Directors’ Tax Liability

In Canadian and Québec tax law, corporate directors hold a strategic position that exposes them to significant personal liability. These include the liability for source deductions and consumption taxes (GST/QST), which is particularly arduous. It is designed to ensure that sums collected or withheld by the company on behalf of the tax authorities are actually remitted to them. This article explores the legal basis of this liability, the available defence mechanisms, and the practical implications for directors.

It should also be noted that directors may also be liable for certain fiscal debts if the company decides to liquidate all of its assets while still owing taxes. A number of forms have to be filed before the liquidation can take place, and forgetting to do so can prove very costly.

We will come back to the requirement to file various information forms with the tax authorities in a later article.

Amounts Belonging to the Tax Authorities and the Obligation to Remit Them

Source deductions include income tax deducted from salaries, CPP or QPP contributions, and employment insurance premiums. These amounts are deemed to be held in trust for the government. That is why these sums are said to “belong” to the tax authorities from the outset.

Under section 227.1 of the Income Tax Act (“ITA”) and section 24.0.1 of the Tax Administration Act (“TAA”), directors may be held jointly and severally liable with the company for the payment of these amounts.

Consumption taxes, such as GST and QST, are also collected on behalf of the tax authorities. Failure to do so may result in personal liability for the directors.

This obligation is very strict, and it’s extremely difficult to avoid. In order for a director to be held personally liable for the amounts mentioned above, the following conditions must be met:

• the company’s failure to collect or remit the required amounts (source deductions, and GST/QST);
• the impossibility of the tax authorities’ collecting the amounts owing; and
• the status of the director (the one appearing in the Registers or the one who is not registered, but acts as such, i.e. the de facto director).

Note that tax authorities must first identify a valid debt (through a notice of assessment) and obtain an ex parte judgment stating that they can take measures to collect a specified amount. These measures, such as direct seizure or garnishment, will then be carried out. If there’s a balance remaining, the tax authorities will turn to the director. Directors are also liable if the company goes bankrupt and still owes source deductions, and GST/QST.

Ground of Defence

A director may avoid liability by demonstrating that they acted with reasonable care, diligence and competency. This defence is based on an objective analysis of the director’s behaviour within the company. Internal administrators are expected to be better informed, while external ones must remain vigilant.

When using this type of defence, it is important to demonstrate the mechanisms in place within the company to ensure that it was doing everything possible to meet its tax remittance and withholding obligations. Examples often cited include filing up-to-date returns, using a bank account dedicated exclusively to tax remittances, avoiding the use of remittance amounts as working capital for the business, and any other means of protecting these remittance amounts.

Finally, in the case of remittances to the tax authorities, the law prescribes a two-year limitation period. In other words, a director cannot be held personally liable for sums due to the tax authorities if more than two years have elapsed since they left office.

Once again, there are large volumes of case law on the amount of proof required to determine exactly when a director left their duties. Generally speaking, you must be able to demonstrate that a resignation was submitted within the time frame of the date written on the resignation letter, and that the company actually received it. If the company acknowledged receipt of this letter and amended the relevant records within the same time period, this constitutes solid proof that can be used against third parties, such as the tax authorities. The important thing is to document a director’s departure as fully as possible.

Directors’ Tax Liability Related to the Liquidation of a Company

The liquidation of a company, whether voluntary or forced, entails a series of legal and tax obligations. A director’s tax liability may be invoked in such circumstances.

When a company goes into liquidation, it remains subject to the usual tax obligations until it is completely dissolved. These obligations include:

• filing tax returns (income tax, sales tax, source deductions, etc.);
• paying any balances due to the Canada Revenue Agency (CRA) and Revenu Québec; and
• issuing required documents, such as tax statements for employees.

The company’s liquidator, often appointed from among the directors or elected by them, is then responsible for ensuring that these obligations are met.

Section 14 of the TAA (s. 159 ITA) imposes an obligation to obtain a certificate from the Minister certifying that no amount is payable by the company prior to any distribution of its assets.

Whose responsibility is it? That of the company’s directors and liquidator.

If a director distributes any assets without having first obtained a certificate, they become personally liable for the company’s tax debts, up to the value of the assets distributed. The certificate can be requested by filling out a form. This liability is automatic and does not depend on the director’s diligence or good faith. Unlike the provisions mentioned in relation to remittances, no due diligence or two-year time limit defences are applicable in this case.

Liability can be incurred up to 12 months after the distribution of the assets or after the tax authorities become aware of it.

Good Practices to Adopt

Directors must stay abreast of the company’s tax situation, ensure that tax returns are filed on time, verify that tax payments are made on time or that arrangements have been made for the payment of tax obligations, document decisions and actions taken to meet said tax obligations, set up control mechanisms, consult tax specialists or competent professionals, and consider resigning in the event of risk.

Liability insurance can also provide protection.

Directors have a heavy workload, so it is important to be well informed. Note that these responsibilities also apply to corporations and not-for-profit organizations.

What should I do if I receive a notice from the tax authorities?

When a director of a corporation receives a notice of assessment under the directors’ liability provisions for amounts not remitted (such as source deductions or GST/QST), they have certain recourses available to them under provincial and federal laws.

For instance, a director who receives a notice of assessment may contest it by filing a notice of objection within 90 days of the date of the notice of assessment (s. 93 TAA or s. 165 ITA). The objection allows the director to contest the validity or amount of the assessment.

The director may also apply to the tax authorities for relief from penalties and interest contained in a notice of assessment, either through a cancellation, reduction or waiver (s. 94.1 TAA or s. 220(3.1) ITA), by demonstrating that they acted with due diligence or that there are exceptional circumstances justifying such relief.