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.
