Director Liability in Canada: What Every Board Member Should Know

Serving as a director can be rewarding, but it also carries real legal responsibility. In Canada, directors can face personal liability for corporate obligations, losses, or statutory breaches under Canadian corporate law in a range of situations — even when acting in good faith and on behalf of the corporation.

Whether you sit on the board of a private company, public issuer, or not-for-profit, understanding director liability in Canada is essential to protecting both the organization and yourself.

Broadly speaking, while incorporation generally limits liability, Canadian law creates important exceptions where directors cannot rely on the corporate shield. These exceptions are found in federal and provincial statutes, including the Canada Business Corporations Act (CBCA) and provincial business corporations legislation.

The Two Core Duties of Directors

Across Canada, directors owe two primary legal duties that form the foundation of board of directors liability:

1. Fiduciary Duty

Directors must:
• Act honestly and in good faith.
• Act in the best interests of the corporation.
• Avoid conflicts of interest.

These fiduciary duties of directors are owed to the corporation itself — not individual shareholders.

2. Duty of Care

Directors must exercise the care, diligence, and skill of a reasonably prudent person in comparable circumstances. This duty of care for directors includes staying informed, reviewing materials, and actively overseeing management.

Failing to meet either duty can expose directors to personal liability under Canadian law.

Common Sources of Personal Liability

Unpaid Wages and Payroll Obligations

Directors may be personally liable for:
• Unpaid wages and vacation pay.
• Failure to remit CPP, EI, and income tax deductions.

Director liability for unpaid wages is one of the most enforced forms of liability, particularly when a corporation becomes insolvent.

Tax Liabilities

Under federal and provincial tax legislation, directors can be liable for:
• Unremitted GST/HST.
• Payroll source deductions,
plus interest and penalties.

GST/HST director liability and CRA enforcement actions frequently target directors after corporate failure. Resigning does not necessarily eliminate liability for past non-compliance.

Environmental Liability

Environmental laws can impose environmental liability on directors for:
• Contamination or pollution.
• Failure to prevent or remediate environmental harm.

A lack of direct involvement does not always shield directors from liability.

Oppression Claims

Shareholders (and sometimes other stakeholders) may bring oppression claims against directors alleging conduct that is:
• Oppressive.
• Unfairly prejudicial.
• Unfairly disregards their interests.

These claims are particularly common in closely held corporations and family-owned businesses.

Securities and Disclosure Issues

For public companies and certain private issuers, directors may face liability for:
• Misleading disclosure.
• Failure to disclose material information.
• Insider trading violations.

The Business Judgment Rule

Canadian courts generally apply the business judgment rule, which protects directors when decisions are:
• Made honestly.
• Informed.
• Within a reasonable range of business outcomes.

Courts will not second-guess decisions simply because the outcome was poor — provided the decision-making process was sound.

Due Diligence: A Critical Defense

Many statutory liabilities allow a due diligence defense for directors. Directors may avoid liability by showing they took reasonable steps to prevent the breach, such as:
• Implementing compliance systems.
• Asking informed questions.
• Seeking professional advice.
• Acting promptly when issues arise.

Passive directors face significantly greater risk of director responsibility under the law. 

Indemnification and D&O Insurance

Most corporations provide indemnities and carry Directors and Officers liability insurance (D&O insurance), but these protections have limits. D&O insurance coverage depends on policy terms and may be unavailable if the corporation is or becomes insolvent or exclusions apply.

Directors should review director indemnification provisions and insurance regularly and not assume full protection.

Practical Takeaways for Directors

To manage risk effectively and reduce director liability in Canada, directors should:
• Stay informed about financial and legal matters.
• Ensure payroll and tax compliance.
• Document decisions and dissent.
• Address conflicts of interest transparently.
• Seek independent advice when appropriate.

Strong corporate governance obligations remain the most effective form of protection.

In Summary

Director liability in Canada is complex and evolving, but it is manageable with the right approach. The law does not require perfection — it requires diligence, honesty, and informed decision-making. Protect yourself by ensuring your actions, requests, inquiries and if necessary objections are duly noted and recorded.

Understanding your obligations is essential to serving effectively and protecting yourself in an increasingly scrutinized governance environment.

Disclaimer: This content is provided solely for informational purposes and is not intended for use in any legal proceeding. You should consult a qualified lawyer for advice tailored to your specific circumstances.