Director's Liability Assessments: Defending a Section 227.1 / ETA 323 Assessment

When a corporation deducts income tax, Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums from its employees' pay, or collects GST/HST from its customers, those amounts are not the corporation's money. They are funds held in trust for the Crown. If the corporation fails to remit them, the Income Tax Act (ITA) and the Excise Tax Act (ETA) allow the Canada Revenue Agency (CRA) to look past the corporate veil and assess the directors personally. A director who thought their exposure ended at the share capital they invested can suddenly receive an assessment for tens or hundreds of thousands of dollars in someone else's unremitted withholdings.

This guide explains how a director's liability assessment works under ITA section 227.1 and ETA section 323, the statutory preconditions the CRA must satisfy before it can assess, the two-year limitation that the CRA frequently misses, and the due-diligence defence as the courts now apply it. It then sets out a defence framework and a worked example. Throughout, the goal is the same: to identify, early, the technical and factual arguments that can reduce or eliminate the assessment.

What the CRA Can Assess a Director For

Director's liability is confined to specific categories of debt. It does not extend to the corporation's general unpaid corporate income tax. The two principal heads of liability are:

• Unremitted source deductions (ITA s.227.1). This covers the income tax, CPP and EI that the corporation withheld (or should have withheld) from employees' wages but did not remit, together with the related penalties and interest.
• Unremitted net GST/HST (ETA s.323). This covers the corporation's net tax — broadly, the GST/HST it collected or was required to collect, less its input tax credits — that it failed to remit, again with penalties and interest.

Both provisions rest on the same logic: these are trust amounts that belonged to the Crown, and directors are the people in a position to ensure they are paid over. The two regimes run on parallel tracks, and a director who served during the relevant period can face both an ITA s.227.1 assessment and an ETA s.323 assessment at the same time.

The Statutory Preconditions: The CRA Cannot Assess First

A director's liability assessment is not a first resort. Both statutes require the CRA to pursue the corporation and come up empty before a director can be made liable. Under ITA subsection 227.1(2) and the mirror provision in ETA subsection 323(2), the director is not liable unless one of three trigger conditions is met:

• Certificate and execution returned unsatisfied. The CRA registers a certificate for the corporation's debt in the Federal Court, a writ of execution issues, and that execution is returned unsatisfied in whole or in part. Where the writ is returned only partly satisfied, the director's exposure is limited to the amount that remains outstanding.
• Bankruptcy. The corporation has commenced liquidation or dissolution, or has become bankrupt, and a claim for the debt has been proved within six months of the assignment or receiving order.
• Dissolution. A claim for the debt has been proved within six months of a dissolution.

These preconditions matter to the defence. If the CRA assessed a director without first registering a certificate and having execution returned unsatisfied (and where no bankruptcy or dissolution applies), the assessment is premature and vulnerable. The first step in any review is to confirm that a valid trigger existed at the time of the assessment, not merely at the time of the appeal.

The Two-Year Limitation — Often the Strongest Argument

The single most powerful defence is frequently the simplest. Under ITA subsection 227.1(4) and ETA subsection 323(5), no action or proceeding to recover an amount from a director may be commenced more than two years after the person last ceased to be a director of the corporation.

The clock runs from the date the individual ceased to be a director, not from the date the corporation failed to remit and not from the date the CRA discovered the shortfall. If the CRA issues the director's liability assessment after the two-year window has closed, the assessment is statute-barred regardless of how clear the underlying liability may be.

The difficulty is fixing the date of cessation, which turns on whether the person was a de jure or a de facto director and on how, exactly, they stopped being one.

De Jure vs De Facto Directors and Resignation Mechanics

A de jure director is a person validly appointed and recorded as a director under the governing corporate statute. A de facto director is someone who, regardless of the formal record, holds themselves out as a director or performs the functions of one — signing off on decisions, directing the business, dealing with the bank or the CRA as though in charge. The CRA can and does assess de facto directors.

This distinction controls the limitation period. A person can resign their formal office, yet if they keep acting as a director — continuing to run the company and make remittance decisions — they may remain a de facto director, and the two-year clock will not start to run. Conversely, resigning effectively and then genuinely stepping back can start the clock and, two years later, close the door on an assessment.

Resignation must be done correctly. Under most Canadian corporate statutes, a director's resignation becomes effective when a written resignation is received by the corporation (or at a later time stated in the resignation). The Federal Court of Appeal in Cliff v. Canada, 2022 FCA 16, confirmed how strictly this is applied: a director who could not prove that a written resignation had actually been delivered to the corporation remained liable, because oral resignations and after-the-fact records such as a corporate registry filing were not enough on their own to establish the effective date. The practical lessons:

• Resign in writing and ensure the resignation is actually received by the corporation; keep proof of delivery (email, courier, or signed acknowledgment).
• Do not rely on a provincial Notice of Change / annual return filing as the resignation itself — it is evidence of a change, not the act of resigning.
• After resigning, stop acting like a director, or risk continuing as a de facto director.

