If you are a business owner who has chosen to incorporate, it’s likely that you are a director and officer of that corporation. Many owners don’t realize it, but directors are liable for the unremitted GST/HST of a corporation (pursuant to section 323 of the Excise Tax Act), and the unremitted source deductions of the corporation, including EI and CPP (pursuant to section 227.1 of the Income Tax Act). This often comes as a surprise for those who thought that they could simply “walk away” from a corporation’s tax debts. CRA will generally pursue the corporation first – but if it cannot collect successfully, it can personally assess a director (or a person acting “like” a director) for the amount outstanding. There are generally three strategies used to fight against a director liability assessment:
1. Due diligence
2. Ceasing to be a director for more than two years
3. Not being a legal or de facto director
A director will not be held liable for the corporation’s unremitted tax where the director exercised the degree of care, diligence and skill that a “reasonably prudent person” would have exercised in comparable circumstances. To succeed in this argument, a director must demonstrate that they took the necessary steps, precautions, and actions to ensure that the unremitted tax would be paid on time. This is often easier said than done – the factors considered include the director’s background and experience in business, and what the business’ circumstances were and how they might influence the director. Note that the due diligence defence only relates to attempts to prevent the failure to remit, and not to attempts to remedy the failure after the fact.
Ceasing To Be A Director For More Than Two Years
One of the limitations on the CRA’s ability to personally assess a director for a corporation’s unremitted tax is that the assessment must either be made while the individual is a director of the corporation, or within two years after the individual ceased to be a director. This includes situations where the director resigns, or where the corporation has been dissolved. That said, if the individual continues to act as a de facto director, their removal as a director will not start the two-year limitation period and that individual will remain liable.
Being Neither A Legal Or De Facto Director
If an individual was never a director of the corporation, CRA cannot validly assess them personally for the corporation’s unremitted tax. Uncertainty arises where allegations are made that an individual is a de facto director. A de facto director is not legally a director (in other words, they are not on the public register of directors, nor have they been elected by the shareholders), but still controls and directs the management of a corporation. At the same time, simply having the authority to manage a corporation is not decisive of whether an individual is a de facto director. Ultimately, the determination of whether an individual is a de facto director is guided by the factors laid out in case law.
If you have been personally assessed for director liability on a corporation’s unremitted tax, or believe you will be assessed, contact one of our tax lawyers for a consultation.