| If you sit on a Board of Directors of a corporation | | | | who had security on the assets of a company prior |
| then exposure to liability exists under various | | | | to CRA having a debt owed, such as a General |
| statutes. For example, unpaid wages and vacation | | | | Security Agreement by a banking institution. This |
| pay, workplace liabilities, liabilities under corporate | | | | priority is given to CRA through the Income Tax Act. |
| statutes as well as environmental liabilities are a major | | | | If the company continues to go forward in a |
| concern of the corporate director. | | | | receivership CRA must be paid for any arrears in |
| Amounts owing to the Crown with respect to taxes | | | | crown taxes. |
| are the most common of the liability claims. | | | | There are only a few defenses available to a director |
| Unremitted source deductions which consists of | | | | in order to avoid payment of the liability. In order to |
| income taxes, employment insurance and Canada | | | | be liable you must be a 'director in law" at the time |
| Pension Plan premiums from employee wages is the | | | | the source deductions were not remitted. For |
| liability that the Crown has been very aggressive in | | | | example, the individual may not have been properly |
| collecting in recent years. The Crown is also being | | | | appointed as a director or may have resigned prior to |
| more aggressive in the collection of other taxes such | | | | the failure to remit. |
| as unpaid sale taxes and the ever controversial | | | | If the above exemptions do not apply then the only |
| Goods and Service Tax (GST). | | | | defense is the "due diligence" defense as set out in |
| A common scenario in creating director's liability is | | | | the Income Tax Act. This defense provides that the |
| that a business that is struggling financially is using the | | | | director is not liable for the corporation's failure to |
| unremitted source deductions as capital to keep the | | | | remit source deductions where he/she exercises the |
| corporation in business rather than close the doors. | | | | degree of care, diligence and skill to prevent the |
| However, when the corporation realizes that the | | | | failure that a reasonably prudent person would |
| unremitted source deductions is not enough capital to | | | | exercise in a similar situation. |
| keep the operations going, the company goes out of | | | | In determining if a director has acted with due |
| business. Canada Revenue Agency (CRA) has a | | | | diligence the court will look at a variety of factors |
| statutory right to go after the directors for | | | | such as, the capability of the person, their business |
| unremitted source deductions plus interest and | | | | knowledge, education and the actions taken by the |
| penalties. | | | | director to prevent the failures. The courts have |
| For CRA to successfully claim against a director it | | | | stated that there is a positive duty to take action to |
| must meet certain requirements under the Income | | | | prevent the failures. |
| Tax Act. CRA must file a certificate in respect of the | | | | To prevent failure the director should familiarize |
| corporations tax liability and CRA must attempt to | | | | himself with the withholding and remittance |
| have execution against the corporation and the | | | | requirements. Ensure that an appropriate system is in |
| execution must be returned unsatisfied. In the case | | | | place to withhold and remit all taxes and require on a |
| of a liquidation in bankruptcy, CRA must prove its | | | | timely basis written reports to ensure that the |
| claim within 6 months of the date of bankruptcy. If | | | | remitting procedures are being done correctly. |
| these actions have not been met by CRA then the | | | | It is human nature especially for most entrepreneurs |
| director has no liability. | | | | to do anything to find away to keep the doors of |
| CRA also has only 2 years to attempt to collect the | | | | their company open. This determination sometimes |
| liability from the director. If the 2-year period passes | | | | leads to the careless use of unremitted source |
| then the director escapes any liability for the | | | | deductions and other government taxes to fund the |
| unremitted deductions. In order to attempt to collect | | | | operations. The courts have said where a corporation |
| from the director, it must be established that the | | | | reaches the point where it cannot issue a remittance |
| funds could not be collected from the corporation or | | | | cheque for fear that it won't be honored it is time to |
| from the Receiver or Trustee in bankruptcy. | | | | close down the business. Thus, the mere decision or |
| CRA has first priority on all assets of a bankrupt | | | | will of the entrepreneur to keep the doors open may |
| company. If a company files a bankruptcy CRA has | | | | result in the director reducing his/her ability to rely on |
| priority over all other secured creditors even those | | | | the due diligence defense. |