Director Liability for Unremitted Source Deductions and HST in Ontario

When a corporation stops sending money to the Canada Revenue Agency — whether it is employee payroll deductions or collected HST — the CRA does not simply write off the debt when the company closes. Federal tax law reaches through the corporation and holds directors personally responsible. This is one of the most significant personal tax risks facing directors of small and medium Ontario businesses, and it catches many people off guard.

This article explains how the director liability rules work under the Income Tax Act and the Excise Tax Act, what the due diligence defence requires, and what directors can do to reduce their risk. Note that these are federal obligations — they apply to all Canadian corporations, including those incorporated under the Ontario Business Corporations Act (OBCA).

What Amounts Trigger Director Liability?

Two separate streams of federal law create director liability for unremitted amounts:

Source Deductions Under the Income Tax Act

When a corporation pays employees, it is required to withhold amounts from each paycheque and remit them to the CRA. These source deductions include:

• Federal and provincial income tax withheld from employee pay
• Canada Pension Plan (CPP) contributions — both the employee's share and the employer's matching share
• Employment Insurance (EI) premiums — both the employee's share and the employer's share

If the corporation collects these amounts from employees (they are deducted before the employee ever sees the money) but does not send them to the CRA, the law treats this as holding money in trust for the Crown. The Income Tax Act makes directors jointly and severally liable for those amounts, plus applicable interest and penalties.

Unremitted HST Under the Excise Tax Act

Similarly, the Excise Tax Act makes directors liable for net tax (i.e., HST collected but not remitted) that the corporation fails to pay. HST collected from customers is not the corporation's money — it is collected on behalf of the government and must be forwarded. When a struggling company uses that HST money to pay rent, suppliers, or other creditors instead of the CRA, directors can be personally assessed for the shortfall.

This Is Strict Liability — With One Defence

The director liability regime under both statutes is effectively strict liability: if the corporation failed to remit, directors are presumptively liable. Unlike some legal obligations where the plaintiff must prove fault, here the corporation's failure to remit is enough to start the clock. The CRA issues an assessment; the director must respond.

There is one defence: due diligence.

A director escapes liability if they can show they exercised the degree of care, diligence, and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. This mirrors the duty of care concept in corporate law, but the threshold the courts have applied can be demanding. Simply not knowing about the failure is rarely enough. The question is whether you took active steps to prevent it.

The Certificate Step and Two-Year Limitation

Before the CRA can assess a director personally, the law requires the CRA to take two preliminary steps:

1. Obtain a judgment or certificate confirming the corporation's debt — this typically means either getting a court judgment against the corporation or registering a certificate in Federal Court.
2. Show the debt is uncollectible from the corporation — the execution must have been returned unsatisfied, meaning the corporation has no assets from which the CRA can recover.

Only once those steps are complete can the CRA assess the director directly.

There is also a critical two-year limitation period that runs from the date a director ceases to be a director. The CRA cannot assess a former director more than two years after they left the board. This limitation period is one of the most important planning considerations for directors who resign from struggling corporations — but it only helps if the resignation is valid and properly documented (more on this in our separate article on resigning as a director).

What Due Diligence Looks Like in Practice

Courts have distinguished between two kinds of directors when applying the due diligence defence:

Inside directors — those actively involved in day-to-day management — are held to a higher standard. If you are running the business or managing the finances, you are expected to know about remittance obligations and to ensure they are met.

Outside directors — those who are arms-length from operations — may have more room to argue due diligence based on reliance on management. But courts have still required outside directors to show they:

• Took steps to get basic financial information about the corporation's remittance status.
• Raised questions or concerns when they became aware of financial difficulties.
• Did not simply look away and hope the problem resolved itself.

The most protective steps a director can take include:

1. Confirming remittances are current as a standing item at board meetings — ask management to confirm, in writing, that CRA accounts are up to date.
2. Reviewing CRA correspondence directed to the corporation — letters from the CRA about overdue remittances are a warning sign that must trigger action, not be filed away.
3. Prioritizing remittances over other creditors when cash is tight — a corporation that pays its suppliers while falling behind with CRA is creating a serious director liability problem.
4. Consulting a lawyer or accountant immediately when the company falls behind — knowing about a remittance failure and doing nothing is far worse than knowing and acting.
5. Resigning promptly and validly if the board will not fix the problem and the situation is irreversible — but understand that resignation does not eliminate liability for amounts already owing at the time you leave. See our separate article on how and when to resign as a director.

Frequently asked questions