Directors’ due diligence important to prevent CRA penalties

publication date: Oct 12, 2012
author/source: Ryan M. Prendergast
On August 27, 2012, the Tax Court of Canada released its decision in Martin, J. v. The Queen, which discusses director liability in relation to GST/HST and payroll remittances owing under the Excise Tax Act (ETA) and Income Tax Act (ITA). Ryan Prendergast photo

Although it concerned a director of a for-profit corporation, the decision applies equally to the directors of nonprofits and charities concerning what due diligence they need to evidence to avoid the application of penalties under the ETA or ITA during economic downturns. 

The appellant in this case, James Martin, was appealing an assessment against him as the sole director/shareholder of a group of share capital corporations. Mr. Martin had been assessed by the Canada Revenue Agency as the director of these corporations for not having submitted payroll contributions, employee deductions and GST remittances. 

Perform, prove due diligence 

The only issue before the court in this decision was whether or not the due diligence defence available under the both ITA and ETA to the statutory liability for remittances was available to the appellant. Briefly speaking, a director, including a director of a nonprofit or charity,  is not liable for remittances where he or she exercised the degree of care, diligence and skill to prevent the failure to remit that a reasonably prudent person would have exercised in comparable circumstances. 

The court applied the 2004 Supreme Court of Canada decision of Peoples Department Stores Inc. (Trustee of) v. Wise, which stated that an examination of the care, diligence and skill that a reasonably prudent person exercised requires an analysis of the circumstances. The court recognized that the appellant and his group of companies took on a contract much larger than they had experience with in the past, and that reasonable efforts were made through consulting with legal and financial advisors to address the liability for remittances. 

Accordingly, the court allowed the appeal of the assessments, in part, and referred them back to the Minister for reassessment. 

How to create evidence of diligence 

The decision reminds directors to prove that although they were aware of the financial difficulty that brought about the failure to make the remittances to the government, they exercised their duty of diligence, care and skill that a reasonably prudent person would in their circumstances. 

Directors of charities and not-for-profits are reminded of the importance of paying CRA before any other liability. In this regard, it is recommended that the directors put safeguards in place through staff reminders or creating checklists to review at meetings in order to ensure that these statutory liabilities are being fulfilled. 

Ryan M. Prendergast is an associate practicing charity and not-for-profit law with Carters Professional Corporation, and can be reached at

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