FAQ — Directors’ Liability Assessments (Ontario)
FAQ — Directors’ Liability Assessments (Ontario)
This FAQ deals with the Income Tax Act (Canada) (ITA) and Excise Tax Act (Canada) (ETA), and adds resignation timing under the Business Corporations Act (Ontario) (OBCA).
Table of Contents
Core Concept
What is a Directors’ Liability Assessment (DLA)?
It is a CRA assessment that makes a director personally liable for a corporation’s unremitted GST/HST and source deductions, plus penalties and interest.
What statutes create this liability?
Section 227.1 of the ITA covers source deductions; section 323 of the ETA covers GST/HST. Both impose joint and several liability.
Are regular corporate income taxes included?
No. Liability targets trust-type amounts, not ordinary Part I corporate income tax.
Which payroll items are in scope?
Income tax withholdings, CPP, EI, and certain non-resident withholding amounts.
Are directors liable for penalties and interest too?
Yes. Liability includes principal, penalties, and interest.
Does it matter if the corporation is a for-profit, NPO, or charity?
No. The provisions apply to any corporation.
Who Can be Assessed
Can “passive” or “outside” directors be assessed?
Yes. The statutes do not distinguish based on activity level.
What about “de facto” directors?
People who act like directors, even if not properly appointed, can be liable.
Are newly appointed directors liable for past periods?
They are liable only for failures during their tenure, not for earlier failures.
Can former directors be assessed?
Yes, but subject to a strict two-year limitation, discussed below.
Can every director be assessed for the full balance?
Yes. Liability is joint and several; CRA can collect up to 100% once, across all debtors.
Can a director who pays recover from co-directors?
Yes. Statutes give a right of contribution against other liable directors.
Preconditions Before CRA Can Assess You
Must CRA try to collect from the corporation first?
Yes. CRA must show an unsatisfied execution or corporate insolvency/dissolution or bankruptcy.
What is an “unsatisfied execution”?
It means the Crown registered the corporate debt in court and could not collect through enforcement.
Does corporate bankruptcy affect director exposure?
Yes. It is one of the statutory preconditions that allows the CRA to pursue directors.
Does a payment plan for the company block a DLA?
No. CRA may assess directors to preserve limitation periods even during negotiations.
Will CRA warn me first?
Often, yes, but the CRA doesn’t have to. CRA may issue a pre-assessment proposal; if you do not respond, it may assess.
Can CRA assess multiple directors for the same debt?
Yes, but it cannot collect more than 100% in total.
Time Limits and Ontario Resignation Rules
What is the two-year rule under the ITA?
No “action or proceedings to recover” a director amount may start more than two years after the person last ceased to be a director.
What is the two-year rule under the ETA?
CRA cannot assess a director more than two years after the person last ceased to be a director.
When do I “cease” to be a director in Ontario?
Under subsection 121(2) of OBCA, your resignation is effective when your written resignation is received by the corporation, or at the later stated time in the resignation.
Is filing Ontario Form 1 enough to resign?
No. Form 1 is notice to the registry; you still need to deliver a written resignation to the corporation. Courts have emphasized proper delivery.
What if I keep acting like a director after resigning?
You risk being treated as a de facto director and being exposed.
The Due Diligence Defence
What is the defence?
You are not liable if you exercised the care, diligence, and skill of a reasonably prudent person to prevent the failure.
Is the test objective?
Yes. Courts and CRA apply an objective standard, considering your circumstances.
What conduct best supports diligence?
Documented controls, verified remittances, and board oversight.
Does “I didn’t know” help?
No. Ignorance or blind delegation is not a defence.
Does cash-flow hardship excuse non-remittance?
No. Trust funds must be remitted first.
What if an employee misled me?
You still need evidence of robust controls and timely corrective steps.
Do minutes and bank proofs matter?
Yes. Keep minutes, remittance proofs, and bank confirmations to prove diligence.
Can I rely on external advisors?
Reasonable reliance helps, but you remain responsible for remittances.
Assessment, Objections, and Appeals
How will CRA notify me?
By a Notice of Assessment naming you.
How long do I have to object?
Generally, 90 days from the date the assessment is sent (ITA s.165(1); ETA s.301(1.1)).
Can I get an extension to object?
Possibly. Apply within one year after the 90-day deadline and meet statutory tests.
If CRA takes too long to decide, can I appeal?
Under the ETA, you can appeal to the Tax Court after certain timelines.
Can I dispute the underlying corporate amounts?
Yes. You can challenge quantum, periods, and penalties as part of your objection or appeal.
What if CRA misses the two-year clock?
The CRA is statute-barred from issuing the director’s liability assessment. Track resignation timing closely.
Does a DLA create a lien like other tax debts?
Yes. Once certified, CRA can register against property and use normal enforcement.
Where can I read CRA’s formal approach to DLAs?
See IC89-2R3. It summarizes preconditions, timelines, and diligence.
Collection and Payment While You Dispute
Does filing an objection stop CRA collection?
Not for trust-fund debts or GST/HST. The ETA has no collection-stay provisions, and ITA collection-stays do not apply to amounts required to be withheld.
Can CRA garnish wages or freeze bank accounts during a dispute?
Yes, for these debts. CRA policy confirms trust funds can be collected despite an objection.
Is there any relief for GST/HST during a dispute?
The Minister may postpone collection under subsection 315(3) of the ETA. Discretion is case-by-case.
Can CRA accept security instead of payment?
In some cases that may be possible.
Does interest continue to accrue?
Yes. It runs daily until paid or reversed.
What enforcement tools can CRA use?
Requirements to pay (garnishment), liens, set-offs, and seizures are available.
Where do “Collection Commencement Day” rules fit?
Those rules govern collection stays for income tax assessments but exclude trust amounts. See our explanation and paragraph 225.1(6)(b) of the ITA.
Special Scenarios
Are non-resident withholding failures included?
Yes. Subsection 227.1(1) of the ITA references obligations under section 215 of the ITA.
What about SR&ED or Part VII/VIII refundable taxes?
These may trigger exposure for directors’ liability.
Can D&O insurance cover a DLA?
Please check your insurance policy.
Are volunteer or NPO directors treated differently?
No statutory exemption exists; the same tests apply.
What if CRA already assessed another director?
CRA may assess several directors, but will not collect more than the total once.
Can bankruptcy wipe out a DLA?
It may be possible, but a bankruptcy trustee should be consulted.
Can CRA set off my personal refund against the DLA?
Yes. Statutory set-off applies to assessed balances.
Can a director seek contribution after paying?
Yes. Both ITA and ETA provide contribution rights.
Practical Prevention
What diligence should I do before joining a board?
Review remittance history, CRA account balances, and recent payroll/HST filings. Document your review.
What monthly steps reduce risk?
Verify every remittance, review CRA statements, and record oversight in minutes.
What if cash is tight?
Remit trust funds first. Negotiate with other creditors after.
What documents should I keep?
Resignation letter with proof of delivery, board minutes, bank confirmations, payroll/HST proofs.
What are my first steps after a DLA arrives?
An objection should be filed promptly. You should consult a lawyer immediately.
Who can help me plan the defence?
A tax litigator can frame the due diligence case and manage CRA strategy. (Speak to a Tax Lawyer)