What is CRA Director Liability?
Are directors personally liable for GST/HST and other taxes owing by a corporation? Taxpayers may assume that a corporation’s tax debt is its own, and they cannot be held legally responsible for any unpaid taxes. However, the concept of Director Liability, established per the Income Tax Act, RSC 1985, c 1 (5th Supp) and the Excise Tax Act, RSC 1985, c E-15, among others, means the Canada Revenue Agency (“CRA”) has the authority to assess a corporation’s directors as personally liable for company tax debt such as GST/HST and payroll deductions. This applies to an individual who is officially designated as a director as well as a person CRA assumes to be a director based on factual circumstances, or a ‘de facto’ director. In general, shareholders are not responsible for corporate taxes, unless they are considered by CRA to be a director, common in smaller closely-held corporations.
A director is jointly and severally liable, together with the corporation, for amounts deemed to be held in trust for the government such as GST/HST and payroll deductions (Employment Insurance Act, SC 1996, c 23; Canada Pension Plan, RSC 1985, c C-8). A director may be held personally liable for the failure of a corporation to pay, deduct, withhold or remit an amount required under the aforementioned legislation. Directors cannot be held personally liable for the income tax arrears of a corporation unless they are assessed pursuant to section 160 of the Income Tax Act and 325 of the Excise Tax Act. For example, if as shareholders they received dividends from the corporation while it had a tax debt.
Legislation - Director Liability
A director’s liability for certain tax arrears of a corporation is established in part pursuant to subsection 227.1(1) of the Income Tax Act:
Liability of directors for failure to deduct and or remit:
227.1 (1) Where a corporation has failed to deduct or withhold an amount as required by subsection 135(3) or 135.1(7) or section 153 or 215, has failed to remit such an amount or has failed to pay an amount of tax for a taxation year as required under Part VII or VIII, the directors of the corporation at the time the corporation was required to deduct, withhold, remit or pay the amount are jointly and severally, or solidarily, liable, together with the corporation, to pay that amount and any interest or penalties relating to it.
Similar legislation for Excise Tax Act liabilities (e.g. GST/HST) exists per subsection 323(1) of that Act:
323 (1) If a corporation fails to remit an amount of net tax as required under subsection 228(2) or (2.3) or to pay an amount as required under section 230.1 that was paid to, or was applied to the liability of, the corporation as a net tax refund, the directors of the corporation at the time the corporation was required to remit or pay, as the case may be, the amount are jointly and severally, or solidarily, liable, together with the corporation, to pay the amount and any interest on, or penalties relating to, the amount.
Director Liability for CPP/EI deductions (payroll) is established pursuant to subsection 21.1(1) of the Canada Pension Plan, RSC 1985, c C-8 and subsection 83(1) of the Employment Insurance Act, SC 1996, c 23:
21.1 (1) If an employer who fails to deduct or remit an amount as and when required under subsection 21(1) is a corporation, the persons who were the directors of the corporation at the time when the failure occurred are jointly and severally or solidarily liable, together with the corporation, to pay to Her Majesty that amount and any interest or penalties relating to it.
83 (1) If an employer who fails to deduct or remit an amount as and when required under subsection 82(1) is a corporation, the persons who were the directors of the corporation at the time when the failure occurred are jointly and severally, or solidarily, liable, together with the corporation, to pay Her Majesty that amount and any related interest or penalties.
Defences against Director Liability Assessments
There are various general defences against a director liability assessment. As an example, before pursuing a director for a tax debt, CRA must prove its claim against a corporation by certifying the debt in Federal Court, obtaining a writ and attempting recovery of the tax debt, proving its claim within 6 months of dissolution or liquidation efforts having begun or proving its claim within 6 months of corporate bankruptcy:
227.1(2) A director is not liable under subsection 227.1(1), unless:
(a) a certificate for the amount of the corporation’s liability referred to in that subsection has been registered in the Federal Court under section 223 and execution for that amount has been returned unsatisfied in whole or in part;
(b) the corporation has commenced liquidation or dissolution proceedings or has been dissolved and a claim for the amount of the corporation’s liability referred to in that subsection has been proved within six months after the earlier of the date of commencement of the proceedings and the date of dissolution; or
(c) the corporation has made an assignment or a bankruptcy order has been made against it under the Bankruptcy and Insolvency Act and a claim for the amount of the corporation’s liability referred to in that subsection has been proved within six months after the date of the assignment or bankruptcy order
Due Diligence Defence
A director can argue that they were duly diligent in efforts to ensure the corporation’s taxes were paid:
227.1(3) A director is not liable for a failure under subsection 227.1(1) where the director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.
2-Year Resignation Defence - A Director must be assessed within 2 years of Resignation
A director can also argue that they were not assessed within 2 years of their resignation:
227.1(4) No action or proceedings to recover any amount payable by a director of a corporation under subsection 227.1(1) shall be commenced more than two years after the director last ceased to be a director of that corporation.
The CRA must issue the assessment within two years from the time the taxpayer last ceased to be a director. Directors cease to be directors by resigning in writing, corporate dissolution, or by operation of law (e.g., they become personally bankrupt).
Note, directors continue to be directors, although with reduced rights and powers, after a trustee, receiver, liquidator, or other similar person, acting in a similar capacity, has been appointed to act on behalf of the company. A proper documented resignation is key to protection from liability.
To Establish Director Liability
In summary:
The CRA must demonstrate it is unable to collect from the corporation;
The director liability assessment must be issued within 2 years of the director’s resignation;
The CRA must demonstrate that the director did not exercise the degree of care, diligence, and skill (“due diligence”) required to prevent the failure to deduct, withhold, remit, or pay.
Fatal Errors or Omissions in CRA's attempts to Establish Liability include:
Failing to levy the corporation for payment;
Failing to prove its claim within 6 months of dissolution or liquidation commencement;
Failing to file its proof of claim with the Trustee within six months in the case of a corporate bankruptcy;
Using the “incorrect” paragraph under the legislation to prove its claim.
How can we Help?
Director Liability is a legal issue involving the intersection of various pieces of provincial and federal legislation and numerous court decisions (case law). For the best chance of a successful outcome it is key to have an experienced Tax Lawyer conduct a comprehensive review of your facts in relation to the law and determine the best course of action. We can advise you on avoiding liability as well as disputing a director liability assessment with a Notice of Objection and/or appeal to the Tax Court of Canada.
Contact us for a free consultation. We will review your facts and outline the steps necessary to challenge CRA’s position.
SpenceDrake Tax Law
Link: CRA – IC89-2R3 Directors’ Liability