November 24, 2017
Generally speaking, corporations are considered to be distinct legal entities, separate from their stakeholders. This separation serves to protect shareholders and directors from the liabilities of their corporations. However, in cases where the CRA is unable to collect the tax arrears of a corporation, it can sometimes “pierce the corporate veil” and hold third-parties personally liable.
As a result, shareholders and directors need to carefully ensure compliance with corporate tax obligations, lest they be held liable for debts that are not theirs.
Are Directors Liable for Corporate Debts?
Under our tax laws, the CRA can hold directors personally liable for corporate debts, including any interest and penalties. The most common assessments are for unpaid payroll source deductions under section 227.1 of the Income Tax Act and unremitted GST/HST under section 323 of the Excise Tax Act.
For an individual to be held liable under the director liability provisions, he/she must have been a director of the corporation during the period when the tax debt arose. The law does not distinguish between active and passive directors, nor does it have exceptions for outside directors who are not directly involved in the company. In addition, individuals who act in a capacity similar to directors can also be held liable even where they not legally appointed as such.
Are Shareholder Liable for Corporate Debts?
Shareholders of a corporation who are considering declaring and paying dividends when the corporation has a tax debt should be mindful of triggering about a section 160 assessment.
Under section 160 of the ITA, shareholders can be held liable for corporate tax debts if they received a dividend from a corporation owing tax debt. Shareholders who find themselves in this position may be held liable to pay for corporate tax debt.
Who Else Can be Liable for Section 160 Assessments?
Transferring property or funds to help get out of paying a tax debt will do more harm than good. According to section 160 of the ITA, non-arm’s length third-parties can be held liable for the tax debts if they received a gift from an individual owing tax debt.
Common non-arm’s length parties include:
- the taxpayer’s spouse or common-law partner;
- a person under 18 years of age; or
- relatives of the taxpayer.
Section 160 assessments could occur in many situations. For example, if a husband while owing taxes transfers title of the family home to his wife, the wife can potentially be held liable for the husband’s tax debt. Alternatively, if a father while owing taxes gifts a large sum of money to child, the child can be held liable for the father’s tax debt.
How Can Directors Defend Against Liability and S.160 Assessments?
Generally, a director will not be held liable for a corporation’s failure to remit its taxes where it can be shown that the director exercised a reasonably prudent degree of care, diligence and skill to prevent the failure. Some examples of diligence include:
- using separate bank accounts for remittances of payroll and GST/HST;
- requiring regular status updates on the remittances; and
- obtaining regular confirmation that remittances have in fact been made during all relevant periods.
While directors are held to a relatively high standard of conduct, their subjective backgrounds, such as personal knowledge, experience, education can be taken into consideration when determining personal liability. In addition, the tax debtor corporation’s organizational structure, resources, and internal reporting structure may also be taken into consideration.
In addition, there is a two-year limitations period on the CRA. The CRA cannot bring legal action against individuals who ceased to be directors of a corporation for at least two years. Individuals cease to be directors where they have resigned and informed the corporation of their resignation, typically in writing.
The main defences to the imposition of a section 160 assessment are:
- arguing that transfer of property was at arm’s length; or
- arguing that the taxpayer gave consideration or paid fair market value for the property.
Unlike director liability, there is no limitations period within which the CRA must raise an assessment. As a result, the CRA has the ability to initiate these assessments no matter how much time has passed. If you have received a section 160 assessment from the CRA, contact a professional immediately. Ignoring these notices could lead to CRA enforcement actions, such as a frozen bank account, property lien or wage garnishment.
How We Help
Despite the CRA’s aggressiveness in pursuing directors for the tax debts of their corporations, director liability assessments can be overturned.
To successfully defend against a directors’ liability assessment, an individual must either prove that they acted diligently in their capacity as a director, or that it has been at least two years since they ceased to be a director. The burden of proof is on the director to establish their case.
Our team of ex-CRA professionals, working in affiliation with tax lawyers from Farber Tax Law, regularly help directors fight the CRA with a range of services including audit defense, objection representation and tax court litigation. We have successfully defended directors against corporate tax liability and may be able to do the same for you.
Contact us to learn more about how we can help.