If you are a director of a company, even if it is a non-profit corporation or a charity, you should be aware of the risks and steps to take to protect yourself. Every year, assessments are issued by the Canada Revenue Agency (CRA) against directors to collect tax debts owing by their companies.
Corporate tax liabilities for which a director can be responsible
Mainly these cover such things as:
- payroll deductions that were withheld but not remitted to the CRA, or should have been withheld
- HST that the corporation collected, or should have been collected and remitted
- normally directors are not personally liable for corporate income tax debt. However, if the director received a benefit, including, for example, a dividend, from his corporation after the tax liability arose, that can change.
What if you’re not legally a director?
If you are not listed in the corporate minute book as a director but, in fact, run the company, or if it is not active but you are the one dealing on it’s behalf, you may be a de facto director. In this case, the CRA could still treat you as being liable.
What if there are other directors?
If there are several directors, the taxman can assess all the directors, or any one of them. If, for example, you were one of three directors, it is not a defence to say that the others should also be assessed and you will pay one-third of the tax liability. The CRA usually treats all directors as being jointly and severally liable. In this case, any one of them can be assessed for all the tax debt.
While the director who has become a CRA target has the right to sue the other directors for their portion of the liability, if they are bankrupt or have no seizeable assets, it may be a waste of time and money.
If you are being pursued by the taxman, some possible defences are as follows:
- You were never a director. If you never consented to being a director, then it is possible you were never a director and are not liable. However, as previously noted, by doing the things directors do (managing the company, signing documents on its behalf, or representing it), you may have been a de facto director. If you were neither a director nor a de facto director when the corporation’s tax liability arose, you are most likely not liable. If you resigned before the tax liability arose, you might not be responsible. However, proving that you resigned and did not continue as a de facto director may be difficult.
- If you stopped being a director more than two years before you are assessed as being responsible as a director, you likely cannot be held to be responsible. Caveat. If your name was never removed from the public registry of companies after you resigned, proving that you actually resigned could be difficult. You must be able to prove from all the surrounding circumstances and documentation that you really did resign. The worst thing of all is that there is no limitation period. Even if the corporation’s failure to remit GST/HST or payroll deductions happened many years ago, you can still be assessed as being responsible for it. To add insult to injury, in that case, there will be huge interest charges. Make sure your advisor completes the paperwork correctly so as not to remain liable.
- Due Diligence – If you are caught in the CRA’s cross hairs, the due-diligence test might be the answer to your problem. The gist of this defence is that a director of a corporation is not liable for the corporation’s failure to remit payroll deductions or GST/HST if the director exercised the degree of care, diligence and skill necessary to prevent the failure to pay same that a reasonably prudent person would have exercised in comparable circumstances. This is usually hard to prove, but, with proper record keeping and affidavits from witnesses, could be the solution.
If you are a company director, be very sure the company collects and remits the HST and payroll deductions. If you are not running the company, ensure the remittances are actually forwarded to the CRA. If you fear corporate officials are not being candid, formally resign as a director and ensure that your resignation is properly recorded in the government registry of corporations. It may be wise to have your lawyer do the job and get a reporting letter to keep as proof. Then hide in the weeds until two years go by without an assessment being issued against you.
© The foregoing provides only an overview and does not constitute legal advice. You are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained in the context of your own particular circumstances.