The following is an illustrative, composite scenario, not a real, named-client matter. It is offered to show how a director's-liability assessment is defended.
The situation
In a representative director's-liability matter, a corporation fell behind on remitting payroll source deductions and GST/HST during a cash-flow crisis and ultimately ceased operating. Source deductions are amounts the corporation withholds from employees and holds in trust for the Crown, and GST/HST collected is treated similarly, so the CRA pursues these debts aggressively. When the corporation could not pay, the CRA assessed one of its directors personally under section 227.1 of the Income Tax Act (and the parallel provision in the Excise Tax Act) for the corporation's unremitted amounts, plus interest and penalties. The director, who had stepped back from day-to-day management before the worst of the shortfall, suddenly faced a personal liability for a corporate debt.
The issue and the risk
Director's liability is one of the few places where the corporate veil is set aside by statute, and the amounts can be significant. But the liability is not automatic — it is subject to both a substantive defence and several procedural conditions, each of which is a potential ground of challenge.
- The due-diligence defence protects a director who exercised the degree of care, diligence, and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. The standard is now largely objective, so what the director actually did, and when, is the heart of the inquiry.
- There is a two-year limitation: a director generally cannot be assessed more than two years after they last ceased to be a director, which makes the precise date of resignation a live and often decisive issue.
- The Crown must also have satisfied the procedural pre-conditions — including registering a certificate of the corporation's debt in the Federal Court and having an execution returned unsatisfied (or the corporation having begun winding-up, dissolution, or bankruptcy proceedings) — before the director can be pursued.
- The director cannot owe more than the corporation properly owed, so the underlying corporate liability itself can be put in issue.
The approach Barrett Tax Law took
The defence ran on two tracks — the technical conditions and the merits — at the same time, because either one alone can be enough to defeat or reduce the assessment.
- Test the procedural pre-conditions. The assessment was checked against the statutory requirements, including the limitation period and the steps CRA must take against the corporation first. The exact date the director ceased to act was documented through corporate records, since the two-year clock runs from that point.
- Establish the due-diligence record. The director's actual conduct was documented — the steps taken to keep remittances current, the controls put in place, the point at which their involvement changed, and what a reasonably prudent person would have done in the same position as the company's finances deteriorated.
- Verify the underlying corporate debt. The corporation's own liability was examined, including whether the remittance figures and any associated penalties were correct, since a director cannot be liable for more than the corporation properly owed.
- Preserve appeal rights. The objection and Tax Court routes were kept open, since a director's-liability assessment is appealed through the same channels as any other assessment.
Our director's-liability page and the guide to director's liability for source deductions and GST/HST explain the defences and the limitation rules in more detail.
The illustrative outcome
In this illustrative scenario, a combination of the due-diligence evidence and a limitation argument produced a result in which the director's personal assessment was substantially reduced. This outcome is illustrative only and is not presented as typical or assured — director's-liability files turn on the specific timeline, the director's documented conduct, and whether the statutory conditions were met.
What "due diligence" looks like in practice
The due-diligence defence is not a vague invitation to argue that the director meant well. The courts look for concrete, contemporaneous evidence that the director took real steps directed at preventing the failure to remit. In practice, that can include putting controls in place to ensure source deductions and GST/HST were segregated and remitted, monitoring remittances rather than assuming they were being made, raising the issue with management or the bookkeeper when cash flow tightened, and seeking advice when the company's finances began to deteriorate. The standard is largely objective, so the question is what a reasonably prudent person would have done in comparable circumstances — not what this particular director happened to know. A director who can show that the remittance obligation was actively managed, and that the eventual shortfall arose despite those efforts rather than because they were absent, is in a materially stronger position. This is why documenting the timeline and the director's actual conduct, early and in detail, is so often the difference in these files.
The takeaway
A section 227.1 assessment can make a director personally responsible for a company's tax debt, but it is far from unbeatable. The defence lives in two places: the procedural conditions the Crown has to satisfy, and the director's own documented diligence. Both should be examined as soon as the assessment arrives, because the limitation period and the evidentiary record both reward acting early — and the precise date a director stepped down can be the difference between liability and none.
Past results do not guarantee a similar outcome. Each matter turns on its own facts. This is an illustrative scenario provided for general information and is not legal advice.