Lots of small business owners in Brampton became directors without giving it any thought. An accountant or online service incorporated the company, the form needed a director, and the owner’s name went in the box. A spouse or adult child may have been added to make things simpler. For years, nothing about the title seemed to matter.
Then the business runs short of cash. Payroll is late, the CRA remittance is skipped so that a supplier can be paid, and the company eventually closes. That is often when the owner discovers the limits of “the corporation protects me.” A corporation is a separate legal person, and in general its debts are its own. Yet the law carves out specific debts for which directors can answer personally, and these are exactly the debts most likely to pile up when a company is failing.
This article offers general information about Ontario and federal law and is not legal advice. If you are facing a claim or a CRA letter, get individualized advice promptly, since some defences and deadlines depend on the exact dates and facts.
Who Counts as a Director?
Being named on the corporate records is the obvious route. But liability may also reach someone who acts as a director in substance without formally holding the position, known as a de facto director. Calling yourself an “adviser” while running the company’s finances may not protect you. Conversely, a person named on paper who does nothing is not safe either. Passive directors have long been a problem for courts and regulators, because ignorance alone isn’t a defence.
Resigning has formal requirements too. A written resignation should be delivered to the corporation and recorded, and a notice of change filed with the province. Under Ontario’s Corporations Information Act, changes such as these generally must be filed within 15 days. If you leave the business and your name remains on the public record, you may spend a long time explaining why.
Unpaid Wages and Vacation Pay
Employees have a direct route to directors for unpaid amounts. Section 81 of the Employment Standards Act, 2000 and section 131 of the Business Corporations Act (Ontario), known as the OBCA, each provide for director liability of up to six months’ wages and up to twelve months of accrued vacation pay, for amounts that accrued while the person was a director. The two statutes have different procedures and conditions.
Under the Employment Standards Act route, a director’s liability arises in situations such as a corporate insolvency or an order against the corporation that remains unpaid, and an employment standards officer may issue an order against a director directly. Under the OBCA route, the employee generally sues the corporation and the director together, and the corporation’s failure to satisfy the judgment is part of the equation.
The liability is limited in kind. Termination and severance pay generally fall outside the Employment Standards Act definition of the wages a director must cover, and damages for wrongful dismissal are generally not recoverable from directors under these provisions. Those distinctions are often the first thing a lawyer checks when a demand arrives.
Directors of federal corporations have a parallel exposure under section 119 of the Canada Business Corporations Act, which also uses a six-month wage measure. Its time limits are strict, including a two-year window after a person ceases to be a director.
Source Deductions
Employers hold income tax, Canada Pension Plan and Employment Insurance amounts withheld from pay on behalf of the government. Skipping them is treated very seriously. Section 227.1 of the Income Tax Act makes directors jointly and severally liable with the corporation for failures to remit, along with interest and penalties, subject to conditions. The CPP and EI statutes have similar provisions.
“Jointly and severally” has a practical sting. The CRA may collect the entire amount from any one director, leaving that person to seek contribution from the others. A person holding 10 per cent of the shares can still be pursued for the full debt.
Certain conditions must be met before the CRA proceeds: broadly, the corporation has been wound up, gone bankrupt, or the CRA has tried unsuccessfully to collect from it. Assessment against a former director must occur within two years after the person last ceased to be a director.
GST/HST
Section 323 of the Excise Tax Act applies a similar regime to net tax a corporation should have remitted. It too has conditions, a due diligence defence and a two-year limit after ceasing to be a director.
HST is a common trap because the cash arrives with the sale and looks like revenue. An owner who dips into that money to keep the lights on may be creating a personal debt for every director. A quarterly filing schedule can also hide how quickly the balance is growing.
The Due Diligence Defence
The tax provisions don’t impose absolute liability. A director isn’t liable if he or she exercised the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances to prevent the failure.
The word “prevent” does much of the work here. Courts have looked for steps taken before the failure, rather than efforts to clean up afterward. Promises from a bookkeeper, or plans to catch up once a big customer pays, generally aren’t enough on their own. An outside director without involvement in finance may be judged differently from a controlling owner who signs every cheque, though each has to have actually done something.
