The CRA and Director’s Liability
What is Director’s Liability?
In Canada, corporations are considered to be separate legal entities with their own assets and liabilities. It is a basic principle that employees, officers, and directors are not personally responsible for the debts incurred by their corporation. However, there are some circumstances where directors may be put under the microscope by the Canada Revenue Agency (CRA). If the CRA cannot collect an amount owing from the corporation directly, it may assess the director(s) personally for certain debts accrued during the time they were in that position. This is most common when there are unpaid source deductions, and GST/HST liability.
For more background material on director’s liability, feel free to consult our blog post that discusses the topic at greater length. This article reviews remedial actions you are able to take after receiving a letter threatening director’s liability, or a notice of assessment for director’s liability. First and foremost, we recommend you seek professional assistance to help navigate the complexities of this process as it can have very serious consequences.
What can I do after Receiving an Assessment for Director’s Liability?
We highly recommend reviewing your corporate by-laws and various agreements. All corporate law statutes, under which corporations are incorporated, permit corporations to indemnify their directors for claims brought against them. However, they can only indemnify their directors to the extent that it is permitted by statute. In some circumstances, the corporation may be required to indemnify the directors, while others they may be allowed to refrain from doing so. While bylaws are boring and often ignored, they are very relevant because they can help shield you from liability.
You should also start compiling records that demonstrate that you acted responsibly and with due diligence. A significant portion of legislation that imposes liability on directors permits them to avoid this liability if they can establish a due diligence defence. The due diligence defence basically means that you did all you reasonably could to avoid the current circumstances. For instance, the director of a corporation with large payroll deductions debts must demonstrate that they were diligent in trying to prevent the failure; that they acted as any reasonably prudent person would in comparable circumstances.
This involves documenting any actions you may have taken that demonstrate you fulfilled your duties responsibly. Document actions taken at meetings. If you dissented at a board meeting because you felt they were taking an unreasonable course of action, look to see if that dissent was recorded. This also includes any evidence that you relied on in good faith on experts through your course of work, for example: financial statements, interim reports, advice from an employee or officer, lawyer, accountant, engineer, etc.
The CRA and Director’s Liability
The CRA takes unpaid liabilities extremely seriously. They will go after everyone, and anyone they can to recover funds they claim are owing to the government. They will very likely pursue director’s liability, while at the same time looking into whether they may assess someone under section 160 of the Income Tax Act, or section 325 of the Excise Tax Act.
Directors may resign from the corporation, but this must be done very carefully, and they may still be assessed for unpaid tax arrears that accumulated during the time they were a director for a certain period of time. As mentioned, resigning will help to prevent incurring further liabilities. However, it will not protect you from liabilities arising from events that occurred while you were director, but it can effectively put an “end date” to your potential liability.
You must resign in writing because a resignation becomes legally effective at the time it is written and received by the corporation, unless it specifically names a later date. Also you should make sure that it is actually delivered to a senior officer at the corporation, with proof of receipt.
That is not all! You must also make sure that your resignation is reported on the public record. In Ontario, this involves filing an appropriate Notice of Change under the Corporations Information Act. This puts the fact of your resignation in the public record and allows you to report the date that you believe your resignation became effective. The date of resignation can also be relevant for limitation period considerations.
If you have received a letter threatening director’s liability, or an assessment for Director’s Liability, we strongly recommend giving us a call at 1 844 53 TAXES. As a director, you may be held liable for enormous amounts of money due to unpaid GST/HST or source deductions even when it was not your fault. The process can be quite complicated, with many moving parts that are time sensitive, so it is best to have legal counsel helping you navigate through it. Don’t delay, contact us today!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.