Piercing the Corporate Veil in Canada

Broadly speaking, “piercing the corporate veil” in Canada refers to the removal of the separate legal personhood enjoyed by corporations and the loss by shareholders of the limited liability status that is otherwise inherent to the corporation-shareholder relationship. That is, when the corporate veil is pierced (in Canada, we also talk of “lifting” the corporate veil) by a court of law, the shareholders of a corporation will become liable for the actions of the corporation.

The separate legal personhood of corporations has been recognized in Canada since the 1896 landmark English case, Salomon v Salomon & Co Ltd, [1896] UKHL 1. Generally, Canadian courts have upheld this doctrine of corporate personality and have been reluctant to pierce the corporate veil. It is important to note that the plaintiff bears the onus to show that the corporate veil should be lifted, and as such, must demonstrate specific and material facts which would justify a court to pierce the corporate veil.

What happens if the formalities are not complied with?

Canadian corporations that do not comply with formal requirements under the Canada Business Corporation Act (the “CBCA”), such as by failing to file their annual returns, may be dissolved by Corporations Canada. This is referred to as ‘involuntary dissolution’ which differs from situations in which a corporation’s shareholders consent to dissolving a corporation (voluntary dissolution).  A court of law will rarely, if ever, look behind a Certificate of incorporation issued by a Canadian corporate authority to enquire whether the corporation has been duly created. Hence, an “unduly” created corporation continues to exist.

 A dissolved corporation, whether involuntary or otherwise, can be revived. Pursuant to Section 209(3) of the CBCA, once revived, the corporation is, in the same manner and to the same extent as if it had not been dissolved, a) restored to its previous position in law, including the restoration of any rights and privileges whether arising before its dissolution or after its dissolution and before its revival; and (b) liable for the obligations that it would have had if it had not been dissolved whether they arose before its dissolution or after its dissolution and before its revival. Therefore, any legal actions of a revived corporation taken between the time of its dissolution and its revival are valid. For instance, the CBCA will preclude a plaintiff in a legal action against a dissolved corporation from alleging that its dissolution opens the door to the plaintiff having a right of action against the shareholders of a corporation if it is subsequently revived, as the revival of a corporation retroactively reinstates the corporate veil.

In Canada, “abuse” of legal personality occurs when a corporation is being completely controlled by its owner(s) and is being used as a shield to carry out fraudulent or improper conduct. There are two elements to this exception to the corporate veil: (i) complete domination or control; and (ii) fraudulent conduct. The first element requires more than ownership or control in the typical sense; it must be shown that the corporation is completely dominated and controlled by its owner(s) such that the corporate form is abused.  The second element refers to the use of a corporation to conceal the fraudulent conduct of its owners in order to avoid liability and deprive aggrieved parties of their rights.

In Canada, the decision to pierce the corporate veil is subject to judicial discretion and is inherently a contextual exercise. Some of the contextual factors that a court will consider is the conduct of the owners and the corporation to determine whether the corporation is an “alter ego” of its owners, referred to as the alter ego doctrine. The alter ego doctrine has been commonly applied to parent-subsidiary relationships:  a subsidiary will not be found to be the alter ego of its parent corporation unless it is under the complete control of the parent and is nothing more than a conduit used by the parent to avoid liability. The parent-subsidiary relationship is further explored in Question 10 to this Guide.

Yes. The concept of separate legal personality means that the corporation is a person in law, distinct from its shareholders and from anyone else purporting to act for or on behalf of the corporation, such as its directors, officers, employees and other agents. Accordingly, businesses and individuals often decide to incorporate in order to take advantage of this notion of separate legal entity. The separate legal identity of corporations is routinely upheld by Canadian courts, and many courts across Canada take a clear position that they will not disregard the separate legal personality of a corporate entity unless it is needed to prevent a flagrant injustice. Therefore, as previously mentioned, the corporate veil is typically pierced only when the company is incorporated for an illegal, fraudulent or improper purpose and is a mere façade concealing the true facts.

No. Canadian courts have recognized three circumstances under which the corporate veil may be pierced: (1) when a corporation is being completely controlled and is being used as a shield in carrying out fraudulent or improper conduct; (2) when a subsidiary corporation is an agent of the parent corporation and is a mere “puppet” of the parent; and (3) when a statute requires that the corporate veil be pierced.

Exceptions (1) and (2) are further discussed in other sections to this Guide. An example of exception (3) includes the Construction Act (Ontario), which states that if a corporation misappropriates trust funds it receives relating to a particular construction project, the individuals who have effective control of the corporation may be held personally liable along with the corporation.

No. One of the most common reasons for incorporating a company is that a separate corporate personality can shield shareholders and directors from any liabilities associated with corporation debts and actions. However, a shareholder may be personally liable by application of the ‘oppression remedy’ for knowingly stripping value from the corporation to the prejudice of creditors, especially when the creditor has no effective means of protecting itself.  An oppression claim permits a creditor to compel a company to meet the creditor’s legitimate and objectively reasonable expectations in order to remedy conduct that is oppressive, unfairly prejudicial to, or that unfairly disregards the creditor’s reasonable expectations. Directors and officers who are shareholders and would benefit from the alleged dissipation of corporate assets will also face additional scrutiny by Canadian courts. The oppression remedy is further discussed in Question 8 to this Guide.

