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Understanding Director Liability: When the CRA Comes After You
A corporation, for both general and tax purposes, is recognized as a separate legal entity from its shareholders, unlike a partnership or a sole proprietorship. Consequently, the corporate taxes payable by the corporation are liabilities of the corporation itself and not of the shareholders, officers or directors.
However, there are circumstances in which the Canada Revenue Agency (CRA), after being unable to collect taxes owed by the corporation, may assess the directors as personally liable for the outstanding amounts. Such situations arise in cases involving unpaid source deductions, specifically income tax withholdings, Employment Insurance (EI) premiums, Canada Pension Plan (CPP) contributions and HST/GST remittances. These liabilities form the focus of this article.
When Directors Become Personally Liable for Corporate Taxes
A director of a company is generally not personally liable for the company's tax debts when the company fails to pay ordinary corporate taxes, such as corporate income taxes, including interest and penalties.
However, liability can arise if a director receives a distribution from the company while a tax debt exists from unpaid taxes. Additionally, a director becomes jointly and severally liable with the corporation for the resulting taxes, penalties, and interest where he fails to remit source deductions such as GST/HST, income taxes, Employment Insurance (EI) premiums, and Canada Pension Plan (CPP) contributions.
For the purpose of determining liability, a "director" is not limited to an individual formally listed as a director in the company's minute book. Any person, including a shareholder, may be deemed to be a director if the evidence demonstrates that he acted in the capacity of a director during the period in which the remittances should have been made.
Before the CRA can assess and recover these amounts from a director, the CRA must establish that it has exhausted all available means of recovery from the company and has been unable to collect the amounts owing.
It must also demonstrate that the individual was a director at the time that the company failed to make the required remittances; that the director did not exercise due diligence to ensure the remittances were made; and that the assessment was issued within two years after the individual ceased to be a director, whether through resignation or dissolution of the company (voluntary or by operation of law). If the CRA is unable to establish the foregoing, the director may rely on these factors as a defence.
Once the CRA issues a Notice of Assessment against a director, the director may challenge the assessment by filing a Notice of Objection within ninety days. If this process does not succeed, the director may appeal to the Tax Court of Canada and, if necessary, to the appeal courts should the Tax Court appeal fail.
The CRA possesses broad authority to collect tax amounts assessed against a director. It may issue collection calls or notices, register tax liens, and seize a director's property. The CRA may also garnish a director's bank accounts to satisfy the debt.
Pro Tax Tips: Proactive Measures and Distinct Legal Defences for Specific Claims of Director Liability
To reduce personal liability, a director must be proactive and exercise due diligence to ensure that the source deductions discussed above are properly remitted to the CRA. A director who is resigning from the company must ensure that the resignation is properly documented and that the changes are accurately reflected with the relevant government registries, so that the director will not be held liable for non-remittances that occur after the resignation.
Merely holding the title of director on paper will not be an excuse to escape accountability for such non-compliance. Directors may seek guidance from experienced Canadian tax lawyers whenever doubts arise.
A director should also consult a knowledgeable Canadian tax lawyer to take advantage of specific legal defences available under the applicable statutory regime. For example, a director's liability for failure to deduct payroll taxes, non-resident withholding taxes, and other required withholding taxes governed by Section 227 of the Income Tax Act (ITA).
However, a director may have a defence under Section 227.1(1) if a certificate of the corporation's liability has not been registered in the Federal Court and the certificate remains unsatisfied in whole or in part; or if a claim for the corporation's liability was not proven within six months of the earlier of the company's dissolution or the commencement of dissolution or liquidation proceedings; or if a claim was not proven within six months after a bankruptcy order or assignment in bankruptcy against the corporation, was made.
These defences similarly apply to GST/HST liabilities under Sections 323(1) and (2) of the Excise Tax Act, but may not apply to EI or CPP liabilities. Consultation with our top Canadian tax lawyers may help you determine which defences are available for your specific circumstances.
Frequently Asked Questions (FAQs):
Under what circumstances can a director become personally liable for a corporation's taxes in Canada?
A director becomes personally liable when the Canada Revenue Agency (CRA) cannot collect unpaid source deductions from the corporation, such as income tax withholdings, GST/HST remittances, Employment Insurance (EI) premiums, and Canada Pension Plan (CPP) contributions.
What conditions must the CRA meet before assessing a director for unpaid corporate taxes?
The CRA must:
- Exhaust all means of recovery from the company.
- Establish that the individual was a director at the time the company failed to remit deductions.
- Prove the director did not exercise due diligence to ensure remittances were made.
- Issue the assessment within two years after the individual last ceased to be a director.
How can a director challenge a CRA assessment for unpaid corporate withholding taxes?
A director may file a Notice of Objection within ninety days of the assessment. If unsuccessful, the director may appeal to the Tax Court of Canada and, if necessary, to higher courts.
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.
