A corporation that withholds income tax, CPP, and EI from employee paycheques — or collects GST/HST from customers — holds those amounts in trust for the Crown. When the corporation fails to remit them, the CRA has a powerful tool: it can assess the directors personally for the shortfall, plus interest and penalties. The provisions are section 227.1 of the Income Tax Act for source deductions and section 323 of the Excise Tax Act for GST/HST. They share the same framework and the same two principal defences.

When director's liability applies

The CRA may assess a director personally where three conditions are met:

The corporation failed to remit source deductions, GST/HST, or another covered "trust" amount.
One of the statutory collection preconditions has occurred — typically the corporation has been dissolved, a Federal Court certificate for the debt has gone unsatisfied, or the corporation has entered bankruptcy or insolvency proceedings.
The person was a director of the corporation at the time the failure to remit occurred.

The assessment covers the unremitted amount together with the interest and penalties that accrued on it. Importantly, liability does not depend on the director having received any personal benefit from the corporation — a point that surprises many directors of struggling companies.

Why these amounts are treated differently

The reason directors are exposed to source deductions and GST/HST, but not to the corporation's ordinary income-tax debt, is that these are "trust" amounts. When a corporation withholds tax, CPP, and EI from an employee's pay, it is collecting money that belongs to the employee and the Crown; when it charges GST/HST on a sale, it is collecting tax that belongs to the Crown. The corporation holds those amounts in trust and is obliged to remit them. Director's liability is the mechanism Parliament chose to deter directors from funding a struggling business with money that was never the corporation's to use. Understanding that rationale helps explain why the defences focus on the director's conduct around remittance specifically, rather than on the corporation's overall financial health.

The two-year limitation defence

The most decisive defence is also the most frequently overlooked. Subsection 227.1(4) of the Income Tax Act and subsection 323(5) of the Excise Tax Act both provide that no action or proceeding to recover an amount from a director may be commenced more than two years after the director last ceased to be a director of the corporation.

This defence is procedural, not merits-based. The director does not have to show they did anything right; they only have to show that the CRA's assessment came too late. The analysis turns on a single date, and getting that date right is everything:

When did the director cease to be a director? This is a question of corporate law in the governing jurisdiction. A director generally ceases to hold office on a valid resignation in accordance with the corporation's articles and by-laws, on removal by the shareholders, on death, or on becoming disqualified.
Is the resignation properly documented and filed? The provincial or federal corporate registry should reflect the resignation, and the minute book and registers should record the date. A verbal resignation that was never recorded may not start the clock.
Did the director keep acting as a director afterward? A person who continues to function as a director — signing documents, directing operations, dealing with the bank — may be treated as a "de facto" director despite a formal resignation, which can reset the limitation analysis.

The case law on what it means to "cease to be a director" is extensive and fact-driven. Some directors who believed they had resigned were found still in office; others who never formally resigned were found to have ceased through the surrounding circumstances. Where the assessment lands outside the two-year window and the cessation date is airtight, the limitation defence can end the file.

The due-diligence defence

Subsection 227.1(3) (and section 323(3) for GST/HST) provides that a director is not liable where the director "exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances."

The Federal Court of Appeal's decision in Canada v. Buckingham, 2011 FCA 142 — read together with cases such as Chriss and Liu — establishes that this is an objective standard. Older authority had imported a subjective element keyed to the individual director's own experience; the current law asks what a reasonably prudent person would have done in comparable circumstances, which is a more demanding test.

Crucially, the defence is forward-looking: it asks what the director did to prevent the failure, not what they did to fix it afterward. In practice the defence is built on contemporaneous evidence of preventive steps, such as:

Active engagement with the bookkeeper or accountant on remittance schedules and deadlines.
Review of source-deduction and GST/HST remittances at board meetings.
Specific arrangements with the bank to ensure remittances were funded.
Professional advice obtained when the corporation ran into difficulty.
Active responses to CRA correspondence about missed remittances.

Passive directors who simply trusted management generally do not meet the standard. Directors who were involved and can document their efforts to keep remittances current generally have a real defence. "Outside" or nominee directors face the same legal test, and while the defence is harder for an inactive director, attending meetings, asking the right questions, and obtaining advice all weigh in their favour.

A frequent point of confusion is the role of the corporation's financial distress. The objective standard does not excuse a director simply because money was tight; on the contrary, the prevention-focused inquiry asks what the director did before the remittances were missed, including when the corporation was already under strain. A director who, faced with a cash shortfall, made a deliberate decision to pay suppliers or wages ahead of the CRA generally has a weak due-diligence defence, because that is precisely the choice the trust-fund regime is designed to discourage. Conversely, a director who put arrangements in place — segregated remittance funds, automatic payments, direct involvement with the bank — to ensure the Crown's money was protected even as the business struggled is in a much stronger position.

