When a Silent Business Partner Left Two Directors Holding the Bill

The situation

Cristina worked full time as a construction project manager. Jomar worked full time as a pharmacist. Neither of them ran a business for a living, but several years earlier they had incorporated a small company to hold and manage a handful of rental properties they owned together — collecting rent, hiring superintendents and maintenance staff, and handling the payroll that came with employing people. On paper, both were directors of the corporation. In practice, the person who actually ran it was Kwame, a longtime acquaintance they had brought on as the company's operations manager. Kwame collected rent, paid the supers and contractors, and handled the bookkeeping, including remitting the source deductions withheld from employees' pay — the portions of income tax, Canada Pension Plan contributions and Employment Insurance premiums an employer is required to hold back from wages and forward to the government.

For a couple of years, the arrangement worked well enough that Cristina and Jomar treated it as something that ran itself. They reviewed year-end summaries, signed what needed signing, and trusted Kwame's updates that everything was current. Neither of them had a background in payroll compliance, and neither one thought to ask, month over month, whether the remittances Kwame said were going out were actually landing where they were supposed to.

The problem

The company's rental income slowed after two units sat vacant longer than expected, and cash got tight. Kwame kept paying the staff in full — supers and contractors don't wait — but started holding back the source deduction portion instead of remitting it, treating it as a short-term cash flow buffer with the intention of catching up later. Later never came. Over roughly fourteen months, the shortfall grew.

When the Canada Revenue Agency (CRA) eventually caught the gap through the corporation's payroll filings, it assessed the company directly for the unremitted amounts, plus interest and penalties. The corporation, still cash-strapped and now facing a debt it could not absorb, could not pay. Under the Income Tax Act, when a corporation fails to remit source deductions and cannot satisfy the debt, the CRA can pursue the corporation's directors personally for the shortfall. This is one of the narrow places in Canadian law where operating through a corporation does not fully shield an individual from business debt — the logic being that directors control whether payroll deductions get sent in, and the government should not be left unpaid because a company folded.

Cristina and Jomar each received a personal director liability assessment for the full unremitted amount, plus accumulated interest and penalties — a total in dispute of roughly $340,000. Because director liability is joint and several, the CRA was entitled to pursue either of them, or both, for the full sum, though it could not collect more than the total actually owed. For two people with steady professional incomes and no history of business trouble, it was a serious and unfamiliar threat, arriving as a formal notice rather than any warning that the company's payroll had gone off track.

What we did

1. Confirmed the assessment was procedurally valid before contesting the substance. Director liability assessments carry their own conditions — including a required window after a person stops being a director within which the CRA must act, and a prior enforcement step against the corporation itself. We checked both were satisfied before deciding where the real fight was, since a defect here can end a case without ever reaching the merits.
2. Built the timeline month by month, not as a single period. A due diligence defence under the Income Tax Act does not require a director to have prevented every failure — it requires the director to show they exercised the degree of care, diligence and skill a reasonably prudent person would have exercised in comparable circumstances to prevent the failure. That standard can succeed for part of a period and fail for another, so we broke the fourteen months into segments defined by what Cristina and Jomar actually knew and did at each point.
3. Gathered the evidence of active oversight in the early months. We pulled bank records, signed year-end filings, email exchanges with Kwame requesting remittance confirmations, and the corporation's own payroll account statements. For roughly the first half of the shortfall period, the record showed genuine, if imperfect, oversight — Cristina had asked pointed questions about cash flow, and Jomar had reviewed and signed off on quarterly summaries that, on their face, appeared to confirm remittances were current.
4. Documented the point at which the picture changed. The record also showed a gap: once vacancy losses mounted, the directors' inquiries slowed and the summaries they were shown became vaguer, without either of them pressing further or verifying independently against the CRA's own remittance records. That gap mattered, and we did not try to argue it away — a due diligence defence built on an inflated account of vigilance tends to collapse under CRA scrutiny and costs more credibility than it buys.
5. Prepared a submission that conceded the weaker period honestly. Rather than asking the CRA to accept a due diligence defence for the entire fourteen months, we presented the stronger first segment as a genuine defence and the later segment as a basis for negotiating the remaining liability down, supported by the corporation's near-total insolvency and the directors' cooperation once the shortfall came to light.
6. Negotiated directly with the CRA collections and appeals officers assigned to the file. With the evidentiary record laid out clearly, we opened a dialogue aimed at a resolution both sides could accept rather than a prolonged dispute through the Tax Court of Canada, which would have taken well over a year and added further interest to whatever was eventually owed.
7. Addressed Kwame's role and the company's own remedies separately. Kwame was not a director and so was not subject to the same personal assessment mechanism, but the corporation retained a potential claim against him for mismanaging funds earmarked for remittance. We flagged this as a separate matter for Cristina and Jomar to consider, distinct from resolving their own liability to the CRA.

The outcome

The CRA accepted that Cristina and Jomar had exercised reasonable diligence during the first segment of the shortfall period, reducing the amount attributable to that stretch substantially. For the later segment, where oversight had genuinely thinned, the CRA held its position that liability remained — but agreed, in light of the corporation's insolvency, the couple's cooperation, and the cost and delay of continued litigation, to resolve the remaining balance through a negotiated compromise rather than the full assessed amount.

The final liability landed at roughly $165,000, split between Cristina and Jomar under a payment arrangement they could manage against their regular incomes, down from the roughly $340,000 originally assessed. It was not a clean win — both of them paid, and paid for a period where their own inattention had genuinely contributed to the shortfall — but it reflected the real difference in their conduct across the two halves of the period, rather than treating fourteen months of mixed diligence as a single uniform failure.

The corporation itself was wound down not long after, its rental properties sold to satisfy remaining debts. Cristina and Jomar chose not to pursue Kwame personally, judging the further cost and uncertainty of a civil claim against him not worth the likely recovery given his own limited means.

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