28 June 1999 Internal T.I. 9900957 - PAYROLL SERVICE PROVIDER

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: What is the effect of ss. 227(4) on a contract between a payroll service company and its client, allowing the service company to invest the client's payroll funds between the time received until the time disbursed.

Position: The employer remains liable for the payroll remittances. Subsection 227(4) applies to the employer, not the payroll service company.

Reasons: The terms of the contract are a matter between the two parties. The payroll company is only an agent of the employer. The employer remains responsible for the payroll remittances.

		June 28, 1999

	Winnipeg Taxation Services Office	HEADQUARTERS
	Client Services/Business Window	David Shugar
		957-2133
	Attention: Colette L. Gustaw
		7-990095

Subsection 227(4) of the Income Tax Act (“the Act”)

We are writing in response to your enquiry of January 13, 1999, regarding subsection 227(4) of the Act.

In your letter you state that XXXXXXXXXX (“Payserv”), a payroll service company, wants to amend its existing contract with its client, XXXXXXXXXX (“The Employer”), to allow Payserv to invest payroll funds held in trust for The Employer and keep the income and profits resulting from those investments. Payserv also wants to revise its contract to allow it to pledge those investments as security for any borrowing that Payserv may be required to make in order to meet its obligations under the customer agreement. A copy of the proposed contract was included with your request. You asked for our opinion whether these amendments are in compliance with subsection 227(4) of the Act and whether it is legal for Payserv to invest payroll funds held in trust and to keep the income and profits resulting from those investments.

Our Comments

In a phone conversation on April 15, 1999 (Gustaw\Shugar), you informed us of the following terms of the existing payroll service contract. Every two weeks, Payserv is authorized to transfer funds from The Employer’s bank account to Payserv’s. The amount transferred includes the gross payroll amount, The Employer’s levies, and Payserv’s fee. Payserv is authorized to issue payments on behalf of the employer, and Payserv is responsible for the withholding of taxes and making The Employer’s statutory remittances.

The Act addresses the issue of the withholding of taxes and the responsibility to remit those amounts to the Receiver General. Amounts are required to be withheld from employees as payroll deductions at any time in a taxation year when a salary, wage or other remuneration is paid. The employer, as an agent of Her Majesty, holds the money in trust until required to remit it. A trust is deemed to be created pursuant to subsection 227(4) of the Act, and deems that amounts deducted or withheld are kept separate and apart from other property. The purpose of this is to give priority to the Crown’s claim, as unremitted source deductions are part of the gross wages of employees and are held in trust for remittance to the Receiver General. However, the employer is not required to physically segregate the amounts from other property.

Regarding your concern about the legality of the proposed revisions allowing Payserv to invest the payroll funds until the time the funds are needed, in our view, the use to which the funds are put while held by Payserv, as well as the right to any income resulting from investing the amounts, is a matter between The Employer and Payserv. Regarding taxes withheld from employees, as stated above, the Act only states that taxes withheld are deemed to be held in trust. In addition, in our view, the proposed changes to the contract do not affect the application of subsection 227(4) of the Act.

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch