What is Director’s Tax Liability?

The Tax Court of Canada has recently decided a case regarding director’s liability for unremitted GST/HST returns. Generally, a director of a corporation can be held personally liable to CRA for various corporate liabilities such as unremitted GST or HST, as well as unremitted payroll deductions for employees.

Corporations have a duty to remit GST/HST as well as the required wage deductions such as CPP/EI and income tax withholdings. However, when a corporation fails to do so, and the corporation does not have the funds to pay the CRA, directors of a corporation can be held personally liable under subsection 227.1(1) of the Income Tax Act and section 323 of the Excise Tax Act.

Often, this occurs when a business is struggling financially. For example, a business owner uses funds that are owed to the CRA to save the business. The director and business owner believes that when the business begins to make more money, the corporation will then pay off its CRA tax debts. For a business owner with limited tax knowledge, funding the business in this manner may seem like an obvious choice.

However, the director can be held personally liable for the taxes owing by the Corporation. It is a tax trap is to think that merely because business is incorporated, that the owner (who is a director) cannot be held personally liable for these monies. The CRA can collect from the director personally.

Limitation Period for Director’s Tax Liability

Section 227.1 has several key provisions and defences against the CRA issuing a director’s tax liability assessment. One such defence is the limitation period of two years. Subsection 227.1(4) states that no action can be commenced against a director more than two years after director ceased to be a director of the corporation. Simply, if a director resigns, and two years passes, the CRA is barred from collecting the taxes owing from the director. This is referred to as a “limitation period” because it limits the amount of time the CRA has available to come after the director for these monies.

Ontario Business Corporations Act on Resigning as a Director

As per section 115(4) of the Ontario Business Corporations Act, where all of the directors have resigned or have been removed by the shareholders without any replacement, any person who manages or supervises the management of the business and affairs of the corporation shall be deemed to the director for the purposes of the OBCA.

As per OBCA section 119(2), until the first meeting of shareholders, the resignation of a director named in the articles shall not be effective unless at the time the resignation is to become effective a successor has been elected or appointed.

This means that the initial director of the Corporation cannot resign until after the first shareholders meeting unless a replacement director is appointed. After that initial shareholder meeting the director can resigned without being replaced.

Soulliere v The Queen, 2022 FCA 126

The recent Federal Court Soulliere case, through its statutory interpretation exercise, examines the interplay of subsections 115(4) and 119(2) of the OBCA.

The sole issue of this case was whether the appellant’s resignation was effective or not.

In this case, the taxpayer, a few weeks after accepting the role of the incorporating director, resigned from the position of director of Metro 2010 by handing his resignation letter to his father. The taxpayer claims that since he handed his resignation letter to his father, he was no longer the director of M2010 and therefore was not liable for any unremitted tax liability. He also claimed that since his father was supervising the management of the corporation, his father should be deemed to be a director and therefore, responsible for any tax liability.

As per the taxpayer, the Tax Court of Canada erred in its interpretation of subsections 115(4) and 119(2) of the OBCA. In the

Decision of the Federal Court of Appeal:

The Federal Appeals Court ruled that the taxpayer should be considered a director of the Metro 2010 because of following reasons:

  • As per OBCA section 119(2), the taxpayer cannot resign from the position of director because the Corporation never held the initial shareholder meeting and did not appoint a successor director. The taxpayer cannot simply resign from his fiduciary duties in those circumstances.
  • The taxpayer’s father cannot be deemed to be a director of the Corporation just because he supervised the management of the business. This is because not only was his resignation invalid but also because it would be inconsistent with the provisions of the Ontario Business Corporations Act which details how the directors may be elected.
  • The purpose of the provisions, specifically subsection 119(2) of the OBCA was introduced as a part of a bill with the stated goal of improving investor protections. By siding the interpretation of the taxpayer, this purpose would not be fulfilled as it may contribute to loopholes in the system.

As a result, the Federal Court of Appeal held that the taxpayer’s resignation was ineffective.

Pro Tax Tip: Resignation of a Director

It is critical to know the proper rules and regulations to resign in order to minimize the chances of personal liability. Failing to resign in a legal manner may leave an individual vulnerable under director’s liability. For more information on how to resign from a directorship so as to avoid director tax liability, contact our expert Canadian Tax Lawyers.


How do I resign as a director?

Make sure all the corporate formalities are followed including an initial shareholder meeting if you are the incorporating director. Prepare a written resignation that is dated and signed. Deliver it by registered mail to the listed corporate address as per the minute book and keep a copy as well as confirmation of delivery. Make sure that the corporate minute book has indicated your resignation. Make sure the corporation files a Form 1 (notice of change of director) with the Ministry and ensure that it is filed.

How do I know my resignation is legally valid?

Find out under which act is your corporation registered under, for example, if it is under Ontario Business Corporations Act, Canadian Business Corporations Act, etc. Then go through the act carefully and compare it with your situation to see how you can protect yourself from any liabilities. Contact our experienced Canadian Tax Lawyers to assist you.

If the corporation that I am director of goes bankrupt, can the CRA still come after me?

Yes, subsection 227.1 allows the CRA to assess directors personally when the corporation is bankrupt. Therefore, you should always pay your CRA debt. However, because of the two-year limitation period, the CRA is disallowed from doing so two years after a director has lawfully resigned or after the Corporation has gone bankrupt.

How can I avoid director’s liability altogether?

By being due diligent and looking through the accounting records to ensure that the corporation has paid the required taxes owing. Contact our experienced Canadian Tax Lawyers to fully assist you in any director’s liability matters.

“This article provides information of a general nature only. It is only current at the posting date. It is not updated, and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a Canadian Tax Lawyer.”