Director’s Personal Liability: Section 227.1 of the Income Tax Act

Perhaps the most sobering aspect of payroll trust compliance is that corporate directors can be held personally liable for a corporation’s failure to remit source deductions. Under section 227.1 of the Income Tax Act and section 323 of the Excise Tax Act, directors are jointly and severally liable for unremitted payroll deductions and GST/HST. The CRA can pursue your personal assets your home, savings, investments  to recover amounts the corporation failed to pay. Three conditions must generally be met: the corporation has defaulted; the CRA has attempted to collect from the corporation without success; and the CRA issues the director assessment within two years of the person ceasing to be a director. 2.2 Who Is a “Director”? Liability extends beyond those formally registered with Corporations Canada. The CRA may pursue de jure directors (registered), de facto directors (those who act as directors regardless of title), and shadow directors (those who direct from behind the scenes). If you exercise control over financial decisions or direct corporate policy without being a registered director, you may still face liability.

The Due Diligence Defence and Protection

 Directors are not without protection. The due diligence defence allows directors who exercised “the degree of care, diligence, and skill that a reasonably prudent person would have exercised in similar circumstances” to avoid personal liability. This means demonstrating that you monitored payroll remittances, ensured adequate funding for trust amounts, questioned irregularities, and documented your efforts. In Ferri v. The Queen, a director, was held personally liable after his company withheld but failed to remit source deductions for eight years, using the funds to support operations. The Tax Court emphasized that “when a business uses source deductions to pay other bills, it is using money that belongs to employees and the Crown.” To protect yourself, monitor remittances monthly, keep trust amounts segregated from operating funds, document every due diligence effort in writing, and consider director liability insurance though coverage for tax-related claims varies.