CRA Directors Liability

Many people do not know that directors can be personally responsible for a company’s unpaid taxes. If the Canada Revenue Agency, or CRA, cannot collect money from the business, it might come after you as a director.

Directors Liability is a serious issue for anyone who helps run a corporation.

A recent CRA circular explains how directors can become liable if their company does not pay certain amounts like GST/HST or payroll deductions. This means even if you are just an outside or nominee director, you could still owe big money to the CRA.

This guide will explain what Directors Liability means and how you can protect yourself. Keep reading to learn simple steps to avoid getting caught in tax debt because of your position as a director.

Key Takeaways

Directors can be personally responsible for unpaid company taxes like GST/HST or payroll deductions.
There are limits to a director’s liability, such as the due diligence defense, which requires acting with care.
Resigning from a director position does not instantly free one from past tax liabilities; CRA can still act within two years of resignation.
Keeping detailed records and ensuring the company meets its financial obligations help protect directors from personal liability.
Getting Directors and Officers (D&O) insurance and following proactive measures like regular financial checks can reduce risk.

Key Responsibilities of Directors Under the Income Tax Act

Moving from the introduction, directors in Canada face strong duties under the Income Tax Act. Section 227.1 of this law makes each director jointly and severally liable for unpaid corporate taxes, penalties, and interest.

These rules apply to GST/HST debts and unremitted payroll deductions too. For example, if a company does not send payroll deductions to the CRA as required by ITA subsection 153(1), directors can become personally responsible for these amounts.

Directors must make sure their corporation pays salary, wages, benefits, and all required tax payments on time. The legal basis for this liability comes from both the Income Tax Act and Excise Tax Act.

The CRA can take action against a director when corporations miss these key financial obligations. Failing to meet these responsibilities may lead to serious personal consequences even after leaving the board.

“Directors who do not ensure remittance of taxes could find themselves personally liable for debt along with penalties or interest.”

Sources of CRA Directors’ Liability

Directors can face personal risk if their company fails to pay certain taxes. The CRA may hold directors responsible for some unpaid amounts.

Unpaid GST/HST

The Excise Tax Act makes directors personally liable for unpaid GST/HST. CRA can collect these amounts from them if the corporation does not pay. GST and HST are trust funds, so it is very important to make sure they are sent to CRA on time.

Failing to remit GST/HST can lead to personal debt for directors, even if the business shuts down or cannot pay.

CRA gives past directors two years after leaving their role before starting any new collection action for old unpaid GST/HST debts. If you get a notice about this type of CRA tax debt relief issue, you have 90 days to dispute the assessment.

Using tools like CRA Debt Relief programs or seeking CRA debt help may ease some pressure but will not erase all director liability. Always keep clear records and act quickly if your company falls behind on payments.

Unremitted Payroll Deductions

Directors can face personal liability if their company does not remit payroll deductions to the Canada Revenue Agency. This includes CPP, EI, and income tax withholdings taken from employees’ pay.

On August 31, 2022, a court held a director personally responsible for $78,121 in unpaid payroll deductions and penalties. The court ruled that failing to verify payments with the CRA did not meet the standard of due diligence.

CRA debt consolidation options may help companies manage these debts but do not remove directors’ personal risk for unremitted amounts. Directors must make sure all source deductions are sent on time to avoid extra charges.

Courts have found directors liable when they do not check directly with CRA about remittances.

Understanding other sources of liability like unpaid GST or HST is also important for every director in Canada.

Limitation of Director Liability

Limits on director liability exist under the law. Some defenses can help directors avoid personal charges for company debts.

Due Diligence Defense

Courts excuse directors from liability if they act with care, diligence, and skill. The R. v. Buckingham case set an objective standard for judging this duty. This means the court looks at what a reasonable person would do in the same situation.

For example, Hamad showed enough due diligence by taking action when needed; the court found he met the standard.

