the amount likely to be recovered as a result of that action.

This means that the more expensive or difficult a collection action is, such as requesting the sheriff to execute a writ of seizure and a sale in a remote location with uncertain prospect of recovery, the greater the amount likely to be recovered must be before that action would be reasonable. It also means that collections actions which are relatively inexpensive or easy to execute would be reasonable to exhaust even if the amount likely to be recovered is less.

The collection file must document the collection action taken, the rationale for that action, and the results of that action to demonstrate that all reasonable collection action was exhausted.

Decision Point #2:
Ceasing to be a Director

Authority:

The consumer tax statutes provide that an assessment against a director, or any person carrying out the functions of a director, cannot be made after two years from the date the person ceased to be a director or to carry out the functions of a director.

Social Service Tax Act: Section 115.1
Hotel Room Tax Act: Section 17.1
Motor Fuel Tax Act: Section 46.1
Tobacco Tax Act: Section 22.1

Discussion:

A director is normally appointed or elected by the shareholders of a corporation to act as a director until either the date of the next annual general meeting or for a term of office specified in the articles of incorporation or corporate bylaws.

A director who wishes to cease being a director before the end of their term must comply with the requirements set out in the articles of incorporation or corporate bylaws, if any, and comply with the requirements set out in the statute that governs the corporation.

The following discussion is based on the requirements set out in the Business Corporations Act (which replaced the Company Act). It is anticipated that the vast majority of director's liability files will relate to corporations incorporated under the Business Corporations Act. If a director's liability action is contemplated in connection with a corporation incorporated under the Society Act, Canada Business Corporations Act, Canada Corporations Act, or other statute, guidance should be sought from Policy and Legislation Branch to determine if similar statutory provisions govern directors.

Under the Business Corporations Act, the following individuals are not qualified to directors:

• anyone under the age of 18;
• a person found by a court to be incapable of managing his or her own affairs;
• an un-discharged bankrupt;
• a person convicted of an offence related to the promotion, formation, or management of a corporation or business, or an offence involving fraud unless:
  • a court orders otherwise,
  • a pardon was granted or issued, or
  • it has been five years since:
    • end of the period for imposing a suspended sentence and no sentence was passed;
    • the fine was imposed;
    • the term of imprisonment;
    • and the end of any probation period.

The Business Corporations Act provides that a director ceases to hold office when:

• they are no longer qualified to act as a director;
• the term of office expires under the Act, the articles of incorporation, or under the terms of the election or appointment;
• the director dies or resigns;
• the company passes a special resolution to remove the director;
• shareholders having an exclusive right to appoint the director, pass a special resolution to remove the director;
• upon application, a court orders that the director is no longer a director.

For a director to resign, the director must provide a written resignation to the company or to a lawyer for the company. The resignation is effective when the written resignation is delivered to the company or a lawyer of the company, unless the resignation specifies a particular effective date in the future. This means that a director cannot claim to have resigned on a date earlier than the date the written resignation is delivered.

The courts have held that the effectiveness of a director's resignation is not affected by the failure of the corporation to update its minute book or file the required notice of change of directors with Registrar of Companies. However, the onus is on the director to provide evidence that he or she did resign and the date of the resignation.

It is possible for all directors to effectively resign and for there to be no directors for a period of time. In such cases, it will be necessary to determine who is carrying out the functions of a director.

A person who effectively resigns, but continues to hold him or herself out as a director or continues to perform the functions of a director may be deemed to be a director despite the resignation. Deemed directors cease to be directors when they cease to perform the functions of a director.

Process:

If ministry decides it is appropriate to impose director's liability against a director of record, the ministry will:

1. After an initial investigation, issue a request for information asking the director provide any records regarding whether they were a director and the term during which they were a director.
2. Review all documentation or evidence submitted by directors regarding their term as a director. The ministry must consider the merits of every submission before deciding to issue an assessment.
3. If a director does not submit records regarding their term as a director or, does not provide sufficient proof that they ceased to be a director, issue a Notice of Assessment for the full amount of the corporate debt for which they are believed liable.
4. Commence routine collection action.
5. Continue to consider any evidence presented regarding when a director may have ceased to be a director after the Notice of Assessment is issued.
6. Vary the assessment if necessary to reflect the amount of the corporate debt for the director is liable.
7. Cease collection action, if a director proves they were not a director at the time the corporation failed to collect or remit taxes or failed to pay security or ceased to be director more than two years before the date of assessment.
8. Issue, as required, confirmation that the director is no longer being held personally liable

Decision Point #3:
Deeming a Director

Authority:

The consumer tax statutes provide that any person who carries out the functions of a director may be deemed to be a director, even though they were not a member of the board of directors, and is subject to the same personal liability as an appointed or elected director.

