Author: Kris Gurprasad

Statutory Framework for Directors’ Tax Liability

Directors of Canadian corporations face personal liability if their company fails to remit certain taxes. Under Income Tax Act (Canada) (ITA) subsection 227.1(1) and Excise Tax Act (Canada) (ETA) subsection 323(1), directors are jointly and severally liable with the corporation for unremitted employee source withholdings (payroll deductions) and net GST/HST, including interest and penalties. Both statutes provide a due diligence defence in virtually identical terms: a director is not liable if they “exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.” This statutory defence places the onus on directors to show they took proper steps to prevent the company’s failure to remit. The scope of this defence -and the standard of care it entails – was sharply defined by the Federal Court of Appeal in Canada v. Buckingham, 2011 FCA 142 (“Buckingham”).

Buckingham v. Canada (2011 FCA 142): Objective Standard and the Duty to Prevent Non-Remittance

In Buckingham, the Federal Court of Appeal clarified the standard of care for the due diligence defence and underscored that a director’s duty is oriented toward preventing failures to remit, not merely addressing them after the fact. The case involved a director (Mr. Buckingham) whose company fell into serious financial trouble. He undertook extensive efforts to keep the business afloat – seeking new capital, cutting costs, pursuing mergers – but, in the interim, the corporation stopped remitting payroll deductions and GST/HST. The Tax Court had partially absolved Mr. Buckingham (finding his defence succeeded for payroll deductions but not for GST), but on appeal the FCA found him liable for all unremitted amounts.

Objective standard: The FCA held that the standard of care in ITA s.227.1(3) and ETA s.323(3) is strictly objective. This marked a departure from the earlier “objective-subjective” approach in Soper v. Canada (FCA, 1997), which had allowed consideration of a director’s personal knowledge and attributes. The Court explicitly stated that Soper’s mixed standard “has been replaced by the objective standard laid down by the Supreme Court of Canada in Peoples Department Stores”. In other words, the director’s conduct is measured against the actions of a reasonably prudent person in similar circumstances, not against the director’s own background or subjective good intentions.

Preventing the failure vs. curing it: Buckingham also refocused the due diligence inquiry on pre-emptive action. The Court criticized the trial judge for applying a “reasonable business decision” or business judgment approach (drawn from general corporate law in Peoples), instead of the correct statutory test which demands that “the director’s duty of care, diligence and skill be exercised to prevent failures to remit.” The FCA stressed that a director’s foremost duty in this context is to prevent the remittance failure in the first place, rather than simply to remedy it later. Mr. Buckingham’s defence failed because his efforts, however earnest, were directed at rescuing the company and paying creditors after tax defaults had already occurred, instead of ensuring the remittances were made on time. The Court noted that once his company began diverting funds from the tax obligations, his subsequent attempts to catch up were “curative rather than preventive” and thus fell short of the statutory due diligence standard.” Crucially, Buckingham held that the due diligence defence cannot be used to excuse a decision to keep a struggling business operating at the expense of using trust tax monies for cash flow. The judgment made clear that this is precisely the scenario the director-liability provisions are meant to avoid. Quoting the decision, the defence “must not be used to encourage such failures by allowing a care, diligence and skill defence for directors who finance the activities of their corporation with Crown monies, whether or not they expect to make good on these failures to remit at a later date.” In Mr. Buckingham’s case, once he chose to use the proceeds of asset sales to continue operations – knowing that source deductions and GST would not be remitted – he “transferred the risk associated with the asset transaction from [the company] to the Crown,” and at that point his due diligence defence was no longer sustainable. The Court pointedly observed that had the director ceased operations earlier or resigned, thereby avoiding further unremitted tax accruals, he might have been in a better position to avoid personal liability.

