Personal Director Liability for Unpaid Corporate Tax Obligations

[ Photo by Scott Graham on Unsplash ]

When a company faces financial difficulties, many assume that liability stops with the corporation itself. However, directors may face personal consequences, particularly for unpaid taxes. If your company owes money to the Canada Revenue Agency (CRA), you could be at risk of personal liability. Here’s what every director should know.

Directors Can Be Held Personally Liable for Corporate Taxes

Under section 227.1 of the Income Tax Act, directors may be jointly and severally liable for a corporation’s unpaid taxes, including penalties and interest. This means the CRA can pursue one or all directors for the full amount if the corporation fails to pay. Importantly, similar liability provisions exist under other statutes, including the Employment Insurance Act and the Canada Pension Plan. These laws require companies to hold back, collect, and pay certain amounts to the government. Failure to do so may expose directors to personal liability beyond just income tax debts.

Three Conditions Must Be Met Before the CRA Can Enforce

Personal liability is not automatic. Before the CRA can hold a director personally liable, it must satisfy three conditions. First, the CRA must have attempted and failed to collect the unpaid taxes directly from the corporation. Second, the CRA must bring its claim within two years of the date the individual last ceased to be a director. Third, the director must have failed to meet the due diligence standard by not acting with the care, diligence, and skill that a reasonably prudent person would have used in similar circumstances.

The Due Diligence Defence Is Key

Directors can avoid personal liability if they can demonstrate that they took reasonable steps to prevent the corporation’s failure to meet its tax obligations. This may include reviewing financial reports to confirm that required remittances were made, ensuring the company had effective processes in place for withholding and paying taxes, and making inquiries or taking action when issues or red flags arose. Relying on others is not enough because directors must be proactive, and a passive approach is not a valid defence. Delegating responsibility to others or taking a hands-off approach will generally not shield a director from liability.

What Directors Should Be Doing Now

To reduce risk, directors should:

• Regularly monitor corporate tax obligations
• Request proof that payroll deductions and GST/HST remittances are being made
• Establish separate accounts for holding and remitting source deductions and GST/HST
• Document efforts to ensure compliance

Proactive oversight is not only good governance but also helps protect you from personal liability.

Being a corporate director comes with serious responsibilities, including potential liability for unpaid taxes. If you have questions about your obligations or want help understanding your risk, contact our Waterstone Law Business team.