Being a director of a corporation comes with many responsibilities. Failing to exercise due diligence in ensuring source deductions (such as EI, CPP, and income tax) are properly withheld from wages and remitted to CRA may result in a director’s personal liability for the corporation’s outstanding amount.
A June 12, 2018 Tax Court of Canada case examined whether an individual who set up a corporation (along with a bank account) for his brother to operate would be held liable for unremitted source deductions, penalties and interest totaling $37,536. The individual testified that he was not personally involved in the operations and that he had participated in this manner because his brother had “zero credit”. The operation went out of business after approximately a year and a half with wages and source deductions outstanding.
The taxpayer argued that he had exercised due diligence by requiring his brother to sign an agreement at the onset to “keep deductions current” and to “keep everything in good standing”. The taxpayer indicated that while he never asked to see the records, he did enquire from time to time “if things were going ok”.
The Court determined that a reasonably prudent person would have done more to keep abreast of the corporation’s financial affairs, especially given that his brother had either little financial knowledge or financial problems in the past. Entering into the initial agreement without follow-up indicated that the taxpayer did not act with due diligence. He was, therefore, held personally liable for the unremitted amounts and associated interest and penalties.
ACTION ITEM: Be cautious when acting as a director or taking responsibility for loans when not directly involved in a corporation’s activities. Failing to take certain actions may result in personal liability for certain corporate tax debts.