No absolute liability: While Buckingham set a high bar, it also affirmed that directors’ liability is not absolute. Parliament provided the due diligence escape hatch, so courts must not interpret the law in a way that makes every failure to remit automatically a director’s personal fault. The FCA rejected any suggestion that because trust taxes (especially GST) are collected from third parties, a director could never be diligent unless remittances were perfect – that would effectively eliminate the defence. Instead, each case must examine whether the director did everything a reasonably prudent person would have done to avoid the company’s default. If so, the defence can still succeed and shield the director, even if the corporation ultimately failed to remit. In short, Buckingham confirmed that a corporation’s tax default does not automatically equal director negligence, but the onus is squarely on directors to prove their vigilant oversight or timely corrective measures to prevent a failure.

Post-Buckingham Appellate Developments: Chriss, Ahmar, and Others

Subsequent Federal Court of Appeal decisions have reinforced and built upon Buckingham’s principles. Notably, in Canada v. Chriss, 2016 FCA 236, the Court applied the objective due diligence test to directors who attempted to avoid liability by resigning (or believing they had resigned). In Chriss, two individuals argued they were not liable for a company’s unremitted payroll taxes because they had effectively resigned years earlier. The FCA disagreed – their resignations were never properly executed or delivered, so they remained directors during the default period. The Court then considered if their belief that they were no longer directors could constitute due diligence. Citing Buckingham, Justice Rennie reiterated that the due diligence defence is assessed on an objective standard – i.e. against the conduct expected of a reasonable person in similar circumstances. A “reasonable director” would not casually assume an oral resignation or unsigned draft was effective; he or she would insist on proper formalities and confirmation. The FCA held that a director’s unilateral subjective belief in having resigned, without taking all steps a prudent person would take to ensure it, does not meet the high threshold for due diligence. In the Court’s words, “a director cannot raise a due diligence defence by relying on their own indifferent or casual attitude to their responsibilities”.

Chriss also addressed a common argument when companies fail: that the directors lost de facto control of the company’s finances to a creditor or third party, leaving them unable to cause the tax payments. The FCA acknowledged that prior cases (e.g. Canada v. McKinnon, 2000 FCA 338; Moriyama v. Canada, 2005 FCA 207) have relieved directors of liability where an outsider (like a secured lender) had legally seized control of the company’s accounts, genuinely preventing the directors from remitting funds. However, the Chriss appellants were not in that situation – although a creditor/investor had influence and had promised further funding, the corporate directors still retained ultimate authority over how available funds were used. The Court drew a clear line: unless a director is effectively stripped of power by external forces, they remain responsible for the decision to pay (or not pay) the Crown. Even facing pressure to pay other bills, a director cannot justify using money owed to the government for other purposes absent a truly involuntary inability to pay.

More recently, in Ahmar v. Canada, 2020 FCA 65, the Federal Court of Appeal reaffirmed the hard line against using government withholding funds as a float for a failing business. Mr. Ahmar was the sole director of a construction company that ran short of cash. He consciously decided to defer HST remittances and instead used incoming revenue (and even his personal funds) to continue operations in hopes of a turnaround. When the CRA assessed him, he invoked due diligence, arguing that keeping the company alive was a reasonable strategy that might ultimately have allowed all creditors (including CRA) to be paid. The FCA flatly rejected this argument. Ahmar underscores that the due diligence defence will fail when a director knowingly uses or withholds tax money to pay other creditors.

Other appellate cases have consistently cited Buckingham as the authoritative framework. For example, in Balthazard v. Canada, 2011 FCA 331, the FCA applied Buckingham to a GST remittance case, overturning a Tax Court judge who had implied that, because GST is collected from customers, a director could hardly ever claim due diligence for failure to remit. The Court of Appeal, pointing to Buckingham, held that this reasoning would effectively make directors insurers of tax debts and impose absolute liability, contrary to Parliament’s intent. Instead, the proper approach was to assess whether the director took all reasonable actions to prevent the failure – including using personal resources, making timely arrangements with tax authorities, etc. – and to only hold them liable if they fell short of that standard. The consistent theme in post-Buckingham jurisprudence is a strict yet principled interpretation: directors will be protected from personal liability only if they can demonstrate concrete, proactive steps directed at preventing tax defaults, and never if they passively allow defaults or willfully choose other priorities over tax compliance.

