Zvilna v. Canada: Director’s Liability for Unpaid Taxes: A Canadian Tax Lawyer’s Note of Caution to Directors

A picture of unpaid taxes by a director with a post it note on a laptop reading ”tax deadline

Zvilna v. Canada: Director’s Liability for Unpaid Taxes: A Canadian Tax Lawyer’s Note of Caution to Directors

Background on Directors Liability for Taxes:

The Tax Court of Canada has recently decided a case regarding director’s liability for unremitted GST/HST. Generally, a director of a corporation can be held personally liable to CRA for various corporate liabilities such as unremitted GST and HST, as well as unremitted payroll deductions for employees. Corporations have a duty to remit GST/HST as well as the required wage deductions such as CPP/EI and income tax withholdings. However, when a corporation fails to do so, and the corporation does not have the funds to pay the CRA, directors of a corporation can be held personally liable under subsection 227.1(1) of the Income Tax Act.

Often, this occurs when a business is struggling financially. For example, a business owner uses funds that are owed to the CRA in an attempt to save the business. The director and business owner believes that when the business begins to make more money, the corporation will then pay off its CRA tax debts. For a business owner with limited tax knowledge, funding the business in this manner may seem like an obvious choice. However, the director can be held personally liable for the taxes owing by the Corporation. It is a tax trap is to think that merely because business is incorporated, that the owner (who is a director) cannot be held personally liable for these monies. The CRA can collect from the director personally.

Limitation Period for Director Tax Liability

Section 227.1 has several key provisions and defences against the CRA issuing a director’s liability assessment. One such defence is the limitation period of two years. Subsection 227.1(4) states that no action can be commenced against a director more than two years after director ceased to be a director of the corporation. Simply, if a director resigns, and two years passes, the CRA is barred from collecting the taxes owing from the director. This is referred to as a “limitation period” because it limits the amount of time the CRA has available to come after the director for these monies.

Zvilna v. Canada [2022] T.C.J. No. 36

The recent Zvilna case enlightens several key aspects of the limitation period for director’s liability. The corporation in question: TASAC Ltd had unremitted taxes and had failed to pay them in the 2009 tax year. The CRA had commenced an action on September 30, 2015 (almost six years later) against the director personally under section 227.1. The key issue was whether Zvilna had resigned as a director more than two years prior to the commencement of the action.

Three underlying arguments were made on behalf of Zvilna concerning the limitation period defence. First, that Zvilna had verbally resigned from being a director, and had nothing further to do with the business or the directorship of the business. However, a purely verbal resignation is insufficient. This is because the resignation must a be legally valid resignation. A purely verbal resignation is not legally valid because of a key section (121(2)) in the Ontario Business Corporations Act (OBCA) which states that: “A resignation of a director becomes effective at the time a written resignation is received by the corporation or at the time specified in the resignation, whichever is later”. Hence, a verbal resignation does not constitute a resignation for corporate law and therefore for tax purposes.

Second, the taxpayer argued that a future condition resignation is sufficient for a resignation.

However, because further action was required to resign when those conditions were met, it did not on its own constitute a resignation. Hence, a written resignation must be clear and current. If it is a future date, the resignation occurs on that future date.

And third, that a written agreement confirming his resignation as a director was signed and delivered to the other director in 2011. The events in the clause for a future resignation occurred prior to 2011 and the subsequent agreement was signed in 2011, though it was ready to be signed five years prior. Further evidence also pointed to the written resignation being a clear resignation. Hence, because there was a resignation four years prior to the action commencing, the judge agreed with the taxpayer that he could not be held personally liable.

As a result, because the director had resigned in writing four years before the CRA action, the CRA was barred from creating personal liability against the taxpayer.

Pro Tax Tip: Directors Liability Assessments

It is critical to resign in writing from your directorship to minimize the chances of personal liability. Otherwise, a director can be held fully liable for the tax debt of the corporation.  Failing to resign may leave you vulnerable under director’s liability.  For more information about how to properly resign from a directorship so as to avoid director tax liability, contact our expert Toronto tax lawyers.


  1. How should I resign as a director?

Prepare a written resignation that is dated and signed. Deliver it by registered mail to the listed corporate address as per the minute book and keep a copy as well as confirmation of delivery. Make sure that the corporate minute book has indicated your resignation. Make sure the corporation files a Form 1 (notice of change of director) with the Ministry and ensure that it is filed.

  1. If the corporation that I am director for goes bankrupt, can the CRA still come after me?

Yes, subsection 227.1 allows the CRA to assess directors personally when the corporation is bankrupt. This is why you should always pay your CRA debt.  However, because of the two-year limitation period, the CRA is disallowed from doing so two years after a director has resigned.

  1. How can I avoid director’s liability altogether?

By being due diligent and looking through the accounting records to ensure that the corporation has paid the required taxes owing. Contact our experienced Canadian Tax Lawyers to fully assist you in any director’s liability matters.

“This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a Canadian tax lawyer.”