Limited liability is one of the best reasons to incorporate. The corporation is a separate legal person; if it owes a supplier and can't pay, that's generally the corporation's problem, not yours personally. Most directors understand this and rely on it.
What far fewer understand is that there's a sharp exception, and it covers exactly the amounts a struggling business is most tempted to dip into. When cash is tight, the money a company "borrows" from is usually the tax it has withheld or collected on the government's behalf. And for that money, directors are personally on the hook.
- Payroll source deductions (income tax, CPP, and EI withheld from employees' pay) and GST/HST you collect are not the corporation's money — they're held in trust for the government.
- If the corporation fails to remit those trust amounts, its directors can be held personally liable for them, plus interest and penalties — under section 227.1 of the Income Tax Act (source deductions) and section 323 of the Excise Tax Act (GST/HST). The corporate veil does not protect you here.
- There is a due-diligence defence: a director isn't liable if they exercised the care a reasonably prudent person would, taking steps to prevent the failure before it happened — not after.
- The CRA must generally pursue the corporation first, and there's a two-year limitation after you stop being a director — but resigning does not erase liability for amounts that went unremitted while you served.
- The practical rule: never use withheld or collected tax for cash flow, keep remittances current, and stay genuinely informed about whether they're being paid.
Read on for why these amounts are different, how the liability works, the due-diligence defence, and how to protect yourself.
Trust money isn't the corporation's money
When you run payroll, you withhold income tax, CPP, and EI from your employees' wages. When you make a taxable sale, you collect GST/HST from your customer. In both cases, that money was never really the corporation's to keep — it belongs to the Crown, and the law treats the corporation as holding it in trust until it's remitted.
That trust character is what changes everything. Ordinary debts of the corporation stay with the corporation. But trust amounts that should have been remitted and weren't can be pushed through to the people who controlled the company: its directors.
The income tax you withhold and the GST/HST you collect were never your company's money. Spending it is spending the government's — and directors answer for it personally.
ITA 227.1 and ETA 323
Two parallel provisions create the personal liability:
Section 227.1 of the Income Tax Act makes directors jointly and severally liable when the corporation fails to deduct, withhold, or remit payroll source deductions (the income tax, CPP, and EI taken from employees), together with interest and penalties.
Section 323 of the Excise Tax Act does the same for GST/HST the corporation collected (net of input tax credits) and failed to remit.
Note what's not on this list: the corporation's regular corporate income tax, and its ordinary trade debts, generally don't flow through to directors personally. It's specifically the trust amounts — the money held for others — that do.
Source: Income Tax Act section 227.1 (director liability for unremitted source deductions) and Excise Tax Act section 323 (director liability for unremitted GST/HST); CRA, Information Circular IC89-2, Director's Liability.
Due diligence: the escape hatch (if you earned it)
The liability isn't automatic. Both provisions contain a due-diligence defence: a director is not liable if they exercised the degree of care, diligence, and skill that a reasonably prudent person would have exercised in comparable circumstances to prevent the failure.
The crucial word is prevent. The defence is about steps taken before the failure happened — putting controls in place, staying informed, acting when you saw a problem coming. Scrambling to explain it after the cheques bounced is not due diligence. Practically, courts look at whether you were genuinely engaged: Did you know whether remittances were being made? Did you keep lines of communication open with whoever handled the money? Did you act when trouble appeared?
Due diligence is what you did before the remittance was missed — not what you said after.
The limits on the CRA's reach
There are real guardrails, and it's worth knowing them:
- The corporation comes first. The CRA generally can't assess a director until it has tried and failed to collect from the corporation — typically by registering a certificate in Federal Court and having execution returned unsatisfied, or where the corporation has dissolved or gone bankrupt.
- A two-year limitation. A director generally can't be assessed more than two years after they last ceased to be a director of the corporation.
- Resigning isn't a reset. That two-year clock is a reason to formally resign when you leave — but it does not wipe out liability for amounts that went unremitted while you were a director.
One more trap: you can be a de facto director — someone who acts like a director without the formal title — and still be assessed. Stepping back in name only doesn't necessarily help.
How to stay out of the line of fire
Remit on time, always
Treat source deductions and GST/HST as money that isn't yours — because it isn't. Never let it fund operations, even temporarily. Late remittance is where this story always starts.
Stay genuinely informed
Know whether remittances are actually being made. "I left it to the bookkeeper and never checked" is not a due-diligence defence — being informed is.
Keep the trust money separate
Some owners move withheld and collected tax to a separate account so it's never mistaken for working capital. It makes both the discipline and the paper trail easy.
Resign formally if you leave
If you step away from a corporation, document your resignation properly — it starts the two-year limitation clock running.
A practical checklist
- Are your payroll remittances (income tax, CPP, EI) current and on schedule?
- Is your GST/HST being remitted on time?
- Has trust money ever been used to cover cash-flow gaps?
- Do you actually verify that remittances are made, or just assume?
- If you've left a corporation, did you formally resign and keep proof?
- Are you a director (formal or de facto) of a company whose tax compliance you can't vouch for?
Keeping remittances on time and the records clean is the most reliable form of due diligence there is — and it's exactly what a bookkeeper managing your payroll and GST/HST is for. That's part of what's included in every CDL plan, and you can estimate the cost in about a minute.
Two kinds of money, one personal risk
Incorporation protects you from most of what can go wrong in a business. The exception is narrow but unforgiving: the tax you withhold from employees and collect from customers is held in trust, and if it isn't remitted, you can pay for it personally. The good news is that this is one of the most avoidable risks an owner faces — it comes down to never spending money that was never yours, and being able to show you stayed on top of it.
The winter Kevin borrowed from the wrong account
Meet Kevin, sole director of a restaurant corporation in Sudbury. A brutal slow winter left him short on cash, so — telling himself he'd catch up in spring — he used the GST he'd collected from customers and the income tax, CPP, and EI he'd withheld from his staff's pay to cover rent and make payroll. It felt like dipping into his own business's money.
It wasn't his money. Spring was slow too, the corporation couldn't pay, and the CRA assessed Kevin personally for the unremitted source deductions and GST under ITA 227.1 and ETA 323 — plus interest and penalties. The corporation being a separate legal person didn't protect him, because those amounts were held in trust for the government. "I'll catch up later" is not a due-diligence defence.
It felt like borrowing from his own business. It was actually spending the government's money.
What should have happened: treat withheld and collected tax as untouchable — ideally parked in a separate account — and never let it fund operations, even temporarily. That discipline is the due-diligence defence.
Want to be sure your remittances — and your personal exposure — are in order?
This is squarely what we manage day to day. A 20-minute call is usually enough to confirm you're protected.
Book a Free 20-Minute CallThis article is for informational purposes only and does not constitute tax or legal advice. Director-liability rules, defences, and limitation periods are detailed and fact-specific. Consult a qualified professional or lawyer about your particular situation.
Primary sources, linked so you can read and interpret them yourself. Legislative links open on the official Justice Laws Website; agency links open on Government of Canada websites.
- Income Tax Act, section 227.1 — liability of directors for failure to deduct/remit source deductions
- Excise Tax Act, section 323 — liability of directors for unremitted GST/HST
- CRA — Information Circular IC89-2, Director's Liability (including the due-diligence defence)
- CRA — Information on deemed trust
- Related reading: The $30,000 Question (GST/HST), Employee or Contractor? (payroll obligations), and Should You Incorporate? (the limits of the corporate veil)