Conclusion

Ultimately, the Buckingham line of cases delivers a clear message to corporate directors and their advisors: ensuring tax remittances are made is a non-negotiable duty. Good intentions or general efforts to keep the company afloat will not shield a director if they allow the government’s money to be used as working capital. The due diligence defence remains available, but only for the diligent – those who can show concrete, timely and prudent actions aimed at preventing a failure to remit. Especially for directors of financially troubled companies, the prudent course may sometimes be to wind up or step down before tax obligations go unpaid, rather than soldiering on and risking personal liability.

When a corporation fails to remit its payroll withholdings or Goods and Services Tax/Harmonized Sales Tax (GST/HST) to the Canada Revenue Agency (CRA), the company’s directors can be held personally liable for those unpaid amounts in certain circumstances. Stepping down from a directorship does not automatically absolve someone of these tax obligations. In fact, Canadian tax law imposes a “two-year clock” on director liability: the CRA cannot commence an action against a former director for unremitted taxes more than two years after that individual has left the board. However, taking advantage of this time limit requires a proper and timely resignation. Complicating matters, even people who are not officially directors on paper but act like directors – so-called de facto directors – may find themselves on the hook as well. In this article, we explain when directors remain personally liable for unremitted payroll deductions and GST/HST, how resignation and the “two-year rule” work, and why de facto directors should also be cautious.

Directors’ Personal Liability for Unremitted Payroll and GST/HST

In Canada, certain tax debts of a corporation can follow directors home. Specifically, directors are personally liable for the company’s unremitted employee source deductions (payroll withholdings for income tax, Canada Pension Plan, and Employment Insurance) and for unremitted GST/HST collected from customers. These amounts are considered trust funds collected on the government’s behalf, so if the corporation fails to remit them as required, tax authorities treat it as a serious offense. The law (primarily the federal Income Tax Act (Canada) for payroll and Excise Tax Act (Canada) for GST/HST) allows the CRA to recover such debts from the directors in office at the time the remittances were due. All directors of the company during that period can be held jointly and severally liable, meaning the CRA may pursue any or all of them for the full amount outstanding.

That said, there are important preconditions and defenses built into the law. First, the CRA is generally required to attempt collection from the corporation itself before turning to directors. Typically, this means the CRA will try to seize corporate assets, enforce liens, or push the company into bankruptcy to obtain the tax money. Only if those efforts are unsuccessful (e.g. the company is insolvent, bankrupt, or defunct) will the CRA shift focus to the personal liability of directors. Second, directors have a statutory “due diligence” defense: if a director can prove that they exercised the degree of care, skill, and diligence to prevent the failure that a reasonably prudent person would have exercised, then the director is not liable for the unremitted tax. In practice, this generally means showing that you took proactive steps to ensure the company’s tax withholdings and filings were being handled properly – for example, by making inquiries, reviewing records, or objecting to risky financial decisions. A director who was duly diligent (or who resigned before the tax non-compliance occurred) has a strong defense against personal liability.

Finally, the CRA must move within a specific timeframe to hold a director liable. This is where the “two-year clock” comes into play, as discussed next.

The Two-Year Limitation Period

One of the most crucial protections for directors in these situations is the two-year limitation period. Under Canadian tax law, no action or proceeding to recover a company’s unremitted tax can be commenced against an individual more than two years after that individual last ceased to be a director. In simpler terms, the CRA cannot legally assess or sue a former director for a corporation’s payroll or GST/HST debts if over two years have passed since the person’s resignation from the board.

This rule effectively puts a timer on a director’s personal exposure. If you resign as a director and two full years go by with no director liability claim, you can no longer be held personally liable for earlier unremitted taxes of that company. The clock starts ticking from the date you “cease to be a director.” Importantly, if you never formally resign (or your resignation isn’t legally recognized), the clock never starts – leaving you indefinitely exposed. Likewise, if you resign but the CRA initiates a director liability assessment within the next two years, the matter can proceed even if the actual collection or court process extends beyond the two-year mark. The key is that the government’s action must begin within that two-year window.

