Directors of corporations can be held personally liable for the unremitted HST and payroll deductions owing by those corporation to the Canada Revenue Agency (“CRA”). However, when a corporation files for bankruptcy, the CRA is required to undertake certain steps in order to assess the director(s) of the bankrupt corporation for unpaid HST and/or source deductions. In accordance with section 227.1(2)(c) of the Income Tax Act (Canada) and section 323 of the Excise Tax Act (Canada) where a corporation files for bankruptcy, the CRA must file a proof of claim with the Trustee within six months of the date of bankruptcy, failing which the director(s) of the corporation will not be held personally liable for the unpaid HST or source deductions owed by the Company.
In order to illustrate why this may be relevant, let’s look at a relatively common scenario.
In this scenario your client is the director of a corporation that has become inactive for any number of reasons. The important factors here are that the Company has no (or minimal) assets and is indebted to the CRA for legacy HST and/or unremitted source deductions debts. Your client is concerned that as a director of the company he/she may be held personally liable for the HST and/or source deduction arrears. Your client may have already received a letter from CRA advising that it is considering assessing your client for the liabilities of the Corporation and requiring your client to respond as to why he or she should not be held liable. If this individual does not have a valid defense or otherwise have the resources available to pay the arrears owing by the Corporation to the CRA, he/she must consider other options. One of those option could be to assign the Company into bankruptcy and wait. If the CRA does not file a claim with the Trustee within six month of the date of bankruptcy the relevant sections of the ITA and ETA would come into force and the director should not be liable for the arrears owing to the CRA.
In conclusion, in our practice we have seen that the CRA has been making efforts to file claims with the Trustee prior to the expiry of the six month limitation period. However, we have noticed in several cases where the CRA has not filed a claim and, as a result, the director(s) are absolved of their statutory director liabilities which, in some cases, were quite significant.
About Albert Gelman Inc.
Albert Gelman Inc.’s corporate and consumer insolvency group has over 100 year of combined experience assisting individuals and businesses who are experiencing financial difficulty. Please feel free to call us to discuss your client’s financial situation.
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