21 August 1996 External T.I. 9620485 - EMPLOYEE'S LIAB ON TAX NOT WITHHELD BY EMPLOYER

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

liability of employer and employee for the tax to be withheld in respect of the taxable benefit relating to the assumption of a share-purchase debt upon the termination of employment

Position:

while employer should withhold & remit if possible (given that the assumption of debt creates a non-cash benefit), employee is still responsible for the tax payable on the employment benefit (note that the benefit from the settlement of debt under 6(15) is taxable under 6(1)(a) and not as a retiring allowance even though the settlement is occasioned by the termination of employment

Reasons:

the balance due which is payable by the employee under 156.1(4) is calculated with reference to the amount actually withheld by the employer so that even though the employer is required to withhold, when the employer does not withhold (or can't because it is a non-cash benefit0, the employee remains liable for the tax.

A. Humenuk
XXXXXXXXXX							962048

Attention: XXXXXXXXXX

August 21, 1996

Dear XXXXXXXXXX:

Re: Liability for Withholding from a Retiring Allowance

We are replying to your letter of May 7, 1996, in which you ask for clarification of the income tax liability imposed on an employer and its former employee in respect of a benefit conferred on that former employee upon the termination of employment without cause.

The particular situation outlined in your letter appears to relate to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R2 "Advance Income Tax Rulings", it is not our practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a transaction that is already in progress, you may wish to submit all relevant facts and documentation to the appropriate Tax Service Office for their views. However, we are prepared to offer the following general comments which may be of assistance to you.

In the situation you describe, a corporate employer has agreed to assume a former employee's debt incurred in respect of the purchase of shares of the corporate employer to the extent that the fair market value of those shares is less than the principal amount of the debt outstanding at the time the employment relationship is terminated. The employer has also agreed to pay the employee an amount equal to any tax that is payable by the former employee in respect of any benefit arising from the assumption of that debt. You have asked whether the employer is required to withhold and remit tax on the amount of debt assumed and if so, whether it is the employer or employee who is liable for the payment of tax if the employer fails to withhold and remit the appropriate amount of tax.

When an employee receives a loan in the course of his or her employment and all or part of the employee's obligation in respect of that loan is subsequently settled or extinguished without payment by that employee, subsection 6(15) of the Act deems the employee to have received a benefit from employment which is taxable under paragraph 6(1)(a) of the Act. The value of that benefit is the "forgiven amount" as defined in subsection 80(1) and modified by subsection 6(15.1) of the Act. An amount which is taxable under paragraph 6(1)(a) of the Act cannot be recharacterized as a retiring allowance solely by reason of the fact that the settlement of the debt only occurs upon the termination of employment without cause.

Nevertheless, a determination of whether a particular amount is taxable as a retiring allowance or as remuneration can only be made upon a review of all the relevant facts and documentation relating to the particular transaction. With respect to your second question, subsection 153(1) of the Act requires an employer to withhold income tax from the amount of any remuneration, including a retiring allowance, paid to an employee or former employee in accordance with the rules set out in the Regulations.

However, when a non-cash benefit is the only form of remuneration or retiring allowance received from an employer, it becomes impractical to withhold an amount so that the employer is not required to withhold tax on the amount of such benefits. On the other hand, if a cash payment is also required, the withholding from the cash payment should be adjusted to reflect the total amount or remuneration or retiring allowance paid.

When the total amount of remuneration payable includes an amount for the payment of tax on that amount, the withholding tax is calculated by applying the following formula:

Required income tax to be withheld =

tax rate as determined by Regulation X amount of non-cash benefit
100 minus tax rate as determined by Regulation

With respect to your last question, an employee is required to pay the balance of income tax payable for a taxation year on or before the balance-due date (generally April 30th of the immediately following the taxation year) as defined in subsection 248(1) of the Act. The amount payable on or before the balance-due date is set out in subsection 156.1(4) of the Act and is calculated as the amount of tax payable under Part I of the Act for the taxation year less any amount deducted or withheld by an employer or other person on account of that liability. Subsections 180.1(4) and 180.2(2) of the Act ensure that an individual's liability for the individual surtax and tax on old age security benefits is paid by the balance-due date as well. As a result, any amount of income tax payable for a taxation year which was not withheld by an employer is payable by the employee on or before the balance-due date for the taxation year.

Provided that the former employee is a resident of Canada at the time the payment is made (and is not a resident in Canada solely by reason of the length of his or her sojourn in Canada), an employer who fails to withhold tax, as required under subsection 153(1) of the Act, is liable under subsection 227(8) for a penalty of 10% or 20% of the amount that should have been withheld on account of income tax and not for the actual amount of tax itself. However if the employer fails to remit the tax which was withheld, the employer is liable under subsection 227(9.4) of the Act for the tax as well as the penalty.

We trust our comments will be of assistance to you.

Yours truly,

J.A. Szeszycki
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch