The Due Diligence Defence to Director Liability in Ontario

Being a corporate director comes with a specific tax risk that catches many people off guard: if the corporation fails to remit source deductions or collected GST/HST, its directors can be assessed personally for the shortfall. This is commonly called director's liability, and it exists separately from the corporation's own tax obligations.

The law does not leave directors without a defence, though. If you exercised real, active diligence to prevent the failure, you may be able to avoid personal liability entirely. This is known as the due diligence defence, and understanding what it actually requires — not just what people assume it requires — matters long before a CRA assessment ever arrives.

What Director's Liability Actually Covers

Director's liability applies specifically to two categories of unremitted amounts: source deductions withheld from employees' pay (income tax, CPP, EI) and GST/HST the corporation collected but didn't remit. It does not generally apply to the corporation's own income tax debts in the same automatic way — the personal exposure is tied to amounts the corporation was holding in trust for the government and failed to hand over.

This liability can attach to directors regardless of whether they were actively involved in day-to-day finances, which is part of why the defence matters so much.

The Legal Test: What Counts as Due Diligence

The defence asks whether the director exercised the degree of care, diligence, and skill that a reasonably prudent person would have exercised in comparable circumstances to try to prevent the failure. It is not enough to say you didn't know, or that you trusted someone else to handle it — the test looks at what active steps you took, not your state of mind alone.

Courts distinguish between a director who was passive (simply unaware, uninvolved, or trusting without checking) and one who took active steps and still couldn't prevent the failure. The defence protects the second kind of director, not the first.

What Decision-Makers Look At in Practice

When assessing whether a director exercised due diligence, decision-makers commonly consider:

• Whether the director asked regularly about the status of remittances, not just once
• Whether the director had a system in place for monitoring payroll and GST/HST compliance
• What the director did once they learned (or should have learned) that remittances were falling behind
• Whether the director had genuine authority and information, or was excluded from financial decisions
• The director's role and expertise — a hands-on finance director is held to a different practical standard than an outside director with no financial background, though both must show real effort

Steps a Director Can Take to Build This Defence

• [ ] Request regular confirmation (not just assurances) that source deductions and GST/HST have actually been remitted
• [ ] Keep records of your inquiries and the responses you received
• [ ] Escalate — in writing — the moment you learn remittances are behind
• [ ] Consider resigning if the corporation continues to fall behind despite your objections and you have no ability to fix it
• [ ] Don't rely solely on a bookkeeper's or co-director's word without any independent verification

What Won't Work as a Defence

• "I wasn't involved in finances." Passive ignorance, without evidence of active steps to find out, generally isn't enough.
• "I resigned eventually." Resigning can limit future exposure, but it doesn't erase liability for remittances that were already overdue while you were a director.
• "The company was in financial trouble." Financial hardship of the corporation doesn't excuse a director from the diligence standard, even though it may explain why remittances fell behind in the first place.

Frequently asked questions