Director liability in BC: when a company director can be personally responsible

Incorporating usually keeps business debts off your personal balance sheet. But a handful of laws reach past the company to the people on its board, and the ones that catch most owner-managed BC companies are unpaid wages and unremitted taxes.

This guide explains when a director can be personally responsible, which defences exist, and the practical steps that reduce the risk, including for a spouse or family member who agreed to be a director on paper.

The starting point: the company is a separate person

A BC company is a legal person separate from its shareholders and directors. Its contracts, debts and lawsuits are generally its own, which is a main reason owners incorporate (see our guide on whether to incorporate your small business in BC).

Directors do take on duties. Section 142 of the Business Corporations Act requires every director and officer to act honestly and in good faith with a view to the best interests of the company, and to exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances. Those duties are owed to the company. The more immediate personal exposure for most small-company directors comes from specific statutes that make directors answerable for particular debts.

Improper payments under the Business Corporations Act

Directors who vote for or consent to a resolution authorizing certain payments the Act prohibits are jointly and severally liable to restore the money to the company (s 154). The list includes a dividend or a share redemption made when there are reasonable grounds to believe the company is insolvent or would be made insolvent by the payment, and an indemnity the Act does not allow.

A director present at the meeting is treated as consenting unless their dissent is recorded in the minutes or delivered in writing. An absent director has 7 days after learning of the resolution to deliver a written dissent. A director is not liable if they relied in good faith on financial statements presented by an officer or in an auditor’s report, or on a professional’s report (s 157). The practical point for owner-managed companies: check solvency before signing a dividend resolution, and keep the financial statements you relied on.

Unpaid wages: up to two months per employee

Under section 96 of the Employment Standards Act, a person who was a director or officer when wages were earned or should have been paid is personally liable for up to two months’ unpaid wages for each employee. The Province’s interpretation guidelines say the amount is two months of the employee’s normal wages plus applicable vacation pay. The Employment Standards Branch first issues a determination against the company, then can issue determinations against directors and officers and collect from any or all of them.

There are exceptions. A director or officer is not personally liable for length-of-service compensation, termination pay or group termination amounts if the company is in receivership or insolvency proceedings, or for vacation pay or time-bank money that becomes payable after they leave office. Titles do not decide who is an officer: someone who performs a policy-making function can be one.

Unremitted source deductions, GST/HST and PST

Tax authorities can also look to directors when a company collects or withholds money for the government and does not pass it on:

• Source deductions. Under section 227.1 of the Income Tax Act, directors are jointly and severally liable with the company for income tax it failed to withhold or remit from employees’ pay, with interest and penalties. The CRA notes that similar provisions in the Canada Pension Plan and the Employment Insurance Act cover CPP contributions and EI premiums.
• GST/HST. Section 323 of the Excise Tax Act makes directors liable for net tax the company failed to remit, with interest and penalties.
• PST. The Provincial Sales Tax Act makes a board member jointly and severally liable for PST the company failed to levy, collect or remit during their term, with penalties and interest (s 207). Someone who performs a director’s functions can be treated as a board member (s 209).

Each regime has built-in limits. Liability generally arises only after a collection step or insolvency event involving the company, for example a certificate registered in court with execution returned unsatisfied, or the company’s dissolution or bankruptcy. And a former director cannot be assessed more than two years after they last ceased to be a director (Income Tax Act s 227.1(4), Excise Tax Act s 323(5), Provincial Sales Tax Act s 210(2)).

The main defence is due diligence: a director is not liable if they exercised the care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. The CRA’s guidance on directors’ liability stresses that the steps must be taken before the failure occurs, so catching up after remittances have been missed will not, on the CRA’s view, establish the defence.

Directors in name only, including spouses

Many owner-managed BC companies list a spouse, parent or adult child as a director for convenience. The statutes above do not exempt them. The CRA’s guidance says the law does not distinguish between active, passive, nominee and outside directors, and that people who perform a director’s functions without being formally appointed may also be liable. A director who never asked about payroll or tax remittances may find it harder to show due diligence.

A personal guarantee is a separate matter. If you signed a personal guarantee for the company’s lease, loan or supplier account, your liability comes from that contract, not from being a director, and resigning as a director does not by itself end it.

Practical protections for directors

• Keep the register current. A company must file a notice of change of directors with the BC Registry within 15 days after a change in its directors (BCA s 127). Our BC company annual compliance checklist covers the yearly filings.
• Resign in writing and check the filing. A resignation takes effect when the written resignation is delivered to the company or its lawyer, or at a later time it specifies (s 128). Keep a copy, and confirm the company has filed the change. Resigning does not remove liability for periods when you were a director, but the two-year tax assessment limits run from when you last ceased to hold office.
• Watch remittances. Ask for regular confirmation that payroll deductions, GST/HST and PST have been remitted. The CRA suggests measures such as a separate account for withholdings and regular reports from the person responsible.
• Indemnities and insurance. A company may indemnify a director and buy directors’ and officers’ (D&O) insurance (ss 160 and 165), but it cannot indemnify a director who did not act honestly and in good faith with a view to the best interests of the company (s 163). An indemnity is only as good as the company’s ability to pay, so check what any D&O policy covers and excludes.
• Put the rules in writing. A shareholders’ agreement can set who may sit on the board and how decisions about dividends, borrowing and payments are made.

Named as a director of a BC company? Check your exposure before a problem arrives

Our business lawyers can review your company’s director records and filings, explain your exposure for wages and taxes, and prepare resignations, indemnity agreements and shareholders’ agreements.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.