Social Service Tax Act: Section 102.2
Hotel Room Tax Act: Section 23.2
Motor Fuel Tax Act: Section 45.2
Tobacco Tax Act: Section 28.2

The Collections Manager must approve all requests for information to confirm an individual has acted as a director.

The Commissioner or Director of the Act, as applicable, must make a determination that an individual is a deemed director before an assessment may be made against that individual.

After an assessment has been made against a deemed director, the usual notice and collection processes should be followed.

Discussion:

Deeming a director is a power to be exercised carefully. It is intended to be used when individuals have been identified as a controlling mind of a corporation and is very clearly a de facto director of the corporation.

Deemed directors are individuals who are not formally elected or appointed under the corporation's articles and bylaws, but who carry out the functions of a director. A deemed director may include:

• a person who was elected or appointed in the past but whose term of office has expired;
• a person who was elected or appointed in the past but who no longer meets the qualifications of a director; or
• a person who was never elected or appointed to be a director.

The legislation specifically excludes individuals who may carry out the activities of a director in the course of their normal professional duties. This protects the following individuals who may act as a director under certain circumstances, but are doing so in their professional capacity:

• individuals acting under direction or control of a shareholder, board member or senior officer;
• professionals (such as lawyers or accountants) whose primary activity was providing professional services; [Note if a professional is acting in a capacity beyond providing professional services, to the point they are acting as a member of the board, they can be deemed a director]
• bankruptcy trustees acting to administer the bankrupt's estate; or
• receivers, receiver managers or secured creditors enforcing a debt obligation.

The functions of a director include:

• directing and supervising the business and affairs of the corporation, including adopting bylaws and passing resolutions;
• considering and authorizing major actions and transactions;
• issuing and allotting shares;
• declaring and paying dividends;
• establishing corporate policies and measuring implementation by officers and employees;
• hiring officers;
• providing advice and direction to officers and employees; and
• supervising any functions delegated to officers and employees

If an individual was performing some or all of these functions on their own, not acting on the request of or under the direction of the board of directors of a corporation, the individual might be performing the functions of a director. In such cases, we may wish to request documents and information to help us determine if the person was performing the functions of a director.

Ask Yourself:

When considering if an individual may be acting as a director:

1. Was this individual carrying out any of duties of a director?
2. Was this individual directing the affairs of the corporation?
3. Was this individual authorizing major activities and transactions?
4. Did this individual believe they were a director or believe they had authority to influence or control the management or direction of the corporation?
5. Did this individual hold themselves out as a director or decision maker?
6. Did others in the corporation (especially known directors) defer to this individual?
7. Was this individual a professional acting outside their professional responsibilities?
8. Was this individual providing payment for corporate debts from their personal bank accounts?

If you answered YES to the above questions, the individual may be acting as director.

1. Was this individual acting under the direction of another person or a member of the board of directors?
2. Was this person a professional (such as a lawyer or accountant) primarily carrying out their professional duties?
3. Did this individual defer to or refer to board of directors?

If you answered NO to the above questions, the individual may be acting as a director.

Evidence that an individual may have acted as a director might include but is not limited to:

• Information provided on forms such as the application for registration and return forms. For example, contact information or signatures.
• Letters received from the company which indicate the individual is acting as, or describing themselves as, a director or is controlling the company.
• Signatures or other evidence on payments received.
• Repeated evidence in the history of contact with the company indicating the individual is acting as, or describing themselves as, a director or is controlling the company.
• Other evidence from other sources (company records, other records, correspondence, verbal contacts, audit records etc) which show that the individual controlled the company, made decisions as if they were a director or instructed/directed the directors of record regarding major decisions.

Process:

If ministry decides it is appropriate to impose director's liability against a person carrying out the functions of a director, the ministry will:

1. After an initial investigation, identify individuals, who are not directors of record, a collector believes may have carried out the functions of a director at the time the corporation failed to collect or remit taxes or failed to pay security. This belief will be based on:
   • documentation received by the ministry;
   • contact with the individual;
   • how the individual represented themselves to the ministry;
   • actions taken by the individual; and
   • other evidence that the individual was acting on their own initiative and not under the direction of a shareholder, the board of directors or a senior officer of the corporation.
2.  Issue a letter requesting information to confirm or refute the belief. The Manager, RMB must approve the request for information.
3.  Review information received in response to request for information.
4.  Prepare a recommendation for the Commissioner or Director of the Act which sets out the evidence that the person acted as a director.
5. Commissioner or Director of the Act, as applicable, will determine that an individual has been carrying out the functions of a director and will be deemed a director.
6. Issue a letter deeming the individual a director.
7. Issue a Notice of Assessment
8. Commence routine collection action.
9. Continue to consider any evidence presented regarding whether the person was carrying out the functions of a director after the Notice of Assessment is issued.
10. In the majority of cases, if an individual appeals either a determination that they carried out the functions of a director or an assessment, no direct collection action will be taken beyond measures to secure the debt. However, in keeping with routine collection procedures, there may be extraordinary cases in which direct collection action will be taken despite the appeal.

