CRA Director's Liability (227.1): The Due Diligence Defense

When a Canadian corporation fails to remit payroll source deductions, GST/HST, or employee CPP/EI premiums, the CRA can pursue the directors personally. This is not a theoretical risk. The CRA issues thousands of director’s liability assessments every year, and the liability can be massive: a company with 15 employees that misses six months of source deductions can generate a personal assessment of $150,000 or more against each director. The defense is narrow (due diligence), the limitation period is short (two years from resignation), and the cross-border complications are real (a US resident who sits on a Canadian board can be assessed by the CRA without ever having filed a Canadian return). This page covers how director’s liability works, when the due diligence defense applies, and how to build it before you need it.

What does the CRA hold directors liable for?

Director’s liability covers three categories of trust obligations:

1. Source deductions. When a corporation pays employees, it must withhold income tax, CPP contributions, and EI premiums, then remit those amounts to the CRA. The withheld amounts are held in trust for the Crown (ITA 227(4)). If the corporation does not remit, the directors are personally liable for the unremitted amounts plus penalties and interest under ITA 227.1(1).

2. GST/HST net tax. When a corporation collects GST/HST, it holds the collected tax in trust for the Crown (ETA 222). If the corporation does not remit, the directors are personally liable under ETA 323. The structure mirrors section 227.1.

3. Employer CPP/EI contributions. The employer’s share of CPP and EI (in addition to the employee’s share withheld from pay) is also a trust obligation.

Director’s liability does not extend to corporate income tax. If the corporation fails to pay its T2 balance, the CRA collects from the corporation’s assets but cannot pursue the directors personally for the corporate income tax debt. The distinction matters: a director can be liable for $200,000 in unremitted source deductions while having zero personal liability for the corporation’s $500,000 income tax bill.

When can the CRA assess a director?

The CRA cannot go directly to the directors. ITA 227.1(2) requires one of three preconditions:

1. The corporation’s assets are insufficient. The CRA has a judgment against the corporation and the execution is returned unsatisfied (the bailiff could not find assets to seize).
2. The corporation is insolvent. The corporation has filed for bankruptcy or been placed in receivership, and the CRA has proven its claim within six months of the proceedings.
3. The corporation has been dissolved. A dissolved corporation has no assets to seize.

In practice, the CRA usually waits until the corporation is defunct or bankrupt, then assesses the directors. By the time the director receives the personal assessment, the corporation’s affairs may be years old, records may be scattered, and the director may have assumed the problem was resolved.

What is the due diligence defense?

The only complete defense to a director’s liability assessment is due diligence under ITA 227.1(3). The director must prove they “exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.”

The leading case is Soper v. Canada (1998 FCA), which established that the standard is objective-subjective: it considers what a reasonable person with the director’s particular skills and experience would have done. An experienced business director is held to a higher standard than someone who was a director in name only with no business background.

The Tax Court has identified several factors that support a successful due diligence defense:

Steps that help:

• Setting up a system where source deductions were remitted automatically (payroll service, direct remittance schedule)
• Regularly checking that remittances were being made (reviewing bank statements, CRA My Business Account)
• Giving specific instructions to the person handling payroll that source deductions must be remitted before any other creditors are paid
• Resigning when it became clear that the corporation could not meet its remittance obligations (and the director could not prevent the failure)
• Documenting concern about remittances in board minutes or written communications

Steps that do not help:

• Delegating payroll to a bookkeeper and never checking whether remittances were made (Soper)
• Being a “passive” or “accommodation” director (a friend or family member who lent their name to satisfy provincial requirements) without taking any steps
• Claiming ignorance of the obligation (every director is deemed to know about the remittance obligation)
• Paying other creditors (rent, suppliers, bank loans) before the CRA when cash was short

The key question: when the corporation started falling behind, what did the director actually do to prevent it? A director who can show they tried to ensure remittances were made, and either succeeded or resigned when it became clear they could not, has a defense. A director who shrugged or did not notice does not.

What is the two-year limitation period?

Under ITA 227.1(4), the CRA cannot assess a director more than two years after the person last ceased to be a director. This is a hard deadline: if the director resigned on January 15, 2024, the CRA must issue the assessment by January 15, 2026.

