Section 153

A limited partnership, which shortly will be declared bankrupt, failed to remit source deductions. Would the general partner, which is a corporation, be liable for the unremitted source deductions?

After discussing Laxton, the Directorate stated:

[T]he corporation, as the general partner, has the power to manage, control, administer and operate the business and affairs of the limited partnership. Accordingly… the corporation is the payor of the amount and must meet the requirements of subsection 153(1)… .

See summary under s. 227.1(1).

A corporation failed to withhold the required amounts based on taxable benefits received by Canadian employees. Is it or its directors liable for the amount that should have been withheld? What if it instead is an unincorporated association? CRA responded:

…The payor is not required to pay the amount of income tax that should have been withheld provided that the employee is resident in Canada. However, where the particular employee is a non-resident of Canada…subsection 227(8.4) provides that the employer is liable for the whole amount that should have been deducted or withheld, along with any penalties and interest.

… [W]here the payor failed to remit amounts withheld or deducted, the payor…is liable for the amount of the deductions that were not remitted together with the penalty for not remitting, and interest thereon.

…[W]here the corporation failed to make the required withholding of tax with respect to an employee who is a resident of Canada, the corporation and its directors…are liable only to penalties [under ss. 227(8) and 227(8.3)] and interest… .

[W]here an association has failed to deduct or withhold an amount[,] or deducted, but failed to remit the amounts, the members of the association who have the power to provide overall management of the association may be liable for the tax, along with any penalties and interest as described above.

Is a taxpayer (CanCo), who hires a USCo to provide services and equipment in Canada of its employees in Canada, liable for source deductions for the remuneration paid to the employees of USCo? CRA stated:

[I]in some situations, such as the one that you describe, it may not be clear who is the payer of the remuneration. These situations, where an employee is temporarily assigned from an entity in one country to an entity in another country, are addressed in paragraphs 35 to 39 of the Information Circular [IC-75-6R2].

Where the facts indicate that an employer/employee relationship exists between CanCo and the Employees, CanCo could be considered to be the Payer, even if the Employees remain on the payroll of USCo. …

A Canadian resident employee, after qualifying for benefits under the unfunded long term disability plan ("LTD Plan") of the Canadian resident employer, becomes a resident of the U.S. Under the terms of the Plan, the employee is not required to fulfill any duties of employment and will continue to receive benefits until the earlier of rehabilitation and commencement of benefits under the employer pension plan. Would Part XIII withholding apply? CRA stated:

[T]he LTD Plan payments would be salary, wages or other remuneration…because they would be amounts arising out of the employment relationship. … As such, the amount of LTD Plan payments that would be taxable as income earned by a non-resident employee would be determined in accordance with subsection 115(2) and withholdings under Part XIII would not be applicable… [and] the LTD Plan payments would be subject to withholding under paragraph 153(1)(a)… .

CRA went on to note that as Art. XVIII, para. 3 of the Canada-U.S. Convention defines "pensions" to include any payment under a disability plan "a U.S. resident employee receiving LTD Plan payments could file a Canadian income tax return in order to obtain a refund of any withholdings made in excess of the 15% amount specified in paragraph 2 of Article XVIII."

Were fees received by members of a council of a professional college, who also had professional corporations, subject to withholding? Before indicating that "unless the individual receiving the fees is doing so on behalf of the corporation and not in a personal capacity, the payor is required to withhold and remit income tax and report the amounts on a T4 slip," CRA indicated that the individuals were able to serve because they "are registered to practice the profession" and "are usually elected or otherwise appointed to council… by the professional association." Accordingly, each individual received the "fees in his or her capacity as an individual," so that their fees were subject to withholding.

Under an arrangement described in s. 7(6), does obligation to withhold tax rests with the corporation/employer or the s. 7(6) trust? CRA stated:

[T]he arrangement is deemed to be a section 7 agreement to issue shares. Accordingly…the corporation is paying the section 7 employment benefit as remuneration for purposes of paragraph 153(1)(a) and therefore, the corporation has the obligation to withhold and remit the appropriate amount of tax.

