What Directors Don't Realize About Personal Liability For Unremitted Payroll And GST HST

A corporation is supposed to protect you. That's the whole point of incorporating in the first place right. Limited liability. Your personal assets stay separate from whatever happens inside the business. At Rauf Hameed we've sat across the table from more than one director who assumed that shield covered everything including tax debt and had to explain that it absolutely does not cover this specific situation.

Here's the exception almost nobody reads about until it's already too late. When a corporation collects GST or HST from customers or deducts CPP EI and income tax from employee paycheques that money was never really the corporation's to begin with. It's held in trust for the government. If the business fails to remit it the CRA doesn't just chase the company. It can come after the directors personally.

Why This Rule Exists In The First Place

Think about it from the government's side for a second. Most creditors can protect themselves. A supplier can demand payment upfront or cut off credit if a client stops paying on time. The Crown can't do that. It's what's sometimes called an involuntary creditor because employees have taxes deducted and customers pay GST HST regardless of whether the business ever intends to hand that money over. Section 227.1 of the Income Tax Act and the matching provision under the Excise Tax Act exist specifically to close that gap by making directors jointly liable alongside the corporation for those trust amounts.

This isn't some obscure rule either. It shows up constantly in cases where a business hits a rough patch and starts using source deductions as a stopgap to cover payroll or rent. I've seen this exact pattern more than once. A struggling company keeps paying employees their NET wages while quietly falling behind on the withholding portion figuring they'll catch up next quarter. Next quarter rarely comes and by the time the CRA notices the balance owing has grown into something much harder to unwind.

A Quick Tangent Because This Reminded Me Of Something

Funny enough this whole topic makes me think of a landlord I dealt with years ago who kept telling tenants the security deposit was just sitting in his regular account and he'd sort it out at move out. He treated trust money like it was his own working capital the entire time. It worked fine right up until three tenants moved out the same month and he suddenly didn't have the cash to return any of it. Trust funds behave the same way whether it's a damage deposit or payroll withholdings. The moment you start treating them as available cash flow instead of money that already belongs to someone else you're setting a trap for your future self.

The Due Diligence Defence Actually Matters

Directors aren't automatically on the hook the second a remittance is missed. There's a real defence available and it's called due diligence. If a director can show they took genuinely active steps to make sure the corporation was withholding and remitting properly setting up a dedicated remittance account monitoring cash flow pressing management for confirmation that payments went out they may avoid personal liability even if the company ultimately failed to pay. Simply being a passive director who trusted someone else to handle it usually is NOT enough to satisfy this defence and that surprises a lot of people who thought staying hands off was the safer approach.

There's also a two year clock here worth knowing about. The CRA generally has to assess a former director within two years of them ceasing to hold that role so timing around resignations matters more than most people realize when a company is already circling the drain.

When This Actually Becomes A Real Risk

This tends to surface most often with smaller and mid sized businesses going through a genuine cash crunch. Seasonal companies construction firms and anything with thin margins are particularly exposed because the temptation to borrow from source deductions during a slow month feels less risky than it actually is. By the time revenue picks back up the shortfall has often compounded with penalties and interest stacked on top making the original gap look small by comparison.

If your business is already behind on remittances the worst move is doing nothing and hoping it resolves itself. Getting ahead of it with a proper repayment arrangement or a review of director exposure before the CRA escalates collection action changes the entire trajectory of how this plays out.

FAQs

Can a director be personally liable even after resigning from the company?
Yes though the CRA generally must assess within two years of the resignation date which makes the timing of a director's departure from a struggling corporation genuinely significant for their personal exposure.

What counts as due diligence for a director facing this kind of assessment?
Active oversight matters here. Setting up dedicated accounts for withholdings confirming remittances were actually made and pressing management on cash flow issues tend to count far more than simply assuming someone else was handling it properly.

Does this liability apply to corporate income tax debt too?
No this specific personal liability rule is narrower than people assume. It applies to trust amounts like GST HST and payroll source deductions rather than to ordinary corporate income tax the company itself owes.

What should a director do if the company is already behind on remittances?
Address it immediately rather than waiting. A proactive conversation about repayment arrangements and a review of personal exposure tends to produce a far better outcome than letting the balance and penalties keep growing.

Final Thought

I'll be direct about this one. Too many directors treat source deductions like a flexible line of credit during a rough quarter and that assumption has cost people their homes their savings and years of stress they never saw coming. The corporate shield is real for plenty of debts. This just isn't one of them. If you're a director of a business that's fallen behind the smartest thing you can do is get proper advice before the CRA decides the timeline for you.