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, [1999] 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

Canadian Tax Focus
Volume 9, Number 4, November 2019
©2019, Canadian Tax Foundation