Dean Blachford, Tax Litigation Lawyer
Karen Cheung, Law Student
According to the law, corporations are distinct “people” and generally the CRA can’t pursue one person for the tax debts of another person. Canada’s tax laws, however, allow the CRA to hold directors personally liable for their corporation’s failure to remit source deductions, non-resident withholdings and GST/HST. This is known as “directors’ liability”.
In this article, we explain the rules surrounding directors’ liability and the methods for defending against this type of reassessment by the CRA.
The rules surrounding directors’ liability
A director can be held liable for their corporation’s unpaid source deductions under section 227.1 of the Income Tax Act and GST/HST under section 323 of the Excise Tax Act. Under both Acts, any director can be held individually liable for the full amount the corporation owes as well as any interest or penalties relating to that amount.
Prior to assessing a director personally, the CRA must first attempt to recover the amounts directly from the corporation. To demonstrate they have done this, the CRA must establish one of the following:
- The corporation has filed for bankruptcy
- The corporation has started liquidation or dissolution procedures
- The CRA executed a writ (e.g. a court order) to seize assets from the corporation, but it was returned unsatisfied
When the CRA is considering pursuing someone for director’s liability, they will typically send a warning letter to the individual providing them with 30 days to respond. The CRA’s next step is to issue the director a Notice of Reassessment.
3 ways to defend against directors’ liability
Whether a director receives a warning letter or has already received a Notice of Assessment, the director needs to act promptly because there are time deadlines that will prevent a director from disputing the assessment. There are three defences against a director’s liability assessment:
- Challenging the underlying assessmentA director assessed with directors’ liability has the right to dispute the assessment that led to the corporation’s tax liability. Whether the corporation tried and failed to dispute the liability or didn’t dispute it at all, if the director thinks that the corporation shouldn’t have had to pay the tax in the first place, the director can dispute the underlying assessment.
- The two-year limit
The CRA must issue an assessment against a director within two years from the time they stopped being a director. If two years have passed since the director resigned (and stopped acting as a director) or since the director became personally bankrupt, the CRA cannot bring an assessment against the director.If a director resigns on paper but continues to act like a director, then the two-year time limit does not start ticking and the CRA can assess the director despite the director’s formal resignation.
- The two-year limit
- The due diligence defenceThe law states that directors are not personally liable for the tax debts of the corporation where they “exercised a degree of care, diligence, and skill of a reasonably prudent person”. This is known as the “due diligence defence”.This defence will succeed if the director took active steps to try to prevent the corporation from failing to satisfy its source deductions and GST/HST obligations. The burden is on the director to prove that they took such steps and that these steps met the threshold of a “reasonably prudent person”.
We can help
Receiving a warning letter or Notice of Assessment from the CRA for directors’ liability is both common and intimidating. At Hazlo Law – Business Lawyers, we have a wealth of experience successfully defending directors against assessments of directors’ liability. Contact us today to see how we can help.
This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Dean Blachford today. 613-747-2459 ext.310, [email protected]