Director Liability for CRA Debts: The One Place the Corporate Veil Does Not Hold

People incorporate partly for liability protection, and for most obligations it works. There is a specific and important exception, and it catches directors of small corporations more often than any other single rule.

Unremitted payroll source deductions and net GST/HST are trust amounts. They were never the corporation’s money. The corporation collected them on the Crown’s behalf and failed to hand them over. Directors can be assessed personally for them.

What is caught, and what is not

The line is clean: money the corporation held for someone else attracts personal liability. Money the corporation owed does not.

That is why a corporation can go under owing corporate tax and the directors walk away, while the same corporation owing three months of payroll remittances follows them home.

Before the CRA can assess you

The assessment is not automatic. Certain conditions must generally be met first, including that a certificate for the amount has been registered in Federal Court and execution returned unsatisfied, or that the corporation has begun liquidation or dissolution proceedings, or has become bankrupt.

In practice this means the CRA has pursued the corporation, failed to collect, and is now looking at whoever was directing it.

The two-year clock

A director cannot be assessed more than two years after they last ceased to be a director.

That sounds like an exit route and it is a narrow one:

• Resignation must be valid and properly documented under the governing corporate statute. An informal “I stepped back” is not a resignation
• The two years runs from the effective resignation date, not from when the debt arose
• Resigning after the trouble starts does not erase liability for what already accrued; it starts the clock on the CRA’s window to assess you for it
• A de facto director, someone who acts like a director without being formally appointed, can be caught without ever holding the title

If you are resigning from a corporation with CRA exposure, do it properly, file the change with the corporate registry, and keep the evidence. The date is worth money.

The due diligence defence

A director is not liable if they exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

Note the wording: it is about preventing the failure, not reacting to it. That distinction decides most cases.

What tends to help:

• Systems put in place so remittances happen automatically and on time
• Evidence you monitored compliance rather than assumed it
• Documented action taken as soon as a problem appeared
• Money set aside for remittances, separately from operating funds

What does not help:

• Not knowing. Uninformed is not diligent
• Being the “silent” or “inactive” director. Inactivity is the opposite of the defence
• Relying on a bookkeeper with no oversight
• Prioritising other creditors to keep the business alive. Understandable, and precisely the choice the rule exists to discourage

Courts have historically applied an objective standard, so “I did my best given my inexperience” is a weaker argument than people expect.

The practical protections

Never touch the trust money. Move source deductions and net GST/HST into a separate account the moment they arise. Treat the operating balance as excluding them. This is one line in the monthly close and it is the single most effective protection available.

Automate the remittance. Payroll software that files and remits removes the most common failure, which is forgetting during a busy month.

Check remittances monthly, personally, even if someone else runs payroll. Confirm the money left the account. A director who reviews a one-line report each month is in a materially different position from one who does not.

Know when you are a director. If you are on the corporate registry, you are exposed. Spouses added as directors for share-structure reasons frequently do not realise this.

Resign properly if you leave, and keep the filing.

The CRA is not the only one who can do this

Directors of an Ontario corporation carry a second personal exposure that has nothing to do with tax, and it surfaces in exactly the same circumstances.

Under the Business Corporations Act, the directors are jointly and severally liable to the employees for debts not exceeding six months’ wages that become payable while they are directors, and for vacation pay accrued while they are directors for up to twelve months under the Employment Standards Act. As with the CRA, the liability is not immediate: the corporation must generally have been sued with execution returned unsatisfied, or be in liquidation, winding up or bankruptcy.

A corporation that runs out of money usually stops remitting and stops paying wages in the same month. The two claims then arrive together, and the same person answers for both.

If an assessment arrives

Do not ignore it. Personal assessments proceed to collection.

You have objection rights. Generally 90 days from the notice to file a notice of objection. That is the forum for the due diligence defence, for the two-year limit, and for challenging the underlying corporate assessment, since a director assessed for a corporate liability may dispute the correctness of that underlying amount. The procedure, and what a well-built objection contains, is in objecting to a reassessment.

Separate the tax from the interest and penalties. The due diligence defence goes to the assessment itself. Interest and penalties are a different application, made under the taxpayer relief provisions, and it can be run alongside an objection rather than instead of one. See applying for taxpayer relief.

Deal with collections in parallel. An objection does not pay the bill, and interest keeps running on the assessed amount while the dispute is outstanding. Where the sum is large, a payment arrangement is usually worth negotiating alongside the objection rather than after it, and that process is set out in CRA payment arrangements.

Get advice before responding. These assessments are frequently reduced or vacated where the facts support diligence or the timing is wrong, and the first response shapes everything after it.

Pay the CRA trust amounts before other creditors

If your corporation is short of cash and you are choosing which creditor to pay, pay the CRA the trust amounts first. Not because they are the most sympathetic creditor, but because they are the only one who can follow the debt into your personal life after the company is gone.

Knowing which amounts are trust amounts, in the month they arise rather than at year end, is one of the plainer arguments for reconciling payroll and GST/HST every month.

If your corporation is behind on remittances, dealing with it now is substantially cheaper than a director assessment later. That conversation is worth having early.