Director’s Liability Limitation Period: A Canadian Tax Professional’s Guide

Posted on by Tax Partners
30
Dec

Introduction: Understanding Director’s Liability
Corporate directors in Canada can be held personally responsible for unpaid GST/HST or payroll remittances owed by their corporations. However, this responsibility is subject to specific legal restrictions. The Canada Revenue Agency (CRA) cannot pursue directors indefinitely or without meeting certain statutory requirements. 

This article outlines the conditions under which directors may be held liable and focuses on the two-year limitation period that protects former directors.

Conditions for CRA to Pursue Director’s Liability

Directors may only be held personally liable if one of the following conditions is met:

  1. Certificate Registration: The CRA registers a certificate for unpaid amounts with the Federal Court, and collection efforts are unsuccessful.
  2. Dissolution: The corporation has dissolved, and CRA files a claim within six months of the dissolution date.
  3. Bankruptcy: The corporation has declared bankruptcy, and CRA files a claim within six months of the bankruptcy filing.

Directors can defend against liability if:

  • They demonstrate due diligence in attempting to prevent the failure to remit, or
  • The two-year limitation period has elapsed.

The Two-Year Limitation Period

The CRA is prohibited from pursuing directors for unpaid amounts more than two years after they cease to hold their positions. Events that trigger the end of directorship include:

  • Formal Resignation
  • Completion of Term Without Reappointment
  • Removal by Shareholders
  • Corporate Dissolution

This limitation applies specifically to director’s liability and does not affect other CRA recovery tools, such as the derivative liability provisions under the Income Tax Act and Excise Tax Act, which apply to certain non-arm’s-length transactions.

Steps to Resign Properly

Resigning triggers the two-year limitation period but must follow proper procedures:

  1. Written Resignation: Submit a signed, dated resignation to the corporation. Retain copies for personal records.
  2. Notify Corporate Registry: File the necessary forms (e.g., Form 1 Notice of Change in Ontario) to update the registry.

Restrictions for First Directors
First directors under some statutes, such as the Ontario Business Corporations Act, cannot resign unless:

  • A shareholders’ meeting has been held, or
  • A replacement director has been appointed.

Failure to meet these conditions can invalidate the resignation.

Impact of Dissolution on Limitation Periods

When a corporation dissolves, its directors cease to hold their roles, starting the two-year limitation period.

  • Voluntary Dissolution: The corporation must settle debts or secure creditor consent before dissolution. This may delay dissolution if CRA arrears exist.
  • Involuntary Dissolution: Typically results from non-compliance, such as failure to file tax returns. Directors receive notice and a chance to address the issue before dissolution.

Effect of Revival on the Limitation Period
Reviving a dissolved corporation does not restart the limitation period or reinstate directorship, except where a court order explicitly reinstates former directors.

De Facto and Deemed Directors

Former directors may still face liability in specific situations:

  1. De Facto Directors: Individuals acting as directors without formal appointment—e.g., signing documents or attending meetings—may be treated as directors.
  2. Deemed Directors: Certain statutes consider individuals managing the corporation’s affairs to be directors if no formal directors remain, unless exceptions apply (e.g., professionals providing limited services).

Pro Tax Tips: Protecting Against Director’s Liability

  1. Plan Resignation Carefully: Follow statutory formalities and retain records to establish the start of the limitation period.
  2. Act Quickly: Exit the directorship of corporations with financial issues as soon as possible to minimize liability exposure.
  3. Seek Professional Advice: Engage a Canadian tax professional to ensure compliance and safeguard against potential CRA claims.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

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