Are you responsible for your corporation's debts?

As a shareholder of your corporation, you have limited liability. This means that you and the other shareholders are not responsible for the corporation's debts. However, limited liability may not always protect you from creditors. For example, if a smaller, more closely held corporation wants to borrow money from a bank or other creditor, the creditor may ask for the shareholder's guarantee that the debt will be repaid. If you agree to this condition, you will be personally liable for that debt if the corporation does not pay it back.

This applies to taxes owing as well. If your corporation owes taxes and has obtained a loan or secured a line of credit, an advance under the loan or line of credit can be intercepted on account of the corporation's tax arrears. Notwithstanding that the proceeds of the advance have been paid to the receiver general for Canada, the corporation is deemed to have received the advance and is liable to the lender as such. When you have personally guaranteed the loan or the line of credit for the corporation, you would be liable jointly with the corporation for the amounts intercepted.

Directors may also be liable to pay amounts owed by the corporation if it has failed to deduct, withhold, remit or pay amounts as required by the Income Tax Act, the employment Insurance Act, the Canada Pension Plan, the Excise Act, 2001, and the Excise Tax Act. For more information on director's liability, see Information Circular IC89-2, Directors' Liability - Section 227.1 of the Income Tax Act and Section 323 of the Excise Tax Act.

For more information on the above, please contact HazloLaw Founder & Business Lawyer, Hugues Boisvert at 613-747-2459 x 304 or at hboisvert@hazlolaw.com