An incorporated company is a separate, distinct legal person.
The "corporate veil" is a term used to describe how
incorporation can shield the personal assets of the individuals
running the business as well as its owners. Individuals frequently
conduct business through numbered companies to avoid personal
liability. The numbered company will be the legal person that holds
title to the assets of the business. While the corporation as
a legal entity was created to encourage business development and
risk taking, the corporation has also been used to shelter personal
assets from creditors or former spouses and to avoid personal
liability for the individual's actions in operating the
Notwithstanding the fact that a corporation is a distinct legal
entity separate from its officers, directors and shareholders, in
some situations a court will disregard the separate legal
personality. This has been called piercing the corporate
veil. Canadian courts have pierced the corporate veil when
the corporation has been completely dominated by a single person or
if the corporation has been used as a shield for fraudulent or
improper conduct. The two primary factors considered by the
courts in deciding whether to breakdown the protection usually
afforded by incorporation are:
The degree of control of the shareholders or directors over the
The nature of the wrongful act.
Fortunately for those who want the protection, the courts are
usually very reluctant to lift the corporate veil and hold the
guiding minds of the corporation personally liable for the
corporation's actions. There is no single situation or
consistent test applied by the courts when someone asks the court
to lift or pierce the corporate veil and treat the company as a
mere "agent" or "puppet" of its controlling
shareholder or parent corporation. There are a number of
factors that the courts will consider to ascertain whether the
degree of control is so high that the corporation is a "sham,
cloak or alter ego" and those include: where the
shareholder intermingles the corporation's affairs with their
own personal affairs; where the corporation is not independent from
its shareholders; where the corporation does not have its own
assets, skills or employees; and where the corporation does not
have its own bank account, books or records. The courts will
also look at whether declining to pierce the corporate veil will
allow injustice to be visited on a party.
A leading case on piercing the corporate veil in Ontario of Lynch v. Segal, 2006 CanLII 42240 (ON
CA), involved an individual named Moses Segal who the court
described as an "extraordinarily wealthy" man. Mr.
Segal admitted to having a net worth exceeding $100,000,000.
During divorce proceedings of Mr. Segal and his wife, Cynthia
Lynch, the court found that Mr. Segal shielded almost all of his
personal assets inside corporations. The court determined
that it would not permit those assets to be shielded from the
matrimonial proceedings as the result of declining to pierce the
corporate veil would be to deny Ms. Lynch her rightful access to
assets of the marriage.
While there is no doubt that corporate entities play a very
important role in limiting the liability of officers, directors and
shareholders from business or litigation risk, the protection
offered by corporations is not absolute. To bolster the
protection afforded by incorporation, steps should be taken to
ensure that the corporation exists and operates as a separate
entity rather that just existing on paper. The corporation
should have its own phone number, bank accounts, contracts and
employees. Shareholders must not treat the corporation as the
repository of their personal assets or as their
"personal" business, but take steps to acknowledge and
act as if the corporation has its own separate and distinct
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).