17 July 1998 External T.I. 9810975 - DIRECTOR'S LIABILY FOR EMPL-CORP'S FAILURE TO WITHHOLD

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: director's liability when employer fails to withhold income tax from Canadian resident employee and the provisions of 227.1(1) of the Act apply

Position: director will only be required to pay the amount of the employer's outstanding liability on account of source deductions and that does not include income tax that was not withheld from the employee

Reasons: 227(8) only imposes a penalty for the failure to withhold from a Canadian residents remuneration because the employee is liable for the balance of tax owing for that year. tax payable by the employee If 227.1(1) applies, the Department will not require any more from the directors than was required of the corporation

XXXXXXXXXX 981097
A. Humenuk
Attention: XXXXXXXXXX

July 17, 1998

Dear Sir:

Re: Director’s Liability

This is in reply to your letter of April 21, 1998, concerning a director’s liability in respect of an amount of income tax that a corporation has failed to withhold from the remuneration paid to an employee. You have asked whether the corporation or its directors can be held liable for income tax that should have been withheld from the remuneration of an employee resident in Canada, but was not.

The provisions of the Income Tax Act (the "Act"), Canada Pension Plan, and Employment Insurance Act related to the obligation imposed on employers and directors of a corporation with respect to the employees of a business, are designed to ensure that employers do make the required deductions of income tax, Canada Pension Plan contributions, and employment insurance premiums, that they remit these deductions to the Receiver General along with the employer's share of Canada Pension Plan contributions and employment premiums, and that they file the necessary information returns.

If an employer fails to withhold or deduct an amount as required by subsection 153(1) of the Act from an employee, the employer must pay a penalty equal to the amount determined under subsection 227(8) of the Act, but the employer is not required to pay the amount of income tax that should have been withheld on such an amount provided that the employee is resident in Canada. To the extent that a failure on the part of an employer results in an amount payable by the employee under subsection 156.1(4) or section 158 of the Act for a particular taxation year, the employee is liable for that amount in addition to any interest or penalties that may be imposed under the Act, whether or not such interest or penalties would have been applicable if the employer had withheld the appropriate amount of income tax from the employee’s remuneration.

The provisions of section 227.1 of the Act hold the directors of a corporation liable for the tax withholding obligations imposed upon the corporation in certain circumstances. When those circumstances occur (i.e. when subsections 227.1(2) to (4) of the Act do not apply), the directors will not be required, under this provision, to pay any amount that is not owing by the corporation in respect of its obligations as an employer. Accordingly, in the situation you describe, the directors would be liable for the outstanding amount of the corporation’s liability for:

• income tax, Canada Pension Plan contributions, and the employment insurance premiums withheld but not remitted,
• Canada Pension Plan contributions, and the employment insurance premiums not withheld or remitted,
• the employer's share of Canada Pension Plan contributions, and employment premiums, and
• any penalties or interest applicable thereto.

We trust that these comments will be of assistance.

Yours truly,

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch