By Grant Gilmour
When corporations face cash flow shortages, one of the easiest short term measures is to stop paying remittances to CRA. This is because no prior consent is required and commonly the only cost is the interest that has to be paid on the “loan” CRA has given you. However, under no circumstances ever, should you fail to remit withholding taxes on payroll. We repeat, never, never, never fail to remit withholding taxes on payroll.
When you deduct withholding taxes such as EI, CPP and income tax from payroll you are basically holding them in trust on behalf of your employees. At the end of the year, your employees will file their personal tax returns and report that they have already paid a significant part of their personal taxes owing through their employer. Because this money does not belong to the corporation, using it to pay for business expenses instead of remitting it to CRA is viewed as a serious offense. Think of it as stealing from your employees.
CRA are very aggressive when they are aware a company has failed to remit payroll withholding taxes. They will act very quickly to collect the taxes. This can involve garnishing income sources such as customer receivables, seizing and selling assets, extracting money from the company bank account and chasing the directors of the company personally for the unpaid amounts. In addition, they will assess penalties on top of the taxes owing. CRA are a lot less willing to reach a payment plan for payroll withholding taxes than they are for other taxes such as GST or corporate tax.
To help ensure you always have sufficient cash to meet payroll remittances we suggest the following:
• Prepare a cash flow budget so that you know when the biggest demands on the bank account will be. This will allow you to postpone payments or other purchases ensuring you have sufficient cash resources at payroll time.
• Utilize other finance sources such as credit cards to pay for non payroll items such as assets and supplies. This then frees up cash in your bank account.
• Hire the services of a payroll company such as ADP or Ceridian as they will automatically pull the money out of your bank account and calculate all your tax withholdings. You may actually save time in the long run.
• If you are short of cash, as an owner manager you could defer your own salary. Still pay the remittances but leave the net pay in the shareholder loan account to be taken at a later date when the company has sufficient cash.
• Set aside an amount of money received from customers equal to the remittances owed into a separate bank account that is only used for payroll. That way you are forcing yourself to save the necessary remittances and do not have to find the money from other sources.
If you are concerned about remitting payroll withholding taxes you should contact Gilmour Knotts Chartered Accountants for assistance.
OUR FAQ ISSUE NEXT WEEK
What are the most common corporate income tax issues our clients face? Next week part four of our six part series will focus on auto expenses not recorded properly.