Director Assessed for the Company's Unpaid HST — Defence That Worked

The situation

Navdeep worked as a pharmacist, but for about three years he had also been a director of a small corporation that operated a compounding and delivery service on the side, run day to day by a business partner while Navdeep handled the pharmacy work and occasionally reviewed the corporation's numbers. The corporation collected HST — the harmonized sales tax charged on most goods and services in Ontario — from its customers and was required to remit it to the Canada Revenue Agency on a regular filing schedule.

The business struggled through its final eighteen months, losing a major supply contract and bleeding cash. It wound down and was dissolved without ever filing for bankruptcy. Roughly $210,000 in HST that had been collected from customers over several reporting periods was never remitted to the Canada Revenue Agency. Two years later, Navdeep received a notice of assessment addressed to him personally, in the amount of about $210,000 plus accumulated interest, bringing the total closer to $240,000.

He had assumed that once the corporation closed, its debts closed with it. That assumption is one of the most common and costly misunderstandings directors carry into a shutdown, and it is rarely tested until years later, when a letter arrives addressed to the director personally rather than to the business that no longer exists.

Navdeep's first instinct was that there had to be a mistake — he had never personally handled a dollar of the corporation's HST, never signed a remittance form, and had assumed his partner, who ran the operational side, had it under control. That instinct is understandable, but it is not a legal defence on its own, and the notice made clear the Canada Revenue Agency considered him personally responsible regardless of who had actually filed the paperwork.

The legal problem

Under the Excise Tax Act, the federal statute that governs HST, directors of a corporation can be held personally liable for HST the corporation collected but failed to remit — even after the corporation has dissolved. The liability attaches to anyone who was a director at the time the failure occurred, regardless of whether they handled the finances directly. A director does not need to have been dishonest, or even careless in the ordinary sense, for the Canada Revenue Agency to issue an assessment; the assessment is often the opening position, not a final judgment on fault.

The Excise Tax Act does give directors a defence: liability does not apply if the director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. This is often called a due diligence defence. It is available, but it has to be proven with facts — board minutes, correspondence, remittance records, evidence of what the director actually knew and did — not simply asserted after the fact.

The problem for Navdeep was that he had almost none of that documentation. He had trusted his business partner to handle remittances and had rarely asked questions. He had no board minutes, because the corporation had never really operated with formal governance. He had a vague memory of once asking whether HST was being paid and being told it was fine. That was not going to be enough on its own, and the assessment had already been issued — the defence would have to be built now, mostly from records other people held.

What we did

1. Confirmed the assessment was still within the objection window. A taxpayer who disagrees with an assessment has a limited period to file a formal objection, which pauses collection action and starts an internal review by the Canada Revenue Agency. Missing that window closes off the least expensive route to a resolution. Navdeep had acted quickly enough that the window was still open, though narrowly.
2. Verified the director liability assessment was timely. The Excise Tax Act also limits how long after a director stops being a director the Canada Revenue Agency can issue this kind of assessment. We confirmed the timing was within that limit, which meant the case would have to be won on the merits of the due diligence defence rather than on a procedural bar.
3. Reconstructed the corporation's financial history. We worked with Navdeep to gather bank statements, the corporation's accounting file, email correspondence with his business partner and the corporation's external bookkeeper, and whatever records the bookkeeper still held. This rebuilt a rough timeline of when remittances started falling behind and what was said about it at the time.
4. Found the evidence that mattered: two specific written exchanges. Buried in old email, Navdeep had twice asked his business partner directly, in writing, whether HST remittances were current, after noticing the corporation's cash position tightening. Both times he was told, in writing, that they were current and that a payment plan was already in place with the Canada Revenue Agency for a temporary shortfall. Written, dated questions followed by written, false reassurance are exactly the kind of evidence a due diligence defence is built on.
5. Filed a notice of objection with a detailed written submission. The submission laid out Navdeep's limited operational role, the specific inquiries he had made, the false reassurances he had received in writing, and the absence of any red flag that should reasonably have prompted him to dig deeper before the business partner's misrepresentations came to light. It argued that a reasonably prudent director in Navdeep's position — a part-time, non-financial director relying on a partner's direct assurances — would not have acted differently.
6. Addressed the gap directly rather than hiding it. The submission did not claim Navdeep had a sophisticated compliance system, because he did not. It argued instead that the standard for due diligence is not perfection; it is what a reasonably prudent person would do in the same circumstances, and a small operator relying on a partner's direct, repeated written assurances meets that bar even without formal board oversight.
7. Responded to a request for further information from the CRA appeals officer. Several months into the objection, the appeals officer assigned to the file asked for additional detail on Navdeep's role and the corporation's remittance history. We coordinated a further submission with supporting bank records showing the pattern of remittances made and missed, which corroborated the timeline already provided.

The outcome

After roughly ten months, the appeals officer accepted the due diligence defence and vacated the assessment in full. Navdeep was not required to pay the approximately $240,000 the Canada Revenue Agency had originally sought from him personally. The corporation's underlying HST debt was not erased — it remained a debt of the dissolved corporation, which by that point had no assets to collect against — but Navdeep's personal exposure ended.

The case turned on something narrow: two written questions and two written, false answers, kept by accident in an old email account rather than by design. Without them, the outcome would likely have gone the other way, because a director's genuine belief that everything is fine is not, by itself, due diligence. What matters is whether the director took active steps to verify that belief and can show it.

Navdeep's business partner was not part of this process and faced no consequence through it — the objection concerned only Navdeep's personal liability, not any dispute between the two of them, though the written record it surfaced would likely matter if Navdeep chose to pursue his former partner separately at a later date.

The file also underlined how much timing mattered. Had Navdeep waited past the objection deadline, or been unable to locate the two email exchanges before the corporation's email hosting lapsed, the same facts might have existed but been unprovable. A due diligence defence lives or dies on documentation that most directors never think to preserve until the assessment is already on their desk.

What you can learn from this