Directors of a corporation can personally be held liable for the corporation’s failure to withhold and remit taxes from certain payments, including payments of salary and dividends, interest and rental payments to non-residents. In the case of failure to withhold, the directors may be liable to pay the amount that should have been withheld, and may be subject to a penalty. In the case of failure to remit, directors are liable to pay the unremitted amount, and may be subject to a penalty. The Excise Tax Act provides a similar rule for GST/HST collections.
The statement above likely scared those among us who run corporations.
The CRA is required to pursue the corporation first for its tax debt. The debt must have been certified in court and the writ returned by the sheriff unsatisfied in whole or in part. When the CRA does file a writ against a corporation, some directors resign in an attempt to limit their responsibilities, appointing others in their stead, while still directing the company’s affairs. Those who are aware of this added liability may have never taken the official title of director though still handling the responsibilities of a director. But the CRA may still assess those who operate the corporation “unofficially” by assessing them as:
- a passive director, one who delegates his responsibilities to others;
- a nominee director, one who was elected only to obey the instruction of others;
- an outside director, one who is not an officer or employee of the company or has any business dealings with the company;
- a de facto director, one who exercises the duties and functions of a director though they may not be qualified to do so.
The best way to prevent a directors’ liability assessment, other than immediately resigning when facing financial difficulties, is to show that you, the director, applied all due care and diligence. The easiest way this can be achieved is by keeping a record or log of your company’s minutes. In this log you should establish corporate policies for dealing with the withholding of taxes from employees, you should regularly report on the implementation of these policies and you should record that you have checked to see that the policies were being followed.
Once you sense financial troubles you can put special controls in place like obtaining a line of credit to pay all necessary deductions. This way the CRA still gets their money and your financial situation is left holding the bag, which does not bother the CRA tax collector one bit. But which bank is going to lend out money to a company facing financial straits? If your bank says no, get something in writing to show that at least you attempted to exercise due diligence but that your bank would not cooperate.
What if your company is in bankruptcy and you no longer have control? Can you still be held liable for the company’s tax debt? Yes, you can. One method of proving that you attempted to exercise due diligence and so exonerating yourself is by advising the trustee, in writing, of any banking arrangements in place for the payment of the debts.
If you are nervous that a directors’ liability tax assessment may be in your future, call us today. Tax Solutions Canada can help you sort out the details: 1-888-868-1400.