Although a central purpose of incorporation is to create a shield between the company’s creditor’s and the personal assets of its principals, certain tax debts can be attached personally to the directors of a company. Trust amounts such as GST, CPP, and EI owed by the company can be assessed as personal debts of the directors in certain circumstances for up to two years from the date they last served as director.
In legal terms, the directors of a company have a duty of care to ensure that trust debts are paid, so they are held personally liable. And these trust amounts are approached differently under the law than corporate taxes as HST and source deductions are amounts that a business has literally collected or withheld on behalf of the government. A director of a business has a high standard with respect to these amounts. In order not to be held liable for the non-payment of trust amounts, the director must show that he or she exercised the degree of care and diligence with respect to the trust funds, that a reasonable director would have exercised under the circumstances. In other words, it is a “reasonable director” test. Ie: Under the same circumstances (for example, landlord will lock out the business and force its closure), would a reasonable director have used the trust funds to pay the landlord? Or would they not?
Generally, when the CRA does the analysis, they almost always arrive at the position that the director should NOT have allowed the HST money to be used to pay the rent.
But what reasonable director of a business would actively choose to pay the HST to the government instead of paying the landlord, knowing full-well that non-payment of the rent would result in the closure of the business? I would say that all directors would try to save their business with whatever resources are available. But the CRA generally interprets the “reasonable director” test as the “perfect director” test, which can’t be met.
In practice, the CRA views directors as guarantors of the debt, despite being reproached for this view by many tax court judges.
And before a director can be personally assessed for a corporation’s trust amount debts, the ability of the corporation to pay must first be exhausted. If the collections officer then assesses the director personally, this can be objected to and even appealed in Tax Court. However in practice, at the CRA level it is very difficult to escape director’s liability if the person has been a director of a company in the previous two years.
When collectors are trying to collect trust amounts from a corporation, and have hit a wall, their next step is generally to attempt to collect the amounts outstanding from the directors of the corporation. With sole proprietors the CRA is already collecting from the individual business owner as there is no distinction between the business and the person. However with corporations, the CRA has the power to pierce the corporate veil and directly assess the directors in certain circumstances.
Directors of corporations have a duty as an agent to the CRA to ensure that trust amounts are kept safe and are subsequently remitted as and when required. When directors fail in this duty, they can be held personally liable if certain conditions are met – one being that the director is assessed no more than two years after they cease to act as a director. So if a director resigned on June 5, 2017 and the CRA was threatening director’s liability in April of 2020, it would be too late to go after that particular director. However any other directors could be pursued for any tax debt which came to existence during their tenure as director – but not for debts which predated their involvement as a director.
In practice it is very difficult to successfully challenge a director’s liability assessment. There are a few defenses available, such as the two-year limitation period and the “due diligence” defense, which involves demonstrating that the director exercised the degree of skill and diligence that a reasonable director would have under similar circumstances. As discussed elsewhere in this book, it is a difficult bill of goods to sell.
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