Director Liability in Canada: When Directors Pay a Corporation's CRA Debts

What directors can be liable for

Income tax, CPP and EI deducted from employees' pay, and GST/HST collected from customers, are held in trust for the Crown. When a corporation, for profit or not, fails to deduct, remit or pay those amounts, the directors in office at the time are jointly and severally liable with the corporation for the amount due, including penalties and interest. Where nothing was deducted at all, the liability is the amount that should have been deducted plus a penalty of 10% or 20% of it.

Each director can be assessed for the full amount. A director who pays can claim a contribution from the other directors who are also liable.

What the CRA has to show

The rules give directors real protection. The CRA can assess a director only when all of these hold:

• It could not recover the amount from the corporation: a certificate registered in the Federal Court was executed and returned unsatisfied, or a claim was proved in the corporation's bankruptcy, liquidation or dissolution.
• The assessment is issued within two years after the director last ceased to be a director, whether by resigning or by operation of law.
• The director did not exercise the care, diligence and skill a reasonably prudent person would have exercised in comparable circumstances to prevent the failure.

Who counts as a director

The rules make no distinction between active, passive, nominee or outside directors, so being uninvolved in the business is generally no defence, and handing the job to another director, an officer or an employee does not end the responsibility. People who were never formally appointed but act as directors can be liable too. Resigning starts the two year clock, but it does not undo liability for failures that happened while in office.

What due diligence looks like

Due diligence means reasonable steps taken to prevent the failure before it happens; steps taken afterwards to fix it do not count, and not knowing the obligations is no excuse. The CRA points to practices such as:

• A separate bank account for source deductions and GST/HST remittances.
• Regular reports from the people handling the finances on the status of those accounts.
• Regular confirmation that each remittance has actually been made.
• If the corporation goes into receivership or bankruptcy, telling the trustee in writing how the remittances are being paid.

If the CRA proposes an assessment

Before assessing, the CRA writes to the directors it is considering. Replying within the time it sets, with the steps you took and the documents that show them, matters: the CRA weighs every response, and a director who does not reply can be assessed without further notice. An assessment that does issue can be disputed with a notice of objection like any other.

Quick answers

Related pages

• Payroll services
• GST/HST filing
• CRA trust account examinations
• Payroll remittance deadlines
• Notice of objection explained