Introduction – Payroll Tax Remittance Obligations
Canadian employers that pay salaries, wages, or most other types of remuneration to an employee are required to withhold or deduct from each wage payment made to the employee. The amount to be withheld or deducted is determined by rules set out in the regulations to the Canadian Income Tax Act. 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.
Regardless of whether the employer ultimately remits the relevant amounts, employees get credit for the personal income tax, Canada pension plan, and employment insurance amounts withheld or deducted by the employer. 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 remit amounts they deducted or withheld from their payments to employees.
Liability for Amounts Not Remitted – Canadian Payroll Obligations
When employers fail to remit the amounts they withheld or deducted from a payment made to an employee they are liable for the tax that they deducted or withheld. In addition, the employer is liable for interest which begins accruing on the day that employer was required to remit.
Tax Penalties For Failure to Withhold – Canadian Payroll Penalties
When an employer fails to remit the appropriate tax amounts withheld or deducted from payments to employees by the day those amounts are required to be remitted, then the employer is liable for a tax penalty equal to a specified percentage of the amounts that should have been remitted. The specified percentage depends on the number of days late the remittance is received by the Receiver General of Canada. As of 2019, the specified percentages are as follows:
|Number of Days Late||Specified Percentage|
|No more than 3||3%|
|More than 3 but no more than 5||5%|
|More than 5 but no more than 7||7%|
|More than 7||10%|
If at the time of the failure to remit, the employer already has a penalty amount payable for a failure to remit for the same calendar year, and the failure to remit was made knowingly or under circumstances amounting to gross negligence, then the tax penalty is increased to 20% of the total amount that should have been remitted instead of the relevant specified percentage.
The courts have not yet considered the meaning of the gross negligence standard specifically in the context of failures to remit amounts withheld or deducted 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.
Penalty Adjustment for Low Amounts – Canadian Payroll Penalties
The penalties discussed only apply to the amount by which unremitted amounts exceed $500. The employer is still liable for remitting the entire amount not the adjusted amount. However, this adjustment to the penalty calculation does not apply in either of the following circumstances. If the employer knowingly or in circumstances amounting to gross negligence delays in remitting the amount, penalties still apply on the entire amount. Similarly, if the employer knowingly or in circumstances amounting to gross negligence remitted an amount less than the amount required, penalties still apply on the entire amount.
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 remit amounts deducted or withheld from payments to employees and tax penalties for failing to remit. 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 remit, 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.