Behind on payroll or HST remittances? When a director can be personally liable to the CRA, and what limits it

When a small business falls behind, the debts that worry owners most are often not the bank’s. They are the payroll deductions and sales tax the business has collected on the government’s behalf. The Canada Revenue Agency (CRA) treats those amounts differently from ordinary bills, and in some cases the rules reach past the company to the people who direct it.

This is general information, not advice for any particular business. Whether liability applies depends on the facts, and anyone facing an assessment should get advice promptly.

Why the CRA treats these amounts differently

Income tax, Canada Pension Plan contributions and Employment Insurance premiums withheld from employees’ pay, plus the GST/HST a business collects from customers, are what the CRA calls deemed trust amounts. The agency says they rank ahead of other creditors on the business’s assets, including assets pledged to a lender.¹ In practical terms, a business that spends this money on rent or suppliers has spent funds the law treats as belonging to the Crown.

Can a director be personally liable?

Sometimes, yes. The CRA’s information circular on directors’ liability, which applies sections 227.1 of the Income Tax Act and 323 of the Excise Tax Act, covers unremitted payroll deductions and GST/HST, along with a few other amounts. It notes that similar provisions apply under the Canada Pension Plan and the Employment Insurance Act.² Liability can include the unpaid amount plus penalties and interest.

The circular sets out three basic rules. A director can be held personally liable only if:

• the CRA shows it cannot recover the amount from the corporation;
• the assessment is issued within the time limit; and
• the director did not exercise due diligence to prevent the failure.²

What is the two-year limit?

The circular says “the CRA must issue the assessment against the directors within two years from the time they last ceased to be directors.”² The clock runs from the day a person stops being a director, not from the day the debt arose. Resigning does not cancel earlier failures to remit; it starts the clock on them.

The circular adds that a director’s personal bankruptcy ends their directorship by operation of law, which starts the two years. A trustee, receiver or liquidator being appointed to the company does not, on its own, end a directorship.²

What counts as due diligence?

The circular describes the standard as the care a reasonably prudent person would take in similar circumstances. It suggests keeping a separate account for withholdings and remittances, having financial officers report regularly on that account, and confirming that payments were actually made. Steps must be taken before the failure happens, and delegating the work does not remove a director’s responsibility. Not knowing about the obligations, and being a passive or nominee director, are not automatic defences.²

If you act as a director of a small corporation, the practical message is that the record matters: dated reports, remittance confirmations and a paper trail showing you checked.

What if the company can’t pay?

A struggling business has more than one path, and each has trade-offs. The CRA says people who can’t pay in full or on time should contact it about payment arrangements.³ A Division 1 proposal, covered in our guide to small business debt in Canada, lets a business offer creditors a restructured repayment while it keeps operating, but it requires creditor approval, costs money to run, and doesn’t automatically settle what a director might owe personally. How a company’s proposal or bankruptcy and a director’s own exposure fit together depends on the case, which is a question for a Licensed Insolvency Trustee or a lawyer.

The pressure on small business is real. Our earlier story on tariffs, rising arrears and restructuring looked at the figures, and Parliament is also considering a simpler insolvency track for small corporations, which is not law yet.

What this means for you

1. Remit current amounts first. If you must choose which bill to pay late, payroll deductions and GST/HST can carry the most personal risk for directors.
2. Keep a separate account and a paper trail for withholdings and collected tax.
3. Call the CRA early to ask about a payment arrangement rather than waiting for a collection notice.
4. Get advice before resigning as a director, because the timing affects the two-year clock.
5. If a CRA assessment lands on you personally, it becomes a personal tax debt. Harris & Partners’ page on options for tax debt, from CRA payment plans to proposals outlines the routes, and a Licensed Insolvency Trustee can explain which, if any, apply to you.