Director Liability for a Corporation's Unpaid Tax in Ontario

Most people who incorporate a small business understand that incorporation creates a legal separation between themselves and the company. Personal assets, in theory, are protected from the company's debts. But there is a significant and often overlooked exception: when a corporation fails to remit certain taxes to the CRA, the directors of that corporation can be held personally liable for those amounts — including interest and penalties.

Director liability for corporate tax debt is one of the CRA's most powerful tools against tax non-compliance in closely held businesses, and it catches many Ontario business owners off guard. Understanding the rules — including the defences available — is essential for anyone who is, or is thinking of becoming, a corporate director.

What Taxes Can Trigger Director Liability?

Not every corporate tax debt creates director liability. The personal liability rules apply primarily to two categories:

1. Unremitted payroll source deductions

When a corporation pays employees, it is required to deduct income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums from each paycheque and remit those amounts to the CRA by specified deadlines. These are called source deductions — the money has already been withheld from employees but not sent to the government.

If a corporation fails to remit source deductions, the directors of the corporation can be assessed personally for the unpaid amount, plus interest and penalties.

2. Unremitted GST/HST

If a corporation collected GST/HST from its customers but failed to remit those amounts to the CRA, directors can again be held personally liable.

In both cases, the policy rationale is similar: the corporation was holding money that belonged to the government (or to employees, in the case of withholdings) and chose not to pass it along. The director liability rules treat directors as responsible for ensuring the corporation fulfills these trust-like obligations.

How Director Liability Arises: The CRA's Process

Before the CRA can assess a director personally, it must first establish that the corporation owes the tax. The CRA must also, in most circumstances, have taken steps to collect from the corporation — such as obtaining a certificate from the Federal Court for the corporate debt and attempting to execute on the corporation's assets — before pursuing the directors. As of writing, this is the general rule; verify the current requirements with a tax professional, as procedural details matter.

Once the conditions are met, the CRA issues a Notice of Assessment to the director personally — not the corporation. The director then has the same rights as any taxpayer assessed: the right to object and, ultimately, to appeal to the Tax Court of Canada.

Who Is a "Director" for These Purposes?

The term "director" is defined broadly. If you are listed as a director in the corporation's records — even if you were a passive investor, a spouse asked to sign incorporation documents, or someone who stepped down — you may be caught.

This is why it is critical to:

• Resign properly from a directorship if you are no longer active in the business (and document the resignation correctly)
• Understand that simply not acting like a director is not sufficient — formal resignation matters

The Defences Available to Directors

Director liability is not absolute. The Income Tax Act and the Excise Tax Act (for GST/HST) provide a statutory defence for directors who exercise the requisite degree of care.

Due diligence defence

A director is not liable if they can demonstrate that they exercised the degree of care, diligence, and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

What does this mean in practice? Courts have held that this requires directors to:

• Be aware of the corporation's remittance obligations
• Take positive, concrete steps to ensure remittances are made (not just ask someone else to handle it)
• Act promptly when they become aware of remittance problems — not wait and hope things improve

Being a passive director — signing documents without understanding the business, leaving everything to a co-director or accountant, and never asking questions about remittances — has generally not been accepted as a due diligence defence.

By contrast, a director who actively monitored cash flow, raised the alarm about remittance failures with co-directors and management, sought professional advice, and took steps to cause the corporation to catch up has a much stronger defence.

Limitation period

There is also a limitation period for director assessments. As of writing, the CRA generally cannot assess a director more than two years after they ceased to be a director of the corporation. Verify the current rule with a tax professional, as this deadline can be a complete defence if properly established.

Practical Steps to Protect Yourself

If you are a director of an Ontario corporation:

1. Know your remittance calendar. Source deductions and GST/HST have specific due dates. Know what they are and verify they are being met.

1. Get regular confirmation from your accountant that remittances are up to date. Don't just assume — ask for documentation.

1. Act immediately if you learn of a remittance default. The longer you wait after knowing about a problem, the weaker your due diligence defence.

1. Resign formally and correctly if you leave. A proper written resignation, delivered to the corporation (or filed with the corporate registry where required), starts your limitation period. Informal departures may not.

1. Be cautious about being a "nominee" director. Being listed as a director as a favour to someone else, without actually participating in governance, puts you at personal risk for corporate tax failures.

Frequently asked questions