When Limited Liability Doesn’t Protect You from the CRA

One of the biggest perks of incorporating a business is limited liability; your personal assets are normally protected if your company runs into financial trouble.

But there’s one major exception: if your corporation owes money to the Canada Revenue Agency (CRA), limited liability may not protect you.

Today, I want to highlight a common situation where incorporated business owners can unknowingly create a personal tax liability: issuing or receiving dividends from their corporation when taxes are still owing.

What is a Non-Arm’s Length Assessment?

This assessment allows the CRA to hold a third party (person or legal entity) responsible to pay another taxpayer’s tax debt, even if they never personally earned the income.

Once issued, CRA can collect the debt directly from that third party’s assets.

To raise this assessment, four conditions must be met:

1. A transfer of property occurred (cash, assets, etc.)

2. The transfer was for less than fair market value

3. The parties were not dealing at arm’s length (for example, you and your own corporation)

4. The transferor (the company) had a tax debt at the time of transfer

Real-World Example: When Dividends Create Personal Liability

Imagine you’re the sole shareholder and director of a corporation that owes $20,000 in corporate income tax for 2021–2023.

In 2024, your company issues you dividends of $80,000.

• You received property (cash) → condition #1

• You didn’t pay fair market value for the dividends → condition #2

• You and your company are related → condition #3

• The company already owed taxes → condition #4

All four conditions are met, meaning the CRA can assess you personally for up to $20,000, plus interest.

For more detail: https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-5-transfer-income-property-rights-third-parties/income-tax-folio-s1-f5-c1-related-persons-dealing-arms-length.html

Why This Matters

I’ve seen this scenario play out many times throughout my career in public service. Most business owners are shocked to learn that dividends can trigger personal tax liability if corporate taxes are outstanding.

If they had known sooner, they could have taken simple steps to avoid it; like staying current with their books and filing on time.

Proactive education is the best prevention.

What You Can Do

If you’re behind on bookkeeping or corporate filings:

• Get caught up early.  The longer a balance sits unpaid, the more daily compound interest adds up.

• File outstanding returns even if you can’t pay immediately.

• Talk to your accountant or tax lawyer if you’ve already received a notice or expect one.

Disclaimer

I’m not a tax lawyer, and this post is for general educational purposes only. My perspective comes from 10 years of professional experience working in government and helping businesses stay compliant with CRA requirements. If you’re facing a potential assessment, consult a qualified tax lawyer to discuss your situation.

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