Resignation timing

Because the limitation period runs from cessation and liability only attaches to failures during the director's tenure, the timing and mechanics of resignation are central. A director who resigns properly and ensures the registry and minute book reflect the date both starts the two-year clock and caps the periods of exposure. A resignation that is informal, undocumented, or contradicted by continued conduct may achieve neither. For a director of a corporation in distress, getting the resignation right — and then staying out of de facto director conduct — is one of the few protective steps still available.

Common scenarios

Certain fact patterns recur on these files, and each calls for a different emphasis:

Resignation followed by a late assessment. A corporation is in financial trouble, the director resigns, and the personal assessment arrives more than two years later. The limitation defence is likely available — but only if the cessation date is documented and the director did not keep acting after resigning.
One active director and one passive co-director. The active director may have a genuine due-diligence defence built on documented preventive steps, while the passive director may not. The cases are sometimes severable, and each director's position is assessed on its own facts.
Continued signing after a purported resignation. A director who signs cheques, contracts, or filings after the resignation date risks being treated as a de facto director, which can undo the limitation defence. Conduct evidence matters as much as the formal record.
Reliance on a bookkeeper who failed to remit. Reliance on a professional is part of a due-diligence defence but is not, by itself, enough. The director must have taken steps to verify that remittances were actually being made.
Single-director family corporation. Where one spouse is the sole director, the file is often paired with section 160 exposure on the other spouse for non-arm's-length transfers out of the corporation.

Frequently asked questions

Can I be liable if I never received any benefit from the corporation? Yes. Director's liability does not depend on the director having received a personal benefit.

What if I was only a director on paper? "Outside" and nominee directors are subject to the same legal framework. The due-diligence defence is harder to establish for an inactive director, but attending meetings, asking the right questions, and obtaining advice all weigh in the director's favour.

Does directors' and officers' (D&O) insurance cover this? D&O policies generally exclude tax liabilities. The actual policy wording controls, so it should be reviewed carefully.

Can the corporation indemnify me? A corporation can usually indemnify its directors under corporate law, but if the corporation cannot pay, the indemnity is of little practical value and the personal exposure remains.

Can bankruptcy discharge a director's-liability assessment? Bankruptcy can discharge many of these assessments, though certain large or trust amounts may survive in defined circumstances. Advice before filing is important.

Related exposure: section 160

Director's-liability files frequently travel with derivative liability under section 160 of the Income Tax Act. Where a corporation in tax arrears transferred property to a non-arm's-length party — often a director's spouse or a related corporation — for less than fair market value, the recipient can be assessed separately. The two files are best analyzed together; our guide on section 160 derivative liability covers that exposure in detail.

The objection and appeal path

A director's-liability assessment is a notice of assessment like any other, and it carries the same review rights. The first step is a notice of objection, which must be filed within 90 days of the date of the assessment. The objection goes to the CRA's Appeals branch, where an officer independent of the auditor reviews the file. If the objection does not resolve the matter, the director may appeal to the Tax Court of Canada within 90 days of the CRA's decision on the objection.

Two practical points deserve emphasis. First, the deadlines are firm, and missing the 90-day objection window forfeits the most direct route to challenge the assessment (relief for late objections is possible but discretionary and time-limited). Second, the underlying corporate debt may itself be open to challenge — sometimes the corporation still has live objection or appeal rights, or the trust-amount calculation is simply wrong. A director's file is not only about the director's personal defences; it is also an opportunity to test whether the number the CRA is trying to collect is correct in the first place.

Common mistakes

Skipping the limitation analysis. The most decisive defence is the one most often missed.
Assuming an informal resignation works. The CRA and the courts look for documented evidence.
Treating "due diligence" as good character. The defence requires specific, contemporaneous steps to prevent the failure.
Ignoring related-party transfers. Section 160 frequently follows.
Letting a "small" assessment go unchallenged. Even modest assessments become the basis for collection action against personal accounts, registered plans, and real property.

How we approach the file

We run the limitation analysis first — fixing the cessation date by reference to the corporate registry, the minute book, and the director's actual conduct. We build the due-diligence record in parallel, confirm that the underlying corporate debt is correct, identify any section 160 exposure on related parties, and file the objection within the 90-day window. Personal collection action tends to follow these assessments quickly, so the analysis benefits from starting early.

Director's Liability for Unremitted Source Deductions & GST/HST (s.227.1)