Directors’ liability

Which unpaid amounts can reach a director

Payroll deductions withheld from employees and GST/HST collected from customers are not the business’s own money. If the corporation does not remit them, the directors in office when the payment was due may be liable together with the corporation for the unpaid amount, plus penalties and interest. If the corporation failed to withhold in the first place, the exposure is the amount that should have been withheld plus a 10% or 20% penalty and interest.

The rule is not limited to active owners. The statutes do not distinguish between active, passive, nominee or outside directors, and handing the work to a co-director, officer or bookkeeper does not by itself remove responsibility. Someone who performs a director’s functions without a formal appointment can also be caught.

What the CRA has to establish first

Three basic rules apply. The CRA must show it cannot recover the amount from the corporation, for example because collection action came back unsatisfied or because it has proved a claim in a dissolution, liquidation or bankruptcy. It must assess the director within two years after that person last ceased to be a director. And the director must have failed to show the care, diligence and skill needed to prevent the failure.

Resigning does not erase earlier periods, but it starts the two-year clock. Each director can be assessed for the full amount, and a director who pays is generally entitled to contribution from the other liable directors.

What due diligence looks like

The test is the care a reasonably prudent person would take in similar circumstances. It is an objective standard, though your own circumstances are not ignored. The steps have to be taken before the failure happens, not after the notice arrives.

The CRA’s own circular points to practical measures: a separate account for withholdings and remittances, regular reports from the corporation’s financial officers on that account, and regular confirmation that payments were actually made in every relevant period. Not knowing your obligations is not a defence.

An illustrative example

Suppose a corporation has two directors, an owner and a family member who is a director on paper only. Payroll remittances of about $4,000 a month are skipped for two slow months and $8,000 is still unpaid when the corporation later becomes bankrupt. The CRA could consider both directors. A director who had reviewed monthly confirmations and acted as soon as a gap appeared is in a different position from one who never asked. These figures are illustrative, and the outcome always turns on the facts.

What to discuss with your accountant

Confirm who is registered as a director, whether payroll and GST/HST remittances are confirmed each period, and whether tax money is kept apart from operating cash. If cash is tight, ask before skipping a remittance. Keep written evidence of the checks you perform, and get advice before resigning or changing directors. See payroll remittance for how the payments work.