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