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