Introduction – Payroll Tax Remittance Obligations
Canadian employers paying salaries, wages, or most other types of remuneration to employees are legally required to withhold or deduct amounts from each payment. These amounts typically cover income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums.
The employer must remit these withheld amounts to the Canada Revenue Agency (CRA) on a regular schedule, usually monthly, although small employers may qualify for quarterly remittances. Additionally, employers must file annual T4 information returns by the last day of February for payments made in the previous year.
Failure to withhold, deduct, or remit these amounts can result in penalties, interest, and personal liability for directors of the corporation. This article explores the obligations and consequences of failing to remit payroll deductions.
Liability for Unremitted Amounts
Employers who fail to remit withheld amounts remain liable for the full amount owed to the CRA, including any related penalties and interest. The CRA provides credit to employees for taxes, CPP, and EI amounts withheld, regardless of whether the employer remitted these amounts.
However, the employer's liability is unaffected, and interest begins accruing on the unremitted amounts from the due date.
Tax Penalties for Late or Non-Remittance
The CRA imposes penalties based on the number of days the remittance is overdue. As of 2023, penalties for late remittance are calculated as follows:
| Number of Days Late | Penalty Percentage |
| 1–3 days | 3% |
| 4–5 days | 5% |
| 6–7 days | 7% |
| More than 7 days | 10% |
If an employer knowingly or through gross negligence fails to remit, the penalty increases to 20% of the unremitted amount.
Gross Negligence Penalties
The CRA may apply gross negligence penalties if it determines that the employer’s failure to remit was intentional or demonstrated a high degree of negligence. Courts have interpreted gross negligence in tax matters as a standard requiring behavior tantamount to intentional disregard or willful blindness.
Examples where gross negligence penalties might not apply include:
- Seeking professional accounting assistance.
- Making errors due to lack of skill or experience.
- Disclosing all amounts on the relevant tax returns.
- Facing technical difficulties with accounting software.
The CRA bears the burden of proving gross negligence, but taxpayers often need skilled representation to successfully dispute these penalties.
Penalty Adjustments for Small Amounts
For unremitted amounts below $500, penalties may not apply. However, this exception does not cover situations involving gross negligence or intentional non-compliance. Employers are still responsible for remitting the entire amount, and penalties apply to amounts exceeding $500 or involving negligent behavior.
Director Liability for Payroll Failures
Corporate directors may be held personally liable for the corporation’s payroll remittance failures, including penalties and interest. Directors can mitigate liability by:
- Exercising Due Diligence: Ensuring proper payroll systems and timely remittances.
- Timely Resignation: Stepping down as a director if the corporation is facing persistent payroll issues.
Director liability is subject to specific defenses and limitation periods, making it crucial for directors to consult professionals when issues arise.
Pro Tips – Avoiding Payroll Penalties
- Establish Robust Payroll Systems: Ensure accurate deductions and timely remittances.
- Seek Professional Assistance: Work with an accountant to maintain compliance and address potential issues proactively.
- Dispute Penalties with Expert Guidance: If assessed penalties, engage an experienced Canadian tax professional to file an objection and challenge the CRA’s determination.
- Prevent Escalation: Address payroll remittance issues promptly to avoid gross negligence penalties and potential legal action.
Conclusion
Failing to remit payroll deductions can have significant financial and legal consequences for employers and corporate directors. Accurate record-keeping, timely remittances, and professional advice are crucial to avoiding penalties and disputes with the CRA. If you face payroll-related issues or penalties, consulting a skilled tax professional can help navigate the complexities and minimize potential liabilities.
For assistance with payroll compliance or CRA disputes, contact our experienced tax team today. We are here to help you protect your rights and ensure smooth resolution.
This article is written for educational purposes.
Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.
Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.
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