CRA Director’s Liability: Personal Liability for Corporate Tax Debts

A corporation is generally a separate legal entity responsible for its own tax liabilities. However, Canadian tax legislation can make directors personally liable for certain amounts that a corporation failed to deduct, withhold, remit, or pay.

Director’s liability most commonly arises in connection with unpaid payroll source deductions and unremitted GST/HST. A director who receives an assessment from the Canada Revenue Agency (CRA) may have important defences, including statutory conditions that the CRA must satisfy, a two-year limitation period, and the due diligence defence.

When Can a Director Be Personally Liable for Corporate Tax Debt?

Directors are not automatically responsible for every tax debt owed by a corporation.

However, specific provisions of Canadian tax legislation impose personal liability on directors for certain corporate remittance failures.

Two of the most important provisions are:

Section 227.1 of the Income Tax Act, which can apply to certain amounts the corporation failed to deduct, withhold, remit, or pay, including payroll source deductions; and
Section 323 of the Excise Tax Act, which can apply where a corporation fails to remit certain GST/HST net tax amounts.

Where the statutory requirements are satisfied, the director may become jointly and severally liable with the corporation for the applicable amount, together with related interest and penalties.

What Corporate Tax Debts Can Lead to Director’s Liability?

Director’s liability most frequently involves amounts that a corporation was required to collect, deduct, or remit to the government.

Examples can include:

Employee income-tax source deductions;
Canada Pension Plan deductions and required contributions;
Employment Insurance premiums;
Certain withholding amounts relating to payments to non-residents; and
GST/HST net tax required to be remitted by the corporation.

A director is not simply made personally liable for all ordinary corporate income-tax debt merely because they served as a director.

Does CRA Have to Try to Collect From the Corporation First?

Generally, the legislation requires specified conditions to be satisfied before a director can be held liable.

For example, under section 227.1 of the Income Tax Act, director’s liability generally requires one of the statutory collection conditions to have occurred, such as:

A certificate for the corporation’s liability being registered in Federal Court and execution being returned unsatisfied in whole or in part;
A qualifying liquidation or dissolution proceeding in which the Crown’s claim has been proved; or
A bankruptcy or assignment in which the Crown’s claim has been proved.

Comparable statutory conditions exist under section 323 of the Excise Tax Act.

Are Directors Jointly Liable for the Debt?

Where more than one director is legally liable, the directors can be jointly and severally liable together with the corporation.

This means the CRA may seek payment of the outstanding amount from one or more liable directors, subject to the statutory limits on the liability.

A director who pays more than their share may have a statutory right to seek contribution from other directors who were also liable.

What Is the Two-Year Limitation Period for Director’s Liability?

One of the most important protections available to former directors is the two-year limitation period.

Under subsection 227.1(4) of the Income Tax Act, proceedings to recover an amount from a director generally cannot be commenced more than two years after the person last ceased to be a director.

Section 323 of the Excise Tax Act similarly provides that an assessment generally cannot be made more than two years after the person last ceased to be a director.

The precise date on which a person legally ceased to be a director can therefore become a major issue in a director’s liability dispute.

Does Dissolving the Corporation Start the Two-Year Period?

Not necessarily.

The legislation focuses on when the individual last ceased to be a director.

Corporate dissolution may be relevant to determining that date in some circumstances, but it should not automatically be treated as the beginning of the limitation period in every case.

Evidence concerning resignation, corporate records, statutory filings, and the applicable corporate legislation may therefore become important.

What If CRA Says You Were Still a Director?

Director status can become a significant factual and legal issue.

Relevant evidence may include:

A written resignation;
Corporate minute books;
Government corporate registry filings;
Shareholder or director resolutions;
Correspondence showing when the individual stopped acting as a director; and
Evidence concerning the individual’s actual role in the corporation.

Simply stopping involvement in the business does not necessarily establish that a person legally ceased to be a director.

Can a Person Who Was Not Formally Appointed Be Assessed?

Potentially.

Director’s liability disputes can sometimes involve whether a person acted as a de facto director even though the corporate records did not formally identify that person as a director.

Whether someone was legally a director depends on the applicable law and the person’s actual role and conduct.

What Is the Due Diligence Defence?

Both the Income Tax Act and Excise Tax Act contain a statutory due diligence defence.

A director is not liable where the director exercised the degree of care, diligence, and skill to prevent the corporation’s failure that a reasonably prudent person would have exercised in comparable circumstances.

The defence therefore focuses on what the director actually did to prevent the corporation from failing to make the required remittances.

What Does a Director Need to Prove for Due Diligence?

There is no single action that automatically establishes due diligence.

Relevant evidence can include whether the director:

Regularly monitored the corporation’s payroll and GST/HST remittances;
Asked management or accounting personnel whether remittances were current;
Reviewed financial statements and CRA accounts;
Implemented systems to ensure remittances were made;
Responded promptly when financial difficulties became apparent;
Insisted that trust amounts be remitted instead of being used to pay other creditors;
Obtained professional advice where necessary;
Took corrective action when defaults were discovered; and
Documented the steps taken to prevent further failures.

