Two Director Assessments, Two Different Statutes, One Outcome

The situation

Donovan worked full-time as an investment advisor. On the side, together with a colleague, he had incorporated a small placement business a few years earlier that matched independent contractors — mostly locum physicians and part-time financial consultants — with clinics and firms across the Burlington area that needed short-term coverage. It was a gig-economy business by design: the corporation billed the client organizations, paid the contractors, and kept a margin in between. Winston, a specialist physician, came on as the second director not long after incorporation, largely as a source of clinical credibility and referrals; he had little involvement in day-to-day operations and trusted Donovan and the corporation's bookkeeper, Ifrah, to run the finances.

For its first two years the business ran cleanly. Then a stretch of rapid growth — more contractors, more clients, more invoicing volume — outpaced the corporation's back-office capacity. Ifrah, working part-time, fell behind reconciling the books. Payroll source deductions withheld from the corporation's few employees, and HST collected on the placement fees charged to client organizations, both began accumulating in the corporation's general operating account instead of being remitted on schedule. Winston stepped back from the corporation about a year into that stretch, resigning formally as director to focus on his medical practice, though he remained a shareholder. Donovan stayed on and eventually discovered, during a year-end review, that both remittance streams were substantially behind — a discovery that arrived only weeks before the Canada Revenue Agency opened a payroll and HST audit of the corporation.

The legal problem

The audit confirmed what Donovan had found: the corporation owed roughly $310,000 in unremitted payroll source deductions, interest and penalties, and separately, roughly $430,000 in unremitted HST, interest and penalties. The corporation itself had limited assets left to pay either amount, so the CRA moved to collect from the people behind it. Both Donovan and Winston received personal assessments holding them jointly and severally liable as directors — Donovan for both amounts, Winston for both amounts as well, despite having resigned before the audit began.

These were two separate legal claims dressed up as one problem, and the distinction mattered enormously. Payroll source deductions and HST are both trust funds — money an employer or vendor collects on the government's behalf and holds in trust rather than as its own — but the director liability provisions covering them sit in two different statutes with two different tests. The Income Tax Act allows the CRA to assess a director personally for unremitted payroll deductions unless the director exercised the degree of care, diligence and skill a reasonably prudent person would have exercised to prevent the failure. The Excise Tax Act contains a near-identical due diligence standard for unremitted HST, but it also carries a strict limitation: a director cannot be assessed for a corporation's HST failure more than a fixed period after the day they ceased to be a director. Treating the two assessments as a single dispute, or arguing only due diligence and ignoring the timing question for Winston's HST assessment, would have left real defences on the table.

There was a further complication specific to Winston. He had resigned as director well before the worst of the shortfall accumulated, but resignations are only effective for liability purposes if they are properly documented and filed — a director who simply stops showing up without a formal resignation on the corporate record can remain legally a director indefinitely, still exposed to whatever accrues afterward.

What we did

1. Pulled the corporate minute book and confirmed the resignation date. We obtained the corporation's records and confirmed Winston had filed a proper written resignation with the corporation, effective on a specific date, and that the corporation had updated its own records accordingly. That date became the anchor for everything that followed.
2. Separated the two assessments into two distinct legal analyses. Rather than responding to the CRA with a single combined objection, we treated the payroll assessment and the HST assessment as two cases sharing a fact pattern but governed by different statutes, different tests, and — for Winston — a different outcome entirely.
3. Tested the HST assessment against Winston against the limitation period. We calculated the gap between Winston's confirmed resignation date and the date the CRA issued its HST assessment against him. It fell outside the window the Excise Tax Act allows, which meant the HST assessment against Winston was out of time regardless of anything else — a complete defence that did not depend on due diligence at all.
4. Built the due diligence record for Donovan's payroll assessment. For the payroll deduction assessment, timing offered no shortcut, since Donovan remained a director throughout. We reconstructed the oversight measures Donovan had put in place before the shortfall — monthly payroll reports he reviewed, a standing instruction to Ifrah to remit source deductions before other payables, and his own escalation once he found the books were behind, including bringing in outside bookkeeping help within weeks of discovery.
5. Corrected the HST calculation underlying Donovan's own assessment. Reviewing the CRA's working papers, we found the audit had applied HST to a portion of the placement fees that were properly pass-through reimbursements to contractors, not consideration for a taxable supply by the corporation, and so should not have been included in the corporation's taxable revenue at all. Recalculating the base reduced the HST figure attributable to the corporation, and by extension the amount Donovan could be assessed for as director.
6. Submitted separate representations to the CRA's appeals division for each assessment. Winston's package led with the limitation bar and asked that the HST assessment against him be vacated as untimely, with the due diligence argument as a fallback. Donovan's package led with the corrected HST calculation and the documented oversight system, addressed to the payroll assessment and the recalculated HST assessment separately.

The outcome

The CRA appeals division accepted the limitation argument for Winston without needing to reach the due diligence question. Both assessments against him — payroll and HST — were vacated in full, since the payroll deduction provision in the Income Tax Act contains a comparable time limit tied to a director's departure, and his resignation predated both assessments by more than the permitted window on the corrected timeline the minute book established.

For Donovan, the payroll assessment of roughly $310,000 was withdrawn entirely once the appeals officer reviewed the documented oversight system and the prompt corrective action taken on discovery — the same kind of evidence that satisfies a due diligence defence for any trust-fund assessment. The HST assessment fared differently but still favourably: the corrected calculation reduced the amount properly attributable to the corporation by roughly $320,000, leaving Donovan personally liable for approximately $110,000, which he arranged to pay through a structured plan directly with the CRA rather than contest further, given the underlying corporate liability was genuine and the calculation was no longer in dispute.

Of the roughly $740,000 in combined assessments the CRA had raised against the two directors, Winston's full exposure and the bulk of Donovan's were eliminated, and what remained was reduced to a manageable, accurately calculated figure. The case was resolved entirely through the CRA's internal objection and appeals process, without either director needing to file an appeal with the Tax Court of Canada.

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