Tax Liability of a Director
Incorporation is an essential tool in tax planning and in shielding the shareholder from potential lawsuits. However, incorporating does not shield the shareholder/director personal assets from the Ontario Ministry of Finance (Ministry of Finance) nor does it shield it from the Canada Revenue Agency (“CRA”) from taxes owed by the incorporated business. A director of a corporation is personally liable to the Ministry of Finance for unremitted employment health premiums of the corporation. Similarly under the Retail Sales Tax Act, now part of the Harmonized Sales Tax Act, a director can be held personally liable for unremitted amounts. The Corporations Tax Act imposes a fine of up to twice the amount of tax payable on the director and includes similarly to the Retail Sales Tax Act the possibility of an up to two year imprisonment.
Under the Income Tax Act, the CRA will look at the corporation first for source deductions and then to the director. A director is also liable for a corporation’s failure to file a corporate income tax return and is subject to minimum a $1,000 fine to a maximum of a $25,000 fine with an up to 12 month imprisonment possibility.
A due diligence defence is available under the Excise Tax Act and under the Retail Sales Tax Act where a director exercised the degree of care, diligence, and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. This question is a factual question but note that the facts look to whether the director exercise due care to prevent the failure of the remittance. In other words, what actions did the director take to ensure that GST or PST or HST which is too be held in trust was being remitted. Usage of the funds held in trust to carry on the business or to ensure the business survival is what often happens and unfortunately does not provide a defense to a director.
Anyone accepting a directorship must be aware of the above. Even a director who is considered to be an outside director, i.e. a director not involved in the day to day operations of the corporation, must exercise caution.
TaxChambers LLP is collaborating with Andersen Global® in Canada.