THE DUE DILIGENCE DEFENCE & DIRECTORS’ LIABILITY
PROVING DUE DILIGENCE TO AVOID DIRECTORS’ GST/HST LIABILITY NO EASY FEAT!
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The GST/HST framework under the Excise Tax Act (“ETA”), as with other indirect tax regimes (like federal and provincial alcohol, tobacco and vaping taxes) includes “directors’ liability” provisions that are triggered when the corporation does not have the money to pay an assessed amount. Most of these systems have “due diligence defences” and “statutory limitation rules” which may limit a director’s liability, but these rules are tricky to apply in practice.
We review these rules in a two-part series, with reference to the recent case Stevens v. The King, 2026 TCC 76 (“Stevens”), which revolves around this directors’ liability framework.
This Report concerns the “due diligence defence”. For our companion Report on “statutory limitations rules”, click here.
Directors’ Liability Overview
Section 323 of the ETA imposes personal liability on directors for unremitted GST/HST obligations of the corporation, including net tax, penalties and interest. It prevents corporations from collecting GST/HST from customers and then failing to remit those amounts to the CRA while insulating directors behind the corporate veil.
In practice, the Canada Revenue Agency (“CRA”) pursues directors only after exhausting collection efforts against the corporation itself – and only after it satisfies certain procedural requirements.
Even if all assessment requirements are met, directors are still afforded a special defence to avoid personal liability: they can demonstrate “due diligence” – meaning they had exercised the requisite care, diligence, and skill to prevent the corporation’s failure to remit tax that a reasonably prudent person would have exercised in comparable circumstances.
The Stevens Decision
In Stevens, the appellant sought to avoid personal liability for his corporation’s unremitted GST/HST of $704,243, in part by claiming the due diligence defence. Specifically, he claimed that by appointing a director of finance and delegating all financial oversight to that position, he had been duly diligent and should not be personally liable for unremitted GST/HST.
The Court rejected this argument, finding that the appellant had not exercised due diligence to prevent the corporation’s failure to remit GST/HST. When he was director, the appellant left it entirely to the director of finance, and did not set up any formal controls to ensure remittances were made – even after he learned about the corporation’s unpaid GST/HST bills. Unsurprisingly, this entirely passive approach was not enough to establish due diligence.
The case Balthazard v. The Queen, 2011 FCA 331 demonstrates what steps actually do amount to due diligence for a director of a corporation with unpaid GST/HST bills. In that case, the director had taken an active approach in contacting tax authorities, negotiating payment plans, and preventing the unremitted GST/HST from going to the corporation’s other creditors. He avoided personal liability.
provisions which allow for Due Diligence Defences
Proving Due Diligence is difficult, and generally
requires help from Experienced Indirect Tax Counsel
Takeaways
Directors of corporations that do not remit GST/HST may be held personally liable for the corporation’s back taxes, but a director may avoid personal liability by establishing the due diligence defence.
Establishing such a defence is difficult, and concerned parties are encouraged to contact Experienced Indirect Tax Counsel for help.
For help with Indirect Tax Issues, please click here.