Director Liability for Corporate Tax Debts: Key Defenses
Corporate directors can face personal liability for unpaid corporate taxes. Learn about the key defenses available and how to protect yourself from CRA collection actions.
Directors at Risk
If you're a corporate director, you could be personally liable for your company's unpaid taxes. The CRA can pursue your personal assets even after the corporation is dissolved. Understanding your defenses is critical.
Understanding Director Liability
Under Canadian tax law, directors of corporations can be held personally liable for certain unpaid corporate taxes. This liability is joint and several, meaning the CRA can pursue any or all directors for the full amount of the debt. Director liability is a powerful collection tool that makes directors personally responsible for their corporation's tax obligations.
Types of Tax Debts Covered
Directors can be held liable for several types of corporate tax debts:
Source Deductions
- • Income tax withheld from employees
- • CPP and EI contributions
- • Penalties and interest on source deductions
GST/HST
- • Unremitted GST/HST collected
- • Input tax credit overpayments
- • Related penalties and interest
Trust Funds Concept
Source deductions and GST/HST are considered "trust funds" that corporations hold on behalf of the government. Directors are personally responsible for ensuring these funds are properly remitted, even if the corporation faces financial difficulties.
When Director Liability Applies
Director liability is triggered in specific circumstances:
- Corporation fails to remit source deductions or GST/HST
- Corporation is assessed for the debt by CRA
- CRA attempts collection from the corporation (or corporation is liquidated/dissolved)
- Corporation cannot pay the debt in full
- CRA issues director liability assessment within two years of last serving as director
Due Diligence Defense
The primary defense against director liability is the due diligence defense. Directors can avoid personal liability by proving they exercised the degree of care, diligence, and skill that a reasonably prudent person would have exercised in comparable circumstances.
Inside Directors
Directors actively involved in corporate management are held to a higher standard and must demonstrate they took positive action to prevent failures in tax remittances.
Outside Directors
Directors with limited involvement may satisfy due diligence by establishing systems to ensure compliance and monitoring their effectiveness.
Evidence of Due Diligence
To successfully establish a due diligence defense, directors should document their efforts to ensure tax compliance:
Burden of Proof
Directors bear the burden of proving they exercised due diligence. Simply claiming ignorance or relying on others without oversight is not sufficient. The defense requires active, documented efforts to ensure compliance.
Other Available Defenses
Beyond due diligence, directors may have other defenses against liability:
Limitation Period Defense
CRA must assess directors within two years of last serving as a director. Proper resignation procedures and timing can provide protection.
Corporate Dissolution Defense
If two years have passed since the corporation was dissolved and the director ceased to be a director, liability may be avoided.
No Collection Efforts Defense
If CRA has not attempted collection from the corporation or the corporation wasn't liquidated, director liability may not apply.
Preventive Measures for Directors
Directors can take proactive steps to minimize their risk of personal liability:
Protect Yourself from Director Liability
Director liability can result in devastating personal financial consequences. Don't wait until you receive an assessment. Our experienced corporate tax lawyers can help you understand your risks, implement protective measures, and defend against liability claims.
Professional Defense Strategies
Experienced legal representation is crucial when facing director liability claims: