One Notice, Two Different Debts: A Director Assessment Untangled

The situation

Raymond and Angela ran a small incorporated staffing company out of St. Catharines that placed workers with local businesses on short-term contracts — call-centre representatives for a telemarketing firm one month, security guards for a warehouse the next. The business was steady but thin-margined: it collected fees from client companies, paid its placed workers, and was responsible for remitting both the income tax and other statutory deductions withheld from those workers' pay and the HST it charged on its invoices.

For about a year, the company had a bookkeeper named Nirosha handling remittances. When Nirosha left on short notice to take a position elsewhere, the handover was rushed. Raymond, who handled sales and client relationships, and Angela, who handled scheduling, both assumed the books were current. They were not. Several months of payroll source deductions and two quarters of HST had gone unremitted before anyone noticed, by which point the company itself had wound down its operations and had no assets left to pay the shortfall.

The Canada Revenue Agency does not simply write off a corporation's unpaid remittances when the corporation stops operating. Under both the Income Tax Act and the Excise Tax Act, the federal statute governing HST, directors of a corporation can be held personally liable for certain unremitted amounts if the corporation cannot pay. Raymond, as the sole director on record, received an assessment combining both categories of debt into a single number just under $15,000. Angela, though active in the business day to day, had never been formally appointed as a director, and her name did not appear on the assessment.

The legal problem

The notice Raymond received treated the payroll shortfall and the HST shortfall as a single combined debt, and his first instinct was to try to negotiate the whole amount down as one figure. That approach would have left real money on the table, because the two components rest on different legal footing and are not equally hard to defend against.

Unremitted payroll source deductions — the income tax, and other amounts an employer withholds from an employee's paycheque and holds in trust for the government — carry a director liability provision under the Income Tax Act. A director can be held personally responsible for the corporation's failure to remit these trust funds, but the Act also provides a due diligence defence: a director who exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances is not liable. This defence looks at what the director actually did to try to ensure remittances were made, not just whether they succeeded.

Unremitted HST is treated similarly under the Excise Tax Act, with its own parallel director liability provision and its own due diligence defence. But the two defences are not judged on identical facts. A director's diligence around payroll trust funds is usually assessed by looking at internal controls over payroll processing and bank transfers. A director's diligence around HST often turns on different questions — how invoicing and collection worked, whether the corporation was tracking HST collected separately from operating funds, and what steps were taken once a shortfall was discovered. Raymond had a considerably stronger factual case on one side of the ledger than the other, and the two needed to be argued separately rather than compromised together.

There was also a threshold question worth checking before anything else: a director can only be assessed personally within a set window after ceasing to be a director, and only if the corporation's own liability was first properly established. Raymond had remained the sole registered director throughout, so that limitation issue did not help him here — but it is one of the first things worth ruling in or out on any director assessment, since it can end the matter entirely when it applies.

What we did

1. Requested the underlying audit file. Before responding to the assessment, our team requested the CRA's working papers showing how the combined figure had been calculated, and confirmed it split into a payroll portion and an HST portion in specific, separately traceable amounts rather than one blended estimate.
2. Reconstructed the payroll timeline. Bank records, payroll software exports and Raymond's own emails to Nirosha during her final weeks showed he had asked directly whether remittances were current and had been told they were, in writing, shortly before her departure. That correspondence became the core of the due diligence argument on the payroll debt: a director relying in good faith on a bookkeeper's specific, recent assurance, with no red flags to suggest otherwise, has a reasonable basis for believing remittances were being made.
3. Assessed the HST position separately and more cautiously. The picture here was weaker. Invoices showed HST had been charged and collected from client companies for the two quarters in question, and bank statements showed those funds had been used to cover ordinary operating costs rather than set aside, which made a diligence defence much harder to sustain. We advised Raymond honestly that this portion was unlikely to be reduced on the merits and that the better use of effort was negotiating manageable repayment terms rather than contesting liability.
4. Filed a formal objection limited to the payroll component. Rather than disputing the entire notice broadly, the objection focused narrowly on the payroll deductions, laying out the due diligence evidence in detail and requesting that portion be cancelled.
5. Negotiated a payment arrangement on the HST portion in parallel. While the objection was under review, we worked with the CRA's collections division to arrange a monthly payment plan for the HST debt based on Raymond's current income as an employee, avoiding more aggressive collection action while the dispute over the other portion continued.

The outcome

The objection process took several months. The CRA's appeals division ultimately accepted the due diligence defence on the payroll portion, cancelling roughly $6,500 of the combined assessment. The reviewing officer's decision noted the documented, contemporaneous assurance Raymond had received from the bookkeeper as the deciding factor — a general belief that things were probably fine would not have been enough, but a specific written confirmation close in time to the failure was.

The HST portion, roughly $8,000, stood. Raymond continued the payment arrangement already in place, spreading it over a period he could manage around his income as a call-centre representative, work he had taken on after the staffing company closed. He avoided a lump-sum demand or a wage garnishment, and the file was closed as being in good standing under the arrangement rather than in default.

Angela's position was never actually at risk on paper, since she had not been a registered director, but the case prompted a useful conversation about how easily that could have gone differently. Several provinces' corporate registries, including Ontario's, list directors based on what was filed, not on who was actually running the business day to day — and the reverse is also true, since someone who acts like a director in substance can sometimes be treated as one even without formal appointment. Raymond and Angela made sure their filings matched reality going forward, for any future venture.

The result was not a clean win, and it was presented to Raymond as exactly that from the outset. One debt had a genuine defence rooted in specific facts; the other did not, and pretending otherwise would have wasted months contesting a claim that was always going to hold up, while the collections division kept its own clock running in the background.

What you can learn from this