Banka: Director’s liability in small corporations

Whatever happens, you want to make sure your family members have a roof over their heads and can feed themselves if the company goes south.

BankaIt’s been my experience that the perfect strategy between spouses who own a corporation is to have both as shareholders of the corporation, but only one as the director.

However, I have seen instances where only one spouse holds both the corporation and the personal assets with the other spouse being the chief operating officer or having nothing to do with the corporation at all.

The reason you want to segregate the personal assets from the business assets in a family-owned corporation is in case someone takes legal action against you.

Whatever happens, you want to make sure your family members have a roof over their heads and can feed themselves if the company goes south.

You may not face legal action from a supplier or customer, but you may from the Canada Revenue Agency.

There was a recent court case in May where there were two director shareholders in a corporation where one was basically a silent partner and let the other make all the decisions.

It was very similar to a family held corporation.

Unfortunately, the business started to go sour and was unable to make its monthly payroll.

The silent partner became aware that the remittances were not being made because he or she would receive the notices in the mail.

The silent partner confronted the managing partner and was told things were being looked after and everything was expected to turn around in the future and the remittances would be made.

CRA took legal action against the corporation and the two directors for the payroll liability.

Directors can be held personally liable for non-remittance of payroll deductions.

The silent partner’s defence was that he or she relied on the other partner’s word.

That defence was not accepted in court.

The judgement was that any prudent person would have done their due diligence (monitored the situation themselves) to make sure the payments were being made and what was being promised by the managing partner was actually happening.

You may think the silent partner could have just resigned as a director when the corporation started failing, but again you need to have been resigned for two years prior to any difficulty in order to not to be dragged into any legal proceedings of the corporation.

The best tax strategy for setting up a family owned corporation is to have one spouse as a director/shareholder of the corporation and have the other as a shareholder.

The director/shareholder could then receive a salary or bonuses from the corporation and the other spouse would be free to earn income outside of the corporation and hold title to the family’s personal assets. Each spouse needs to own a different class of shares so when the corporation has retained earnings and is able to pay dividends, the choice can be made as to who would receive the dividends based on their personal financial position.