In my recent blog, I wrote about the hidden threat of HST and the director’s liability for not remitting the tax. In my consultations with business owners one of a many hot topics we discuss is what the owner or more particularly the directors are liable for in the event of a business failure or for not remitting or paying certain obligations.
I discussed the family risk where both spouses are directors and how it exposes the family equity. Early planning with your legal advisers can limit the exposure to the family assets but this needs to be done when you are setting up your business and not the night before the business shuts down. Too often I have sat opposite a husband and business owner who explains that he “has taken care of everything” and transferred his equity in the family home to his wife. Unfortunately it doesn’t happen that way.
Here is the legal part, this blog is not designed, nor in the space available, can we set out all conditions, exceptions or possibilities. Once you read this blog, you should contact one of our offices a local trustee near you for greater analysis and review of your particular circumstances. For ease of reading, we will try to create a series of short blogs written for ease of reading and avoiding lots of legal jargon.
Probably one of the most revealing moments is when I discuss the number of items a director is personally liable in a business. Some of the items get pretty complicated but in general the attached table sets out some of them:
|Unpaid wages||Six months of unpaid wages||Business Corporations Act|
|Vacation Pay||Unpaid vacation pay||Business Corporations Act|
|Source deductions||Amounts withheld and not remitted||Income Tax Act|
|HST||Amounts collected and not remitted||Excise tax Act|
|Collection of construction deposits||Amounts collected from customer and used to pay suppliers of another project||Construction lien Act|
While not an exhausting list, these are probably the items I discuss with the directors of a business about. Please note that there may be other items but they come up for discussion rarely.
Interestingly, a common belief is that the government would go after each director for their share of the various liabilities. Wrong, Canada Revenue Agency can go after one or all of the directors for the full amount outstanding also known as the director’s “joint and several liability” for the debt. Once paid by a director, the director that pays can look to the other directors for payment. A word of caution to individuals who sell a business, ensure that your resignation is filed with the government to ensure you are no longer a director.
A number of individuals I have consulted with have inquired whether they could apply for fairness with Canada Revenue Agency. I have not seen a case where CRA allows the argument or forgives what should have been paid.
This leads to the discussion about who to pay when a business is failing. As the optimist, a business owner wants to remain in business and therefore pays his suppliers while not remitting deductions as CRA is not calling. This leads to the personal liability when everything collapses and deductions remain outstanding.
To make matters worse, CRA has registered tax liens on personal residences and on the personal bankruptcy of the business owner, refuse to remove the lien even where there is no equity in the home. Over time and after the personal discharge from bankruptcy the lien remains on title and the owner is refinancing to pay off the lien.
There are a number of factors to consider when a business is failing and a lot of thought must be given to how you handle certain funds received or deducted and how this will impact the directors personally. At S. Funtig & Associates we are here to help and can schedule a telephone or video conference call or arrange to meet with you respecting the need for social distancing.
Remember the people of Chatham and Windsor are strong, we will get through this together!