Three complications:

When does a director “cease”? Filing articles of resignation with the provincial corporate registry is clear. But simply stopping all involvement is not automatically a resignation under corporate law. If you never filed a formal resignation, the CRA may argue you are still a director, and the two-year clock has not started. To protect yourself: file a written resignation with the corporation, ensure it is recorded in corporate minutes, and file a notice of change with the provincial registry.

De facto directors. Even if you never held the formal title, the CRA can assess you as a de facto director if you functioned as one (signed cheques, gave instructions to employees, made business decisions, held yourself out as a director). The two-year clock for a de facto director runs from when you stopped functioning as a director, which is harder to prove than a formal resignation date.

Multiple corporations. If you are or were a director of multiple corporations, each corporation’s liability is assessed separately with its own two-year clock. Being assessed for one corporation does not extend the limitation for another.

How does this apply to cross-border directors?

A US resident who sits on the board of a Canadian corporation is subject to director’s liability on exactly the same terms as a Canadian-resident director. Residency is irrelevant. The assessment is under Canadian law, and the CRA can issue the assessment to the director’s US address.

Collection is a separate question. The CRA can collect from Canadian assets held by the US-resident director (bank accounts, real estate, investments in Canada). For US-based assets, the CRA would need to invoke the collection assistance provisions of the Canada-US tax treaty (Article XXVIA), which allows one country to collect tax debts on behalf of the other. The IRS can collect Canadian tax debts from US assets if the CRA requests assistance and the conditions of Article XXVIA are met.

The practical risk: a US resident who was a director of a Canadian corporation that failed can face a CRA assessment years later, and the CRA can potentially reach their US bank accounts through the treaty collection mechanism. The treaty also allows information exchange (Article XXVII), so the CRA can obtain the director’s US financial information.

For US persons who are directors of Canadian corporations (common in cross-border business structures), the recommendation is to build the due diligence file in real time: document every board meeting, ensure source deductions are being remitted (check CRA My Business Account quarterly at minimum), and resign formally if the corporation cannot meet its obligations.

What about the ETA (GST/HST) equivalent?

ETA 323 mirrors ITA 227.1 almost exactly. Directors are jointly and severally liable for the corporation’s unremitted GST/HST net tax. The same preconditions apply (CRA must first try to collect from the corporation), the same due diligence defense applies, and the same two-year limitation period applies.

One difference: the amounts can be larger. A corporation with $2 million in annual revenue collects roughly $260,000 in GST/HST per year (at a 13% combined rate). If the corporation fails to remit for a year, the director’s personal exposure for GST/HST alone can exceed $260,000, on top of any source deduction liability.

How do I build the due diligence defense before I need it?

The defense is built by doing (and documenting) the following while you are still a director:

1. Verify remittances quarterly. Log in to CRA My Business Account and confirm that source deductions and GST/HST have been remitted. Screenshot or print the confirmation page. If you have a payroll service (ADP, Ceridian, Wagepoint), confirm they are remitting on time.

2. Put the priority in writing. Send an email or memo to whoever handles payroll and finances stating that CRA remittances are to be paid before any other creditors. Date it and keep a copy.

3. Review financial statements. If the corporation’s financial statements show a “source deductions payable” or “GST/HST payable” balance that is growing, investigate immediately.

4. Act when you see a problem. If remittances are late, instruct the controller or bookkeeper to remit immediately. If the corporation does not have the cash, consider whether the corporation can continue operating. A director who allows the corporation to continue operating while falling behind on trust obligations is building personal liability with every pay period.

5. Resign if you cannot prevent the failure. If you are a minority director and the majority directors are directing the corporation to pay other creditors first, and you cannot prevent it, resign. File the resignation in writing with the corporation and with the provincial registry. The two-year clock starts on the date of resignation.

What should I do next?

If your corporation has been reclassified as a personal services business, the resulting tax debt is a corporate liability, but director’s liability can attach if the corporation cannot pay. The PSB reclassification often produces a large, unexpected tax bill that the corporation does not have the cash to cover, which is exactly the scenario where director’s liability bites.

If you are currently a director of a Canadian corporation: verify that source deductions and GST/HST are current on CRA My Business Account. If they are behind, prioritize the remittance and document the steps you are taking. If you are a former director and have received a personal assessment: check the dates (when did you cease to be a director, when was the assessment issued) and gather any documentation of steps you took to ensure remittances. If the two-year limitation has passed, the assessment may be invalid.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.