The analysis is highly fact-specific.

Is Soper Still the Main Test for Director’s Due Diligence?

Older director’s liability cases frequently relied on Soper v. Canada and described the due diligence analysis as containing significant subjective elements.

Later Federal Court of Appeal jurisprudence moved away from that approach.

The modern test applies an objective standard based on what a reasonably prudent person would have done in comparable circumstances.

The director’s circumstances still matter because the statute expressly refers to comparable circumstances, but the test is not based simply on the director’s personal knowledge, skill, or experience.

Does Delegating Tax Remittances to an Accountant Protect a Director?

Not automatically.

A director may delegate day-to-day accounting or remittance duties to employees, bookkeepers, accountants, or other officers, but delegation does not necessarily eliminate the director’s responsibility.

A director should generally have reasonable systems for monitoring whether required remittances are actually being made.

The adequacy of those systems and the director’s response to warning signs can be important to the due diligence analysis.

What If the Corporation Was in Financial Difficulty?

Financial distress is common in director’s liability cases.

A corporation may be unable to pay suppliers, lenders, landlords, employees, and the CRA at the same time.

However, using amounts that should have been remitted to the CRA to keep the business operating does not automatically establish due diligence.

The question remains whether the director took reasonable steps directed toward preventing the remittance failure.

Can a Director Resign to Limit Future Liability?

A valid resignation may be important because director’s liability generally relates to failures occurring while the person was a director and because the statutory two-year limitation period is tied to when the individual last ceased to be a director.

However, resigning does not automatically eliminate liability for remittance failures that occurred while the person was still a director.

It is also important that the resignation be legally effective and properly documented.

What Happens When CRA Assesses a Director?

The CRA may issue a Notice of Assessment personally against the director for amounts it considers recoverable under the applicable director’s liability provision.

The assessment can include:

The underlying unremitted amount;
Applicable penalties; and
Applicable interest.

A director should review the assessment promptly because formal objection deadlines may apply.

Can You File a Notice of Objection to a Director’s Liability Assessment?

Yes.

A director who disputes an assessment may generally challenge it through the applicable tax objection process.

Potential grounds can include:

The individual was not a director at the relevant time;
The two-year limitation period expired;
The CRA failed to satisfy statutory preconditions for director’s liability;
The amount assessed is incorrect;
The corporation had already paid some or all of the liability;
The director satisfied the due diligence defence; or
Other factual or legal errors affected the assessment.

For information about the objection process, see our Notice of Objection guide.

Can a Director Appeal to the Tax Court of Canada?

Potentially.

If a director’s liability assessment remains unresolved after the objection process, the director may have a right to appeal the assessment to the Tax Court of Canada.

The Tax Court can determine issues such as director status, statutory requirements, limitation periods, the amount of the assessment, and the due diligence defence.

For more information, see our Tax Court of Canada procedure guide.

What Evidence Is Important in a Director’s Liability Case?

These disputes are often heavily dependent on documentary evidence.

Potentially important records include:

Corporate minute books;
Director resignation documents;
Corporate registry searches;
Bank statements;
Payroll records;
GST/HST returns;
CRA account statements;
Emails with accountants or bookkeepers;
Board meeting records;
Financial statements;
Evidence of instructions concerning tax remittances; and
Documents showing steps taken when remittance problems arose.

Frequently Asked Questions About CRA Director’s Liability

Can CRA make me personally liable for my corporation’s taxes?

For certain corporate tax obligations, yes. Director’s liability commonly arises from failures involving payroll source deductions and GST/HST remittances. It does not mean that directors are automatically responsible for every corporate tax debt.

How long does CRA have to assess a former director?

The relevant director’s liability provisions generally contain a two-year period running from when the individual last ceased to be a director. Determining the correct resignation or cessation date can therefore be critical.

Does closing or dissolving the company automatically start the two-year period?

Not necessarily. The statutory test focuses on when the individual last ceased to be a director.

Can I defend myself by saying my accountant handled the taxes?

Delegation alone is generally not enough. The court may consider whether the director exercised appropriate oversight and took reasonable steps to prevent the remittance failure.

What is the due diligence defence?

A director may avoid liability by establishing that they exercised the degree of care, diligence, and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

Can I object to a director’s liability assessment?

Yes. Director’s liability assessments can generally be challenged through the applicable CRA objection process and, where necessary, appealed to the Tax Court of Canada.

Speak With a Canadian Tax Lawyer About Director’s Liability

A director’s liability assessment can turn a corporation’s unpaid payroll or GST/HST obligations into a substantial personal tax debt.

KR Law Firm represents directors in CRA disputes involving director status, resignation dates, limitation periods, due diligence, payroll remittances, GST/HST liabilities, objections, and Tax Court appeals.

Book a Free Consultation with one of our tax lawyers to discuss a CRA director’s liability assessment.

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By Kaveh Rezaei – Principal Lawyer, KR Law Firm

Disclaimer: This article provides general information only and does not constitute legal advice. Director’s liability depends on the applicable legislation, corporate records, timing, and the particular facts of each case.