Director’s Liability – What you should know

Many of us have sat on boards of directors, either out of professional obligation or simply to give back to others, without knowing that we were at risk of paying certain debts of the organization or corporation. For certain amounts due to the Canada Revenue Agency (CRA), the CRA has the possibility of collecting these amounts from corporate directors.

The main tax liabilities that directors can be liable for are:

• payroll deductions (income tax, CPP and EI);
• GST or HST (and in Quebec, QST); and
• interest and penalties on the above payable by the corporation, plus interest on the amount you are
  assessed from the time the CRA assesses you as a director.

There are other liabilities as well, such as for provincial retail sales taxes not collected, and certain other federal and provincial taxes but this article will focus mainly on the director’s liability provision in the Income Tax Act.

When a corporation pays salary or remuneration to an employee or officer, it must deduct certain amounts from the amount paid, including income tax, employment insurance premiums and Canada Pension Plan contributions. Amounts withheld in this way are deemed to be held in trust for the federal government, and it is in this capacity that the CRA is given super collection powers.

Pursuant to section 227.1 of the ITA, directors of a corporation that has failed to remit certain amounts to the tax authorities are jointly and severally liable with the corporation for the payment of the amounts. It goes without saying that corporate director could be liable to pay thousands, if not millions, or dollars...

Criteria for holding directors liable

The Act contains certain requirements for directors to be held liable for their corporation's unpaid source
deductions:

1. The CRA must demonstrate that it cannot collect the amounts directly from the corporation.
2. The CRA must assess the director within two years of the date he or she ceased to be a director.
3. The director fails to demonstrate that he or she exercised the degree of care, diligence and skill necessary (“due diligence”) to prevent the failure to deduct, withhold, collect, remit or pay amounts. The third criterion states that a director be held liable for a corporation's debt if he “acted with the degree of care,
   diligence and skill to prevent the default that a reasonably prudent person would have exercised in comparable circumstances”.

This is a purely objective criterion aimed at determining whether a director's actions are those that a reasonable person would have taken. Thus, a person cannot invoke his lack of experience or knowledge to justify his inaction regarding source deductions. The basic purpose of this criterion is to prevent passive directors from sitting on
company boards.

To prove that you have exercised due diligence, ask yourself the following questions:

1. Does the corporation have procedures and processes in place for the payment of source deductions?
2. Does the company have one or more employees who are responsible for remittances to the CRA? Do you ask them questions about the status of remittances? It's reasonable to rely on what these people tell you, provided there's nothing to make you question what they tell you. But if in doubt, always be more cautious: ask for a copy of the bank statements or other documents that confirm the status of the remittances.
3. Is the company in financial difficulty or struggling to pay its debts as they fall due? If so, you need to dig deeper because a company in financial difficulty will often have difficulties with the tax authorities.
4. Even if the company appears to be in good financial health, do you take an interest - on a regular basis - in the status of remittances to the CRA?
5. As a director, are you involved in the day-to-day operations of the company? The courts will tend to be tougher on a person who has “both hands in the game” than one who merely attends board meetings.
6. Apart from the above, do you have reason to suspect that the company is having difficulty meeting its tax obligations? If so, you should take action and do everything possible to avoid failure to remit deductions at source.

So, it's not enough to “do your best”, but rather you need to do everything a “reasonable” person would do in similar circumstances. Follow this rule of thumb: have you done everything you can to determine whether the corporation is diligently remitting source deductions to the CRA? If there's something you think you can do, do it. It's better to do too much than to have to pay thousands, if not millions, of dollars to the CRA.

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