Director liability for CRA payroll and GST/HST debts: s.227.1 and s.323 in plain words

Why these two debts and not the others

Source deductions and GST/HST are money the corporation collected from someone else for the government: the tax withheld from an employee’s pay, the GST/HST charged to a customer. The law treats them as held in trust, and when a corporation spends them on rent or wages instead of remitting them, Parliament decided the people who ran the corporation should answer for it. The corporation’s own income tax is different; it is the corporation’s debt and stays with the corporation. That distinction is why a director of an insolvent company can walk away from a large T2 balance and still be assessed personally for a smaller payroll arrears.

What section 227.1 of the Income Tax Act says

Subsection 227.1(1): where a corporation has failed to deduct or withhold an amount as required, or has failed to remit it or to pay an amount of tax it was required to pay, the directors of the corporation at the time of the failure are jointly and severally, or solidarily, liable, together with the corporation, to pay that amount and any interest or penalties relating to it.

In plain words: the people who were directors when the remittance was missed owe it, personally, each for the whole amount, alongside the corporation. “Jointly and severally” means the CRA can collect all of it from one director and leave that director to recover from the others. The amounts are the employee source deductions (CPP, EI and income tax withheld), the employer share of CPP and EI, and non-resident withholding tax. The payroll mechanics behind each are in payroll remittances and the RP account.

What section 323 of the Excise Tax Act says

Subsection 323(1): if a corporation fails to remit an amount of net tax as required, the directors of the corporation at the time the corporation was required to remit the amount are jointly and severally, or solidarily, liable, together with the corporation, to pay the amount and any interest on, or penalties relating to, the amount.

Net tax is the GST/HST collected less the input tax credits claimed on a return: the amount the corporation owed on the GST/HST return and did not pay. A corporation that files its returns and does not pay creates the liability as surely as one that never files. The provincial equivalents (BC PST, for instance) have their own director liability provisions in provincial law, outside this page.

The three gates: the CRA must try the corporation first

Both sections contain the same precondition. A director is not liable unless one of three things has happened. First, a certificate for the corporation’s debt has been registered in the Federal Court and execution for that amount has been returned unsatisfied in whole or in part; in practice, the CRA has gone after the corporation’s assets and come up short. Second, the corporation has started liquidation or dissolution proceedings or has been dissolved, and the CRA proved its claim within six months of the earlier of the start of the proceedings and the dissolution. Third, the corporation has made an assignment or a bankruptcy order has been made, and the CRA proved its claim within six months.

So the sequence is: the corporation defaults, the CRA collects what it can from the corporation, and only then assesses the directors for the balance. The collection steps the CRA takes against the corporation are described in what happens after a CRA demand. A director who sees the corporation heading for insolvency should assume the gate will be passed and plan for the assessment.

The due diligence defence

Both sections provide the same defence, in the same words: a director is not liable where the director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

The test is objective, about preventing the failure, and it is judged on what the director did before the remittance was missed, not after. Directors who have succeeded with it could show that they put a system in place: a separate account for trust amounts, remittances made by the bookkeeper on a fixed schedule, regular confirmation that the payroll and GST/HST accounts were current, and prompt action when a problem appeared. Directors who have failed with it usually knew the corporation was short of cash, chose to pay suppliers and wages first, and hoped to catch up. Choosing to use trust money to keep the business alive is the opposite of preventing the failure, and the courts have said so consistently. A director who was passive, who signed what was put in front of them and never asked whether the remittances were made, is in the weakest position of all.

What the defence rewards is a routine. The remittance schedule in the payroll hub and the payroll year-end checklist are the kind of record a director points to.

The two-year limit

Subsection 227.1(4) provides that no action or proceedings to recover an amount from a director shall be commenced more than two years after the director last ceased to be a director of that corporation. Subsection 323(5) says the same of an assessment: it shall not be made more than two years after the person last ceased to be a director.

Two things follow. A director who resigns is exposed for two more years, for failures during their time in office, and then not at all. And the resignation has to be real: a written resignation delivered to the corporation and, where the corporate statute requires it, recorded at the registry. A person who resigns on paper but keeps running the company as a de facto director has not ceased to be one, and the clock has not started. The same applies to a person who was never formally appointed but acted as a director; the law looks at the function, not the title. The two years also do not help a director who was in office when a dissolved corporation’s debts come to light, which is why a dissolution should wait for a clearance certificate, as set out in dissolving a corporation.

The decision table

What a director should do now

• Know the status of the payroll and GST/HST accounts every month: filed, paid, balance nil. Ask for the confirmation and keep it.
• Keep trust amounts out of operating cash: the deductions and the GST/HST collected are not the corporation’s money to spend.
• When cash is short, pay the remittances first. A supplier can be negotiated with; the Crown’s trust claim becomes yours.
• If the corporation is heading for insolvency, get advice before the next remittance due date, not after the demand.
• If you are a director in name only, resign in writing and have it recorded; the two years run from the day you actually ceased.
• Before dissolving a corporation, file every return, settle the trust accounts and obtain the clearance certificate.

The bottom line

Source deductions and GST/HST are the two corporate debts a director carries personally, jointly with every other director, after the CRA has failed to collect from the corporation. The defence is a system that prevents the failure, kept up before the failure happens. The exit is a genuine resignation and two years. Everything else is a decision to pay the Crown first.

Whether you are exposed depends on when the failure happened and what you did about it; ask about your own situation and a CPA replies free, usually the same business day. The term is defined in the glossary, and a lawyer should be involved once an assessment is issued.

General information for Canadian business owners, current as of November 2026; not tax, legal or accounting advice, and no client relationship. Rules change, so speak with a CPA before acting.