Decision Point #4:
Due Diligence

Authority:

The consumer tax statutes provide that a director will not be held jointly and severally liable with a corporation for a corporation's failure to collect or remit taxes or failure to pay security, if the director exercised the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances to prevent the corporation's failure.

Social Service Tax Act: Section 102.1
Hotel Room Tax Act: Section 23.1
Motor Fuel Tax Act: Section 45.1
Tobacco Tax Act: Section 28.1

Discussion:

Directors are responsible for the management and conduct of a corporation. Directors must make every reasonable effort to ensure that the corporation remits taxes as required. If a corporation fails to remit taxes as required, the directors may be held personally liable under director's liability.

Due diligence is a statutory defence that a director may raise to avoid the imposition of personal liability under director's liability.

Due diligence does not come into play until after it is determined that a director may be liable under director's liability. A director is only liable under director's liability if:

• a corporation fails to collect and remit taxes or fails to pay security and the amount remains unpaid after all reasonable collection action against the corporation has been exhausted;
• the director was a director at the time the corporation failed to collect or remit tax or pay security as required; and
• it is less than two years since the person ceased to be a director.

A person who argues they were not a director or carrying out the functions of a director at the time the corporation failed to collect or remit tax or pay security must prove only that they were not a director to avoid director's liability. A person who argues that it is more than two years since they ceased to be a director must prove only the date they ceased to be a director to avoid director's liability. Neither person must prove they acted with due diligence to avoid director's liability.

If a director is liable under director's liability, they avoid that liability if they can prove a due diligence defence.

General use dictionaries do not define “due diligence”. However, the Shorter Oxford English Dictionary defines “diligence” as “the attention and care due from a person in a given situation”. Webster's New Collegiate Dictionary defines “diligence” as “the attention and care legally expected or required of a person”.

Black's Law Dictionary, 7th edition, defines due diligence as, “the diligence reasonably expected from, and ordinarily exercised by a person who seeks to satisfy a legal requirement or discharge an obligation”.

Beyond these general definitions, there are no clearly defined principles in federal or provincial statutes for determining what constitutes due diligence. The following is a summary of the common law principles relating to director's liability and the due diligence defence. In most cases, the liability resulted from unremitted source deductions, employment insurance, and Canada Pension Plan premiums under the Income Tax Act (Canada).

• The burden is on the minister to prove the corporation's liability for unpaid taxes and that all pre-conditions for imposing director's liability had been fulfilled before the assessment was made against a director.
• The burden is on a director to prove that he or she was not a director during the relevant assessment period or to prove that he or she acted with due diligence.
• A director need not exercise a greater degree of skill and care in carrying out the duties of a director than may reasonably be expected from a person of his or her knowledge, experience and level of skill.
• There is no standard list of things that a director must do or not do in order to prove due diligence.
• A director does not have to prove that he or she set controls to account for remittances, asked for regular reports, obtained confirmation at regular intervals, or established and monitored a trust account to prove that he or she acted with due diligence.
• A director is not to be equated with a trustee. The standard of behaviour imposed on directors is lower than the standard imposed on trustees.
• A director is not a guarantor charged with ensuring that whatever deficiencies might occur during the course of the operation of the business would be made good by the director in their personal capacity.
• The potential liability for directors is substantial and a mere lack of appreciation for potential legal consequences at a personal level when things go bad does not relieve a director of liability.
• A director is not obliged to give continuous attention to the affairs of the company, but cannot neglect the duties of a director.
• The fact that a director's efforts are unsuccessful does not establish that the director acted unreasonably or without due diligence.
• In the absence of grounds for suspicion, it is not improper for a director to rely on company officials to perform honestly duties that have been properly delegated to them.
• The fact that a director did not personally benefit from the amounts not remitted by the corporation is irrelevant for determining director's liability.
• A director cannot avoid director's liability by simply asserting that he or she did his or her best, if, having regard to that person's level of skill and business experience, he or she failed to act reasonably prudently.
• A director cannot avoid director's liability by asserting that the risk they took would have been taken by a reasonable person if the director decides, knowing that a failure to remit is likely, to continue the business in the expectation that the company's fortunes will revive and the company defaults.
• A director cannot avoid director's liability imposed by statute by asserting that they had to balance competing responsibilities to creditors, to suppliers, to employees and to government.
• A director is under a positive duty to act to prevent failure of current and future remittances upon learning of a corporation's financial difficulties or from the time when the director ought to have known of the corporation's financial difficulties.

