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 The Court explicitly stated that Soper’s mixed standard “has been replaced by the objective standard laid down by the Supreme Court of Canada in Peoples Department Stores”.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.
