Director’s Liabilities – What are they and how do I prevent being on the hook?

A corporation director is responsible for ensuring the corporation is running responsibly, including paying its liabilities. 

They might not directly do payroll, but they are responsible for putting policies and procedures in place to ensure your employees get paid and that the corporation withholds and remits CPP and income taxes. They are also responsible for ensuring the corporation collects and remits GST to the government. 

What are the director’s liabilities? 

The most common director’s liabilities are related to unremitted source deductions, which include income taxes, employment insurance premiums, and Canada Pension Plan (CPP) premiums. 

Sometimes, a struggling corporation will opt to use unremitted deductions from wages or GST to continue operating instead of closing down in hopes of getting past the rough patch and back to success. If the corporation goes out of business, CRA can use the available collection remedies to pursue directors for these debts, along with interest and penalties.

When and how will I be assessed for these liabilities? 

It’s important to note that a director isn’t automatically assessed for these liabilities, and the CRA must go through a process to evaluate them personally. The CRA must follow three basic rules:

1. They need to show an inability to recover the amounts directly related to the corporation. 
2. They must issue the assessment against the directors within two years from when they ceased to be directors.
3. The directors did not exercise the degree of care, diligence, and skill (‘due diligence’) required to prevent the failure to deduct, withhold, remit, or pay.

Protecting Yourself from Director’s Liabilities

Director’s liabilities can only be assessed for two years since you were last a director, so it is vital to remove yourself as a director if you have stepped away from the business or when you are no longer operating the corporation. This puts a clock on how long CRA has to assess you, which might protect you from the assessment if CRA does not act within two years of your resignation. 

Furthermore, the Courts will consider various factors before deciding if you acted with the required due diligence. They will investigate your knowledge and capability as a business owner and take that into consideration. 

What can the CRA do when you owe them money?

Please look at this article for more information about CRA’s tools to collect tax debt. Also, find more resources from the Canada Revenue Agency here. 

Importance of education and proper business practices

Suppose you are currently a director of a corporation. In that case, it is important to familiarize yourself with the requirements to withhold and remit these deductions and ensure that a process and mechanism are in place to do this correctly and that this process is monitored and audited. If your corporation is struggling financially, this is especially important because you, as the director, may be liable if your corporation cannot remain solvent and closes its doors. 

Acting Early Gives You Additional Options for Repaying or Restructuring Your Debt

If you are worried about being assessed for director’s liabilities by the CRA, it is crucial to understand how this assessment will impact your personal finances and your ability to repay it from your assets and income. Considering your current and potential obligations owing to the CRA, we can help you get educated to take the empowered decision to move from financial distress to financial success. 

Don’t hesitate to contact us at 587-802-4461 to schedule a free consultation, or go to our website to book a free consultation with our incredible team.