Directors of a corporation may be held personally liable in cases where the corporation fails to withhold and remit federal or provincial payroll taxes on salary, wages and certain benefits. Directors may also be liable for amounts which ought to have been withheld on payments to a non-resident that are subject to withholdings under Part XIII of the Income Tax Act1 (herein referred to as the «Act»). This article reviews in more detail the potential exposure that directors face, and also briefly describes some of the possible remedies that are available in such cases.

With respect to federal income taxes, the failure of a corporation to deduct, withhold or remit source deductions under the Act, theEmployment Insurance Act2 or the Canada Pension Plan Act3 subjects its directors to personal liability for the unpaid and unremitted amounts. A similar principle applies in the province of Quebec for an amount that an employer was required to deduct, withhold or remit under the Tax Administration Act4 (hereinafter referred to as the “Administration Act”), the Act respecting the Québec Pension Plan,5the Act respecting parental insurance,6the Act respecting labour standards,7the Act to promote workforce skills development and recognition,8 and the Act respecting the Régie de l’assurance maladie du Québec.9

The purpose of these rules is to make the directors liable for the payment of the employer’s contributions. Section 24.0.1 of the Administration Act and section 227.1 of the Act apply to directors holding office on the date on which the amounts were to be remitted, the date they were to be deducted, withheld or collected, and the date on which an amount was to be paid. In certain circumstances, a person not officially appointed as a director could be considered to be a “de facto” director and become liable if such person performs some of the functions that a director would normally perform.

Before a director becomes liable under these provisions, the tax authorities have to demonstrate that they cannot recover the amounts directly from the particular corporate taxpayer. Additionally, the tax authorities must register a certificate for the amount of the corporation’s liability and establish that the amount remains unsatisfied. The director will need to establish that he exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.10 The case law on this point11 has shown that the issue is generally whether, at the relevant time, the director knew or ought to have known of the problem, and whether he took the action within his power under the circumstances to correct the situation.

In addition, the tax authorities cannot assess a director for source deductions owing after the expiry of two years from the date on which the director ceased to be a director of the corporation.12

Directors may require the corporation to purchase insurance on their behalf to protect them and former directors against liabilities incurred due to their status as directors, provided that they have fulfilled their fiduciary duties. Directors may, in particular, seek the advice of tax specialists to ensure that they comply with their obligations relating to payroll withholding taxes.