It is a generally accepted rule that Corporations are deemed to be legal entities that are separate from the individuals who own and operate them. S.15 of the Canada Business Corporations Act (“CBCA”) states that “[a] corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person.”
This principle is further extended to institute a limited liability protection to shareholders, as per S. 45 of the CBCA, which provides that “the shareholders of a corporation are not, as shareholders, liable for any liability, act or default of the corporation.”
LIABILITY FOR DIRECTORS IN EXCEPTIONAL CIRCUMSTANCES
However, the nature of liability protection through incorporation of a business (also known as the “Corporate Veil”) is not exactly a bullet-proof vest protecting Directors and Shareholders from all liabilities arising from business activities.
The courts recognize the long-standing principle that “although the starting presumption is that a corporation is a separate entity, the corporate veil can be pierced if those in control expressly direct a wrongful act to be done.”[1] The courts have disregarded the Corporate Veil in exceptional circumstances involving egregious acts, such as misappropriation of client funds,[2] and even awarded punitive damages against Directors for committing such wrongful acts.[3]
LIABILITY FOR DIRECTORS ARISING FROM VARIOUS LEGISLATIONS
Examples from various legislations that are relevant to a Director’s liabilities include the following, but are not limited to,
Directors are liable for unpaid wages (up to 6 months) S.119 CBCA;
Directors are liable for issuance of shares without adequate consideration, S.118 CBCA;
Directors are liable for withholding tax to the government in accordance with S.227.1 of the Income Tax Act;
Directors are liable for failures to comply with occupational health and safety standards under the Occupational Health and Safety Act of Ontario.
RECOMMENDATIONS FOR PROTECTING PERSONAL LIABILITIES WHILE OPERATING A BUSINESS
Incorporation of your business under the CBCA (or any other similar provincial legislations) is a good starting point.
To further protect personal liabilities of Directors, businesses should publicize their corporate character in all activities and inform others of the limited liability nature of the business. This can be done by spelling out the full business name to include indication of corporate status (E.g. “Corporation/Corp,” “Limited/Ltd,” “Incorporated/Inc”) on contracts, invoices, advertisements, negotiable instruments and orders for goods or services.
It is also a common practice for business to purchase commercial insurance and insurance for Directors.
[1] 6071376 CANADA INC. v. 3966305 CANADA INC. et al., 2019 ONSC 3947 (CanLII) [607]
[2]Shoppers Drug Mart Inc. v. 6470360 Canada Inc. (Energyshop Consulting Inc./Powerhouse Energy Management Inc.), 2014 ONCA 85 (CanLII)
[3] 607, Supra note 1.