Reasonable measures include:
- Setting up a separate account that holds source deductions and HST
- Requiring proof of remittance at each board meeting, or in a regular report, and putting it in the minutes
- Having payroll run through a provider that remits automatically
- Asking directly about remittances the moment cash gets tight, and insisting on an answer
- Refusing to treat remittances as a way to finance operations
- Getting early advice once arrears appear, and documenting the instructions you gave
The paper trail matters. Years later, you may have to convince the CRA or a court what you did and when. A minute reading “Director A asked for proof of the March remittance and received confirmation on April 2” is worth far more than a recollection.
Other Statutes That Can Reach Directors
Wages and tax get the most attention, but they are not the whole list. Depending on the business, these may also apply:
Workplace safety. Section 32 of Ontario’s Occupational Health and Safety Act requires directors and officers to take all reasonable care to ensure the corporation complies with the Act, regulations and orders. Convictions may bring fines. For a warehouse or a job site in the Peel area, this is a real concern, and a director should know how the business manages safety.
Construction trust funds. Under Ontario’s Construction Act, money received by a contractor or subcontractor on a project may be impressed with a statutory trust for those further down the chain. Those who assent to or knowingly acquiesce in a breach of trust by a corporation can face personal liability. Using money from one job to pay bills on another may be a problem.
Environmental and regulatory duties. Environmental legislation and various regulatory statutes place duties on directors and officers. Businesses that handle regulated substances should look specifically into their sector’s obligations.
Unlawful distributions. Under the OBCA, directors who approve share issues for inadequate consideration, or dividends or redemptions that fail the statute’s financial tests, can face personal liability to restore the corporation’s funds. Declaring a dividend in a tight year deserves a proper solvency review.
A person’s own wrongdoing. Directors remain liable for their own torts, such as personally making a fraudulent misrepresentation to a customer. Having a corporation doesn’t excuse what you yourself do.
The Duties You Owe the Corporation
Section 134 of the OBCA requires directors and officers to act honestly and in good faith with a view to the best interests of the corporation, and to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances. A similar duty is found in the federal statute.
Directors must also disclose conflicts of interest. If you’re on the board and the company is renting a building you own personally, the relationship needs proper disclosure and, usually, an abstention from the vote. Section 135 of the OBCA offers some protection to a director who reasonably relied in good faith on items such as financial statements or professional reports, which makes it wise to ask for those documents and keep them.
When the corporation is in the zone of insolvency, the conversation changes. The Supreme Court of Canada has said directors’ duties are owed to the corporation and not directly to creditors, yet creditors may still have remedies, including through the oppression remedy. Moving assets to a relative or paying one creditor over others before a collapse can be reversed and may produce personal claims.
Protecting Yourself Before Trouble Starts
You can’t eliminate every risk, but several sensible steps can reduce it.
Ask yourself why you are a director. Family members added for convenience should understand exactly what they have accepted. Sometimes the right response is to take a name off the register.
Keep the records honest. A current minute book, register of directors and filed notices make it simpler to prove when someone started and stopped serving.
Obtain an indemnity and consider insurance. A corporation can indemnify its directors under the OBCA, subject to conditions, yet an indemnity from an insolvent company is worthless. Directors’ and officers’ insurance is another layer, although policies vary and often exclude some unpaid tax or wage claims. Read the exclusions.
Stay informed. Ask for regular financial statements and remittance confirmations. Silence from management is a warning sign.
Act early and leave properly. If you discover arrears, write them down, insist on a plan, and seek advice. If you resign, do it formally and promptly, and be aware that this doesn’t erase what accrued during your tenure.
If a Demand Lands on Your Desk
Open every envelope, as deadlines to object to a CRA assessment or to apply for review of an employment standards order are short. Note the date of receipt and collect the corporate records: the dates you served, financial reports and whatever shows what you did about remittances. Avoid making admissions in a hurry. An early review can reveal whether the claim is out of time, whether the conditions have been met, and whether a due diligence defence is realistic.
Our corporate law team deals with governance questions, while business litigation covers disputes that have reached a claim. Taking on a directorship deserves about as much thought as signing a personal guarantee, and for the same reason: the risk can sit quietly for years before it comes due.