Directors must always ensure that the proper source deductions from payroll are withheld and then remitted. Under the Income Tax Act 227.1(1) directors who were in office at the time that the corporation failed to deduct, withhold or remit or pay the amount due are personally liable, together with the corporation, for the amount and any interest or penalties.
In a similar fashion, the Canada Pension Plan, the Employment Insurance Act, and the Excise Tax Act all make directors personally liable for corporate failures to deduct or remit the required amounts.
Each of these Acts, however, specifies that a director is not liable unless either:
- a judgement for the corporation’s liability is issued by the Federal Court but is returned unsatisfied; or
- the corporation is dissolved, has begun dissolution proceedings, or is bankrupt, and the liability has been proved within six months.
Furthermore, directors cannot be assessed more than two years after they cease to be directors.
However, a recent Federal Court of Appeal case, Aujla vs. Canada [Aujla v. Canada, 2008 FCA 304, [2009] 3 F.C.R. 93], involved two brothers who were originally the directors of their construction company before the company was struck off British Columbia’s register of companies. Five years later, the Minister of Revenue obtained a court order that restored the brothers’ corporation to the register of companies and then commenced collection actions against them for the company’s $162,391.92 outstanding GST remittances, penalties, and interest.
Unfortunately for the Minister of Revenue, because the restoration order had not specified that the directors were to be restored along with the company, the appeal court upheld the Tax Court of Canada ruling that the brothers had ceased to be directors at the time of dissolution and so could no longer be assessed for the company’s tax debt.
I doubt that CRA will repeat this mistake in the future, so directors of corporations, even dissolved corporations, should ensure that there are no trust monies (e.g. GST, employee tax deductions) outstanding.
