Director liability for unremitted source deductions

Source deductions are the amounts an employer withholds from pay and remits to the CRA. The CRA’s IC89-2 says corporate directors may be held personally liable under section 227.1 of the Income Tax Act and, for GST/HST, under section 323 of the Excise Tax Act. The section reaches the directors in office when the corporation was required to remit.

Limits on the liability

• A director is not liable where they exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances (subsection 227.1(3))
• No action to recover the amount may be commenced more than two years after the director last ceased to be a director (subsection 227.1(4))
• Under subsection 227.1(2), a director is not liable unless execution against the corporation has been returned unsatisfied after a certificate was registered in the Federal Court, or a claim has been proved in the corporation’s liquidation, dissolution or bankruptcy

For a share buyer

In a share purchase, ask whether payroll remittances are current at closing, who the directors were when each remittance fell due, and whether the buyer’s nominees will be directors when the next ones are due. The answer on unpaid source deductions in a share purchase covers the deal side.