Director liability for source deductions runs 2 years past resignation

Which statutes make a director liable for unremitted amounts?

Four provisions do the work, and they share one structure. The directors in office when the corporation was required to deduct, withhold or remit are jointly and severally liable with the corporation for the amount, plus the interest and penalties on it laws-lois.justice.gc.ca.

The CPP and EI rules borrow the Income Tax Act machinery word for word: both say subsections 227.1(2) to (7) apply with the modifications the circumstances require laws-lois.justice.gc.ca. The EI version is drafted the same way laws-lois.justice.gc.ca. GST/HST has its own text in section 323 of the Excise Tax Act, with the same conditions and the same due diligence defence laws-lois.justice.gc.ca.

The three conditions the CRA has to meet before it assesses

The CRA's circular IC89-2R3 boils the law down to three conditions: the CRA can't recover the amount from the corporation, it assesses within two years after the director last ceased to be a director, and the director didn't exercise the required care, diligence and skill canada.ca.

"Can't recover" has a precise meaning. Either a certificate for the debt was registered in the Federal Court and execution came back unsatisfied in whole or in part, or the corporation went into liquidation, dissolution or bankruptcy and the CRA proved its claim within six months of the triggering date laws-lois.justice.gc.ca. Where the CRA went the execution route, the director owes only what is still unpaid after execution, under 227.1(5).

Each director can be assessed for the full corporate debt, not a share of it canada.ca. The assessment makes the director personally liable together with the corporation, and the CRA can then use its usual collection actions against the director canada.ca.

Before assessing, the CRA writes to each director it is considering. Answer that letter in writing, explain every step the director took to make sure the remittances were made, and attach documents. A director who misses the reply date in the proposal can be assessed without further notice canada.ca.

Worked example: two directors, a bankruptcy and a resignation

Your client corporation has two directors, Ana and Ben. It withheld $40,000 of income tax, CPP and EI from pays dated August to October 2025 and never remitted it. It also collected and kept $15,000 of GST/HST net tax. On February 2, 2026 it makes an assignment in bankruptcy, and the CRA proves its claims within six months. Ben sent his written resignation to the corporation on March 1, 2026.

The 10% rate applies because nothing was remitted within seven days of the due date, and for source deductions the penalty applies only to the part above $500 due on each remittance date (a regular remitter has three here, one for each month of pays) unless the failure was knowing or grossly negligent laws-lois.justice.gc.ca. The rates and due dates are on the payroll remittance due dates page. Interest runs on top at the prescribed rate, 7% a year compounded daily as of October 2026 (the CRA interest rate on overdue taxes).

Both directors held office from August to October 2025, so the CRA can assess each of them for the full $57,850 plus interest. Ben's resignation took effect when it was sent to the corporation, the CBCA rule for a federal company laws-lois.justice.gc.ca. The CRA has until March 1, 2028 to act against him. If Ana pays the whole amount, she can claim contribution from Ben under 227.1(7) and ETA 323(8), and the statute doesn't fix the split laws-lois.justice.gc.ca.

What counts as due diligence?

A director who exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances isn't liable laws-lois.justice.gc.ca. The test is objective: what a prudent person would have done, not what this director knew or intended.

Timing matters most. The CRA says the steps must be taken before the failure happens, so cleaning up arrears after the corporation has stopped remitting doesn't help canada.ca. The circular suggests three controls: a separate bank account for withholdings and remittances, regular reports from the financial officers on that account, and regular confirmation that each remittance was actually made canada.ca.

Three arguments don't work on their own. A director can delegate the work but stays responsible for seeing that remittances are made. A director can't plead ignorance of the corporation's obligations. And being an inactive, nominee or outside director doesn't, on its own, get anyone off canada.ca. The CRA's own guide says it won't hold directors personally responsible when they act to make sure the deductions are made and remitted canada.ca.

Resignation, de facto directors and the two year clock

The two years run from the day the director last ceased to be a director, not from the missed remittance laws-lois.justice.gc.ca. Under the CBCA, a written resignation is effective when it is sent to the corporation or at the time it names, whichever is later laws-lois.justice.gc.ca. Provincial corporate statutes have their own wording, so check the one the company was incorporated under, and keep proof of the date the resignation was sent.

Resigning stops new exposure, because liability attaches to the directors in office at the time of each failure. It doesn't erase failures that happened while the client sat on the board. A director can also cease to be one by operation of law, for example through personal bankruptcy, while directors stay in office (with reduced powers) after a trustee or receiver is appointed over the company canada.ca.

A title isn't required. Officers, employees and others who perform a director's functions without a formal appointment may be liable as de facto directors canada.ca.