When are business owners personally liable in Ontario?
Caleesis TeleshFounder & Principal Lawyer
One of the main reasons to incorporate is the corporate shield: the corporation is a separate legal person, and its debts are its own. That protection is real, but it is not absolute. Ontario and federal law carve out specific situations where a director, officer, or owner answers personally, and most owners only learn about them after a demand letter arrives.
The starting point: the corporation is a separate person
A properly incorporated company owns its own assets, signs its own contracts, and owes its own debts. If the business fails, creditors are generally limited to what the corporation has. Shareholders risk what they invested, not their homes. Everything below is an exception to that rule, and the exceptions are where owners get hurt.
Where personal liability comes from
Personal guarantees
The most common source by far. Banks, landlords, and major suppliers routinely require the owner to guarantee the corporation's obligations. Once you sign a guarantee, the corporate shield is irrelevant for that debt: the creditor can come to you directly. Read every guarantee before signing, negotiate limits and expiry terms where possible, and keep track of which guarantees are still outstanding as agreements are renewed.
Signing before the corporation exists
Under section 21 of the OBCA, a person who signs a contract in the name of a corporation that has not been incorporated yet is personally bound by it. The corporation can adopt the contract after incorporation, which releases the signer, but until that happens the deal is yours. If you are negotiating a lease or supply agreement while the paperwork is still with the ministry, wait, or make the contract expressly conditional on incorporation and adoption.
Unremitted taxes
- Source deductions: Under section 227.1 of the Income Tax Act, directors can be personally assessed for payroll deductions (income tax, CPP, EI) the corporation withheld but never sent to the CRA.
- HST: Section 323 of the Excise Tax Act does the same for HST the business collected but did not remit.
- The due diligence defence: A director who exercised the care, diligence, and skill a reasonably prudent person would have exercised in the circumstances can escape liability. In practice, that means actively monitoring remittances and taking concrete steps when trouble appears. Passive or hands-off directors rarely make out the defence.
- The two-year limit: The CRA cannot assess a director more than two years after they cease to be one. Resigning properly, and documenting the resignation, matters.
Unpaid employee wages
Under section 131 of Ontario's Business Corporations Act, directors can be personally liable for up to six months of unpaid employee wages, and up to twelve months of accrued vacation pay, that became payable while they were on the board. This liability follows the directorship, not the shareholding. A director who owns no shares still carries it.
Construction trust funds
If your business is a contractor or subcontractor, Ontario's Construction Act treats money received on account of a project as trust funds for the subcontractors and suppliers below you. Spending project money on anything else before they are paid is a breach of trust, and section 13 extends liability to directors, officers, and anyone with effective control of the corporation who assents to the breach. These claims are pleaded personally as a matter of routine in construction disputes, and a breach of trust judgment can survive personal bankruptcy. If the company runs project funds through one account and payroll is tight, this is the section to worry about.
Improper dividends and share buybacks
Under section 130 of the OBCA, directors who vote for or consent to a dividend, or a purchase of the corporation's own shares, while the corporation cannot meet its solvency tests are jointly and severally liable to repay the corporation. In practice this is the owner who kept drawing money out as dividends while suppliers went unpaid. If cash is tight, take advice before declaring anything, and paper the solvency analysis when you do.
Workplace safety
The Occupational Health and Safety Act puts a personal duty on directors and officers to take all reasonable care to ensure the corporation complies with the Act. Since 2022, a convicted director or officer faces a fine of up to $1.5 million, imprisonment of up to twelve months, or both. After a serious workplace injury, the Ministry of Labour investigates the people as well as the company. Documented safety policies, training records, and evidence you acted on known hazards are what the due diligence defence is built from.
Personal conduct: torts and misrepresentation
Incorporation does not protect anyone from their own wrongful acts. An owner who personally makes a fraudulent or negligent misrepresentation, converts someone else's property, or directs the company to break a contract for an improper purpose can be sued personally, alongside the corporation.
The oppression remedy
Section 248 of the OBCA lets shareholders, creditors, and other stakeholders ask a court to correct conduct that is oppressive or unfairly prejudicial to their interests. Courts can, and sometimes do, make directors personally pay, particularly where they stripped assets, diverted opportunities, or paid themselves ahead of known creditors.
Piercing the corporate veil
Courts will occasionally disregard the corporation entirely where it is a mere facade: completely controlled by the owner and used as a shield for fraud or improper conduct. It is a high bar, but mixing personal and corporate funds, ignoring corporate formalities, and moving assets around when creditors close in are the fact patterns that invite it.
How owners protect themselves
- Keep corporate and personal finances strictly separate, and document major decisions with resolutions.
- Sign contracts in the corporation's name, with your title shown, never in your personal capacity.
- Track every personal guarantee you have given, and ask for releases when facilities are repaid or renegotiated.
- Monitor payroll remittances and HST directly; do not assume the bookkeeper has it handled.
- Put real protection paper in place: the OBCA lets the corporation indemnify its directors and buy directors' and officers' insurance. An indemnification agreement plus a D&O policy is standard once a business has employees or outside shareholders. Read the exclusions; fraud is never covered, and statutory liabilities like unremitted tax vary by policy.
- If the company is heading into trouble, get advice early. The decisions made in the last months before insolvency are the ones courts scrutinize.
The corporate shield does its job when the corporation is run as a genuinely separate business. Understand where the exceptions are, and you can take on business risk without quietly taking it home with you.
- For businesses
- Ontario courts
This article is general information, not legal advice, and does not create a solicitor-client relationship. It is current as at its publication date and is not revised as the law changes. For advice on your specific situation, book a consultation or call 416-639-0887.
LL.B.B.A., York UniversityMember, Law Society of Ontario
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