How Governance Habits Limited a Director's Personal Liability

The situation

Tuan started building websites and doing small IT support jobs for local businesses while he was a college student in Waterloo, charging by the project and banking the money in a personal account. Within a year the work outgrew that arrangement. He was invoicing regularly, taking on repeat clients, and needed a proper business structure to sign contracts and open a business account. He incorporated under the Business Corporations Act (Ontario) — the statute that governs how Ontario corporations are formed and run — and made his friend Linh, who worked as an administrative assistant and helped him keep track of invoices and client emails on evenings and weekends, a co-director and officer of the new corporation.

The business kept growing. By its second year it was generating roughly $100,000 in annual revenue, and Tuan and Linh hired two part-time staff to help with support tickets and client onboarding. That meant running payroll for the first time — and payroll brings obligations that a one-person invoicing business never had. Every pay period, a corporation must withhold income tax, Canada Pension Plan contributions, and Employment Insurance premiums from employees' wages and remit them to the Canada Revenue Agency. It must also collect and remit HST on taxable sales. Those withheld amounts are held in trust for the government the moment they're deducted — they are never the corporation's money to spend, even temporarily.

To handle it, Tuan and Linh hired Layla, a freelance bookkeeper, to run payroll and file the HST returns. For a few months, everything appeared to be working.

How the remittances fell behind

It wasn't working. Layla was juggling several small clients on her own and fell behind on the corporation's remittance filings without telling either director. By the time Tuan noticed — a routine bank reconciliation turned up a Canada Revenue Agency notice he'd assumed was junk mail — the corporation was roughly four months behind on remitting source deductions and HST, with unremitted amounts totalling close to $22,000.

The corporation's cash position had also deteriorated; a slow quarter meant the money withheld from employees' pay had, in practice, been spent covering other costs rather than held aside. That is exactly the scenario the trust-fund rule exists to prevent, and exactly the scenario that triggers personal director liability. Both the Income Tax Act and the Excise Tax Act (which governs HST) allow the Canada Revenue Agency to assess a corporation's directors personally for unremitted source deductions and HST when the corporation itself cannot or does not pay. The idea is straightforward: directors control whether trust funds get remitted, so the law lets the government reach past an insolvent corporation to the individuals who ran it.

The corporation wound down within a few months, unable to recover from the shortfall on top of its other debts. Both Tuan and Linh then received personal assessment letters from the Canada Revenue Agency, each naming them for the full unremitted amount. That is standard practice — the Agency generally assesses every person who was a director during the relevant period, leaving them to sort out among themselves, or through a defence, who actually bears the loss.

What we did

1. Confirmed exactly who was a director, and when. Director liability attaches to the person, not the business, and only for the period someone actually held office. We pulled the corporation's minute book and confirmed Linh had formally resigned as a director roughly five months before the corporation stopped remitting — a fact she remembered but hadn't realized was legally significant. She had stepped back from the company earlier that year to focus on her administrative assistant job, and had signed a resignation and had it recorded in the minutes at the time.
2. Explained the due diligence defence, and went looking for evidence of it. A director is not automatically liable. Both statutes allow a defence if the director exercised the degree of care, diligence and skill a reasonably prudent person would have exercised in comparable circumstances — in practice, whether they took active steps to see that remittances were being made, rather than simply trusting that someone else had it handled. We reviewed the corporation's records for anything showing active oversight: meeting minutes, financial reviews, and any point where a director had asked questions about the bookkeeping.
3. Found that Tuan's habit of keeping minutes worked in his favour — up to a point. Even as a small, informal operation, Tuan had gotten into the habit of writing a short set of minutes after any meeting where money came up, a practice he'd picked up rather than one anyone required of him. Those minutes showed he had asked Layla for remittance confirmations twice in the earlier months and received them. That supported a due diligence defence for the earlier period. But the minutes also showed the questions stopped once the business got busier — there was no record of him checking in during the four months the corporation actually fell behind, which meant the defence couldn't cover that stretch.
4. Built the response to the Canada Revenue Agency around what the records could actually prove. For Linh, the case was about the timeline: she had resigned before the failures began, and tax law generally requires the Agency to assess a former director within two years of their resignation — a limitation period that protects people who have genuinely left. For Tuan, the case was about scope: conceding the amount tied to the period with no evidence of oversight, while disputing the assessment for the earlier period where his check-ins were documented.
5. Set up a payment arrangement for the amount that remained. Once the disputed portion was resolved, we helped Tuan negotiate a monthly repayment plan with the Canada Revenue Agency for the balance still owed, avoiding a lump-sum demand he could not have met on a student's income.

The outcome

Linh's assessment was withdrawn once the Agency confirmed her resignation predated the limitation window — her personal liability for the corporation's debts ended the day she stepped down. Tuan's assessment was reduced by roughly $9,000, reflecting the earlier period where his documented check-ins supported a due diligence defence. He remained personally liable for the remainder, close to $13,000, corresponding to the four months where the record showed no oversight at all.

That was not a win in any full sense, and we were honest with Tuan about that from the first call. The trust-fund rule exists precisely so that directors can't point to a bookkeeper's failure and walk away — someone withheld that money from employees' paycheques, and the law expects a director to know whether it reached the government. What the case shows is how much difference a habit of documentation made to the size of the loss. Without the minutes, Tuan would likely have faced personal liability for the full $22,000, split however the Agency chose to pursue it. With them, roughly 40 percent of the exposure was defensible, and the remainder became a manageable repayment plan rather than a crisis.

Tuan kept the minute-taking habit going in the smaller consulting work he did after winding down the corporation, this time treating it as a discipline rather than something that happened to help him once.

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