Understanding Director’s Liability for Unpaid Corporate Taxes

Introduction

Many small business owners and corporate directors believe that incorporating protects them personally from business debts. That is only partially true. Under Canadian tax law, directors can be held personally liable for certain unpaid corporate taxes—including GST/HST, source deductions, and in some cases corporate income tax penalties. CRA routinely pursues directors when a corporation falls behind on compliance or becomes insolvent. This guide explains exactly when directors are personally liable, how CRA enforces this liability, how long CRA can pursue directors, and how to defend yourself if CRA issues a Director’s Liability Assessment.

What Is Director’s Liability?

Under the Income Tax Act, Excise Tax Act, and Employment Insurance Act, directors may be personally responsible for their corporation’s unpaid:
source deductions (CPP/QPP, EI/QPIP, income tax withheld from employees)
GST/HST (trust funds collected but not remitted)
penalties and interest tied to these trust amounts
When CRA considers taxes “trust funds,” they view directors as custodians. Failing to remit is treated as misuse of funds.

Which Directors Can Be Held Liable?

CRA may pursue:
active directors
de facto (informal) directors
shadow directors (those who control decisions without formal titles)
silent partners who influence operations
If your name is on corporate documents—or if CRA can show that you acted like a director—you may be responsible.

When Corporate Income Tax Creates Director Liability

Generally, corporate income tax does not create personal liability. However:
gross negligence penalties
late-filing penalties
failure to maintain books and records
can lead to director liability in extreme cases, especially if the corporation is dissolved improperly.

Types of Corporate Tax Debts That Trigger Director Liability

1. Source Deductions (Payroll)

CPP/QPP
EI/QPIP
income tax withheld
Source deductions are CRA’s highest-priority trust funds.

2. GST/HST Collected but Not Remitted

CRA treats collected GST/HST as trust money. Directors become personally responsible when filings are missing or remittances unpaid.

3. Penalties & Interest on Trust Funds

These amounts also transfer to directors when assessments are issued.

The Two-Year Rule

CRA can only pursue directors if:
the assessment is issued within 2 years after the director resigned
OR
if the corporation is dissolved, within 2 years of dissolution
Many directors are unaware of this rule — and inadvertently remain at risk long after they stop managing the company.

The Due Diligence Defense

Directors can avoid liability by proving they exercised due diligence, meaning:
they took reasonable steps to ensure remittances were made
they monitored bookkeeping or payroll
they hired competent staff or accountants
they corrected errors when discovered
they were misled by employees or bookkeepers
The due diligence defense is the strongest legal tool against liability assessments.

How CRA Enforces Director’s Liability

CRA begins by:
issuing a Director’s Liability Assessment (DLA)
freezing director’s personal bank accounts
garnishing director’s wages
seizing refunds and credits
placing liens on personal property
A DLA gives CRA the same power as a personal tax debt.

When Are Directors Most at Risk?

underreported payroll remittances
cash-flow shortages (using trust funds to pay expenses)
GST/HST not remitted for months
corporation stops operations without filing returns
corporation dissolves without clearance
owner-operators who manage finances personally
restaurants, construction, retail, and high-cash industries
Directors are frequently targeted when a corporation becomes insolvent.

What Happens If a Corporation Goes Bankrupt?

Corporate bankruptcy does not eliminate director liability for:
source deductions
GST/HST
penalties and interest
CRA will simply shift enforcement to the director personally.

How to Reduce the Risk of Director’s Liability

file payroll and GST/HST returns on time
ensure remittances are paid before other expenses
monitor corporate bank activity
correct missed filings immediately
keep proper books and records
avoid informal “director-like” roles without resigning formally
seek clearance certificates when dissolving a corporation

How to Shut Down a Corporation Safely

Before dissolution:
file all returns
clear all GST/HST
remit all payroll
ensure no outstanding balances
notify CRA
Dissolving with outstanding tax balances guarantees CRA will pursue directors.

Challenging a Director’s Liability Assessment

You must file a Notice of Objection within 90 days. Defense strategies include:
lack of involvement
lack of director status
resignation before the tax period
due diligence defense
errors in CRA’s calculations
corporate misclassification
If the objection fails, the next step is the Tax Court of Canada.

When Taxpayer Relief Applies

Taxpayer Relief may reduce interest on director liability balances if:
illness
financial hardship
death in the family
CRA delay
It cannot cancel the principal tax owing on trust funds.

Mackisen Strategy

At Mackisen CPA Montreal, we defend directors by challenging Director’s Liability Assessments, proving due diligence, reconstructing payroll and GST/HST filings, correcting bookkeeping errors, negotiating payment plans, appealing incorrect assessments, and preventing CRA from enforcing wrongful liability. We also ensure corporations shut down or restructure safely to avoid triggering future liability.

Real Client Experience

A Montreal restaurant owner avoided a $74,000 liability after we proved she exercised due diligence and payroll errors were caused by a rogue manager. A construction director reversed a GST liability after showing he resigned years earlier. A tech start-up founder avoided garnishment after resolving payroll filings and negotiating a structured plan. A dissolved corporation’s director overturned penalties through a strong objection backed by complete documentation.

Common Questions

Can CRA garnish my personal income? Yes. Can I defend myself? Yes — due diligence is key. Does bankruptcy remove director liability? No. Can former directors be assessed? Yes — within the 2-year rule. Should I resign if I’m no longer involved? Yes — and document it properly.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal protects business owners and directors from personal liability by providing expert dispute strategies, strong evidence preparation, and complete compliance planning that keeps CRA collections away from your personal finances.