Directors' Liability

One of the foundational principles of corporate law is that a corporation is a separate legal entity from its shareholders, directors, and officers. Shareholders generally cannot be held personally liable for the corporation's debts — they risk only the amount they invested in their shares.

However, directors occupy a different position. As the individuals charged with managing or supervising the management of the corporation under Section 115 of the Ontario Business Corporations Act (OBCA), directors can be personally liable for certain corporate obligations in circumstances where the legislature has determined that imposing personal accountability is warranted.

This distinction between shareholder liability and director liability is critical. A business owner who incorporates hoping to shield their personal assets may be surprised to discover that serving as a director of the corporation exposes them to significant personal liability — even if they also hold shares. In many closely held Ontario corporations, the founders are simultaneously shareholders, directors, and officers, and they must understand all three roles.

Section 131 of the OBCA imposes personal liability on directors for up to six months of unpaid wages and up to 12 months of unpaid vacation pay owed to employees of the corporation. This liability is joint and several — each director can be held liable for the full amount, not just their pro-rata share.

Key conditions for OBCA director liability for wages: - The corporation must have been sued for the wages and the claim must have been unsatisfied; OR the corporation must have commenced insolvency proceedings - The claim against the director must be made within two years of the director's resignation or removal from office - The director is entitled to claim contribution from co-directors who are also liable

The federal counterpart is Section 119 of the Canada Business Corporations Act (CBCA), which applies to federally incorporated corporations.

Directors who are passive — for example, a director who signed on as a favour to a friend and was never involved in operational decisions — are still liable under this provision. The duty to ensure employees are paid is non-delegable.

Two of the most significant sources of director liability are unremitted payroll source deductions and unremitted HST:

Unremitted source deductions — Income Tax Act, Section 227.1: When a corporation fails to remit payroll source deductions (income tax, CPP, and EI withheld from employees' paycheques) to the Canada Revenue Agency (CRA), the directors can be held personally liable for the unremitted amounts plus interest and penalties. There is no cap — the exposure equals the full amount of unremitted deductions.

Unremitted HST — Excise Tax Act, Section 323: Directors face personal liability for unremitted HST collected by the corporation but not remitted to the CRA. Again, there is no statutory cap.

Both provisions follow the same structure: - A certificate must be registered in Federal Court and returned unsatisfied (i.e., the corporation cannot pay) - OR the corporation must have commenced insolvency proceedings - The claim must be made within two years of the director's resignation or removal

The due diligence defence: Under both Section 227.1(3) of the Income Tax Act and Section 323(3) of the Excise Tax Act, a director escapes personal liability if they can demonstrate they exercised the degree of care, diligence, and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. This is an objective test — the court asks what a reasonable director would have done, not what this particular director intended or believed.

The due diligence defence for tax liability is often the most important practical tool available to a director facing CRA assessment. To successfully assert it, a director typically needs to demonstrate:

Active oversight: The director monitored the corporation's financial situation and specifically the status of payroll and HST remittances — not just revenues and expenses generally.

Early intervention: Upon learning of financial difficulty or cash flow problems, the director took active steps to ensure remittances were prioritized — for example, implementing controls to prevent other payments before CRA remittances, seeking professional advice, or insisting on a repayment plan with the CRA.

Delegation with verification: Where the director delegated financial functions to a comptroller or bookkeeper, they regularly verified that remittances were being made.

The courts have consistently held that passive directors — those who simply signed documents as required but never actively engaged in oversight — are not protected by the due diligence defence. 'Inside' directors (who are also officers or managers) are held to a higher standard than 'outside' directors who serve on the board in a purely governance role.

The leading case in this area remains Soper v. Canada (1997), 97 DTC 5407 (F.C.A.), which established the distinction between inside and outside directors and the need for active engagement to successfully invoke the defence.

Beyond wages and tax remittances, Ontario directors face potential personal liability in several other contexts:

Environmental liability: Under the Environmental Protection Act, R.S.O. 1990, c. E.19, directors and officers of a corporation can be held personally responsible for environmental offences committed by the corporation if they directed, authorized, assented to, acquiesced in, or participated in the offence.

Oppression remedy — OBCA Section 248: Ontario courts can award remedies against directors personally who engage in conduct that is oppressive, unfairly prejudicial, or that unfairly disregards the interests of any security holder, creditor, director, or officer. Directors who participate in oppressive conduct can be ordered to pay damages personally.

Fraudulent or negligent misrepresentation: Directors who make false statements in prospectuses, financial statements, or during negotiations for a business transaction can be personally liable for misrepresentation.

Employment Insurance Act and Canada Pension Plan Act: Personal liability for unremitted EI premiums and CPP contributions follows the same structure as unremitted income tax withholdings.

Occupational Health and Safety Act: Directors and officers can be personally prosecuted for workplace safety violations if they directed, authorized, or acquiesced in the offence.

Directors of Ontario corporations can take meaningful steps to reduce their personal liability exposure:

Active oversight: Regularly review financial statements and specifically verify the status of CRA remittances. Ask management and the accountant to confirm remittances are current at every board meeting or quarterly review.

Resignation as a protective measure: If a corporation is in financial difficulty and is failing to remit payroll and HST, a director who resigns before the failure becomes entrenched may be able to avoid liability — provided they can demonstrate they took reasonable steps before resigning. Resignation alone, without evidence of prior diligence, does not provide a defence.

Directors and officers (D&O) insurance: D&O insurance policies can cover defence costs and indemnify directors for certain types of claims. However, most D&O policies exclude coverage for tax liability and criminal fines. Directors should understand their policy's scope.

Corporate indemnification: Under Sections 136 and 138 of the OBCA, the corporation can indemnify directors for liabilities they incur by reason of being a director, provided the director acted honestly and in good faith. This protection is only as good as the corporation's financial ability to honour the indemnity.

Legal advice before signing: Directors facing significant corporate decisions — particularly those involving financial stress, CRA issues, or potential insolvency — should obtain independent legal advice before acting.

David was the sole director of a small Ontario restaurant corporation. During a difficult period in 2022-2023, the restaurant collected HST from customers but used the HST funds to pay food suppliers and rent rather than remitting to the CRA. Over 18 months, unremitted HST accumulated to $87,000.

When the corporation eventually ceased operations, the CRA registered a certificate in Federal Court. The corporation had no assets. Under Section 323 of the Excise Tax Act, the CRA assessed David personally for the full $87,000 plus interest and penalties.

David argued he was unaware of the remittance failures because he had delegated bookkeeping to an employee. The Tax Court rejected this defence — as the sole director and operator, David had a non-delegable duty to ensure remittances were made. He had never verified remittance status, reviewed CRA correspondence, or taken steps to prioritize remittances during the financial difficulty. The due diligence defence was unavailable.

David was personally liable for $103,000 (original assessment plus accrued interest). His personal bank accounts and home equity were exposed to CRA enforcement action.