To succeed with the defence, a director must prove that he or she exercised the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances to prevent the corporation's failure to collect or remit taxes as required.

There is no single list of things that a director must have done to succeed with a due diligence defence. The determination whether a director has acted with due diligence must be made on a case-by-case basis in light of all the facts and circumstances.

The defence contains both subjective and objective considerations. The subjective considerations are the skills and experience of the director and the circumstances surrounding the failure of the corporation. The objective considerations are what a reasonably prudent person in the same circumstances would do.

It is possible for one director of a corporation to demonstrate that they acted with due diligence and, therefore, are not personally liable for the amounts not remitted by the corporation, and another director of the same corporation being held personally liable under director's liability because they failed to demonstrate they acted with due diligence.

The two main questions to be answered in determining whether a director acted with due diligence are:

• what was the degree of control the director could have exercised? and
• what were the skills and experience of the director in financial or business matters?

With regard to the degree of control a director could have exercised, the following must be taken into account:

• The greater the degree of control exercised by a director, the higher the standard of care expected in order to demonstrate due diligence.
• A nominal or outside director who could not exercise any control over the corporation will be held to a much lower standard of care than a managing or inside director who could exercise control. It is expected that almost all nominal or outside directors will not be subject to director's liability because of their lack of control.
• A nominal or outside director will have to prove that they were unable to exercise any control over the corporation.
• A director who could have exercised control, but chose not to do so, is held to the same standard as a director who did exercise control.
• Directors continue to be directors, although with reduced rights and powers, and subject to director's liability, after a trustee, receiver, liquidator or other person acting in a similar capacity, has been appointed.
• Directors also continue to be directors and subject to director's liability when a corporation's creditor takes informal control of the corporation's finances, such as when banks require pre-approval of all corporate cheques.

With regard to the skill level and experience of a director, the following must be taken into account:

• The greater the level of skill and experience as a director or in business/financial matters, the higher the standard of care expected to demonstrate due diligence.
• Directors with no business or financial experience will be held to a lower standard of care, but such directors will be expected to do what a reasonable person with the same level of skill and experience would do in the circumstances.

The ministry expects that a director attempting to prove they acted with due diligence will provide evidence that they took positive action to prevent the corporation's failure to remit. Such positive action may include:

• they took steps to know and understand the duties and obligations of a director;
• they established appropriate corporate policies regarding the collection and remittance of taxes;
• they implemented appropriate controls to ensure the policies were followed by the officers and employees;
• they requested or required financial officers to report on the implementation of policies and the status of remittances;
• they requested or directed that officers be appointed or tasked to specifically deal with remittances;
• they requested or directed funds be used to pay remittances; or
• they requested or directed an account be established for remittances;

If the corporation is experiencing financial difficulties, such positive action may include, but is not limited to:

• obtaining from the financial institution where the line of credit is extended, an enforceable undertaking to pay all amounts due to the province when due; or
• if the corporation is in receivership or is bankrupt, advising the receiver and manager or trustee in writing of the banking arrangements in place for the payment of the remittances.

The following claims or arguments are unlikely to meet the test for a director's due diligence defence regardless of the skills and experience of the director:

• The director did not personally benefit from the amounts not remitted by the corporation.
• An employee's error caused the failure to remit.
• The amount not remitted was relatively small.
• The director was forced to choose between the competing demands of creditors, suppliers, and the government.
• The director, in choosing to carry on the business knowing that a failure to remit was likely, but hoping the corporation's fortunes would revive, took a risk that a reasonable business person would take.
• After the director became aware of the failure to remit, the director implemented policies and controls to prevent further failures.

Process:

If ministry decides it is appropriate to impose director's liability, the ministry will:

1. After an initial investigation, issue warning letter that, as a director, the individual may be held personally liable for unremitted taxes and advising of their right to raise a due diligence defence.
2. Review all documentation or evidence of a due diligence defence submitted by directors. The ministry must consider the merits of every submission before deciding to issue an assessment.
3. If a director does not submit a due diligence defence or does not provide sufficient proof of a due diligence defence, issue a Notice of Assessment for the full amount of the corporate date for which they are believed liable.
4. Commence routine collection action.
5. Continue to consider any evidence of due diligence presented after the Notice of Assessment is issued.
6. Cease collection action, if a director proves they acted with due diligence.
7. Issue, as required, confirmation that the director is no longer being held personally liable.

TTA - GR.9/R.1

9. Sales To Provincial Governments

R.1 Sales to other Provincial Governments (Issued: 2017/05)

Under section 125 of the Constitution Act, 1867 (Canada), provinces are exempt from paying other provinces' taxes. For example, if another provincial government purchases tobacco in British Columbia, it is not required to pay the tobacco tax.