As a director, can I be held liable for my corporation’s taxes?
Directors of Canadian corporations can be held jointly and severally liable for some Canadian tax along with their companies, meaning that the CRA can pursue any of them individually for the full value of the companies’ debts. This does not apply to “normal” corporate income tax, but it does apply to others’ taxes that are held in trust for the government (in particular, GST/HST, payroll taxes, income tax withholding, and foreign tax withholding).
This liability is not absolute. In particular, directors can advance what is referred to as a “due diligence defence”, on the grounds that they exercised due diligence to prevent the company from failing to withhold, remit, or pay this tax. If they can establish that thy exercised the “degree of care, diligence, and skill” of a reasonable director, they cannot be held liable under this provision. Unfortunately, directors of small businesses have a very difficult time making out this defence, although a tax lawyer may still be able to help you reduce the value of assessments.
Often small businesses accrue trust debts when they divert trust funds to operating expenses in an attempt to keep their business afloat. While tough times may not have arisen through any fault of the directors, this leaves them vulnerable to liability as directors. This is a tragic situation for businesspeople, but the director’s liability provisions seek to insure the government against it. In the recent Tax Court decision Ahmar, later confirmed by the Federal Court of Appeal, the Court confirmed that even if this decision is understandable in the face of financial difficulty, they prevent a due diligence defence from succeeding.
Attempts to fix the issue after the fact also do not help—once the company has failed to withhold tax where a director did not exercise due diligence, the director scrambling to rectify it will not protect them.
Very small businesses face an uphill battle. Directors are more often successful where they can demonstrate that they delegated this obligation to a competent executive or comptroller, while receiving regular updates. Directors of very small businesses, with the same person or small group of people serving as both the only directors and managers don’t have this opportunity, particularly when dedicated bookkeeping and accounting staff are not cost-justified.
Even if the Director could establish a due diligence defence, directors of smaller companies facing other trust debt issues are often vulnerable to other third-party liability mechanisms available to the CRA. In particular, the Agency can assess people who receive property from a tax-owing Corporation for less than the value of that property, which particularly includes dividends and shareholder benefits (most unreported funds received from the company). Where a single individual manages a company, they are often very vulnerable to these types of assessments, against which they cannot advance a due diligence defence.
If the CRA is pursuing you for the taxes of a company you operate, contact Kalfa Law — our experience with these issues can help you find a creative response to any assessments, wherever you are in the process.
CRA’s policy mentions the following as specific actions directors can take to demonstrate due diligence: “establishing a separate account for withholdings from employees and remittances of source deductions and for remittances of GST/HST, excise duty, and amounts charged under the ATSCA and the SLPECA; calling on financial officers of the corporation to report regularly on the status of the account; and obtaining regular confirmation that withholdings, remittances, or payments have in fact been made during all relevant periods.”
In addition to due diligence, you may be able to reduce or eliminate the underlying assessments, and a prior resignation may mean that the CRA’s window to reassess. Sole directors of companies may face difficulties with the latter as well.
Provided you are still a director, there is no limitation period. Once you cease being a director (typically by resigning), they have two years to assess.
– James Alvarez, Tax Counsel
© Kalfa Law 2020