Category: Self-Employed Tax Deadline

CRA Director Liability and You – Protect Yourself Before It’s Too Late!

If you own, or are a director for, a company and accept trust money for the federal or provincial governments, you could be subject to CRA director’s liability.

CRA director liability means that the Canada Revenue Agency (CRA) can decide that you owe a tax debt for your business – personally.

Like anything, director’s liability is a process and there are ways that you can protect yourself if you’re assessed.

Here’s what you need to know.

What is CRA Director’s Liability?

In Canada, incorporated businesses are considered separate legal entities from the owners’ personal assets and liabilities. If any debt is accrued by the incorporated business, the employees, officers, and directors are not held personally liable.

However, this isn’t always the case – also known as director’s liability.

If the CRA can’t collect an amount owing from the business directly, it may enforce director’s liability and assess the director, or directors, personally. This is most common with unremitted GST/HST trust money or unpaid payroll source deductions.

What Happens if You Receive a Director’s Liability Assessment?

If you are subject to director’s liability and can’t pay, the CRA might place liens on your assets, freeze your bank account, garnish wages, and more. And they can do this even if the corporation is no longer operating.

If you are, or ever have been, the director of a corporation with a CRA tax problem, you need to act fast.

How to Protect Yourself

1. Do your due diligence.

In the event that you are the subject of a director’s liability assessment, paperwork is your ally.

If you can prove that you made your best efforts to have the corporation pay the GST/HST remittance or other deduction, then you may have a chance of having it overturned.

According to Mondaq:

“There is also a “due diligence” defence available to taxpayers who are assessed for CRA director liability by Revenue Canada. Subsections 227.1(3) of the Income Tax Act and 323(3) of the Excise Tax Act contain identical wording which states that a director is not liable for a corporation’s failure to collect GST/HST or Payroll Source Deductions if they “exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances”.

However, this solution will likely require a tax lawyer and could end up costing more – especially if the circumstances cannot be proven.

2. Make note of your resignation date.

If you’ve resigned from the corporation, or are planning to resign, make sure the date is well-documented. This is because, in many cases, there has been a precedent set of a two-year limitation period.

According to Lerners, many of the statutes that impose liability on a director have a two-year limitation period. For example, a claim for unpaid wages against a director under the Employment Standards Act, a claim for which there is no due diligence defence, cannot be made more than two years after a director resigns.

However, if a director resigns on paper but continues to act like a director, then the two-year time limit is void. In addition, the resignation needs to be clearly stated. Lerners recommends being on the public record with your resignation and its effective date.

“When government officials are considering an assessment against a director, the first place they check is the public record,” Lerners notes. “You do not want to be in the position where you receive a letter proposing to assess you personally when you resigned years before, but your resignation was never properly noted on the public record.”

Again, this solution would most likely require a tax lawyer.

3. Find solutions for the tax debt.

There may be an event where you are being assessed for director’s liability and cannot afford to work with a tax lawyer or don’t have a defense available.

In these cases, a CRA director liability assessment can be dealt with in the same ways as personal tax assessments: by making a plan for the debt.

The CRA wants their money and you may have to pay it – so the solution becomes finding a way to raise the funds. This might include:

• Taking out a secured loan.
• Accessing home equity.
• Insolvency options, like filing for a consumer proposal or personal bankruptcy.

If you owe a director’s liability and know that you can’t pay it all, even if you use home equity or a loan, insolvency filing options may be the answer. When you file for a consumer proposal or personal bankruptcy, your unsecured debts — including tax debt — are included.

This is the only way, besides paying the debt in full, to stop CRA collection action, such as requirements to pay, frozen bank accounts, and liens against your assets.

Whether you decide to pursue litigation or deal with the CRA director liability tax debt directly, DebtCare Canada can help. We’ll go through your options and find the best way to stay protected.

Do you have a CRA director liability, call 1-888-890-0888 or visit www.debtcare.ca for a free consultation.