Resigning sooner rather than later is therefore critical if the company is in financial trouble. The longer you remain a director of a tax-indebted corporation, the longer you remain personally at risk. By stepping down, you stop accumulating new personal liability for any future unremitted amounts, and you start the countdown on the limitation period. Conversely, delay in resigning could be costly – for example, if you stay on an extra year trying to help the business turn around, that’s one more year of potential unremitted GST/HST or payroll amounts for which you might be on the hook.

It’s worth noting that resigning does not erase liability for the time you were a director. You remain liable (subject to defenses) for any unremitted taxes that fell due during your tenure. The resignation’s main benefit is cutting off future exposure and eventually time-barring the CRA from coming after you for those past debts.

Avoid Being the “Last Director Standing”

A scenario to avoid is being the sole remaining director when others have resigned. If multiple directors served and all your co-directors resign before you, suddenly you become the last director left – effectively holding the bag for ongoing obligations. In that case, you would be solely responsible for any new tax remittances the corporation fails to make after the others’ resignation dates. Those former directors would still be liable for debts from their period in office (until their own two-year clocks run out), but you’d carry the responsibility going forward. If the company’s troubles continue, you might see its unpaid tax debts balloon while you are the only director – a highly risky position.

Proper Resignation: How to Start the Clock and Limit Liability

Resignation, to be effective for limiting liability, must be done properly. It’s not enough to verbally announce you’re quitting or to stop attending meetings – you need to follow the formal process required by corporate law so that you legally cease to be a director. Until you meet these requirements, the CRA will consider you a director on record (and your two-year clock won’t begin).

The exact steps to resign can vary slightly depending on the incorporation jurisdiction (e.g. under the federal Canada Business Corporations Act or Ontario’s Business Corporations Act), but generally they include:

• Deliver Written Notice: Prepare a written resignation letter and deliver it to the corporation’s registered office or an official company representative (such as the corporate secretary). This is typically mandated by law or corporate bylaws.
• Fulfill Any Other Legal Formalities: Follow any additional steps required by the incorporating statute or the corporation’s articles (such as receiving acceptance of the resignation if needed, though in most cases a director’s resignation is effective once delivered).
• Cease All Director Functions: Once you resign, do not continue to act in any capacity that could be construed as a director’s role. This means you should step back completely from decision-making control, stop representing yourself as a director, and avoid signing documents on behalf of the company. Remaining involved in a leadership capacity after resigning can blur the lines and potentially nullify the protection of your resignation (as explained in the next section on de facto directorship).

By resigning properly and promptly, you accomplish two things: (1) you cap your personal liability to the tax obligations that arose during your period of directorship, and (2) you trigger the two-year limitation period to start running as soon as you’re officially out.

De Facto Directors: Liability Without the Title

Even if you are not officially listed as a director of a corporation, you might still be treated as one for tax liability purposes if your actions and role in the company effectively mirror those of a director. The law captures these individuals under the concept of a “de facto director.” A de facto director is someone who acts in the capacity of a director – making high-level management decisions, influencing financial affairs, or holding themselves out as a company authority – without being formally appointed to the board. In the eyes of the CRA (and the courts), such a person may be deemed a director in fact, and thus can be held personally liable for unremitted payroll and GST/HST just like an official director would be.

It’s possible to become a de facto director by accident, without realizing it. For example, consider a spouse or business partner who has no official title but regularly handles the company’s finances, decides which bills get paid, or negotiates with CRA agents – all while the “true” directors are passive or absent. That person might be seen as a de facto director. Officers or employees with significant authority, or former directors who continue to run the show after resigning, are also at risk of being deemed de facto directors. The implication is clear: stepping down on paper is not enough if in practice you maintain control. The CRA (and later, a judge) will look at substance over form – who was actually directing the business?

Crucially, de facto directors have the same two-year limitation protection and due diligence defenses as formal directors. The law doesn’t explicitly name “de facto” directors, but courts interpret the directors’ liability provisions to apply to them in order to prevent individuals from evading responsibility by staying in the shadows. Practically, this means if you stop acting as a director (even if you never were one officially) and fully step away from the company’s management, a two-year clock starts running just as it would for a formally resigned director. After two years of not being involved in that de facto capacity, you cannot be assessed for those past liabilities.

