Two-Year Limitation Period and CRA Director Liability
A director liability assessment can expose an individual to significant personal liability for a corporation’s unpaid GST/HST, payroll deductions, Canada Pension Plan contributions, and Employment Insurance premiums. However, one of the most important protections available to directors is the two-year limitation period.
Under both the Income Tax Act and the Excise Tax Act, the Canada Revenue Agency (CRA) is generally prohibited from assessing a director more than two years after the individual ceased being a director of the corporation.
In many director liability cases, the central issue is not whether the corporation owed money to the CRA. Rather, the dispute is whether the individual was still a director when the assessment was issued. Determining the answer often requires a careful review of corporate records, resignations, annual filings, and other evidence. A Toronto tax lawyer can help assess whether the CRA issued the assessment within the applicable limitation period.
What Is the Two-Year Limitation Period?
The director liability provisions contain a limitation period that generally prevents the CRA from assessing a former director more than two years after they ceased holding office.
As a result, the date a director resigned can determine whether an assessment is valid.
If the CRA issues a director liability assessment after the limitation period has expired, the assessment may be invalid regardless of the amount owed by the corporation.
When Does the Two-Year Clock Start?
The limitation period begins when an individual legally ceases to be a director. In some cases, determining that date is straightforward. A written resignation is delivered, corporate records are updated, and the resignation date is clear.
In other cases, the issue becomes significantly more complicated. Directors often stop participating in the business, move away, sell their shares, or assume they are no longer involved with the corporation. However, none of those events necessarily mean they ceased being a director.
The legal question is not when the individual stopped acting as a director. The question is when the individual legally ceased to hold office.
Common Director Liability Disputes
Many director liability disputes arise because corporate records were not properly maintained.
For example:
- A director resigns but no written resignation is retained;
- Annual corporate filings continue to list the individual as a director;
- The corporation ceases operations without documenting changes in management; or
- Family members are appointed as directors but never formally removed.
Years later, the CRA may assess the individual personally. The dispute then becomes whether the person actually remained a director during the relevant period.
In many cases, the outcome depends on corporate records, annual returns, resolutions, and other documentary evidence.
Is Walking Away From the Corporation Enough?
Generally, no.
Many individuals believe they ceased being a director when they stopped participating in the business. Unfortunately, that assumption can create significant problems. A person may stop attending meetings, cease involvement in management, and have no further connection to the corporation. Nevertheless, they may remain a director in law if they never formally resigned or were never removed.
For this reason, directors should ensure that resignations are properly documented and retained.
Why the Limitation Period Matters
The two-year limitation period is often a complete defence to a director liability assessment.
If a director successfully establishes that they ceased being a director more than two years before the assessment was issued, the CRA may be unable to pursue them personally under the director liability provisions.
Accordingly, determining the correct resignation date should be one of the first issues reviewed whenever a director liability assessment is received.
Kirshen Tax Law Can Help
Director liability assessments frequently involve disputes regarding director status, resignation dates, and the application of the two-year limitation period. In many cases, determining whether the assessment is valid requires a careful review of corporate records and CRA documentation.
If you have received a director liability assessment, contact a Toronto tax lawyer at Kirshen Tax Law for a free consultation. We can review your situation and discuss the options available to challenge the assessment.
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.