Few provisions of the Income Tax Act reach as directly into a person's private finances as section 227.1. When a corporation fails to remit source deductions it has withheld from employees' pay, the Canada Revenue Agency can look past the corporate veil and assess the company's directors personally for the shortfall. For a director of a business that has failed, the result can be a six-figure assessment for amounts the company, not the individual, was obliged to pay.
The Act does, however, offer a way out: the due-diligence defence in subsection 227.1(3). 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 is not liable. The hard question is what that actually requires. The decision in Hamad v. The Queen, 2019 TCC 137, is a useful illustration because the Tax Court of Canada allowed the defence and vacated the assessment, something that does not happen often. It shows how a director can satisfy the demanding objective standard set by the Federal Court of Appeal in Canada v. Buckingham, 2011 FCA 142.
The facts
The taxpayer in Hamad was a director of a corporation engaged in developing hydrokinetic turbines, technology designed to generate electricity from moving water. The company was pursuing an ambitious development program and had several turbines under way.
In 2014, the corporation's prospects changed abruptly through no fault of its own. A newly elected Quebec government terminated agreements that the outgoing government had put in place, and production of the turbines already in development was effectively halted. The loss of that government support pushed the corporation into serious financial difficulty.
The director did not simply let the company drift. Management took the financial picture to the shareholders, holding a meeting at which it requested roughly $150,000 in further funding. The stated purpose was concrete: to support employee pay so that key staff could be retained, to keep the corporation operating, and to allow the company to meet its remittance obligations, including its obligations under section 227.1. Shareholders were given information about the corporation's source-deduction remittances, taxes and other dues. Despite these efforts to raise capital, the business could not be saved, and the corporation filed for bankruptcy in 2015.
During the insolvency, the CRA recovered on its secured claim but received nothing on its unsecured claim for the unremitted source deductions. Unable to collect the balance from the corporation, the CRA turned to the director and assessed him personally under section 227.1 for the unpaid payroll source deductions.
The issue
The director did not dispute that the corporation had failed to remit, or that he was a director when the failures occurred. The single live issue was whether he could establish the due-diligence defence in subsection 227.1(3): had he exercised the care, diligence and skill of a reasonably prudent person to prevent the corporation's failure to remit?
That framing matters. Director's-liability appeals frequently turn not on whether the corporation owed the money, but on the narrow question of the director's own conduct. Three things must generally line up for liability to attach at all: the person was a director, the corporation failed to remit, and the CRA satisfied the procedural preconditions in section 227.1 (such as registering a certificate of the debt in Federal Court and having execution returned unsatisfied, or proving the claim in a bankruptcy or dissolution). Where those are met, the due-diligence defence becomes the director's principal shield, and the burden of establishing it rests on the director.
What the Court decided (and why)
The Tax Court allowed the appeal and found that the director had made out the due-diligence defence. To understand why that conclusion was available, it helps to start with the standard the Court was applying.
Before 2011, the leading case, Soper v. Canada, was often read as blending objective and subjective elements, so that a director's own background and experience could raise or lower what was expected of them. The Federal Court of Appeal recalibrated the test in Canada v. Buckingham, 2011 FCA 142. Buckingham holds that the standard of care under subsection 227.1(3) of the Income Tax Act (and the parallel subsection 323(3) of the Excise Tax Act for GST/HST) is an objective standard. A director is measured against what a reasonably prudent person would have done in comparable circumstances, not against the director's own subjective skills, knowledge or inexperience. A director cannot escape liability simply by pointing to a lack of business sophistication.
Buckingham also sharpened the focus of the inquiry in two ways that are central to Hamad:
- Prevention, not cure. The defence asks what the director did to prevent the failure to remit at the time, not what the director did to remedy or cure a default after it had already happened. Heroic rescue efforts aimed at saving the business as a whole, after remittances have been missed, generally do not establish the defence.
- The remittance obligation specifically. The director's diligence must be directed at the corporation's obligation to remit, rather than at the corporation's general commercial interests. Keeping the company alive is not the same thing as ensuring the Crown's deductions are protected.
Against that demanding backdrop, the director in Hamad succeeded because the evidence showed attentiveness to the remittance obligation itself, and because the failure flowed from an external shock rather than from inattention or a deliberate decision to fund operations out of money owed to the Crown. The Court was influenced by the fact that management raised the funding shortfall with shareholders and asked for capital expressly to support payroll and to meet the corporation's obligations under section 227.1, and that shareholders were kept informed about the company's source-deduction and tax remittances. That record demonstrated that the director was alert to the remittance problem and took concrete, contemporaneous steps directed at it, rather than discovering the shortfall only after the fact.
Equally important was the cause of the default. The corporation's collapse was triggered by the cancellation of government agreements after a change in administration, an event outside the director's control. The director responded by trying to obtain the funds needed to keep employees paid and obligations met. On the whole of the evidence, the Court concluded that the director had exercised the care, diligence and skill of a reasonably prudent person to prevent the failure to remit, and the assessment could not stand.