Conclusion: Protect Yourself as a Director

Serving as a director comes with serious responsibilities – including potential personal responsibility for certain unpaid taxes. If your corporation is struggling to meet its payroll remittance or GST/HST obligations, it’s essential to be proactive in managing your exposure. If you find yourself in a difficult position regarding director’s liability for unremitted taxes, don’t hesitate to seek out expert guidance and protect your personal financial well-being.

If you’re a corporate director in Canada, you could face personal liability for certain unpaid tax debts of your company. The Canada Revenue Agency (CRA) can assess directors personally for unremitted GST/HST and payroll source deductions (income tax, CPP, EI) under section 227.1 of the Income Tax Act (Canada) (ITA) and section 323 of the Excise Tax Act (Canada) (ETA). However, there is an important safeguard for responsible directors: the due diligence defence. This article explains what a CRA director’s liability assessment is, how the due diligence defence works under Canadian law, and practical strategies for proving due diligence.

What Is a CRA Director Liability Assessment?

A director’s liability assessment is a tool the CRA uses to collect certain corporate tax debts from a company’s directors personally. If a corporation fails to remit trust funds like employee withholdings or GST/HST collected, the CRA becomes an “involuntary creditor” and can pursue directors for the unpaid amounts. Typically, this happens with unpaid payroll deductions (income tax, CPP, EI that were deducted from employees’ pay) or unremitted GST/HST that was collected from customers. Before the CRA can tap directors, though, three conditions generally must be met:

• Corporate Default & Execution: The company has failed to pay the amounts, and the CRA has tried to collect from the company (e.g. by seizing assets or in bankruptcy) without success.
• Two-Year Limit: The CRA must issue the director assessment within two years of the person ceasing to be a director.
• Lack of Due Diligence: The director is unable to demonstrate “due diligence,” meaning they did not exercise the degree of care, diligence, and skill to prevent the failure that a reasonably prudent person would have in similar circumstances.

Understanding the Due Diligence Defence

The due diligence defence is a statutory protection codified by subsection 227.1(3) ITA and subsection 323(3) of the ETA. The defence generally provides that if every reasonable measure was taken to avoid the failure to remit, a director should not be personally liable. But this defence has limits and has been interpreted strictly by the courts. Key points to understand:

Objective Standard of Care:

The standard for due diligence is largely objective. In the leading case, Canada v. Buckingham (FCA 2011), the Federal Court of Appeal held that the director’s conduct is measured against what a “reasonably prudent person” in similar circumstances would have done.

Timing – Prevention, Not Cure:

Due diligence is about preventing the failure to remit, not fixing it afterward. Courts draw a line at the moment when things start to go wrong. The clock starts when a director knew or ought to have known the company was in financial trouble. From that point on, a prudent director would actively try to avert a remittance failure. If you only took action after the taxes went unremitted (for example, negotiating a payment plan with CRA once arrears piled up), that’s considered “curative” rather than preventive and usually won’t satisfy the due diligence test.

No Using CRA as a Bank:

A common scenario is a company in a cash crunch that uses the withheld taxes to pay suppliers or keep the lights on, intending to catch up later. Courts have repeatedly rejected due diligence claims in this scenario. The law was designed precisely to prevent directors from financing operations with money owed to the Crown.

Active Oversight is Required:

Being a passive director is dangerous. The ITA and CRA guidance make clear that all directors – even volunteers or nominal directors – are expected to actively ensure tax compliance. You cannot hide behind “I left it to my accountant” or “I was just an outside director”. The law does not distinguish between hands-on and absentee directors. In fact, if you delegate bookkeeping or tax duties, you still must monitor and verify that withholdings and remittances are being made. Failing to ask questions or to implement basic controls can sink a due diligence defence. For example, in Newhook v. The Queen, a director who relied on an accountant was still found liable because he did not oversee or review the accountant’s work.

