4 November 2011 External T.I. 2011-0412471E5 - Director liability for interest

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: Whether a director can be held liable for interest on arrears related to the company's unremitted source deductions that arose prior to becoming a director.

Position: No.

XXXXXXXXXX 					2011-041247
						Richard Aronoff
						613-941-7239

November 4, 2011

Dear XXXXXXXXXX :

Re: Director Liability for Interest on Arrears of Unremitted Source Deductions

This is in reply to your email of June 29, 2011 concerning the application of subsection 227.1(1) of the Income Tax Act (the "Act") to an individual who becomes a corporate director subsequent to the corporation failing to remit amounts required by subsection 153(1). At issue is the question of whether the director can be held liable for interest that accrues on the corporate liability under subsection 227(9.4) in respect of the failure to remit amounts that have been withheld.

You describe a fact situation where a corporation with a sole director withholds source deduction amounts as required by subsection 153(1), but fails to remit these amounts. Following the last remittance deadline the sole director resigns and is replaced by another individual. The corporation has ceased to have employees; hence, there are no further withholding requirements beyond what was been withheld during the tenure of the previous director.

Subsection 227.1(1) 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 liable, together with the corporation, to pay that amount and any interest or penalties relating to it.

The corporation's liability under subsection 227(9.4) together with interest imposed under subsection 227(9.2) is assessed under paragraph 227(10.1)(a). Following the assessment, interest continues to be computed on the outstanding balance pursuant to subsection 161(1). In this regard, subsection 161(1) applies by operation of subsection 227(10.1), which provides, in part, that where a notice of assessment is issued thereunder, sections 150 to 163 of Division I of Part I of the Act apply with any modifications that the circumstances require.

In terms of the liability of a director, it should be noted that only those persons who were directors at the time the corporation failed to remit the amounts deducted or withheld pursuant to subsection 153(1) are jointly and severally liable under subsection 227.1(1). The liability thereunder is assessed pursuant to paragraph 227(10)(a) and, upon issuance of the assessment, subsection 227(10) also provides, in part, that Division I of Part I of the Act applies with such modifications as the circumstances require. The foregoing provision enables interest under subsection 161(1) to accrue on the outstanding balance of the assessment raised against the director, see M.N.R. v. Zen, [2010] 6 C.T.C. 28, 2010 DTC 6979 (F.C.A.).

While subsection 227.1(1) provides that a director is jointly and severally liable for the amount that the corporation failed to remit, including any interest or penalties relating to it, the imposition of the liability is limited to those persons who were directors at the time that the corporation failed to remit. Once a director is assessed, interest continues to accrue on the outstanding balance pursuant to subsection 161(1). However, a director is not liable for interest imposed against the corporation under either subsection 227(9.2) or 161(1) in respect of an amount a corporation has failed to deduct, withhold or remit prior to the time the individual became a director.

Should you have any queries or require additional information in regard to this matter, please do not hesitate to contact Richard Aronoff at the telephone number provided at the outset of this letter.

Yours truly,

B.J. Skulski
Manager
Insolvency and Administrative Law Section
Income Tax Rulings Directorate