DIRECTOR LIABILITY: Is Asking About Source
Deductions Enough?

Posted on December 2nd, 2022 in Domestic Tax

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Directors can be personally liable for payroll source deductions (CPP, EI, and income tax withholdings) and GST/HST unless they exercise due diligence to prevent the corporation from failing to remit these amounts on a timely basis.

An August 31, 2022, Tax Court of Canada case found that the director was not duly diligent and therefore was personally liable for the corporation’s unremitted payroll deductions, interest, and penalties of $78,121 from January 2011 to April 2012.

The taxpayer argued that he was duly diligent as he asked at the directors’ meeting each month whether the tax remittances were up-to-date and received oral confirmations that they were. The taxpayer stated that he had “checked the box” at each directors’ meeting. He also argued that his decisions were driven by materiality; he focused his efforts on the corporation’s overall well-being and safeguarding the millions of dollars of investment, rather than the payroll remittances that he considered “tiny.”

Taxpayer loses

The Court ruled that the taxpayer was not duly diligent in preventing the failure to make adequate payments. It noted that the taxpayer never contacted CRA to confirm whether payroll remittances were current, which was particularly problematic as he was unable to obtain reliable financial statements and was aware ofthe difficult financial situation. While it was the taxpayer’s view that this was someone else’s job, there was no evidence of the taxpayer ever asking anyone else to follow up with CRA.

ACTION ITEM: Prior to accepting any role as a director, ensure to fully understand your responsibilities and potential exposure to personal liability. If currently acting as a director, make sure to be duly diligent in ensuring payroll and GST/HST payments are properly made.

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Article originally published in: Tax Tips & Traps 2022 Fourth Quarter – Issue 140.