One of the most common misconceptions of self employed people is that they will be liable for any unpaid corporate income tax owed by a limited company that can’t pay its debts. The fact is that shareholders, including those that are also directors of a limited company, are not liable for any unpaid income tax of that company.
Any debt owed for corporate income tax in a limited company stays in that company and, in most cases, just dies with that company. Most failed (or failing) companies do not usually have any continuing net value in the shares. That is, the assets of the company are not worth more at liquidation than the total amount of the company debts. As such, the owner simply stops operating it and lets it be “deregistered” and cease to exist after a couple of years of not filing the annual corporate returns with the Provincial Corporate Registry.
What are directors and shareholders liable for?
When assessing your potential liability for company debts, and thus to be able to make good decisions regarding winding up or walking away from the company, you need to keep the following issues in mind:
- Under certain income tax legislation, CRA can follow transfers of funds from a corporation with unpaid tax debts to a shareholder or other connected person. This situation usually involves significant transfers of funds while the company has meaningful unpaid taxes.
- Directors can be liable for unpaid GST or employee withholdings of the company. However, this requires that CRA first “raise an assessment” against the director for that amount. What we have found in recent years is that CRA is becoming more reluctant to raise these assessments. Perhaps this is because of the time and effort required to do so, or possibly because some successful defences have been raised against these assessments. The most common defence used by directors in the past has been that they had very little or nothing at all to do with the fact that the amounts went unpaid.
- Whether you are a director or only a shareholder of the company, you are liable for any personal guarantee you may have signed for any company debts. Debts such as operating loans from banks, office or building leases, and credit cards issued to the company are all normally personally guaranteed. To be certain, you must always look to the specific terms of the loan/lease agreement to see if you have made a personal commitment or guarantee for the debt.
Dealing with limited company debt problems can be complicated. There are many aspects to consider in winding up or otherwise dealing with its debts. Call us today to discuss your situation understand all your options.