Beating a Director Liability Assessment Over Unremitted Payroll Tax

The situation

Arjun built his career as an independent insurance adjuster, the kind of work that comes in waves. Insurers call in extra adjusters when a windstorm or a flood produces a spike of claims all at once, and for years Arjun took that work as a sole proprietor, one file at a time. Eventually he incorporated, both for liability protection and so he could take on a small crew of adjusters himself during the busiest stretches, dispatching them to insurers as contract capacity when call volume surged. His spouse, Amalia, joined the corporation as a co-director, handling scheduling and client relationships while Arjun ran the file work.

During a run of large weather events, the corporation had four adjusters on payroll as employees rather than subcontractors, since the insurers requesting them required employee status for liability reasons. The corporation withheld income tax, Canada Pension Plan contributions and Employment Insurance premiums from each pay run, as every employer is required to do, and was responsible for remitting those amounts to the Canada Revenue Agency on a regular schedule. Arjun and Amalia hired a part-time bookkeeper, Fernanda, to manage payroll and the remittances, and for the first several months everything appeared to run smoothly.

What the review found

Roughly eight months after the busiest stretch began, Arjun received a letter from the Canada Revenue Agency addressed to him personally, not to the corporation. It stated that the corporation had failed to remit source deductions over several pay periods and that, as a director, he was being assessed for the shortfall along with penalties and interest. A near-identical letter arrived for Amalia. Together the two assessments totalled roughly $92,000.

The corporation, it turned out, had continued to withhold the correct amounts from every employee's pay, but Fernanda had not been forwarding them to the Canada Revenue Agency on schedule. Cash flow had tightened during a slow stretch between storm seasons, and rather than flag the shortfall, she had been using the withheld amounts to cover other payroll and operating costs, intending to catch up later. She never did. By the time Arjun noticed the corporation's bank statements did not match what he expected, several remittance periods were already badly behind.

Source deductions are treated differently from most business debts. The money an employer withholds from an employee's pay is held in trust for the Crown from the moment it is deducted — it is not the corporation's money to use for anything else, even temporarily. Under the Income Tax Act, when a corporation fails to remit those amounts, its directors can be held personally and jointly liable for the shortfall, on the reasoning that directors control whether a corporation meets its trust obligations. The corporation's later financial difficulties do not excuse the failure; the assessment follows the directors even after the corporation itself has wound down.

That personal exposure is not automatic, however. A director who can show they exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances, to prevent the failure, has a defence to the assessment. The question for Arjun and Amalia was whether the record could show that — and at the point the CRA letter arrived, no one had been keeping that record with a defence in mind.

What we did

1. Reconstructed the remittance timeline in detail. We worked with Arjun and Amalia to pull every payroll run, bank statement and CRA remittance confirmation for the period in question, building a month-by-month picture of when deductions were withheld, when they should have been remitted, and when — if ever — they actually were. This showed the shortfall was concentrated in a specific four-month window rather than a pattern of ongoing neglect.
2. Established what oversight was actually in place beforehand. Arjun had, in fact, reviewed payroll summaries monthly and had asked Fernanda directly, on at least two occasions documented in text messages, whether remittances were current. She had confirmed they were. That correspondence became central evidence: a director who asks the right question and receives a false answer is in a materially different position than one who never asks at all.
3. Documented the response once the discrepancy surfaced. When Arjun noticed the mismatch in the corporation's bank records, the response was fast and it mattered. Fernanda was terminated within days. Arjun personally reviewed every outstanding remittance, contacted the Canada Revenue Agency's collections division before any assessment had issued to disclose the shortfall voluntarily, and arranged a lump-sum catch-up payment from the corporation's remaining funds within about three weeks of discovery. A new payroll provider with automated remittance was in place before the next pay cycle.
4. Filed a notice of objection for each director. A notice of objection is the formal mechanism for disputing an assessment before it can be challenged in the Tax Court of Canada, and it has to be filed within a strict deadline after the assessment is issued. We filed for both Arjun and Amalia, setting out the due diligence defence with the documentary record attached: the monthly oversight practice, the specific misrepresentation by the bookkeeper, and the speed and completeness of the corrective response once the problem was found.
5. Addressed Amalia's more limited role directly. Amalia's day-to-day involvement was in scheduling and client relationships, not finance, which on its own is not a defence — a director cannot avoid liability simply by delegating financial oversight to someone else. What mattered for her was that she had relied in good faith on Arjun's monthly reviews and on Fernanda's regular confirmations, and had no independent reason to doubt them until the same discovery that prompted Arjun's response. We built her submission around that reliance, supported by the same corrective-action record.

The outcome

The Canada Revenue Agency's appeals division reviewed both objections together, given the shared facts. After several months, it vacated the assessments against both Arjun and Amalia in full. The written decision accepted that the pre-discovery monitoring, combined with the bookkeeper's direct misrepresentations, showed a genuine effort at oversight rather than indifference, and that the response once the shortfall was found — swift termination, voluntary disclosure, and full catch-up payment — met the standard the due diligence defence requires.

The corporation itself still owed the underlying remittance amounts, and the catch-up payment Arjun had already made from its accounts was applied against that balance rather than refunded. What the objection achieved was removing the personal, joint-and-several exposure that would otherwise have followed Arjun and Amalia individually, on top of what the corporation had already paid. Roughly $92,000 in personal assessments, plus accruing interest that would have continued to build during any further dispute, was eliminated.

The corporation itself was wound down within the year, in part because of the reputational and cash-flow strain the episode had caused, but Arjun continued adjusting independently afterward, this time without taking on employees directly.

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