Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether the directors of a corporation which is the general partner of the limited partnership, may be liable for the source deductions and GST/ HST debt of the limited partnership?
Reasons: Where the general partner of the limited partnership is a corporation, and the terms of the partnership agreement provide the general partner with powers and duties to manage, control, and administer and operate the business and affairs of the limited partnership, the general partner will be viewed as the payor of the salaries and wages of the employees. Furthermore, subsection 227.1(1) of the Income Tax Act and 323(1) of the Excise Tax Act provide that the directors of a corporation are liable for the debts of the corporation for unremitted source deductions and GST/HST.
Author: Godson, Gillian
December 4, 2014
High Risk Insolvency Unit – XXXXXXXXXX HEADQUARTERS
Income Tax Rulings
Attention: XXXXXXXXXX G. Godson
Directors’ Liability – General Partner
We are writing in reply to your email of April 29, 2014, requesting our views on whether the provisions of section 227.1 of the Income Tax Act, (the “Act’) would apply to the directors of a corporation that is the general partner in a limited partnership.
In your inquiry you described a situation where a limited partnership failed to remit the source deductions as required under the Act and the limited partnership will soon be declared bankrupt. You have asked us to confirm that as the limited partners’ liability is limited to their investment or contributions to the partnership, the general partner would be liable for the unremitted source deductions and the GST/HST debt of the limited partnership. Furthermore, you have asked us to confirm that in a situation where the general partner is a corporation, the liability extends to the directors of that corporation.
In general, in a limited partnership, the limited partners have limited liability (to the extent of their investment in the partnership) for liabilities of the partnership, and the general partner has unlimited liability for partnership liabilities.
As discussed in the IC89-2R3 Directors’ Liability, subsection 227.1(1) of the Act and subsection 323(1) of the Excise Tax Act (the “ETA”) impose a liability on a director of a corporation for the corporation’s failure to remit source deductions and GST/HST. The directors of the corporation are jointly and severally, or solidarily, liable, together with the corporation, to pay that amount and any interest or penalties relating to it. However, if any of the conditions provided by subsections 227.1(2), (3) and (4) of the Act (and similarly subsection 323(2) of the ETA) are satisfied a director may not to be held liable.
The Tax Court of Canada, in the case of Laxton v. Minister of National Revenue 1989, 2 C.T.C 2407, 89 D.T.C. 629, provided a view with respect to the issue of the liability of the directors of a corporation that is the general partner in a limited partnership. In that case the Court found that, as general partner, the corporation had the powers and duties to manage, control, and administer and operate the business and affairs of the limited partnership. Further, the Court concluded that the corporation did in effect carry on these duties and was the payor of the salaries and wages of the employees. Accordingly, the Court found the corporation was obligated by subsection 153(1) of the Act to withhold and remit the source deductions. Furthermore, the provisions of subsection 227.1(1) of the Act applied to the directors of the corporation.
The information provided in your inquiry and the terms of the partnership agreement indicate the corporation, as the general partner, has the power to manage, control, administer and operate the business and affairs of the limited partnership. Accordingly, it is our view that the corporation is the payor of the amount and must meet the requirements of subsection 153(1) of the Act. Furthermore, the provisions of section 227.1 of the Act apply, such that the directors of the corporation, together with the corporation, could be jointly and severally liable for any unremitted source deductions and any penalties and interest thereon. Similarly, the provisions of section 323 of the ETA with respect to the liability of the directors would be applicable to the directors of the corporation.
We trust these comments will be of assistance.
Terry Young, CA, CPA
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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