The Due-Diligence Defence — the Buckingham Standard

If the assessment is otherwise valid and timely, the central substantive defence is due diligence under ITA subsection 227.1(3) and ETA subsection 323(3). A director is not liable if they exercised the degree of care, diligence and skill to prevent the failure to remit that a reasonably prudent person would have exercised in comparable circumstances.

The governing authority is Buckingham v. Canada, 2011 FCA 142. The Federal Court of Appeal held that this is an objective standard. A director can no longer escape liability by pleading personal inexperience or a lack of financial knowledge; the comparison is to a reasonably prudent person in the same circumstances, not to the particular director's subjective abilities. Buckingham has since been applied repeatedly, including in Balthazard v. Canada, 2011 FCA 331 and Ahmar v. Canada, 2020 FCA 65.

Two principles from this line of cases shape any due-diligence argument:

• The focus is on prevention, not cure. The defence asks what the director did to prevent the failure to remit from happening in the first place — not what they did to fix it afterward. Steps taken to pay down arrears after a default has occurred generally do not, by themselves, establish the defence.
• Positive steps are required. A director must normally show they took concrete, proactive measures that could reasonably have prevented the failure — for example, putting in place systems to ensure remittances were made on time and monitoring them.

A director who, faced with a cash crisis, directed available funds to suppliers or payroll instead of the CRA will find the defence hard to sustain: that is the opposite of preventing diversion of trust funds. By contrast, a non-management director who installed reporting controls, received assurances backed by documentation, and acted promptly when red flags appeared has a far stronger position.

The Objection and Appeal Path to the Tax Court

A director's liability assessment is challenged through the same dispute mechanism as other tax assessments:

• Notice of Objection. A director generally has 90 days from the date of the assessment to file a Notice of Objection, which sends the matter to CRA Appeals for an independent review. Where the deadline is missed, an extension may be available if applied for within the further statutory window and the conditions are met.
• Appeal to the Tax Court of Canada. If the objection is unsuccessful, or if the CRA does not decide it within 90 days of the objection (180 days for GST/HST matters), the director may appeal to the Tax Court of Canada. The Tax Court is where the limitation, de facto director, and due-diligence questions are ultimately litigated.

Filing an objection is also important for collections. Although it does not erase the debt, it preserves every argument and forces the CRA to justify the assessment before it is finalized.

A Defence Framework: Five Steps

When reviewing a director's liability assessment, the analysis proceeds in a deliberate order, because an early technical win can make the substantive merits irrelevant.

• Step 1 — Test the preconditions. Did the CRA register a certificate and have execution returned unsatisfied, or prove a claim in a bankruptcy or dissolution within the required windows? If not, the assessment is premature.
• Step 2 — Run the limitation clock. Identify the date the person last ceased to be a director — de jure and de facto. Was the assessment issued within two years of that date? If not, it is statute-barred.
• Step 3 — Confirm directorship and resignation. Was the person ever validly a director? If they resigned, was the written resignation actually received by the corporation, and did they stop acting as a director afterward?
• Step 4 — Build the due-diligence case. Assemble evidence of the proactive, preventive steps the director took, measured against the objective Buckingham standard — controls, monitoring, and prompt responses to warning signs.
• Step 5 — Quantum and procedure. Verify the amount: source deductions, net GST/HST, penalties and interest should be checked against the corporation's records, and any amount already recovered from the corporation reduces the director's exposure. File the Notice of Objection in time to preserve every argument.

Worked Example

Priya was one of two directors of a small manufacturing company. The company struggled through 2023 and 2024. To keep the doors open, the other director — who ran day-to-day finances — used incoming receipts to pay key suppliers and payroll, and let GST/HST and payroll remittances fall behind. By the time the company became insolvent, it owed roughly $180,000: about $110,000 in unremitted payroll source deductions and $70,000 in net GST/HST, plus penalties and interest.

Priya signed a written resignation and delivered it to the corporation by email on March 1, 2024, kept a copy of the sent message, and stopped attending to any company affairs after that date. The company assigned itself into bankruptcy in late 2024, and the CRA proved its claim. In April 2026 — more than two years after March 1, 2024 — the CRA issued a director's liability assessment against Priya for the full $180,000.

Applying the framework:

• Preconditions: satisfied — the CRA proved its claim in the bankruptcy, so a valid trigger existed.
• Limitation: the assessment was issued in April 2026, more than two years after Priya ceased to be a director on March 1, 2024. Because her written resignation was received by the corporation and she did not continue to act as a de facto director, the two-year clock under ITA s.227.1(4) and ETA s.323(5) had already expired. The assessment against Priya is statute-barred.
• Contrast: the co-director who kept running finances and chose to pay suppliers ahead of the CRA remained a director until the bankruptcy, is within the two-year window, and — having directed trust funds away from the CRA rather than preventing the failure — faces a difficult due-diligence position under Buckingham.