USCo, which is a qualifying person for purposes of the Canada-US Income Tax Convention and is a wholly-owned subsidiary of a Canadian public company, employed a US-resident individual who performed employment duties for USCo in Canada for 55, 100 and 75 days in 2009, 2010 and 2011, respectively. On January 1, 2009, the US employee was granted stock options by Canco in consideration for his duties of employment performed for USCo and, following the exercise of the options on December 31, 2010, USCo paid Canco a sum equal to the in-the-money value of the options at the time of such exercise ($20,000).

After noting that the stock option benefit would be exempt from Canadian tax under the exemption in para. 2 of Article XV of the Canada-US Convention, CRA asserted that this did not relieve USCo of its source deduction obligations:

The corporation that has agreed to sell or issue the shares to the employee (in this case, Canco) will be considered to be the "payer" of the stock option benefit for purposes of paragraph 153(1)(a) (and will be responsible for the normal withholding), unless it receives reimbursement, in whole or in part, either directly or indirectly, in respect of the benefit. Since, in this case, Canco is reimbursed by USCo for the amount of the benefit conferred on the US Employee, it is our view that USCo is in substance making the actual payment and therefore is required to make the withholdings required under paragraph 153(1)(a) in respect of the remuneration paid to the US Employee for services rendered in Canada....Pursuant to subsection 153(1.1), ...CRA... may grant a waiver from withholding if a non-resident employee can provide evidence that the payments will be exempt from Canadian tax under the Treaty....[W]here the US Employee has not obtained a waiver..., USCo (as the employer) will be liable for the amount of tax that should have been withheld from the stock option benefit realized by the US Employee.... Where USCo has failed to withhold... such a failure would generally give rise to an assessment of a penalty and interest under subsections 227(8).. and 227(8.3)....

The employer's withholding obligations apply even where the employee's only remuneration is in the form of benefits.

A US-resident corporation which employs a Canadian-resident individual whose services are performed solely in the US nonetheless is required to withhold source deductions from the wages paid to the employee.

In response to a question as to whether a company resident in the U.S. is required to obtain a payroll number and withhold payroll deductions from the wages it pays to an employee who is a Canadian-resident and renders his services to the U.S. company partially in Canada and partially in the U.S., CRA stated that an employer is required to deduct withholdings at source from the salary it pays to an employee who is a resident of Canada, regardless of where the services are rendered, but went on to note that the individual may be able to obtain a "letter of authority" from CRA to authorize the U.S. employer to reduce the deductions at source to take into account any available foreign tax credit.

The government of Canada retains a third party services provider (the "Agent") to provide relocation services to government employeees on its behalf, as well as payroll reporting compliance, and funds the Agent for all reimbursement or other payments made by the Agent to the relocated employees (some of which give rise to taxable benefits). CRA stated:

any taxable benefit conferred on a GOC employee by the Agent should be reported on a T4 slip. Such a benefit is in effect being conferred by the GOC on its employees through its Agent. For the same reason, the obligation to withhold and remit income tax (and other applicable withholdings) on the taxable relocation benefits on a timely basis would be with the GOC. However, the GOC may engage the Agent or any other agent to fulfil its withholding and reporting obligations.

"Where the restaurant patron settles his bills with a major credit card and includes an amount as gratuity on the card or where the restaurant owner bills the patron for the cost of the food and beverage and includes 15% gratuity for the staff, the requirements of subsection 153(1) of the Act are met."

No withholding is required where an employer makes a contribution to an employee profit sharing plan.

Where an employee who is laid off but wants to retain rights to be recalled requests that amounts that otherwise would be paid to him as severance pay and/or termination pay be held by the Director of the Employment Standards Branch, no withholding should be made by the employer with respect to those payments. However, when amounts are paid by the Employment Standards Branch to the employee, RC would expect that the applicable withholdings would be made at that time by the Branch.

A Canadian-resident loan-out corporation will be required to make deductions at source on any salaries paid to the artist-employee even though the salary pertains to services rendered outside of Canada that may be taxable in the country where the services are rendered.

S.153(1)(a) refers to every person who has employees in Canada irrespective whether the person carries on business in Canada.