Why this decision matters / practical takeaways
Hamad is worth attention precisely because the due-diligence defence so often fails. After Buckingham, directors can no longer rely on personal inexperience, and after-the-fact efforts to rescue a failing company rarely qualify. Hamad shows the kind of record that can carry the defence:
- Document attentiveness to remittances, in real time. The decisive evidence was contemporaneous: a shareholder meeting, a specific funding request tied to payroll and section 227.1 obligations, and disclosure to shareholders about remittances. Minutes, board materials, emails and funding requests created while the company was still operating are far more persuasive than reconstructions prepared once the CRA has assessed.
- Tie your efforts to the remittance obligation, not just to survival. Under Buckingham, generalized attempts to keep the business afloat are not enough. Steps that are visibly aimed at ensuring source deductions are funded and remitted are what the Court is looking for.
- The cause of the default is part of the story. A shortfall driven by a sudden, external shock that a prudent director could not have prevented sits very differently from one caused by a deliberate decision to use withheld amounts as working capital.
- Preconditions and timing still matter. A director's liability can also be challenged on whether the section 227.1 procedural conditions were met, on the two-year limitation period that runs from the date a person last ceased to be a director, and on the underlying amount of the corporation's liability.
If you have been assessed personally for a corporation's unremitted source deductions or GST/HST, the time to assemble this kind of evidence is early, while records, recollections and witnesses are still available. You can read more about how these appeals run in our guides to the Tax Court of Canada appeal process and to evidence and the burden of proof in the Tax Court.
How Barrett Tax Law approaches director's-liability files
Director's-liability files reward early, methodical preparation. When we take on a section 227.1 or section 323 matter, we start by testing the assessment itself: was the person actually a director at the relevant times, were the CRA's procedural preconditions satisfied, and is the two-year limitation period in play? In parallel, we build the due-diligence record, gathering the contemporaneous board minutes, funding requests, financial reports and correspondence that show what the director did, and when, to keep remittances protected. From there, the strategy may run through CRA representations, a Notice of Objection, or an appeal to the Tax Court of Canada, depending on the facts.
Our work in this area connects to related files we handle, including director's-liability assessments, audit representation, and gross-negligence penalties. If you are facing a personal assessment for a corporation's tax debt, you are welcome to reach out for a free, confidential consultation so we can review the assessment and your options.
You can read the decision on CanLII: Hamad v. The Queen, 2019 TCC 137.
This article is commentary on a public court decision. It is general information only, not legal advice, and outcomes depend on the specific facts of each case.
Frequently asked questions
What is director's liability under section 227.1 of the Income Tax Act?
Section 227.1 allows the Canada Revenue Agency to assess a corporation's directors personally when the corporation fails to remit amounts it was required to withhold and remit, such as payroll source deductions. If the CRA cannot recover the debt from the corporation and certain procedural conditions are met, the directors can be held jointly and severally liable for the unremitted amounts, interest and penalties.
What is the due-diligence defence in subsection 227.1(3)?
A director is not liable if they exercised the degree of care, diligence and skill to prevent the corporation's failure to remit that a reasonably prudent person would have exercised in comparable circumstances. The director bears the burden of establishing the defence, and it focuses on steps taken to prevent the failure rather than efforts to cure a default after it has occurred.
What standard did Buckingham set for the due-diligence defence?
In Canada v. Buckingham, 2011 FCA 142, the Federal Court of Appeal held that the standard of care under subsection 227.1(3) of the Income Tax Act, and the parallel subsection 323(3) of the Excise Tax Act for GST/HST, is objective. A director is measured against a reasonably prudent person in comparable circumstances and cannot rely on personal inexperience or lack of business skill. The defence looks at what the director did to prevent the failure to remit, not at after-the-fact rescue efforts.
Why did the director win in Hamad v. The Queen?
The Tax Court found the director had met the objective standard. The corporation's financial collapse was caused by an external shock, the termination of government agreements after a change in Quebec's government, and the director responded by raising the shortfall with shareholders and requesting funding specifically to support payroll and meet the corporation's section 227.1 remittance obligations. Shareholders were kept informed about remittances. That contemporaneous, remittance-focused diligence allowed the defence to succeed and the assessment was vacated.
How long does the CRA have to assess a director under section 227.1?
There is a two-year limitation period that runs from the date a person last ceased to be a director of the corporation. An assessment issued more than two years after a person genuinely and effectively resigned may be statute-barred, which is one reason the timing and validity of a resignation can be an important issue in these appeals.
What evidence helps support a due-diligence defence?
Contemporaneous records are the most persuasive: board and shareholder minutes, funding requests tied to payroll and remittance obligations, internal financial reporting, and correspondence showing the director was monitoring remittances and acting to protect them in real time. Records created while the company was still operating carry far more weight than materials reconstructed after the CRA has issued an assessment.