One of the most serious but least understood risks of serving as a corporate director in Canada is personal liability for the corporation's unremitted tax obligations. If the corporation fails to remit payroll source deductions or GST/HST collected from customers, CRA can pursue the directors personally for the full amount — plus interest and penalties. This liability can arise even when a director was not involved in day-to-day operations. Understanding the rules, the available defences, and the proper way to resign is essential for every director of a Canadian corporation.
Under the Income Tax Act (ITA) section 227.1 and the Excise Tax Act (ETA) section 323, directors are jointly and severally liable for two categories of unremitted amounts:
Notably, director's liability does not apply to the corporation's own income tax (T2 corporate tax), HST that was not actually collected, or other types of corporate debts. But the two categories above — payroll and GST — represent billions of dollars in CRA collections annually and are the primary risk for directors of financially distressed corporations.
CRA must assess a director within two years of the date on which the director last ceased to be a director of the corporation. This means:
CRA also requires, as a precondition to assessing a director, that the corporation's liability be established — typically through a certificate registered in Federal Court, a proof of claim in a bankruptcy, or a winding-up order.
A director is not liable if they can establish that they exercised the degree of care, diligence, and skill to prevent the failure to remit that a reasonably prudent person would have exercised in comparable circumstances. This is the due diligence defence under ITA s.227.1(3) and ETA s.323(3).
Courts have interpreted this defence as requiring positive action to prevent the failure — not merely ignorance of it. The defence is fact-specific, but successful cases typically involve directors who:
Outside directors (those not involved in daily management) have generally been held to a somewhat lower standard than inside directors (CEO, CFO, controlling shareholders), but no director is immune. Courts have found that simply asking management whether remittances are current — without independent verification — is typically not sufficient.
The distinction between inside and outside directors matters for the due diligence defence, but not for the initial imposition of liability. Both are equally liable if the corporation fails to remit.
An inside director who runs day-to-day operations is expected to know about remittance failures almost immediately and take corrective action. An outside director who serves on a board without operational involvement may have a stronger due diligence defence if they can show they had no reason to know of the failure and acted reasonably once they became aware — but they cannot simply plead ignorance.
Resignation stops the two-year limitation clock — but only if properly done. Key points:
CRA will issue a Notice of Assessment against you personally for the amount of unremitted source deductions or GST/HST, plus penalties and interest. This assessment has the same force as any other tax debt — CRA can take enforcement action against your personal assets, including bank accounts, wages, and real property.
You have the right to file a Notice of Objection within 90 days of the assessment date. Grounds for objection include: the corporate liability was never properly established, the two-year limitation period expired, you were never actually a director, or you have a due diligence defence. At Swift Accounting Ltd. Calgary, we work with legal counsel on director's liability disputes and help clients document their due diligence records before and after CRA inquiries.
Practical steps directors can take to reduce exposure:
Yes. Director's liability under ITA s.227.1 and ETA s.323 applies to all directors, including outside directors who were not involved in day-to-day operations. The only way to avoid liability is to establish the due diligence defence — showing you actively took steps to prevent failures — or to demonstrate that the two-year limitation period has expired since your resignation.
No. Director's liability is limited to unremitted employee source deductions (income tax, CPP, EI withheld from employees) and unremitted net GST/HST. The corporation's own income tax is not collectible from directors personally under these provisions.
Act immediately: verify that the most recent payroll and GST/HST remittances were actually paid to CRA, not just processed internally. If the company cannot make remittances, escalate to the board and document your objection. Consider whether a formal restructuring or insolvency process would protect CRA trust funds. If the situation is unresolvable, resign in writing and ensure your resignation is legally effective. Consult an accountant and lawyer before resigning to understand your exposure for past periods.
No. Resignation stops the two-year clock from running on future accruals, but you remain liable for failures to remit that occurred during your time as a director. However, CRA must assess you within two years of your resignation date. Resignation is still important because it limits your exposure going forward and starts the limitation period running.
Director's liability is a real and significant risk for anyone serving on the board of a Canadian corporation — particularly where the business has cash flow challenges. The team at Swift Accounting Ltd. Calgary can help you understand your exposure, document your due diligence, and navigate CRA correspondence. Contact us today for a confidential consultation.
