5 February 2004 External T.I. 2003-0051261E5 - Director's Liability

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Assessment of a director for the amount of the tax where gross wages are paid to an employee.

Position: Only where the employee is a non-resident or a deemed resident under paragraph 250(1)(a).

Reasons: The law.

XXXXXXXXXX 2003-005126
Michael Cooke
February 5, 2004

Dear XXXXXXXXXX:

Re: Application of Section 227.1

This is in reply to your letter of November 22, 2003 wherein you requested our comments with respect to the above provision of the Income Tax Act (the "Act") based on our comments in an earlier technical interpretation dated July 17, 1998 (#9810975).

Briefly, in that earlier technical interpretation referred to above, we stated, inter alia, that the directors of a corporation would not be held liable for the amount of income tax that the employer corporation failed to deduct or withhold as required by subsection 153(1) (i.e. the employer paid the gross amount of the wages to the particular employee) provided the gross wages were paid to an employee who was ordinarily resident in Canada.

You ask us to explain why the residence of the particular employee would make a difference in assessing a director's liability under section 227.1 of the Act in the above-described situation.

Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5 dated May 17, 2002 ("IC 70-6R5"). However, if the situation relates to a completed transaction a request for the Canada Revenue Agency's ("CRA") views must be made to your local Tax Services Office. We can, however, provide the following general comments.

Where an employer fails to deduct or withhold any amount required by subsection 153(1) from an employee's wages (i.e. the employer actually pays the full or "gross amount" of the employee's wage) subparagraph 227(8.4) of the Act makes the employer liable to pay the amount it should have otherwise deducted or withheld from such payment only where the particular employee is a non-resident of Canada or is only resident in Canada solely because of paragraph 250(1)(a). We understand that the rationale for this subparagraph is that where a particular employee is not ordinarily resident in Canada (a "non-resident employee") it may be difficult to recover any Canadian income taxes that may otherwise be owing in respect of that employment. Accordingly, the legal responsibility for paying such taxes is placed on the employer. However, subparagraph 227(8.4) also allows the employer to recover such amount from the particular non-resident employee. The employer would still be liable for a penalty for any such failure pursuant to subsection 227(8) and interest pursuant to subsection (8.3).

We trust that our comments will be of assistance to you. However, as stated in paragraph 22 of Information Circular 70-6R5, the opinion expressed in this letter is not a ruling and consequently is not binding on the CRA.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch