Director’s Liability For Taxes: A Canadian Tax Lawyer’s Guide To CRA Rules

Overview: What Directors Need to Know About Personal Liability for Corporate Taxes

Corporations are treated as distinct legal persons, separate from their shareholders, directors, and officers. What this means is that the corporation has its own debts, assets, legal liabilities, and financial obligations, and the personal assets of shareholders, directors, and officers are protected – they are generally safe if the corporation goes bankrupt or is sued. However, there are times when directors can become liable for the corporation’s debts or liabilities.

One such situation is when a director becomes liable for taxes. After the CRA has tried and failed to collect from the corporation, directors can become liable for payroll taxes, GST/HST, and withholding taxes (but generally not for unpaid corporate income taxes). Directors can protect themselves by exercising due diligence and taking action to ensure the corporation meets its tax obligations.

What is a Director Under Canadian Law?

A director is an individual who manages and oversees the affairs of a corporation. Neither the Income Tax Act nor the Excise Tax Act define “director.” An individual can be either a de jure director, meaning they are legally appointed, or a de facto director, meaning they are a director in fact.

Determining if an individual is a de jure director generally requires reviewing the corporation’s governing and constating documents (i.e., its articles of incorporation and bylaws). Determining if an individual is a de facto director requires considering all the circumstances surrounding the operations of the Corporation.

Since an individual can be a director by fact, and not just by law, de jure directors who resign a directorship but continue carrying on a director role risk becoming a de facto director.

What Is Director’s Liability for Corporate Taxes in Canada?

Director’s liability means that a director is personally liable for GST/HST and other taxes owed by a corporation. Directors are jointly and severally liable, together with the corporation, for amounts deemed to be held in trust for the government. These amounts include GST/HST and payroll deductions. Jointly and severally liable means that the CRA can pursue a single director for 100% of the tax debt if the corporation fails to pay or remit.

Certain tax statutes require a director to take reasonably prudent measures to prevent the corporation they manage or supervise from failing to withhold, collect, or remit tax. Reasonably prudent means that the director acted with the level of care, diligence, and skill that an ordinary, sensible person with similar knowledge and business experience would exercise in similar circumstances. If a director fails to exercise these reasonably prudent measures, the CRA may issue a director’s assessment, and the director may become liable for the taxes.

While directors can be personally liable for GST/HST and other taxes owed by the corporation, there is no personal liability for corporate income taxes unless section 160 of the Income Tax Act applies. Section 160 is an anti-avoidance rule, meaning it exists specifically to stop people from circumventing tax debts. It applies when a corporation transfers property to a non-arm’s length person for less than what that property is actually worth, while the corporation has unpaid tax debts. Non-arm’s length means the parties are not independent of each other — such as spouses, relatives, or corporations under common control — which may influence the terms of the transaction. When this happens, the person who received the property can be held personally responsible for the corporation’s unpaid taxes, but only up to the value of what they received.

Which Statutes Create Director’s Liability in Canada?

Director’s liability for certain tax arrears of a corporation is established in Canada’s tax legislation, specifically the Income Tax Act and the Excise Tax Act. Director’s liability for payroll deductions (Canada Pension Plan (CPP)/Employment Insurance (EI)) is set out in the Canada Pension Plan Act and the Employment Insurance Act.

Section 227.1(1) of the Income Tax Act makes directors personally liable when their corporation fails to meet certain tax obligations. Specifically, if a corporation does not properly deduct, withhold, remit, or pay amounts such as employee payroll deductions or non-resident withholding tax, the directors who held office at the time those obligations arose are equally liable to pay the tax alongside the corporation. This liability extends beyond the unpaid amounts themselves; it also includes any related interest and penalties.

Courts have interpreted this provision broadly. In In Buckingham v Canada, 2011 FCA 142 [Buckingham], the Federal Court of Appeal held that s. 227.1(1) imposes an objective standard on directors. Liability turns on what a reasonably prudent person would have done, not on the director’s personal knowledge or experience.

Section 323(1) of the Excise Tax Act imposes a similar rule for GST/HST obligations. If a corporation fails to remit the net tax, it owes or improperly retains a net tax refund it was not entitled to keep, its directors are personally liable for those amounts together with the corporation. Importantly, this liability applies regardless of whether the corporation actually collected the GST or HST from its customers; the obligation to remit exists either way.

The Federal Court of Appeal in Buckingham confirmed that s. 323(1) operates on the same objective standard as the Income Tax Act provision, not based on what the director actually knew. Directors can also be held personally liable under the Canada Pension Plan Act and the Employment Insurance Act. These statutes follow the same logic as the Income Tax Act and Excise Tax Act: when a corporation fails to remit required payroll deductions, specifically, CPP contributions and EI premiums, its directors are jointly and severally liable alongside the corporation for those unpaid amounts. As with the other statutes, this liability is not limited to the unremitted deductions themselves. Directors are equally responsible for any interest and penalties that accumulate because of the corporation’s failure to remit.

Buckingham also confirmed that the objective standard applicable to directors under the Income Tax Act and Excise Tax Act applies equally to directors’ liability under the Canada Pension Plan Act and the Employment Insurance Act. The Federal Court of Appeal found no fundamental conceptual difference between employee source deductions and GST/HST remittances. It held that the relevant provisions — s. 227.1 of the Income Tax Act, s. 323 of the Excise Tax Act, and the corresponding provisions in the Canada Pension Plan Act and Employment Insurance Act — are sufficiently similar that they should be interpreted and applied consistently, without drawing unnecessary distinctions between them.

Which Directors Are Personally Liable, and What Are the Limits?

