Understanding Director’s Liability for Unpaid Corporate Taxes – A Complete Guide by a Montreal CPA Firm Near You

Introduction

Many business owners believe that incorporating protects them from personal liability. While incorporation does shield owners from many business risks, it does not protect directors from all tax-related obligations. Under Canadian tax law, corporate directors can become personally liable for certain unpaid taxes—including GST/HST, QST, payroll deductions, and source deductions. When CRA cannot collect from the corporation, they often pursue directors directly. This guide explains director’s liability, how CRA enforces it, how to defend yourself, and how to prevent being held personally responsible.

Legal and Regulatory Framework

Director’s liability is governed by:

• Section 227.1 of the Income Tax Act (source deductions)

• Section 323 of the Excise Tax Act (GST/HST)

• Quebec Taxation Act (QST and CNESST equivalents)
  Directors can be personally responsible for: GST/HST collected but not remitted, payroll deductions for CPP/QPP, EI/QPIP, federal/provincial income tax withheld, and related penalties and interest. CRA must first attempt to collect from the corporation, but once the corporation is insolvent, dissolved, or non-responsive, CRA may issue a Director’s Liability Assessment (DLA).

Key Court Decisions

In Barrett v. Canada, the court ruled that CRA must prove reasonable steps were taken to collect from the corporation before assessing directors. In Worrell v. Canada, directors were held liable because they did not demonstrate due diligence. In Balthazard v. Canada, directors successfully defended themselves by proving active oversight and compliance efforts. In Buckingham v. Canada, gross negligence was established when directors ignored tax remittance obligations. These cases show that directors must demonstrate due diligence to avoid liability.

What Taxes Can Directors Be Personally Liable For?

1. Payroll Source Deductions

Directors are personally liable for all: income tax withholdings, CPP/QPP contributions, EI/QPIP premiums, penalties, and interest.

2. GST/HST and QST

If the corporation collected sales tax from customers but failed to remit it, directors can be assessed personally. The same applies to Quebec QST.

3. Penalties and Interest

Directors can also be held liable for penalties (late filing, failure to remit, gross negligence) and interest accumulated on these tax balances.

4. Other Government Remittances

In Quebec, CNESST premiums or certain provincial payroll obligations may also fall under director liability provisions.

The Due Diligence Defence

Under Canadian law, directors can avoid personal liability if they prove they exercised due diligence. This means demonstrating that they took reasonable steps to ensure the corporation was compliant. Evidence may include: reviewing monthly remittance statements, ensuring bookkeeping accuracy, hiring qualified accountants, making payments on time, correcting errors immediately, monitoring cash flow, and responding to CRA notices. Passive or inactive directors cannot claim they “didn’t know”—courts reject this defence.

How CRA Enforces Director’s Liability

CRA must follow a specific sequence:

1. Attempt to collect from the corporation

2. Confirm the corporation is insolvent, dissolved, or uncollectible

3. Issue a Director’s Liability Assessment (DLA)

4. Serve the director personally via registered mail or bailiff

5. Begin personal collections—bank freezes, wage garnishment, liens
   Directors have 90 days to object. If no objection is filed, CRA may pursue full enforcement.

Resignation Does Not Always Protect You

Resigning as a director does not eliminate liability for past obligations. CRA can assess a director up to two years after they resign. A director remains exposed for unpaid GST/HST, payroll, and related penalties incurred during their tenure.

Shadow Directors

You may be considered a director even if not legally appointed. Signs include having signing authority, making financial decisions, or acting as a de facto manager. Shadow directors can also be held personally liable.

How to Defend Against a Director’s Liability Assessment

1. File a Notice of Objection (within 90 days)

Argue that CRA did not meet collection requirements or that you exercised due diligence.

2. Provide Evidence of Due Diligence

Show bookkeeping records, remittances, professional advice, board minutes, payment attempts, or oversight efforts.

3. Challenge CRA’s Collection Efforts

CRA must prove they attempted collection from the corporation first.

4. Correct Underlying Corporate Assessments

Disputing the corporation’s GST/HST or payroll assessment can reduce director liability.

5. Seek Legal Support if Needed

Director liability disputes often proceed to Tax Court, requiring structured arguments.

Risk Factors for Director’s Liability

• Cash-flow shortages

• Poor bookkeeping

• Inconsistent remittances

• Ignoring CRA letters

• Relying on inexperienced staff

• Unreported GST/HST

• Business downturns

• Rapid growth without financial controls
  These increase the risk of personal assessment.

How to Prevent Director’s Liability

Monitor GST/HST and payroll remittances monthly, maintain clear financial controls, hire qualified accountants, stay current with CRA filings, attend board meetings, obtain liability insurance, and resign formally if no longer active.
Directors of struggling companies should act quickly rather than letting liabilities accumulate.

Mackisen Strategy

At Mackisen CPA Montreal, we help directors defend against liability assessments by analyzing CRA’s actions, preparing strong objections, proving due diligence, correcting corporate filings, and negotiating with CRA Collections. We also implement compliance systems to prevent future exposure.

Real Client Experience

A Montreal corporate director avoided a six-figure liability after we proved CRA failed to attempt proper collection from the corporation. A business owner successfully defended payroll liabilities through a due-diligence strategy we documented. A dissolved corporation’s directors reduced their liability substantially after our objection exposed errors in CRA’s assessment.

Common Questions

Can CRA take my personal assets? Yes—if a DLA is issued and upheld. Is ignorance a defence? No. Can directors be liable after resignation? Yes—up to two years. Can I avoid liability by dissolving the company? No—CRA can still assess.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal protects directors from personal liability through strategic objections, compliance reviews, and evidence-driven defence. We ensure CRA follows the law and that directors receive fair treatment.