GST/HST Remittance Deferral: Interest-Free "Loans" May Trigger Personal Liability

• Published date: 30 May 2020
• Author: Mr Joseph Takhmizdjian, Bobby B. Solhi, Braek Urquhart, Beverly Gilbert, C.A. and Laurie A. Goldbach
• Subject Matter: Corporate/Commercial Law, Tax, Corporate and Company Law, Directors and Officers, Sales Taxes: VAT, GST
• Law Firm: Borden Ladner Gervais LLP

Canadian businesses are facing unprecedented times. In response, the Canadian government is announcing unprecedented support measures, including a GST/HST remittance deferral until the end of June 2020, for GST/HST payments or remittances (Remittance Obligations) that become owing on or after March 27, 2020.¹

What you need to know

• GST/HST collected from customers remains the property of the government.
• Directors, trustees and partners can be held personally liable for unpaid Remittance Obligations of their company.
• Directors that use GST/HST collected by their corporation to pay business expenses may be held personally liable by the CRA as for any subsequent failure to remit that GST/HST.

Analysis

The Canadian government described the remittance deferral as "the equivalent of providing up to $30 billion in interest-free loans to Canadian businesses." The government suggests businesses can use these "loans" "so they can continue to pay their employees and their bills, and help ease cash-flow challenges across the country."²

These remittance deferrals may be interest free, but they are definitely not liability-free. What the government omits in its announcements is that directors may risk personal liability for a business's failure to ultimately remit the GST/HST. All GST/HST collected by a business is held in trust for and is treated as the property of the government.³ If a corporation fails to meet its Remittance Obligations, its directors may become jointly and severally liable for that remittance shortfall.⁴ Similar rules exist for trustees, partners and even unincorporated associations.⁵

A director may avoid this liability by demonstrating they were duly diligent in preventing a corporation's failure to remit GST/HST.⁶ Courts routinely confirm that the due diligence defence does not protect directors who consciously divert funds collected as GST/HST to satisfy other obligations such as payroll, creditors and suppliers (as the government appears to encourage with the remittance deferral).

The recent Federal Court of Appeal decision Ahmar v. Canada illuminates this issue.⁷ In Ahmar, a concrete-forming business experienced the "perfect storm" of bad luck, including significant construction delays, which led to a cash flow crisis. The sole director of the business diverted amounts collected as GST/HST to satisfy other business obligations in the hopes of turning the company's financial position around.⁸ In particular, the company continued to file...