Directors’ Liability for Tax Debt
In general, it’s assumed that the tax debt of a person or a corporation is wholly the responsibility of that individual or corporation. It stands to be considered then that the tax debt of a person or corporation would be eliminated if the person or corporation files for bankruptcy.
This is generally considered true for individuals, but it may not be the case for a bankrupt corporation.
When a person becomes a director for a corporation, many responsibilities and obligations come with this position. One of these obligations is liability for certain tax debts.
Generally, the debts and liabilities of a corporation are not the debts and liabilities of the individual directors and owners, but the Canada Revenue Agency (CRA) has the right to pursue directors and former directors of a bankrupt corporation for certain tax debts.
This does not apply to all income tax debt, but is specifically related to GST/HST and payroll source deductions.
What Does Directors’ Liability Mean Regarding Taxes?
When tax debt is outstanding, the CRA is required to pursue the corporation first. If this claim is unsuccessful or if the corporation has dissolved or is bankrupt, an assessment may be issued for the directors of the corporation. De facto directors (individuals who are not formal directors, but who act as directors) as well as former directors may also be pursued.
Protecting Yourself Against Directors’ Liability
There are steps that you can take to protect yourself from liability. One is if you have shown to have exercised due diligence to prevent the failure to remit taxes. The CRA sometimes holds directors to a very high standard in this regard, however, so it is important that directors keep records of their involvement with the corporation and detail their efforts to ensure that proper funds are allocated to make payments to the CRA.
In addition, there is a two-year limitation period from the time a person ceases to be a director of a corporation where the person can be held liable. If it has been more than two years from when you resigned as a director of a corporation, then the CRA cannot hold you responsible if the corporation goes bankrupt without remitting GST/HST and payroll source deductions. This means that, if you are a director and you believe that the corporation is struggling and will be unable to meet its tax obligations, you may wish to consider resigning. Remember that de facto directors can also be liable, so you want to make sure that you cease acting as a director in any capacity, even unofficially.
If you have been contacted by the CRA and are being held responsible for the tax debt of a bankrupt corporation, we can help. Contact the experienced team at Tax Solutions Canada today. We will review your situation and help you understand the options that are