What is the due diligence defence and how can Ontario directors use it to avoid personal liability?

The due diligence defence allows a director to escape personal liability — most commonly for unremitted source deductions or HST — by demonstrating that they exercised the care, diligence, and skill that a reasonably prudent person would have exercised in comparable circumstances to prevent the failure to remit. The defence is available under the federal Income Tax Act and the Excise Tax Act, and courts have developed a substantial body of case law applying it.

What the defence requires in practice depends on the circumstances. An inside director — someone actively involved in managing the company — is held to a higher standard than an outside director who has less access to operational information. Courts look at whether the director had or sought access to financial reporting, whether they asked questions about payroll remittance compliance, whether they identified warning signs of financial trouble and responded appropriately, and whether they had systems in place designed to prevent remittance failures.

Simply being a passive director or trusting others without any oversight mechanism rarely satisfies the defence. At the same time, courts have found the defence made out where a director was genuinely uninvolved in financial management, had no reason to suspect a problem, and acted promptly once a problem became apparent. If you are a director who suspects remittance problems, document what you do immediately — contemporaneous records of your response are valuable evidence if a CRA assessment follows.