Introduction – Payroll Tax Withholding Obligations
Canadian employers that pay salaries, wages, or most other types of remuneration to an employee are obligated to withhold or deduct an amount specified by the regulations to the Canadian Income Tax Act from each wage payment. The employer is then required to periodically remit the amounts withheld on account of the employee's personal income tax, Canada pension plan contributions, and employment insurance premium. Employers are ordinarily required to remit the amounts withheld to the Receiver General of Canada on or before the 15th of the month following the month in which the payments are made. Particularly larger employers may be required to withhold more frequently and particularly small employers may be able to remit quarterly. Employers must also file annual T4 information returns on or before the last day of February in the year following the one in which the payment was made. Employees get credit for the personal income tax, Canada pension plan, and employment insurance amounts withheld or deducted from the moment the employer withholds or deducts, regardless of whether the employer ultimately remits the relevant amounts. The failure to deduct or withhold results in different consequences for the employer than if an employer deducts or withholds and then fails to remit. This article will explore the consequences for employers when they fail to properly deduct or withhold from their payments to employees.
Liability for Failure to Withhold or Deduct – Canadian Payroll Obligations
When employers fail to withhold or deduct the prescribed amount from a payment made to an employee resident in Canada, they will be subject to a penalty, but they will not be liable for the tax that they were obligated to withhold. Employers are liable for the amounts they fail to deduct or withhold from payments to employees who are non-residents of Canada or who are residents of Canada only by virtue of by paragraph 250(1)(a) of the Canadian Income Tax Act which deems individuals who sojourn in Canada for at least 183 days during a calendar year to be residents of Canada throughout that year. However, the regulations describing how much an employer should withhold from a payment provide that no amount should be withheld from payment to employees that are neither employed in Canada nor resident in Canada, except for remuneration that can be reasonably attributed to duties of employment performed while in Canada.
Tax Penalties For Failure to Withhold – Canadian Payroll Penalties
When an employer fails to deduct the appropriate tax amounts from payments to employees, then the employer is liable for a tax penalty equal to 10% of the amounts that should have been deducted or withheld. If at the time of the failure to deduct or withhold, the employer already has a penalty amount payable for a failure to withhold or deduct for the same calendar year, and the failure to deduct or withhold was made knowingly or under circumstances amounting to gross negligence, then the tax penalty is increased to 20% of the amount that should have been deducted or withheld instead of 10%.
The courts have not yet considered the meaning of the gross negligence standard specifically in the context of failures to withhold or deduct from payments to employees, but they have given extensive consideration to what this standard means for taxpayers preparing their income tax returns. It is very likely that the conclusions reached by the courts in the income tax context will guide future decisions in the payroll context. In the income tax context the courts have interpreted the standard of what conduct constitutes gross negligence to be very high. For example, in Venne v the Queen, the court characterized gross negligence as "a high degree of negligence tantamount to intentional acting". The courts have also denied the CRA's attempts to levy gross negligence tax penalties in the following circumstances:
- the taxpayer sought professional-accounting assistance to complete tax returns
- the taxpayer made numerous errors on tax returns, indicating a lack of skill in accounting and tax matters
- the taxpayer disclosed all amounts at issue on his or her tax return
- the taxpayer found it difficult to operate accounting software
In the income tax context the courts have also held that the burden of proof necessary to establish that gross negligence penalties apply falls with the CRA and not the taxpayer.
Tax Tips – Tax Penalties for Payroll Failure to Deduct or Withhold
If you are the director of a corporation which has employees, then you may be jointly liable for the payroll liability of the corporation, including liability for failing to deduct or withhold from employees and tax penalties for failing to withhold or deduct. Directors can sometimes avoid liability by exercising sufficient levels of due diligence or by resigning from their role in a timely manner. If you are the director of a corporation which may have payroll withholding problems, consider consulting one of our expert Canadian tax lawyers.
If you have been charged with gross negligence penalties regarding a failure to deduct or withhold, or are in the process of being audited for payroll one of our experienced Toronto tax lawyers can provide you with assistance and guidance. The standards that CRA trust tax examiners use to apply payroll gross negligence penalties are typically far harsher than the standard established by the courts in the Canadian income tax context. Gross negligence penalties applied by a tax auditor are frequently removed if the employer hires an experienced Canadian tax lawyer to dispute the tax penalty through an objection filed with the CRA appeals division.