In Canada, controlling shareholders who use their corporate status to pursue personal interests are not regulated or sanctioned unless, as previously mentioned, such personal interests have a fraudulent or improper element and the controlling shareholders are using the corporation as a shield to avoid personal liability. Instead, it is a corporation’s directors and officers who owe a fiduciary duty to it. The fiduciary duty requires that the directors and officers act honestly and in good faith, with a view to the best interests of the corporation. Under this duty, directors and officers must act impartially and place the interests of the corporation first, which means they cannot act for their own personal interests. In fact, the duty demands that directors and officers avoid conflicts between their personal interests, opposing interests, and the interests of the corporation.

Additionally, in cases where a claimant wishes to pierce the corporate veil and bring an action against a director or officer of a corporation, Canadian law requires an independent cause of action to be shown in order to institute liability against the individual.  Therefore, it is not sufficient to allege a breach of duty in order to hold a director personally liable; claimants must be able to demonstrate that a separate cause of action against the director is warranted in order for the corporate veil to be pierced. In the absence of a strong cause of action it would be difficult for a claimant to be successful in such a claim, especially as Canadian courts are generally reluctant to pierce the corporate veil.

Canadian law gives an aggrieved party the right to bring a court action against a corporation where conduct has occurred that is oppressive, unfairly prejudicial or which unfairly disregards the interests of a creditor. For example, when a corporate debtor engages in asset tunneling or moves assets beyond the reach of creditors. As previously mentioned, this right is referred to as the oppression remedy. The oppression remedy, according to Canadian courts, imposes a general standard of “fair” conduct on each corporation and its management. When the standard is breached, a complainant can seek rectification of the oppressive conduct by applying to the court. The court will then make an appropriate order, such as awarding money damages, appointing a receiver, or dissolving the corporation.

There is a two-part test to determine whether an oppression remedy claim will succeed. First, the claimant must establish a breach of reasonable expectation and second, the conduct of the corporate debtor must amount to oppression, unfair prejudice or unfair disregard of the claimant’s interests. Canadian courts contextually approach questions of oppression: what is just and equitable is judged by the reasonable expectations of the claimant in the context and in regard to the relationships at play.

A shareholder who is also director of a corporation can be found personally liable when he/she is involved in the misconduct to such a degree that it can be attributed to them, and personal liability is “fit in the circumstances”. For personal liability to be fit in the circumstances, courts will consider the following:

• whether the remedy sought is fair in the circumstances;
  
• whether the remedy goes only as far as necessary to rectify the oppression;
• whether the remedy only vindicates the reasonable expectations of the complainant; and
• whether other remedies are not more suitable.

Therefore, while a shareholder is not responsible for a corporation’s obligations, a Canadian shareholder who is also a director may be held liable for knowingly stripping value from the corporation to the prejudice of its creditors.

While the Canadian legal system does not have the notion of a “hidden” partner, it does have the notion of a de facto director. The CBCA defines a director as a person occupying the position of director of a corporation by whatever name called. Therefore, while Canadian law does not dictate when an individual will be held to be a de facto director, it can be gathered from the definition above that regardless of the name an individual may give to his or her position within a corporation, if he/she acts as a director, he/she will be deemed to be one.

Canadian courts consider several factors in determining whether an individual is a de facto director, such as whether a third party would assume the individual in question is a director, whether he/she represented themselves as such, and whether the person conducted themselves as expected of a director, such as by signing documents as a director or sitting on the board of directors. The individual must have assumed the status and functions of a corporate director and exercised considerable influence in the corporate governance of the corporation. More specifically, the person must have participated in directing the affairs of the company on an equal footing with the other director(s) as part of the board and not in a subordinate role. Typically, a de facto director falls into one of the following categories: (i) persons who are properly elected but lack some qualification under the relevant company law that disqualifies them from legally being directors; (ii) former directors whose term of office has expired but who have continued to act as directors; or (iii) those who simply assume the role of director without any pretense of legal qualification.

Officers, employees, and those who are not legally appointed or elected but who perform the functions of a director may be liable under the Canadian Income Tax Act and the Excise Tax Act.

The corporate veil may be pierced if an agency relationship between the parent and the subsidiary exists and the subsidiary is being used as a “puppet” by the parent corporation.

First, Canadian courts have confirmed that if an agency relationship can be proven to exist at trial, the corporate veil may be pierced and the parent corporation could be held liable. The courts will take into consideration different factors in determining whether an agency relationship exists between the parent and the subsidiary. The following are some relevant factors that may be considered:

• the capitalization of the subsidiary;
• the degree of observance of corporate formalities;
• the extent of the relationship between the business of parent and subsidiary;
• the nature and extent of the business dealings between parent and subsidiary;
• the corporate histories of both parent and subsidiary;
• the relationship between the boards of directors and upper management personnel of parent and subsidiary; and
• the extent of the ownership interest of the parent in the subsidiary.

Finally, in determining whether a subsidiary is being used as a “puppet” by the parent company, as previously stated, the court must be satisfied that there is complete domination of the subsidiary by the parent company.

Conclusions about the doctrine of corporate veil in your legal system.

Even though the doctrine of corporate veil is based on the principle of the separate legal personality of the corporation and its shareholder(s), Canadian case law demonstrates that the corporate veil protects directors and officers whether they are shareholders or not.