Director's Liability for a Corporation's Unpaid CRA Debts
When a director becomes personally liable for payroll deductions and GST/HST the company failed to remit, the conditions the CRA must meet, the two-year limit, and the due diligence defence.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Directors of a corporation can be personally assessed for payroll source deductions, GST/HST, and related penalties and interest the corporation failed to remit. The CRA must first exhaust its remedies against the corporation, assess within two years of the director leaving, and overcome a due diligence defence showing reasonable steps to prevent the failure.
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What debts are covered?
| Covered | Not covered |
|---|---|
| Income tax, CPP, and EI the corporation failed to withhold from employees' pay or failed to remit | The corporation's own income tax |
| GST/HST net tax the corporation failed to remit | Unpaid corporate penalties unrelated to remittances |
| Non-resident withholding tax (Part XIII) not remitted | Trade debts |
| Interest and penalties on those amounts |
What must the CRA show first?
- A certificate for the corporation's debt was registered in the Federal Court and execution was returned unsatisfied; or
- the corporation has started liquidation or dissolution proceedings or been dissolved, and the CRA proved its claim within six months after the earlier of those dates; or
- the corporation is bankrupt, and the CRA proved its claim within six months after the assignment or bankruptcy order.
Only then can the CRA assess the director personally.
Who counts as a director?
Anyone legally appointed under the corporate statute, and anyone who acts as a director — signing cheques, dealing with the bank, directing employees — even without appointment. Under the federal corporate statute, a resignation takes effect when a written resignation is sent to the corporation, or at a later time it specifies; updating the corporate registry documents the date. A director who stops attending meetings but never resigns remains liable. The two-year limitation runs from when the person last ceased to be a director, such as by a valid resignation, the corporation's dissolution, or the director's own bankruptcy; the corporation's bankruptcy or receivership does not end the directorship.
What is the due diligence defence?
A director is not liable if they exercised the degree of care, diligence, and skill that a reasonably prudent person would have exercised in comparable circumstances to prevent the failure. Courts assess the steps taken to prevent the failure, not efforts to fix it afterward. Setting up a separate trust account for remittances, monitoring remittances monthly, and insisting on payroll and GST/HST being paid ahead of other creditors are the kinds of actions that succeed. Relying on a bookkeeper without oversight, or continuing to operate while using withheld amounts to pay suppliers, generally does not.
What about directors living in the United States?
Residence does not matter. A U.S. resident who is a director of a Canadian corporation is personally liable on the same terms, and the CRA can collect from Canadian assets, set off Canadian refunds, and request IRS assistance under the treaty for a finally determined debt.
Frequently asked questions
Can I object to a director's liability assessment?
Yes, within 90 days, and appeal to the Tax Court of Canada. The underlying corporate assessment can also be challenged in that appeal in some circumstances.
Does liability apply to shareholders who are not directors?
No, unless they acted as de facto directors.
Are all directors jointly liable?
Yes, jointly and severally with the corporation; a director who pays may seek contribution from the others.
Does the same rule exist in the United States?
The U.S. trust fund recovery penalty is similar, applying to withheld federal taxes and to any responsible person, not only directors.
Official sources
The CRA explains: “The CRA must issue the assessment against the directors within two years from the time they last ceased to be directors. Directors cease to be directors by resigning or by operation of law (e.g., they become personally bankrupt).” — Canada Revenue Agency, IC89-2R3 Directors' Liability, https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic89-2/director-s-liability.html
The Income Tax Act provides: “A director is not liable for a failure under subsection 227.1(1) where the director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.” — Justice Laws Website (Government of Canada), Income Tax Act, section 227.1, https://laws-lois.justice.gc.ca/eng/acts/i-3.3/section-227.1.html
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Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our Canadian Tax Desk sets up remittance monitoring for directors and responds to director's liability proposals. See pricing or book a free fit call.
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