The Board of Directors of a company are responsible for making decisions for the company. The directors manage or supervise the management of the business and affairs of the company.
The directors are elected by the voting shareholders of the company to fill this important role.
With the role come certain responsibilities and potential liabilities.
This article focusses on certain tax liabilities of a company imposed under the Income Tax Act (the “ITA”) and the Excise Tax Act (the “ETA”) for which directors of the company can be held personally liable. This article is not an exhaustive discussion of all potential corporate liabilities for which directors can be held liable but is focussed on certain tax liabilities for which directors can be held liable.
Directors’ Liability for Certain Tax Obligations
Directors’ Liability for Payroll Deductions
Under the ITA a company is required to withhold/deduct and remit amounts to the Canada Revenue Agency for salary, wages, benefits and payments out of various plans (“Payroll Deductions”).
If the company fails to withhold or deduct from remuneration (paid to a resident of Canada) an amount that is required to be withheld, the directors can be held personally liable for a penalty of 10 or 20 percent of the amount that ought to have been withheld and deducted plus any related interest.
If the company fails to remit an amount to the CRA that was withheld and deducted by the company as Payroll Deductions the directors can be held personally liable for the whole of the unremitted amount plus any related penalties and interest.
Directors’ Liability for Tax Obligations on Payments to Non-Residents
A company is required to withhold and remit certain amounts from payments made to non-residents of Canada. If a company fails to withhold or remit the required amount from a payment to a non-resident the directors of the company can be held personally liable for the whole of the amount plus any related penalties and interest.
Directors’ Liability for GST/HST Obligations
A company is required to collect and remit GST/HST under the ETA on taxable supplies made by the company. If a company fails to collect and remit the required amount of GST/HST the directors of the company can be held personally liable for the whole of the amount that ought to have been remitted plus any related penalties and interest.
De facto Directors
A person who is not technically a director of a company can be held personally liable as a director in certain circumstances. A person who is, in fact, exercising the responsibilities of a director can be held to be a de facto director. A person who plays a key role in a company or has ultimate decision making authority for the company will be at risk of being found a de facto director. The determination of whether a person is a de facto director is fact specific and requires analysis on a case by case basis.
Defences Against a Directors’ Liability Assessment
If you are personally assessed as a director of a company for the tax obligations of that company there are some potential defences that you should be aware of.
A director can only be held liable for tax obligations of the company if the person was a director “at the time the company was required to deduct, withhold, remit or pay the amount”. If your directorship had not yet commenced or you had resigned prior to the time that the company failed to meet its tax obligation, you should not be personally liable for that failure. Strict compliance with the requirements and procedure for resignation under the relevant corporate legislation is crucial. Documentation evidencing when your directorship commenced and ceased is extremely important.
Where a director “exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances” the director should not be personally liable for the tax obligations of the company. A due diligence defence is supported by examples of you acting prudently and being reasonably well informed as a director. You must show that you took active steps to ensure that the company would make its source deduction remittances.
Two Year Limitation Period
The CRA must commence proceedings to collect against a director within two years of when the director last ceased to be a director. This makes the documentation of your resignation as a director extremely important. The two year limitation period starts to count on the date of your resignation. A formal resignation may not be helpful if you continued to act as a de facto director after the date of formal resignation.
Not a Director
Sometimes a person is listed a director of a company despite the fact that he or she did not consent to be a director of the company. If you can show that you did not consent to be a director of the company and did not participate as a director of the company you may be able to dispute a directors’ liability assessment on the basis that you were not a director of the company.
CRA Did Not Attempt Collection Against Company
The Canada Revenue Agency is required to attempt collection against the company before it seeks to personally assess the directors of the company and recover from the directors. The CRA must show that (1) its execution against the company was returned unsatisfied; (2) prove a claim against the company in dissolution or liquidation; or (3) prove a claim against the company in bankruptcy.
Dispute the Underlying Tax Debt of the Company
A director can also dispute the validity of the underlying assessment against the company if the company did not do so. If the director can show that the underlying assessment was wrong, then the director’s own liability can be avoided.
There are significant obligations that come with being a director of a company and significant risk for liability. Understanding this risk and how to limit the risk is important for any director. If you are acting as a director of a company, or are at risk of being considered a de facto director of a company, it is important to understand the company’s tax obligations and your potential liability for certain tax obligations of the company. This should inform how you carry out your responsibilities of directorship.