DIRECTORS’ LIABILITIES
(Ontario Corporations)
Ontario Business Corporations Act (“OBCA”)
1. Section131 - provides personal liability may be imposed on directors, jointly and
severally, for all debts not exceeding six months’ wages of the employees and for
vacation pay accrued. Debts in this case include unpaid commissions, earned bonuses and
expenses incurred by the employee on behalf of the corporation.
2. Sections 256 and 258 set forth provisions that subject persons, including directors, to
potential liability for taking or omitting to take certain actions, such as, make a
statement in any document required to be filed with the Director of Consumer and
Commercial Relations or the Ontario Securities Commission, or fail to file any document
required to be filed with the Director; or the Securities Commission or fail to comply
with any decision, order or requirement of the Director or the Commission; commit any
act contrary to or failing to comply with the OBCA and its regulations; if fail to appoint
auditor (unless exempt); if do not relay prescribed information to shareholders at annual
meetings. (If the corporation is found guilty of any of these offences and the director is
found to have permitted or acquiesced with same, then the director is also guilty)
3. Subsection 134 (1) imposes a duty on directors to act honestly and in good faith
with a view to the best interests of the corporation and exercise the care, diligence
and skill that a reasonably prudent person would exercise in comparable
circumstances - penalty is repaying any profits made by directors personally which
should have gone to corporation and other equitable remedies
4. Subsection 134(2) requires that directors comply with the OBCA and any
unanimous shareholders agreement. Penalties include fine and/or imprisonment.
5. Subsections 132(1) and (7) require directors to disclose to the corporation the
nature and extent of any interest that he/she has in a material contract or
transaction with the corporation. Penalty- contract may be voidable at option of
corporation or director must account to corporation for any profits made by director.
6. Financial Reporting- director must notify auditor and audit committee of any that
error or mis-statement director becomes aware of in financial statements and
provide revised statements to shareholders. Penalties include fines and/or imprisonment.
7. Issuance of Shares - Directors must not vote for or consent to a resolution authorizing
the issuance of share until the consideration for the share is fully paid in money or
property or past services that are not less in value than the fair equivalent of the money
that the corporation would have received if the share had been issued for money on the
date of resolution. Penalty- joint and several liability to the corporation for the amount of
money the corporation should have received on the issuance of the share.
8. Redemption of Shares - Directors must not vote for or consent to a resolution
authorizing a transaction where shares are redeemed or repurchased, if there are
reasonable grounds for believing that the corporation is, would after the payment be
unable to pay its liabilities as they become due or the realizable value of the corporation’s
assets would be less than the aggregate of its liabilities and stated capital of all classes of
shares. Penalty- joint and several liability to restore to the corporation any amount
distributed or paid and not otherwise recovered by the corporation.
9. Declaration of Dividends - Directors must not vote for or consent to a resolution
authorizing the declaration or payment of a dividend if there are reasonable grounds for
believing that the corporation is, would after the payment be unable to pay its liabilities
as they become due or the realizable value of the corporation’s assets would be less than
the aggregate of its liabilities and stated capital of all classes of shares.
10. Loans to Shareholder, Director or Officer - A corporation may not directly or
indirectly provide a loan, guarantee or other financial assistance to a shareholder, director
or officer for any purpose where a corporation is or is likely to be insolvent. Penalty director who votes for same would have to repay the corporation any amounts distributed.
Tax Legislation
1. Subsection 227.1 of the Income Tax Act (“ITA”) plus the provincial Income Tax
legislation provide that a director may be jointly and severally liable with the corporation
with respect to payments that the corporation has filed to deduct or remit to Canada
Customs and Revenue Agency (“CCRA”) including:
-source deductions in respect of salaries, wages, pension benefits and retiring allowances;
and
- payment to non-resident of Canada that are subject to Canadian withholding tax
- plus all interest and penalties due on such amounts
In addition fines can be imposed plus possible imprisonment)
2. Directors are also liable for other unpaid source deductions such as UIC, CPP
3. GST and other Tax Statutes
A director may also be held liable for any net goods and services tax payable and interest
and penalties together with any retail sales tax payable plus interest and penalties
Directors may be liable under the Canada Labour Code and Employment Standards Act
for employee wages and related amounts to a greater extent than under the OBCA
4. A director may be liable for a corporation’s failure to file tax returns, failure to keep
proper books and records or failure to comply with search and seizure. (Fines plus
possible imprisonment)
5. If a corporation is guilty of an offence under tax legislation, a director who directed,
authorized, assented to or acquiesced in, or participated in, the commission of the offence
is a party to the offence for willful tax evasion, evading tax payment, falsifying or
destroying accounting records, in addition to outstanding tax, interest and penalties there
can be imposed fines of up to 200% of the tax evaded plus imprisonment.
6. If a corporation winds up or is liquidated without a proper clearance certificate
showing all prescribed taxes are paid in full the director is liable to the extent of the value
of the assets distributed.
Pension Benefits Act and Workplace Health and Safety
Pension benefit legislation and workplace health and safety legislation provide that a
director is guilty of an offence where the director has acquiesced or failed to take
reasonable care to prevent the commission of an offence by the corporation such as
failing to make required contributions under a pension plan or failing to ensure that the
corporation is complying with all workplace health and safety legislation.
Environmental Legislation
Potential liability for environmental offences is one of the most serious liabilities facing
directors. Directors may be subject to liability if they themselves cause or permit damage.
Many environmental statutes in Canada make directors personally liable for
environmental damage caused by the corporation.
Directors have a duty to take all reasonable care to prevent the corporation from causing
environmental damage and if a director allows an offence to committed by the
corporation the director will be liable and can be subject to fines of up to $1,000,000.00
or imprisonment or both plus clean up costs.
Third Party Claims
Shareholders and third party claimants may be able to sue directors and officers for
breach of common law and statutory duties.
Claims arising out of breach of contract or tort with respect to misrepresentations upon
which third parties rely upon, or participating in a fraudulent scheme or claims arising out
for breach of trust as a result of a failure to pay a creditor on a timely basis. In Ontario
there seems to be a trend to make directors liable to creditors on the eve of insolvency for
the corporation’s debts.
Construction Claims
If a corporation is in breach of trust in its handling of funds that should be paid to
contractors or subcontractors, the directors, if they assent to or acquiesce in the breach,
may be held jointly and severally liable.
In addition to the specific headings contained herein there are many provincial and
federal statutes that impose liability on directors of corporations which may imply further
potential liabilities on you as a director depending upon the nature of the business of the
corporation in question.
Protect Yourself as a Director
Maintain compliance with all tax statutes, make payments on time and keep separate
accounts for monies subject to statutory trusts (ie. employee remittances, sales tax etc.)
with tight controls in place.
Obtain director and officer insurance.
Consult and obtain advice from appropriate professionals with respect to compliance with
laws and deductions etc.
At meetings require evidence of compliance with solvency tests before consenting to
proposals.