Paying other people's taxes.

• Author: Neilson, Hugh

Keeping up with our tax obligations is challenging when times are good, and even more so when the economy turns. Painful though it is to manage our own tax obligations, becoming liable for taxes actually payable by other people can cause even greater distress.

The Canada Revenue Agency (CRA) has amazingly broad collections powers bestowed upon it by the government, and it is in no way shy about using them.

Directors' Liability

Many of us are asked to serve as directors of incorporated entities, whether for profitable corporations or non-profit entities like charities. Such service does not come without responsibilities, and the wise director will ensure they understand these obligations.

The CRA can collect GST/HST and source deduction arrears from directors where the legal entity they oversee fails to remit them. These are considered "trust funds", in that the organization collects them from third parties (clients or employees) on behalf of the government--they are not the organization's own funds.

Especially in times of financial challenge, it is all too tempting to prioritize payments to other creditors, such as suppliers and staff whose continued goodwill is vital to business continuing. While most business people will recognize that penalty and interest charges can result, the potential for personal liability is often a surprise to directors.

Defending oneself against such a claim can be challenging. Before assessing a director, the CRA is required to execute a Writ of Seizure and Sale against the corporation in court. Some cases have failed because the CRA could not demonstrate this had been done.

Often, the defence for directors is limited to establishing that they exercised due diligence to ensure these amounts were remitted in timely fashion. The courts have set this standard fairly high. For example:

* the belief and intention, however heartfelt, that a shortfall will be made up at a later date will not protect the director. The courts have held (for example, in the Maxwell case, 2015 TCC 74) that the director is required to take steps to prevent failure to remit these amounts, not just to make up for shortfalls later in the expectation that funds will become available.

* one director's reliance on another director active in the business is not sufficient, especially when he had previously received correspondence indicating source deductions were in arrears--the court held that a reasonable person would take independent steps to...