Efforts to secure funding to pay tax debts can help prove due diligence. Directors must respond within a reasonable timeframe if their company owes GST or payroll deductions. If legal action starts more than two years after a director resigns, that director cannot be held liable under this defense.

Resignation and Its Impact on Liability

Resigning as a director does not always end personal tax liability right away. Under subsection 227.1(4) of the Income Tax Act, CRA can only take action against directors for two years after they resign.

In the Zvilna v The Queen case, Ugis Zvilna argued he had resigned before CRA assessed him for unpaid source deductions. He lacked written proof but provided indirect and verbal evidence to support his claim.

The court accepted his resignation based on this evidence, even without formal paperwork under the Business Corporations Act (Ontario). This case shows how important it is to follow proper steps and keep clear records when leaving a company role.

Directors who want to avoid future claims from CRA must complete all required procedures at the time of resignation. Learning about ways to protect yourself from personal liability will help you make better choices as a Canadian director.

Protecting Directors From Personal Liability

Directors can lower risk by getting Directors and Officers (D&O) insurance. This type of insurance helps pay for legal costs if the Canada Revenue Agency (CRA) claims unpaid payroll or GST/HST amounts.

Keeping detailed records of all decisions and actions during board meetings is also critical. The Canada Business Corporations Act (CBCA) and Ontario Business Corporations Act (OBCA) make directors responsible for showing duty of care and diligence.

Directors should check that the company pays employee wages, vacation pay, payroll deductions, and GST/HST on time. Using due diligence means watching company finances closely and fixing problems right away.

These steps help prove that a director acted with care if challenged later by the CRA or in court.

Proactive Measures for Directors to Reduce Risk

After gaining knowledge on safeguarding directors from personal accountability, it’s vital to concentrate on preventive actions to reduce risks. Familiarizing yourself with the procedures can assist directors in steering clear of traps related to tax responsibilities. Here are usable methods to decrease risk:

Grasp all tax duties including employee income tax, CPP contributions, EI premiums, and GST/HST. This ensures your alignment with legal obligations.
Set up systems inside your corporation for tracking and managing taxes. These systems assist in maintaining precise records.
Initiate financial checks for monitoring tax remittances closely. Effective checks prevent forgotten or late payments.
Respond promptly if the company encounters fiscal difficulties. Dealing with problems early can control or decrease tax responsibilities.
Regularly seek advice from a qualified tax professional for counseling on compliance and risk reduction. Experts provide guidance suitable for your circumstance.
Enlighten yourself and other directors on prevailing tax laws and changes. Remaining informed aids in making superior decisions.
Build strong governance structures within your organization. These structures bolster decision-making procedures and risk management.

Adhering to these steps can considerably decrease the probability of encountering personal accountability as a director for corporate tax problems.

Conclusion

Directors can face personal risk when a company fails to pay certain taxes or deductions. You learned that unpaid GST, HST, and payroll amounts are key problem areas. All directors must act with care and keep strong records to avoid trouble.

Simple actions like checking payments and staying in touch with financial officers help lower your risk. Have you checked if your company has clear systems in place? This topic makes a real difference for both companies and the people who lead them.

If you want more details, review the CRA’s latest guide or speak with a tax expert soon. Staying informed protects you and helps your business grow strong.

FAQs

1. What is CRA Directors Liability?

CRA Directors Liability refers to the legal responsibility of a company’s directors in relation to the Canada Revenue Agency (CRA). It involves ensuring that all tax obligations are met.

2. Can a director be personally liable for corporate tax debts?

Yes, under certain conditions, a director can be held personally liable for unpaid corporate taxes. This includes GST/HST and payroll deductions that have not been remitted to the CRA.

3. How can a director protect themselves from CRA liability?

A director can protect themselves by making sure their company fulfills its tax obligations on time and accurately. Regular monitoring of financial statements and seeking professional advice when needed also helps in mitigating risks.

4. What happens if a director fails to meet their responsibilities towards the CRA?

If a director fails to meet their responsibilities towards the CRA, they could face severe penalties such as fines or even imprisonment.