2014-0530991E5 Liability for the failure to withhold

Principal Issues: Whether a corporation or association, together with the directors of the corporation or members of the association, are liable for the amount that was required to be withheld with respect to the taxable benefits of its employees who are resident in Canada?

Position: No.

Reasons: Where the payor has failed to withhold or deduct an amount as required under the provisions of 153(1) of the Act in respect of Canadian-resident employees, the payor is only liable to penalties and interest under section 227. However, if the employees are non-resident of Canada, the payor is also liable to pay the amount that was required to be withheld. Under subsection 227.1(1), the directors of a corporation, together with the corporation, are jointly and severally, or solidarily, liable to pay the amount and any interest and penalties. If the employer is an unincorporated association, the association and its members may be similarly held liable.

Author: Godson, Gillian
Section: 153(1), 153(3), 227.1(1)

XXXXXXXXXX
                                                                                                                                                         2014-053099
                                                                                                                                                         G. Godson

November 6, 2014

Dear XXXXXXXXXX:

Re:  Liability for the failure to withhold under subsection 153(1)

We are writing in reply to your email of May 12, 2014, requesting our views concerning the liability of both the employer and its directors with respect to the withholding requirements under subsection 153(1) of the Income Tax Act (the “Act”).

In your inquiry you have described a hypothetical situation where an employer failed to include the taxable benefits of its Canadian-resident employees on the employees’ T4 information slips, and failed to withhold the required amounts calculated based on these taxable benefits. In particular, you wish to know whether an employer that is a corporation is liable for the amount that should have been withheld and whether the directors of the corporation may also be liable for the amount that should have been withheld. You have also requested our comments on the same hypothetical situation with the only difference being that the employer is an unincorporated association.

In addition, you have asked if our comments would be the same if the employer were to make a voluntary disclosure. 

Our Comments

Every person paying salary, wages or other remuneration (the “payor”) is obligated under the Act to determine an employee’s total remuneration, including taxable benefits, and to make appropriate withholdings pursuant to subsection 153(1) of the Act. A payor is any person paying at any time in the taxation year salary, wages or other remuneration. In that regard, payor would include both a corporation and an association. 

In a situation where a payor fails to withhold or deduct the amounts required from an employee’s remuneration and remit those amounts to the Receiver General as required by subsection 153(1) of the Act, the payor is liable to a penalty and interest under subsections 227(8) and 227(8.3), respectively. The payor is not required to pay the amount of income tax that should have been withheld provided that the employee is resident in Canada. However, where the particular employee is a non-resident of Canada or is only resident in Canada solely for the purposes of 250(1)(a) of the Act, subsection 227(8.4) provides that the employer is liable for the whole amount that should have been deducted or withheld, along with any penalties and interest.

In a situation where the payor has deducted or withheld an amount and failed to remit the amount, the payor is liable for the amount that was not remitted. Subsection 227(4) of the Act deems the amounts withheld to be held in trust for her Majesty and subsection 153(3) provides that when an amount has been deducted or withheld for income tax from remuneration, the employee is deemed to have received, as wages, the amount deducted. Accordingly, the employee is given credit for the amount deducted as a payment on account of the employee’s income tax payable for the year. Accordingly, where the payor failed to remit amounts withheld or deducted, the payor is liable for the amount the employee is deemed to have received as wages and credit is given to the employee on account of income tax for an amount equal to the amount deducted. The payor is liable for the amount of the deductions that were not remitted together with the penalty for not remitting, and interest thereon.

Subsection 227.1(1) of the Act provides that where a corporation has failed to deduct or withhold an amount as required by section 153, or has failed to remit such an amount the directors of the corporation at the time the corporation was required to deduct, withhold, or remit the amount are jointly and severally, or solidarily, liable, together with the corporation, to pay that amount and any interest or penalties relating to it. The provisions of subsection section 227.1(2) to (4) of the Act outline specific circumstances where a director’s liability is limited.

The director would only be liable for the same amount as the corporation.  In the situation you have described, where the corporation failed to make the required withholding of tax with respect to an employee who is a resident of Canada, the corporation and its directors (provided the limitations of subsections 227.1(2) to (4) are not applicable) are liable only to penalties and interest, and are not required to pay the amount of income tax that should have been withheld. 

You have also asked where the payor is an association, whether our answer would be the same. An unincorporated association is not a separate legal entity and has no legal status apart from that of its members. The courts have found that the person with the power to control and manage the business and affairs is the payor of the amount and liable for the withholding required by subsection 153(1) of the Act. Furthermore, the members, while carrying out their duties on behalf of the association, may be held liable for the activities of the association. In our view, in the situation you describe, where an association has failed to deduct or withhold an amount or deducted, but failed to remit the amounts, the members of the association who have the power to provide overall management of the association may be liable for the tax, along with any penalties and interest as described above. However, each situation should be considered based on its own facts as the power of individual members of an association may vary from case to case.

Our comments concerning the liability for the failure to withhold or remit amounts as noted above would not differ should the corporation or association make a Voluntary Disclosure. However, where a voluntary disclosure is made, the Canada Revenue Agency has the authority to waive interest and penalties. Please refer to Information Circular IC00-1R4 Voluntary Disclosures Program, located on our website at http://www.cra-arc.gc.ca/E/pub/tp/ic00-1r4/README.html  for more information.

We trust these comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2014

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2014