A Director’s Liability For Unreported Tax – including GST/HST!

If you are a director of a company in Canada, you are already likely aware of the legal and financial challenges that businesses face, specifically related to taxes. The Canada Revenue Agency (CRA) issues assessments every year against directors to collect unreported taxes. Even if you are a director of a charity or non-profit corporation, you may still face collections as a director regarding unpaid taxes or unreported income from your company. If you are curious whether you may have director’s liability for unreported tax amounts to the CRA, consider visiting with the experienced tax attorney Jeremy Scott at Jeremy Scott Law to help you understand all of your legal options. Contact us today at 902-403-7201.

Understanding Unreported Tax (GST/HST)

Every business in Canada must report both the taxes collected and the taxes paid to the CRA in order to ensure compliance with GST/HST tax obligations. If a company does not report these amounts, or reports them incorrectly, a director may become personally liable for any GST/HST reassessments issued to the company.

Specifically, in the court case of Duque v. Canada, 2020 FCA 73, the CRA alleged that the corporation had failed to accurately report income for 2006 and 2007.  As a result, the company was provided with a reassessment for tax purposes under the Income Tax Act. The corporation was then also assessed for unremitted GST/HST ‘net tax’ under the Excise Tax Act. Court records indicate that the corporation did not file a Notice of Objection to this reassessment of GST/HST.  Mr. Duque, a director for the company, was then personally assessed by the CRA for the company’s tax liability resulting from the various tax reassessments. The total amount owed to the CRA included the original unremitted tax, as well as applicable interest and penalties as provided for in the tax legislation.  The court found the director liable for these amounts, and he was required to pay the CRA on behalf of his company.

Examples of Corporate Tax Liabilities

Every director of a company should understand that as a director they may be held personally responsible for tax liabilities, and put in place measures to ensure that the company is properly reporting all of its tax obligations.  Examples of tax liabilities for which a company director could potentially be responsible include:

• GST/HST collected but not remitted by the corporation;
• Over-claimed GST/HST input tax credits;
• Payroll deductions (withheld but not reported to the CRA);
• Income tax debt of a corporation.

These are only some examples of corporate tax liabilities that should be reported to the CRA. If you feel overwhelmed or unsure if your corporation is correctly reporting income for tax purposes, consider visiting with the experienced tax attorney at Jeremy Scott Law today.

What if You Are Not the Only Director?

Many companies have more than one director. As a result, the CRA has the legal right to assess every director of a company regarding unreported income. In most cases, the liability is assessed equitably and equally among all of the directors regarding the tax debt for unreported income. In some cases, if only one director is assessed liability for unreported income, he or she may have the legal ability to sue the other directors for their equitable portion.

Cases Where a Director is Not Officially Listed as a Director

There are some instances where a director is not officially listed on corporate documents as a director of the company. However, if the facts and circumstances point to a person running the company or in any way exhibiting control over the company, the person may still be legally recognized as a de facto director of the company. As a result, the CRA may have the legal right to pursue a de factor director for payment of tax liabilities.

Possible Defenses To Director’s Liability

There are some defenses available to directors of corporations if they discover that they have been assessed by the CRA for unreported income.

Not a Director of the Company

There are circumstances where a person has never been a director, never consented to the title and obligations of director, and never legally acted in any way that would hold themselves out to be a director of a company. As previously indicated, in these cases, the person would have to prove that they never acted in any way that would have represented the company. For example, they never signed any contracts on behalf of the company, never made any discretionary decisions related to the company, and were not listed on any of the company documents.

Resigning More Than Two Years Prior to the CRA Assessment

Simply resigning is not enough to exculpate a director from responsibility and liability regarding reporting corporate income to the CRA. Any actions (or inactions) that were taken during the time of a director’s tenure at a company could result in director liability for unreported income to the CRA.

However, if a director resigned, or stopped acting in the capacity as a director, more than two years prior, a director may have the ability to avoid liability and payment for company unreported tax. However, a director must prove that they truly resigned and that they were removed from all responsibilities and involvement with the company to effectively use this as a defense.

Due Diligence

There are narrow circumstances in which a director may be able to use the defense of due diligence. In this case, the director shows that they are not liable for the unremitted and/or unreported tax because they truly can show they exercised complete due diligence, care, and skill that a reasonably prudent person in a similar circumstance would have done. This is a challenging defense to prove.

Contact an Experienced GST/HST Tax Attorney To Learn More

If you are concerned about whether you may have personal liability to the CRA as a director, consider contacting Canadian tax lawyer Jeremy Scott to help answer all of your questions and understand all of your legal options. Contact us today at 902-403-7201.

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The Disclaimer:

Please note the content above and throughout this website is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind.  I urge you to seek specific legal advice by contacting me (or your current legal counsel) regarding any legal issues you may face.  I do not warrant or guarantee the quality, accuracy or completeness of any information found on this website and will not be held liable for anything contained in this document or any use you make of it. Finally, accessing the information on my website does not create a lawyer-client relationship.