Resigned But Still Responsible? The Hidden Liability of De Facto Directors
De Facto Directors: A Hidden Risk of Personal Liability
Understanding Your Responsibilities and Risks as a Corporate Director
In the world of corporate governance, the title of “director” carries significant legal responsibilities. But what happens when someone steps down from their formal role—yet continues to act like a director? A recent Quebec Court of Appeal decision highlights the serious consequences of being deemed a de facto director, especially when it comes to unpaid tax obligations.
What Is a De Facto Director?
A de facto director is someone who, despite not holding the official title, continues to perform the functions of a director. This includes making financial decisions, negotiating contracts, and interacting with tax authorities on behalf of the corporation. Canadian tax law does not overlook these actions—especially when payroll source deductions or GST/HST (or QST in Quebec) go unremitted.
Personal Liability for Tax Debts
Under Canadian law, directors can be held personally liable for a corporation’s failure to remit payroll source deductions and GST/HST. This liability can extend up to two years after a director resigns, unless they can demonstrate that they exercised due diligence to prevent the failure.
In a November 29, 2024 decision, the Quebec Court of Appeal ruled against a taxpayer who had formally resigned as a director in 2010 but continued to act in a directorial capacity. The court found that his ongoing involvement in banking, contract negotiations, and discussions with Revenu Québec made him a de facto director. As a result, he was held personally liable for unremitted QST and source deductions from 2012 and 2013.
Key Takeaway: Resignation Is Not Enough
ACTION ITEM: If you resign as a director, it is critical to cease all activities that could be interpreted as acting in a directorial role. This includes:
Signing contracts on behalf of the corporation
Managing corporate bank accounts
Communicating with tax authorities
Participating in strategic decision-making
Failing to do so could expose you to personal liability for corporate debts—even years after your resignation.
The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.
No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents