Director’s Liability and the Due Diligence Defence
Directors of Canadian corporations are often surprised to learn that they can be held personally liable for certain corporate tax debts. Under the Income Tax Act, the Excise Tax Act, and comparable provincial legislation, CRA can assess directors personally for unremitted payroll source deductions and GST/HST, along with penalties and interest. These assessments can arise years after the arrears were incurred and can expose personal assets to collection action.
Director’s liability cases frequently surface when a business runs into cash-flow problems and starts using remittances as operating capital. From CRA’s perspective, payroll withholdings and GST/HST collected are amounts held in trust. When they are not remitted, CRA often looks beyond the corporation to the individuals who had control over financial decisions.
Who CRA Can Assess and What Amounts Are Included
CRA’s director’s liability assessment typically targets individuals who were directors when the corporation failed to remit. Liability commonly includes unremitted source deductions, CPP and EI withholdings, GST/HST collected or collectible, and associated interest and penalties.
A key practical issue is that director’s liability is not limited to individuals formally listed as directors. In certain circumstances, liability can extend to individuals who act in the capacity of a director, even if they are not officially appointed. Speaking with a Toronto tax lawyer is important to assess whether your role or conduct may expose you to director’s liability.
The Due Diligence Defence
The principal defence available to a director is the statutory due diligence defence. Put simply, a director will not be liable if they can establish that they exercised the degree of care, diligence, and skill that a reasonably prudent person would have exercised in comparable circumstances to prevent the failure to remit.
This is not a defence that succeeds by claiming ignorance or blaming staff. CRA and the courts generally expect directors to take active steps once they know, or should know, that the corporation is struggling with remittances. The question becomes whether the director took concrete measures that were reasonable in the circumstances, not whether the director intended to comply.
What Due Diligence Looks Like in Practice
Due diligence is fact-specific, but it generally requires evidence of active oversight and timely intervention. This often includes implementing systems to ensure remittances are calculated and paid on time, requiring proof of remittance before authorizing other payments, monitoring CRA account statements, and ensuring the corporation is not using trust amounts to fund operations.
Where remittance problems arise, directors are expected to act promptly. That may involve retaining an accountant to stabilize reporting, restructuring payment priorities so remittances are made first, restricting signing authority, documenting board instructions, or negotiating payment arrangements with CRA.
Common Reasons CRA Challenges Due Diligence
CRA commonly rejects due diligence arguments where the director’s actions were reactive, informal, or undocumented. Verbal instructions to staff, general reliance on a bookkeeper, or vague assertions that the corporation “intended to catch up” are rarely persuasive. CRA also focuses on timing. If a director only started taking steps after multiple periods of non-remittance, CRA will argue that a reasonably prudent person would have intervened earlier.
Another frequent issue is the director who continues to authorize payments to suppliers, landlords, or lenders while remittances remain outstanding. From CRA’s perspective, that conduct is inconsistent with due diligence because it prioritizes other creditors over statutory trust obligations.
Time Limits and Collection Strategy
Director’s liability matters also turn on procedural issues, including limitation periods and the steps CRA must take before assessing directors in certain contexts. These issues can materially affect whether a director is assessable at all and can also shape a defence strategy. Where an assessment has already been issued, directors must usually respond quickly through the objection process to preserve their rights and prevent collection escalation.
A Toronto tax lawyer can review both the factual record and CRA’s procedural steps to determine whether the assessment is legally correct, whether due diligence can be established, and whether settlement or litigation is the best path.
Kirshen Tax Law Can Help
Kirshen Tax Law represents directors in CRA director’s liability matters, including GST/HST and payroll remittance arrears, objections, collections negotiations, and Tax Court appeals. If you have received a director’s liability assessment or CRA has warned that an assessment is coming, early action matters because evidence and timelines often determine whether the due diligence defence can succeed.
Contact Kirshen Tax Law for a free consultation with a Toronto tax lawyer to review your situation and assess whether the due diligence defence is available, whether CRA followed the required steps, and how to reduce or eliminate director’s liability exposure.
Jeff Kirshen BA, JD (CA), JD (US)
Tax Lawyer | Founder, Kirshen Tax Law
Disclaimer
The content on this website, including articles and blog posts, is provided for general informational purposes only. It reflects the laws and regulations as of the date of publication, which may have since changed. This content is not intended to serve as legal advice and should not be relied upon as such. Tax laws and situations can be complex and unique to each individual. The information provided may not apply to your specific circumstances. For personalized advice regarding your tax or legal matters, we recommend consulting a qualified lawyer.