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Many individuals wisely incorporate their businesses in order to limit their personal liability. When you operate your business through a corporate vehicle the obligations and debts are those of the corporation and not of the owners of the business.

In private corporations, the owners are usually both the Shareholders and the Directors. Once an individual becomes a Director of a corporation that individual becomes personally exposed and takes on certain potential liabilities. As a Director, the individual becomes a fiduciary and must act in the best interest of the corporation. In addition, there is personal liability for such items as unpaid wages, source deductions, WSIB payments, PST and GST. There is no limit to the individual’s liability as a Director under the Income Tax Act. Hence there is risk to any Director, particularly if he/she is not involved in the day to day operations of the business and is ill-informed as to the status of wages, withholding taxes, and other government payments.

Any Director should have a special concern if he/she intends to resign. Unless the Director resigns properly and promptly the liabilities can continue. The quantum of any liability could prove to be significant. For example, the liability for GST upon a Director is not only for the amount the corporation collected, but also the amount the corporation should have collected. Should a Director fail to properly and promptly resign then that individual may be faced with a payment demand from either the Federal or Provincial Governments.

Should that happen there are some potential defences. The most common defence is the due diligence claim, usually made by passive or outside directors. The onus is on the Director to prove that he/she was unaware as to the tax liabilities and could not reasonably have become aware of them and has exercised due diligence to make himself/herself aware of the corporate liabilities during tenure as a Director.

Another potential defence is that a limitation period has expired. There is a provision in the Income Tax Act requiring the CRA to commence an action against or assess the Director within two years after he/she ceases to be a Director. In order to start the clock running it is imperative that any resignation be proper and in accordance with the requirements of the Statute.

If you think, suspect, or fear that you may still be a Director of some corporation in which you are no longer involved, it is best to make sure that your resignation was proper and timely.

Garth D. Walkden is the head of the firm's litigation department. He practices in the area of commercial litigation and construction law. He can be reached by email at walkden@kmblaw.com or at 905-276- 0419.