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Directors of a corporation shoulder significant responsibilities in managing a corporation. The corporate veil will generally shield a director from personal liability by recognizing the corporation as a separate legal entity. However, under both the Income Tax Act and the Excise Tax Act, directors can still be held personally liable for unremitted source deductions or GST/HST owed by their companies.
If directors can prove they acted with due diligence, they can be protected from being held jointly and severally, or solidarily liable for the corporation's outstanding tax liabilities.
The Legal Framework of the Due Diligence Defence
Section 227.1(3) of the Income Tax Act and section 323(3) of the Excise Tax Act both set out the due diligence defence: directors will not be personally liable if they exercised the degree of care, diligence, and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. Courts have interpreted this standard through a consistent line of cases.
The burden of proof lies squarely on the director to demonstrate due diligence on a balance of probabilities. The defence is assessed on an objective standard, based on factual, detailed, and credible evidence of the steps taken to prevent the default.
The defence must be based on preventative, not reactive measures. Directors who have taken active steps to avoid non-compliance will be excused from personal liability. Efforts made after the default has already happened will not excuse the non-compliance. Directors must act when they first become aware that the corporation is facing financial difficulties.
Courts have held that reliance on experts, such as accountants or lawyers, may form part of a due diligence process, but directors cannot ultimately abandon their responsibilities to the corporation and play a passive role by relying on others' assurances without independently confirming that statutory remittances are being made.
A director's sophistication or business experience can increase the objective standard expected of them. Where the director is a new business owner or Director, the Courts will grant a measure of flexibility, evaluating what a reasonably prudent person with similar experience could have done in the same situation.
Although the Income Tax Act and Excise Tax Act refer specifically to "directors," personal liability can also extend to "de facto directors". These are individuals who, while not formally appointed, effectively act in a director capacity.
Hamad v the Queen, 2019 TCC 137: A Blueprint for the Successful Use of the Due Diligence Defence
In this case, Hamad was the CEO and director of RER Hydro Ltd, a company developing water-powered turbine technology in Quebec. This company received major funding from the Government of Quebec. In 2014, after a change of government, Quebec terminated its funding commitments. As a result, the company was insolvent, eventually declaring bankruptcy in 2015.
The CRA assessed Hamad personally for over $15,000.00 in unremitted employment insurance contributions, insurance contributions, penalties, and interest for the period of June-August 2014. In response, Hamad raised the due diligence defence.
Mr. Hamad's actions showed what genuine due diligence looks like in practice. When the company's funding collapsed, he called an emergency shareholders' meeting to be transparent about the financial crisis and propose solutions. He pushed for an additional $3.1 million in shareholder investment, sought restructuring advice, and hired a consultant to help stabilize cash flow and manage financial planning. Further, he personally invested more than $4 million into the company to keep it afloat. Eventually, he made the difficult but responsible decision to lay off employees and seek protection under the Companies' Creditors Arrangement Act to manage the company's debts. In the end, management sold the firm's assets to pay secured creditors, including the CRA.
The court found that this was sufficient to demonstrate that Hamad took every reasonable step to prevent losses and act in good faith. Because the default stemmed from unforeseeable external factors, Hamad actively sought solutions and documented his actions, and because he was able to show continuous, good-faith oversight and preventative engagement, even if the company ultimately collapsed, the Court agreed he had met the requirements for the due diligence defence.
Hirjee v. the King, 2023 TCC 4: Where the Due Diligence Defence Falls Short
In this case, Hirjee was the sole director of 1621844 Alberta Inc., a company that operated 4 Bell Mobility Retail Stores in Alberta. The company ran into financial difficulties after Bell Mobility changed its commission structure, which reduced revenues and caused operating costs to exceed profits. Despite hiring a bookkeeper and external accountant to handle filings, the CRA still held Hirjee personally liable for approximately $375,000 in unremitted GST/HST.
Hirjee argued he should be relieved of personal liability because he exercised due diligence by retaining a qualified professional to manage tax filings, and because his ability to act had been severely impaired by mental health challenges during the relevant assessment period. He argued that these factors satisfied his due diligence when measured against what a reasonably prudent person would have done in comparable circumstances.
The Tax Court of Canada found that while hiring a bookkeeper and accountant were relevant to the analysis, it was not sufficient to establish due diligence. The Court recognized that serious mental illness could excuse liability when a director is incapable of understanding and discharging their duties. However, Hirjee's condition did not meet that threshold. He was still capable of overseeing the business, signing filings, and taking active steps to prevent non-remittance.
The Court emphasized that directors must take positive, preventative action to ensure statutory remittances are made, not merely rely on others' expertise. Hirjee had exclusive signing authority over the company's bank account, yet failed to delegate authority, appoint a replacement director, or establish a separate remittance account to ensure GST/HST funds were protected once he knew the business was struggling and that his mental health was declining. In the Court's view, he failed to exercise the care, diligence, and skill of a reasonably prudent person in comparable circumstances. The due diligence defence, therefore, failed.
The decision reaffirms that the due diligence standard is objective. Personal attributes such as inexperience, ignorance, or diminished capacity do not excuse a director's obligations unless they render the individual truly incapable of fulfilling them.
Conclusion
The due diligence defence is a narrow safeguard against personal tax liability. It protects only directors who take concrete, preventative steps, not those who rely passively on others. Hamad shows how proactive leadership can succeed, while Hirjee shows that delegation without oversight is not enough. Diligence means action: stay engaged, anticipate risks, and document efforts to stay compliant.
This blog was co-authored by articling student Mariem Naem.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