Experience and Skill Level:

While the standard is objective, courts do consider the context and the director’s role. A more experienced businessperson may be expected to foresee and address issues that a novice might not. In Hall v. The King, the Tax Court noted the director was an experienced entrepreneur and held him to a higher standard of diligence than a brand-new director. Similarly, if you have an accounting or legal background, you might be held to knowing more about compliance. Conversely, genuine incapacity might be a factor: recent cases suggest that serious mental or physical illness could excuse a director’s inaction, but only if it truly made them incapable of understanding or performing their duties. This is a high bar – generally, partial impairment or stress is not enough to succeed with due diligence on that basis.

Practical Strategies to Prove Due Diligence

If you are a director and want to protect yourself (or if you’re facing a director’s liability assessment and need to build a defence), here are practical steps and proof strategies:

1. Implement Clear Internal Controls:

From day one, set up a system to ensure tax remittances are made. For example, maintain a separate account for payroll withholdings and GST collections. Treat that money as untouchable for other expenses. Regularly check that payments to the CRA are scheduled and executed. Document these procedures in board meeting minutes or internal memos. Showing that you established a reasonable system is strong evidence of diligence.

2. Monitor and Document Compliance:

Don’t just trust – verify. Require that your CFO, bookkeeper or payroll service provide you with monthly reports on all source deduction and GST remittances. Follow up on any anomalies immediately. Keep emails or signed reports that confirm remittances have been made each period. If you’re a non-active director, make inquiries periodically in writing. CRA expects directors to maintain effective communication and be aware of what’s happening in the company.

4. Plan for Financial Stress:

If the business hits a rough patch, prioritize tax remittances in your cash flow. It can be tempting to pay suppliers or wages first, but remember that Crown debts are special. Consider speaking with your bank about a bridge loan or line of credit that covers making CRA remittances on time.

5. Don’t Delay Difficult Decisions:

If it becomes clear the company cannot meet its tax obligations, exercise your duty by taking decisive action. That might mean cost-cutting, temporarily holding back other payments to make the remittance, or even ceasing operations if continuing would rack up unremittable tax debts. The courts praise directors who act quickly to address tax arrears. Conversely, the longer you let a tax debt slide, the more it looks like you were using CRA as an unofficial line of credit.

6. Keep Evidence of Your Diligence:

In a dispute, you’ll need to prove what you did. Keep copies of relevant documents: bank statements showing separate tax accounts, correspondence with accountants or CRA, meeting minutes where tax compliance was discussed, emails where you urged timely remittances or raised concerns about cash flow, etc. If you ever directed someone to make a payment or raised a red flag about falling behind, record it. Also log any professional advice you sought – for example, if you consulted a tax lawyer or advisor when trouble started, that shows proactiveness.

7. Use Professional Help Strategically:

Engaging a tax lawyer early can bolster your due diligence story. Not only can a lawyer advise on how to manage or dispute a director’s liability, but the fact that you sought expert help is evidence that you took the issue seriously. If a director’s liability assessment is proposed, respond to the CRA’s pre-assessment letter. This is often a last chance to persuade CRA officials that you exercised due diligence, potentially avoiding the assessment. A lawyer can help frame your response effectively, citing the evidence of your actions.

Consider Resignation if Necessary:

As a last resort, if you realize you cannot prevent further tax arrears and the business is failing, you might choose to resign as director. Resignation won’t absolve you of liability for amounts that became due while you were a director, but as noted, if you’re no longer a director for 2 years, the CRA cannot assess you for new amounts.

Conclusion

Facing a CRA director’s liability assessment is stressful, but knowing about the due diligence defence gives you a fighting chance if you truly acted responsibly. The courts have set a high bar for this defence – it’s not enough to show you were well-intentioned or busy with other matters. You need to demonstrate concrete actions and vigilance, especially once your company started struggling financially. Many honest directors have fallen short of this standard simply by delaying tough choices or failing to document their efforts. The key lessons are: be proactive, stay informed, document everything, and never assume CRA will wait while you sort things out.