The taxpayer in Charrier v. Quebec (2010 EXP-2783) contributed $5,970 to his spouse's RRSP in 2005, which he deducted, and a year later the amount was withdrawn. The financial institution made the applicable source deductions and remitted the balance to the taxpayer's spouse. Later in the year, the spouses separated. Under the s. 146(8.3) attribution rule, the taxpayer was taxed on the amount of the withdrawal because they were not living separate and apart at the time of withdrawal. However, it was for his ex-spouse that the taxes were withheld at source. The Court of Quebec ruled in favor of the contributor in a decision animated more by considerations of fairness than by an analysis of the legislative provisions.

Does the tax treatment indicated above of withholding tax reflect the federal tax provisions? CRA responded:

Paragraph 153(1)(j) provides that any person paying a payment out of or under an RRSP must deduct or withhold from the payment the amount determined in accordance with the prescribed rules and must remit that amount to the Receiver General on account of the payee’s tax. In the situation described, the deductions are therefore made from the lump sum payment and designated as being for the account of the person receiving the amount, being the RRSP annuitant. No provision of the Act provides a link between the withholding tax on the payment to the annuitant and the attribution rule in subsection 146(8.3).

ITA s. 153(1)(g) and Reg. 200(2) require the issuance of T4As for most services received. At an earlier juncture, CRA was studying its T4A practices. It has now confirmed that there will be no change, although it will maintain the exception for:

i) where the payment made is less than $500, to the extent that no tax is withheld in respect of the amount, and
ii) where personal services are rendered to an individual by a professional or anyone else practising a trade, or if the services are rendered for the repair or maintenance of the principal residence of an individual.

CRA did not discuss the still-extant statement in RC4157 that:

The CRA is not assessing penalties for failures relating to the completion of box 048 [labelled “Fees for services”].

After stating that an estate would be required to issue a T4A to an executor who was earning his fees as business income rather than income from an office, CRA referred to its policy not to require a T4A for payments less than $500, and then further stated:

Also, as noted on page 16 of the T4A guide (RC4157), "Until such time as the CRA undertakes a review for the purposes of clarifying the types of fees for services that are to be reported on the T4A slip, taxpayers will not be penalized for failing to complete Box 048 on the T4A slip."

Where a lawyer, who is a member of a professional partnership, is a director of a corporation, the director's fees paid to him will not be subject to source deductions if it is the partnership that has earned those amounts.

A retirement compensation arrangement (RCA) consists of a supplementary retirement plan (for one employee) that has developed surplus that the employer wishes to withdraw without withholding (based on a waiver letter requested by it to be provided by CRA to the custodian) on the basis that the employer, as a partnership, is not taxable under Part I of the Act. In rejecting the employer’s position, the Directorate stated:

Since the Payment is not a “lump sum payment” for the purposes of the withholding rules, it is subject to subsection 102(1) of the Regulations. … Since Schedule I does not address this situation, the Payment is subject to subsection 106(1). Under this rule, withholding is generally based on the amount of tax that may reasonably be expected to be payable under the Act by the recipient with respect to the payment.

Although no tax is payable under Part I of the Act by a partnership, subsection 96(1) of the Act ensures that the members of the partnership are taxable on their respective share of the partnership’s income. In our view, in applying subsection 106(1) of the Regulations in this situation, the amount to be withheld from the Payment should be equal to the total amount of tax that may reasonably be expected to be payable under the Act by the members of the employer partnership with respect to the Payment.

…In filing their income tax return for the taxation year in which they report their share of the partnership’s income, each member of the partnership would be entitled to apply their share of the income tax withheld in respect of the Payment.

The Directorate noted that upon exercise, s. 7(1.1) provides that the s. 7(1)(a) benefit was deemed to not be received by the employee until the subsequent taxation year of disposition of the shares. However, although s. 153(1.01) “generally ensures that an amount deemed to be received as a benefit under paragraph 7(1)(a) is subject to the withholding and remittance requirements in subsection 153(1) as if it were a bonus”:

paragraph 153(1.01)(b) excludes from these requirements any amount deemed to have been received in a taxation year as a benefit because of a disposition of securities to which subsection 7(1.1) applies. Accordingly, no withholding would be required under subsection 153(1) in the situation described above.