Employer Source Deductions: No Ordinary Tax Debts
There are several aspects of source deductions that distinguish them
from other tax debts. This is largely owing to the fact that a deemed
trust arises over source deductions, because they are not the property
of the party who is charged with the responsibility of collecting and
remitting them. (See subsection 227(4) of the ITA, section 86(2) of the
Employment Insurance Act [EI Act], and section 23(3) of the Canada
Pension Plan [CPP].)
Collection actions can be taken by the CRA as soon as any of these three
types of source deductions are overdue (section 153 of the ITA,
section 85(2) of the EI Act, and section 22(2) of the CPP). Although ITA
subsection 225.1(1) ordinarily provides a stay of collections on income
tax debts if a taxpayer challenges an assessment by filing a notice of
objection or an appeal to the courts, ITA subsection 225.1(6) provides
that this stay does not apply to income tax source deductions or to any
penalties or interest arising from a failure to remit or pay those
amounts on time.
The limitation period for the assessment of employers for source deductions varies by their type:
- CPP contributions: four years from the day on which any contributions should have been paid (section 22(3) of the CPP).
- EI premiums: three years after the end of the year in which the premium should have been paid (section 85(3) of the EI Act).
- Income tax: four years (for a mutual fund trust or a corporation
other than a CCPC) or three years (in any other case) after the original
notice of assessment or the original notification that no tax is
payable was sent.
However, it should be noted that none of the limitation periods above
apply if a taxpayer has made a misrepresentation or committed fraud in
filing a return or in supplying information.
Another important difference between the source deductions is that they
have different deadlines for applying for an extension of time to appeal
to the TCC. If a taxpayer misses the 90-day deadline to file an appeal
to the TCC from a decision of the minister regarding income tax, the
taxpayer can file an application for an extension under
subsection 167(5) of the ITA within one year of the expiration of the
90-day deadline. However, if a taxpayer misses the 90-day deadline to
file an appeal regarding EI premiums or CPP contributions, the taxpayer
has only 90 days from the expiration of the deadline to appeal under
section 103(1) of the EI Act or section 28(1) of the CPP, respectively,
for an extension.
The minister may assess employers for failing to deduct or withhold and
remit source deductions for EI premiums under section 85(1) of the
EI Act, and for CPP contributions under section 22(1) of the CPP.
However, the minister cannot assess an employer for source deductions
for income tax if the taxpayer fails to withhold income tax (MacLeod v. The Queen
,  4 CTC 2223 (TCC)
The minister can assess a taxpayer for source deductions for income tax
only if the employer actually withholds the income tax at source (Suspended Power Lift Service Inc. v. The Queen
, 2007 TCC 519
The minister can, however, assess an employer that fails to withhold
source deductions for income tax under subsection 227(8) of the ITA for
penalties of 10 percent of the amount that should have been deducted or
withheld, or 20 percent of that amount if the failure to deduct or
withhold was the result of gross negligence.
Gergely Hegedus and Keith Hennel
Dentons Canada LLP, Edmonton