The numbers here are illustrative; the point is structural. The same $180,000 produces opposite outcomes for two directors because of the date and manner of resignation and the nature of each person's conduct.

How Barrett Tax Law Approaches Director's Liability Assessments

Our review begins with the technical gateways before turning to the merits. We confirm whether the CRA actually satisfied the s.227.1(2) / s.323(2) preconditions, we pin down the date each client last ceased to be a director and test whether the two-year limitation has run, and we examine the resignation record against the standard set in Cliff. Only then do we build the due-diligence narrative — the contemporaneous, preventive steps the client took — to meet the objective Buckingham standard. We prepare and file the Notice of Objection to preserve every argument, deal with CRA Appeals, and, where necessary, carry the matter to the Tax Court of Canada. This work sits alongside our broader practice in director's liability and tax disputes and objections.

If you have received a director's liability assessment, or fear one may be coming, the timing of your response matters — objection deadlines and limitation arguments can be decisive. Contact Barrett Tax Law for a free, confidential consultation to review your situation and the options available to you.

Frequently asked questions

What can the CRA assess me for as a director?

Director's liability is limited to specific trust amounts, not the corporation's general unpaid corporate income tax. Under section 227.1 of the Income Tax Act, you can be assessed personally for payroll source deductions the corporation withheld but did not remit — the employees' income tax, CPP contributions and EI premiums — plus related penalties and interest. Under section 323 of the Excise Tax Act, you can be assessed for the corporation's unremitted net GST/HST, broadly the tax it collected or should have collected less its input tax credits, again with penalties and interest. The rationale is that these are funds held in trust for the Crown, and directors are positioned to ensure they are paid. A director who served during the relevant period can face both an income tax and a GST/HST assessment simultaneously.

Does the CRA have to try to collect from the company first?

Yes. A director's liability assessment is not a first resort. Before you can be made liable, subsection 227.1(2) of the Income Tax Act and subsection 323(2) of the Excise Tax Act require one of three triggers. The most common is that the CRA registers a certificate for the debt in the Federal Court, a writ of execution issues against the corporation, and that execution is returned unsatisfied in whole or in part. The alternatives are that the corporation has become bankrupt and the CRA proved a claim within six months, or that the corporation has been dissolved and the CRA proved a claim within six months. If none of these conditions was met at the time the CRA assessed you, the assessment is premature and can be challenged on that basis alone.

Is there a time limit on assessing a director?

Yes, and it is frequently the strongest defence. Under subsection 227.1(4) of the Income Tax Act and subsection 323(5) of the Excise Tax Act, the CRA cannot commence proceedings to recover an amount from a director more than two years after that person last ceased to be a director of the corporation. The clock runs from the date you ceased to be a director — not from when the corporation failed to remit, and not from when the CRA discovered the shortfall. If the assessment is issued after the two-year window closes, it is statute-barred regardless of the underlying liability. The complication is fixing the cessation date, which depends on whether you were a de jure or de facto director and on how effectively you resigned.

What is the due-diligence defence and how high is the bar?

Under subsection 227.1(3) of the Income Tax Act and subsection 323(3) of the Excise Tax Act, a director is not liable if they exercised the care, diligence and skill to prevent the failure to remit that a reasonably prudent person would have exercised in comparable circumstances. In Buckingham v. Canada, 2011 FCA 142, the Federal Court of Appeal confirmed this is an objective standard: you cannot rely on personal inexperience or lack of financial knowledge to excuse the failure. The defence focuses on prevention, not cure — what you did to stop the failure from happening, not what you did to fix arrears afterward. Directors normally must show positive, proactive steps, such as putting remittance controls in place and monitoring them. Diverting available funds to suppliers ahead of the CRA generally undermines the defence.

I resigned as a director — am I protected?

Possibly, but only if the resignation was effective and you genuinely stopped acting as a director. Under most Canadian corporate statutes, a resignation takes effect when a written resignation is received by the corporation, or at a later time stated in it. In Cliff v. Canada, 2022 FCA 16, the Federal Court of Appeal held that a director who could not prove a written resignation had actually been delivered to the corporation remained liable; oral resignations and registry filings alone were not enough to fix the date. Just as important, if you keep running the business or making remittance decisions, you may remain a de facto director and the two-year limitation clock will not start. To protect yourself, resign in writing, keep proof that the corporation received it, and stop acting as a director afterward.

How do I dispute a director's liability assessment?

You challenge it through the standard tax dispute process. You generally have 90 days from the date of the assessment to file a Notice of Objection, which sends the matter to CRA Appeals for an independent review; if you miss the deadline, an extension may be available within a further statutory window if the conditions are met. If the objection fails, or the CRA does not decide it within 90 days (180 days for GST/HST matters), you can appeal to the Tax Court of Canada, where limitation, de facto director and due-diligence arguments are ultimately decided. Filing an objection also preserves your arguments and forces the CRA to justify the assessment before it is finalized. Because deadlines and limitation points can be decisive, it is worth obtaining advice promptly after receiving the assessment.