The HST Assessment That Named the Director, Not Just the Company

The situation

Raymond ran a small software development company out of Guelph, the kind of business that lives and dies by cash flow between client invoices. The company had a handful of contract developers, a couple of long-standing enterprise clients, and Raymond as its sole director. For about a year and a half, the company had struggled through a slow stretch: two large clients paid late, a third disputed an invoice outright and withheld payment for months while the dispute was worked out, and the company's bookkeeper — a part-time contractor working remotely — fell behind on filings during a period when she was also dealing with a family health crisis. Harmonized Sales Tax, or HST, is the tax businesses collect from customers on most goods and services in Ontario and remit to the Canada Revenue Agency on a set schedule, generally monthly or quarterly depending on the size of the business. The company had been collecting HST from clients as invoiced, but by the time the shortfall was discovered, roughly $210,000 in collected-but-unremitted HST had built up across several reporting periods, as the cash that should have been set aside for remittance was instead used to cover payroll and contractor invoices during the tight months.

Raymond caught the problem himself, several months after it started, when he took over the bookkeeping personally and reconciled the accounts against the company's filing history. He immediately arranged a repayment plan with the CRA and began catching the company up, redirecting incoming client payments toward the arrears rather than new spending. The corporation was current on a voluntary payment arrangement within about four months. Raymond assumed that resolved it. It did not.

The legal problem

Under the Excise Tax Act, the federal statute that governs HST, corporate directors can be held personally liable for a corporation's unremitted HST if the corporation fails to remit and the director did not exercise the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. This is sometimes called a director's liability assessment. It exists because HST is trust money — the corporation collects it on the government's behalf — and the CRA can pursue directors personally when a corporation cannot or does not pay it back, rather than treating the shortfall purely as an unsecured corporate debt. It is a deliberate exception to the general rule that a corporation shields its directors from the company's debts, and it applies specifically to trust-fund amounts like HST and payroll source deductions rather than to ordinary corporate liabilities.

About seven months after Raymond's company had caught up on its remittances, he received a formal notice: the CRA was assessing him personally for the historical shortfall, plus interest, on the theory that as sole director he had not taken reasonable steps to ensure the company remitted HST on time. The corporation had already repaid the underlying amount through its payment arrangement, but director's liability assessments can proceed independently of a corporate repayment plan, and interest and penalties can accrue on the personal assessment even while the corporate debt is being paid down. Raymond was suddenly looking at a personal assessment that could attach to his own assets — his house, his savings, his RRSP — separate from anything the company owed.

The core question in a director's liability defence is not whether the company failed to remit — that much was not in dispute. It is whether the director exercised the standard of care a reasonably prudent person would have exercised to prevent that failure. That is a due diligence defence, and it turns entirely on what the director actually did, and what records exist to prove it.

What we did

1. Requested the underlying assessment details and the limitation clock. Director's liability assessments must generally be raised within a set period after a director stops being a director, and separately, the CRA must be able to show the corporate debt was properly established first. We confirmed Raymond remained a director throughout and that the corporate assessment underlying the personal one was validly raised, which meant the case would turn on the due diligence defence rather than a procedural bar.
2. Reconstructed a timeline of what Raymond actually knew and did. A due diligence defence lives or dies on documentation, not recollection. We worked with Raymond to rebuild, from bank records, emails, and the bookkeeper's own correspondence, a month-by-month picture of when remittances were made, when they slipped, and when Raymond became aware of the shortfall.
3. Gathered evidence of the oversight systems in place before the failure. We collected records showing Raymond had a functioning system for the eighteen months before the trouble started — a dedicated HST holding account the company used to segregate collected tax from operating funds, monthly bookkeeper reports Raymond reviewed, and a general practice of reconciling the HST account against filings. A system that worked for a long stretch and then broke down under specific, identifiable pressure supports due diligence far better than no system at all.
4. Documented the corrective action once the problem surfaced. The moment Raymond discovered the shortfall, he took over the bookkeeping personally, contacted the CRA proactively before any audit began, and negotiated a repayment arrangement the company then honoured in full. Courts and the CRA's own appeals officers weigh a director's response to discovering a problem almost as heavily as prevention — a prompt, transparent, and effective correction is strong evidence of a prudent person acting reasonably under the circumstances.
5. Prepared a written representations package for the CRA's appeals division. Rather than going straight to the Tax Court of Canada, which is slower and more expensive, we first pursued an objection through the CRA's internal appeals process, submitting the timeline, the segregated-account records, the bookkeeper correspondence, and the repayment history as a coherent due diligence submission, framed around the specific legal test the Excise Tax Act sets out.

The outcome

The CRA appeals officer reviewing the file agreed that Raymond had maintained a reasonable oversight system before the failure and had responded diligently once the shortfall was identified. The personal assessment, which by that point had grown to roughly $235,000 with accumulated interest, was withdrawn in full. Raymond remained responsible only for the corporation's own repayment arrangement, which by then was substantially complete.

The case never had to proceed to the Tax Court of Canada, which shortened the timeline considerably — the objection and review process took a little under a year from the date the personal assessment was issued, rather than the multi-year path a court appeal can involve. Raymond's personal exposure was avoided entirely, not reduced or negotiated down, because the underlying due diligence defence held up on its facts.

The corporation adopted a small change afterward on our recommendation: a second person, not just the part-time bookkeeper, now receives a monthly summary of the HST holding account balance against amounts collected, so a gap would surface faster the next time cash flow gets tight.

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