The liable director is the director of the corporation at the relevant time. This will include de jure and de facto directors. However, the CRA cannot assess an individual more than two years after they have last ceased to be a director. It is important to note that if a de jure director resigns but continues to be a de facto director, the CRA can assess the individual up to two years after they cease being a de facto director.

In addition, the CRA generally cannot hold a director personally responsible unless at least one of the following situations applies:

• The CRA tried to collect from the company and was unsuccessful. The CRA must have registered the company’s debt in Federal Court and attempted to collect it, but recovered nothing or only recovered part of the amount owed. This must happen within six months of the execution being returned unsatisfied.
• The company is being wound down or dissolved. If the company has started a formal shutdown or has already been dissolved, the CRA must file its claim against the company within six months of whichever comes first: the start of the shutdown process or the date the company was dissolved.
• The company went bankrupt. If the company has filed for bankruptcy or been forced into it under Canada’s Bankruptcy and Insolvency Act, the CRA must file its claim within six months of the bankruptcy filing or order.

The Due Diligence Defense: How Directors Can Protect Themselves from CRA Assessments

Many statutory liabilities allow a due diligence defense for directors. Due diligence means the care that a reasonably prudent person in similar circumstances would take to ensure that the corporation deducts, withholds, collects, remits, or pays the tax that is due and owing. To meet a due diligence defense, a director must be able to demonstrate that they took steps to ensure the corporation met its tax obligations. Passive inaction is not enough to satisfy the due diligence standard.

In other words, directors can demonstrate due diligence by showing that they took reasonable steps to prevent the breach, such as implementing compliance systems, asking informed questions, seeking professional advice, and acting promptly when issues arise.

Hirjee v the King, 2023 TCC 4 illustrates how courts apply the due diligence defense in practice. In that case, the Tax Court of Canada held Mr. Hirjee personally liable for unremitted GST/HST after the corporation experienced financial difficulties caused by declining revenues. Mr. Hirjee had retained a bookkeeper and accountant and argued that he had acted reasonably by relying on qualified professionals to manage the company’s tax filings. He also submitted that mental health challenges during the relevant period impaired his ability to fulfill his duties as a director.

The Court accepted that retaining professionals was relevant to the due diligence analysis, but found that it was not, on its own, sufficient to establish due diligence. The Court also acknowledged that mental illness may excuse liability where a director is incapable of understanding or discharging their responsibilities but concluded that this threshold had not been met in the circumstances. In reaching its decision, the Court emphasized that Mr. Hirjee failed to take additional preventative steps once he became aware that the business was struggling and that his mental health was deteriorating. In particular, he did not delegate signing authority, appoint a replacement director, or establish a separate remittance account to ensure statutory remittances would continue to be made. As a result, the Court found that he had not exercised the care, diligence, and skill of a reasonably prudent person in comparable circumstances.

The decision emphasizes that directors cannot rely solely on the expertise of accountants or bookkeepers; they must take active and preventative measures to ensure that required remittances are properly made.

Whether a director has met the due diligence standard depends on the specific circumstances and the steps taken to prevent the corporation’s failure to remit taxes. An experienced Canadian tax lawyer can help directors evaluate their potential liability, respond to CRA assessments, and determine whether a due diligence defense may be available.

Pro Tax Tips: How Canadian Directors Can Minimize Personal Tax Liability

• Resign properly and completely: Formally resigning as a director is not enough if you continue acting in that role. To protect yourself, ensure your resignation is documented, filed with the corporation’s governing documents, and that you genuinely cease all director-level activities. A formal resignation with continued involvement may still expose you to liability as a de facto director.
• Ensure you know the tax liabilities that the corporation may incur. If you do not have tax knowledge, consult with an experienced Canadian tax lawyer or accountant. Directors are not excused from liabilities on the basis that they did not have the knowledge or skill to deal with tax matters.
• Act quickly when financial difficulties arise. The due diligence defense requires a director to exercise the care, diligence, and skill of a reasonably prudent person in comparable circumstances to prevent the corporation from failing to remit its taxes. To demonstrate due diligence, a director must be able to demonstrate taking positive steps to meet its tax liabilities.

Frequently Asked Questions About Director’s Liability in Canada

I became director of an Ontario corporation and just discovered that the corporation has a debt to the CRA of thousands of dollars in unremitted GST and HST from before I became director. The corporation does not have the funds to pay this debt. Will I be liable for it?

No, you will not be liable. A new director is not liable for amounts owed before their appointment. However, you would be liable for any current liabilities. As such, you should endeavor to ensure that the corporation remains current with any new liabilities to avoid personal liability.

I officially resigned as director of an Alberta corporation three years ago after discovering that the corporation had a debt of $5 million in non-resident withholding taxes that were not remitted. Even after formally resigning as director, I continued doing the same work as when I was director. Two months ago, the company was dissolved. The CRA is now trying to come after me for the corporation’s tax debt. Am I protected because I resigned as director more than two years ago?

Your resignation as director may not protect you. Directors can be legally recognized (de jure) or based on fact (de facto). Three years ago, you resigned as a de jure director, but continuing your duties suggests that you may be considered a de facto director. Director’s liability applies to both de jure and de facto directors.

I am a director of a corporation that is currently being audited by the CRA. The corporation owes significant amounts in unremitted payroll deductions and GST/HST. Can the CRA assess me personally right now?

Not necessarily, at least not yet. The CRA must satisfy certain conditions before it can assess a director personally. Generally, the CRA must first attempt to collect from the corporation itself, whether through a registered Federal Court certificate that has been returned unsatisfied, evidence that the corporation has commenced dissolution or bankruptcy proceedings, or a filed bankruptcy order. Only after establishing one of those preconditions can the CRA turn to the directors. That said, if any of those conditions are imminent, you should consult a top tax lawyer promptly to assess your exposure and explore available defenses, including the due diligence defense.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.