Generally speaking, a corporation is a separate legal entity from its directors. This is a key difference between a corporation and a partnership or an unincorporated sole proprietorship. There are certain circumstances, however, where directors can face personal liability for a corporation's taxes.
This post gives general answers to common questions about director's liability for taxes. This post is not intended as legal advice. A tax lawyer can provide you with advice about your specific situation. This post also does not cover types of director's liabilities apart from taxes.
Which taxes of a corporation can be the responsibility of directors?
Directors of a corporation may be liable for several tax-related liabilities of the corporation. In particular, directors may be liable for a corporation's failure to remit source deductions for employees (income tax, EI, and CPP) and GST/HST. Directors are not personally liable for the corporation's own income taxes.
How do I know if I am a director of a corporation?
You generally cannot be a director of a corporation unless at some point you consented to act as director. Depending on the jurisdiction of the corporation, you may need to have given consent in writing.
If you don't remember whether you consented to act as a director, the best place to look is likely the minute book of the corporation. A minute book typically contains copies of shareholder and director resolutions, the articles of incorporation, and a register of directors. A corporate lawyer who has done work related to the corporation (such as incorporating the business, or assisting with the purchase of the business) often has the original minute book. Otherwise, the shareholders, directors, or management of the corporation may have some or all of the records that would be in a minute book.
If you are unable to locate the corporate records, you can also search the public records of the provincial or federal government. Corporations must update the provincial and federal governments regarding the current directors of a corporation. Please note, however, that provincial and federal records may be inaccurate or out of date. The fact that a corporation has reported a particular person as a director does not necessarily mean the person is in fact a director, or is still a director.
Am I still liable if I resign as a director?
The CRA can assess you for director's liabilities for source deductions and HST for up to two years after you resign. Once two years have passed, the CRA can no longer reassess you.
How do I resign as a director?
To resign, a director must provide a written resignation to the corporation. The written resignation must be received by the corporation to be effective.
A director may not always know where to send a resignation, particularly if the corporation's records are not well organized or updated. It may be prudent to find the corporation's last registered office, using provincial or federal records. It may also be prudent to send a copy of the resignation to the corporation's last known corporate lawyer, or to anyone else currently responsible for the corporation. It would be prudent to keep proof of delivery of a resignation, in case you later need to prove the resignation took place.
For the sake of clarity, it is preferable to use a formal, signed document to resign. However, the particular format of a written resignation is flexible. A resignation can even take place by email or text. In any case, it is prudent to keep a copy of a written resignation in case you need it later.
If I am not a director, could I be liable if I act like a director?
A person who has resigned as director, or who was never appointed as a director in the first place, may be considered a "de facto" director. The case law about "de facto" directors is complex. Generally speaking, you may be a de facto director if you hold yourself out to third parties as a director. This could happen, for example, if you signed documents as a director of the corporation. You may also be de facto director if you take on the responsibilities of a director of the corporation.
If a new person becomes a director, are they liable?
A new director is not liable for amounts owed prior to the appointment of the new director. However, a new director will be liable for current liabilities. Therefore, a new director will want to ensure that the corporation remains current with their income tax and GST liabilities to avoid liability.
Am I liable if I did my best to make sure the corporation paid its taxes?
A director is not liable if they can show they took the care, diligence, and skill of a reasonably prudent person in comparable circumstances to prevent the corporation's failure to remit its taxes.
Proving that a director exercised due diligence is not easy. Directors cannot escape liability by relying on their own inaction - they must take positive steps to ensure the corporation meets its tax liabilities. Directors are not excused because they lack the skill or knowledge about tax matters. And directors must quickly make the necessary decisions if they become aware that a company is entering financial difficulty.
That said, the due diligence defence is sometimes available. For instance, a director who has reason to believe the company is well-capitalized and no reason to suspect the company is in financial difficulty may be able to avoid liability. If a creditor has taken over management and control of a corporation, a director may not be able to ensure that CRA is paid and may not be liable. Or, if a director has a serious mental illness that makes him or her incapable to understand their duty, or to fulfil that duty, this may excuse him or her from liability.
Originally published 31 May 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.