Operating a Canadian business usually means becoming an unpaid agent of the Canada Revenue Agency. Most businesses end up collecting GST or HST from their customers, and any business with staff on payroll ends up withholding source deductions from its employees. In both cases the business is acting as the agency's agent and trustee — and that single word, "trustee," is the reason these obligations are the most dangerous ones a new business carries. Unremitted trust amounts pierce the corporate liability shield and attach directly to the directors. Understanding registration and remittance is not optional housekeeping; it is what keeps a tax problem from becoming a personal one.
GST/HST: who has to register, and when
GST/HST is governed by the Excise Tax Act, which determines what goods and services are taxable, zero-rated, or exempt. The provinces that harmonized their sales tax with the federal GST charge HST; the others charge GST plus their own provincial tax. The rule of thumb is that once a business generates $30,000 or more in a year, it is required to charge and collect GST/HST. Plenty of business owners cross that threshold without realizing it and then learn — often years later, during an audit — that they were required to collect, say, 13% HST that they never actually charged their customers. The Canada Revenue Agency will still want that tax, even though the money was never collected, which can be a brutal surprise. The lesson is to register for an HST number and apply the correct tax to every transaction, every time.
"Correct tax" depends on where the customer is and where the goods or services are supplied, not on where you are. A widget merchant in Toronto charges 13% HST to a customer in Sudbury, Ontario, 5% GST to a customer in Calgary, Alberta, and 0% to a customer outside Canada. Getting the rate right by destination matters.
The upside of registering: input tax credits
Registration is not all obligation. Once you are an HST registrant, you can claim input tax credits (ITCs) for the HST you pay on your own business expenses — even if your sales were under the $30,000 threshold. An example: a business sells $20,000 of goods or services in a year, collecting $2,600 of HST for the agency (assuming all sales were in Ontario). If that business also paid $1,040 of HST on $8,000 of expenses, it can apply the $1,040 as an ITC and remit only the net $1,560. Any HST you spend comes straight off the HST you have to send in. And an exporter who pays HST on inputs but charges 0% on its exports can end up with a refund cheque from the Canada Revenue Agency.
Source deductions: withholding from your employees
If you put anyone on payroll, you must deduct CPP (or QPP in Quebec) contributions, EI premiums, and income tax from their gross pay. The employee receives their pay net of these deductions, and the employer must set the withheld amounts aside and remit them to the Canada Revenue Agency on a regular cycle, along with the required paperwork including T4 summaries. The employer also pays its own share of CPP and EI on top of what it withholds.
What goes wrong, predictably, is that a business in financial trouble uses the source deductions (or the HST it collected) to pay rent, staff, or suppliers instead of remitting them. That is the moment directors get themselves into serious trouble, because those are trust funds. For new owners, outsourcing payroll to a payroll-management company is worth strong consideration for three reasons: it saves the time of preparing paperwork and running calculations; it reduces errors; and it pulls the money from the business account and remits it automatically each pay period, removing the temptation to dip into funds that were never the business's to spend.
Director's liability: why trust taxes are different
The whole point of incorporating is to put a shield between the company's creditors and the principals' personal assets. Trust taxes are the most important exception to that shield. GST/HST, CPP, and EI that the company collected or withheld can be assessed as personal debts of the directors for up to two years from the date they last served as a director. The reasoning is that these are amounts the business literally collected or withheld on the government's behalf, so directors are held to a duty of care to ensure they are paid.
The escape route, in theory, is the "due diligence" defence: a director is not liable if they exercised the degree of care, diligence, and skill that a reasonable director would have exercised in comparable circumstances. In practice, the Canada Revenue Agency tends to read the "reasonable director" standard as a "perfect director" standard and treats directors almost as guarantors of the debt — a posture for which tax court judges have repeatedly criticized the agency. Before a director can be assessed personally, the corporation's own ability to pay must first be exhausted; and a director's assessment can be objected to and appealed to the Tax Court of Canada. But at the agency level, escaping director's liability is genuinely difficult once you have been a director within the previous two years.
Paying yourself without creating a trust-tax problem
If you run a corporation, you can pay yourself by salary, by dividends, or by both, and the choice interacts with these trust obligations. Salary puts you on the corporation's payroll, which triggers CPP, sometimes EI, and payroll administration — and obliges the corporation to withhold and remit your source deductions. Dividends come out of after-tax corporate income and skip payroll mechanics, but you must leave enough money in the corporation to pay its corporate tax at year-end; if the corporation pays dividends and then fails to pay its corporate taxes, the agency can assess the dividend recipients for the unpaid corporate tax. The uncomfortable symmetry is this: if you are the sole shareholder and sole director, you will be assessed personally either way you mishandle the company's money — as a shareholder if you take dividends ahead of unpaid corporate tax, or as a director if you go on payroll and fail to remit source deductions. You wear several hats, but you are still one person, and the responsibility lands on you.
How the work gets done
Trust-tax problems are among the most common — and most personally damaging — issues new businesses face. Barrett Tax Law can advise on GST/HST registration and remittance, set up payroll obligations correctly, and represent directors who have been assessed personally for trust amounts, including objections and Tax Court appeals. The first consultation focuses on your situation and the realistic options.
This guide draws on Dale Barrett's book, A Quick and Dirty Business Start-Up Guide. It is general information, not legal advice, and reading it does not create a lawyer-client relationship.