From Boardroom to Courtroom: Unpacking Directors' Personal Liability
Understanding directors' personal liability for tax assessments in Canada. Discover the legal framework that applies to corporate directors.
In Canadian law, the concept of directors' liability for tax assessments is a critical aspect that emphasizes the accountability of corporate directors for ensuring their corporation's compliance with tax obligations. This legal framework aims to safeguard public revenue by holding directors personally responsible for certain types of tax debts of their corporation, should the corporation not deal with the tax debt properly. Here's a more detailed overview:
Background and Legal Basis
Directors' liability is grounded in various statutes, including the Income Tax Act, the Excise Tax Act (for GST/HST), and the Canada Business Corporations Act, among others. These laws articulate the circumstances under which directors can be held personally liable for the corporation's tax debts, specifically focusing on source deductions and sales taxes.
Scope of Liability
- Source Deductions: Directors are liable for the corporation's failure to remit employees' income tax withholdings, Canada Pension Plan contributions, and Employment Insurance premiums. These funds are considered trust monies that the corporation collects on behalf of the government, and failing to remit them is treated severely under the law.
- GST/HST: Directors can also be held liable for the corporation's failure to collect and remit Goods and Services Tax or Harmonized Sales Tax. Similar to source deductions, these taxes are collected from customers on behalf of the government, and non-compliance/failing to remit is a serious matter.
Conditions for Liability and Defenses
To establish a director's liability (re)assessment, the Canada Revenue Agency (CRA) must demonstrate that the director did not exercise the necessary due diligence to prevent the corporation's failure to remit the taxes. The "due diligence defense" allows directors to avoid liability if they can prove that they took reasonable steps to ensure compliance, or that the failure was due to circumstances beyond their control.
Assessment and Collection Process
The process begins with the CRA assessing the director personally for the corporation's unpaid taxes. This assessment can be challenged through an objection filed within 90 days, and subsequently, if necessary, an appeal can be made to the Tax Court of Canada. Should the assessment be upheld, the CRA has broad collection powers, including garnishing the director's wages, seizing assets, and registering liens against personal property.
Limitations and Timing
A key limitation to directors' liability is the two-year rule. The CRA cannot assess a director for the corporation's unpaid tax debts more than two years after the director has formally resigned. This limitation period is crucial for limiting the duration of potential liability for former directors.
Implications and Importance
The implications of directors' liability are significant. It ensures that individuals in positions of corporate authority, cannot disregard their corporation's tax obligations without facing personal consequences. This accountability mechanism protects the integrity of the tax system and ensures the collection of public revenue necessary for governmental operations.
Directors need to be vigilant about their corporation's tax affairs, understanding that their personal financial well-being could be at stake if the corporation fails to meet its tax obligations. Engaging in proactive financial oversight, ensuring timely tax compliance, and seeking legal or financial advice when necessary are prudent steps for directors to mitigate the risk of personal liability.
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.
