Failure-to-remit penalty (source deductions)
A failure-to-remit penalty is a charge on a person who fails to remit, as and when required, an amount deducted or withheld under the Income Tax Act. Section 227(9) sets it, subject to sections 227(9.1) and (9.5), and the CRA’s employer guide describes it alongside interest and other consequences.
A buyer or seller meets this where payroll remittances were late or missed. Amounts deducted from pay have to be remitted, so a gap is something to look for in diligence. See what employment liabilities you inherit when you buy a business, and the payroll compliance review entry.
What the sources say
Section 227(9.2) adds interest at the prescribed rate from the day the remittance was due. Section 227(9.4) makes the person who failed to remit liable to pay the amount as tax on behalf of the other person. The CRA guide says it applies the penalty to the total amount, rather than part of it, if the failure was made knowingly or in circumstances of gross negligence. Section 227(8) is a separate penalty for failing to deduct or withhold.
What to ask
- Whether the target has any unremitted deductions, penalties or interest, as shown on its CRA payroll account.
- Whether the seller can give a written statement of what is outstanding at closing.
- How the purchase agreement allocates any amount later assessed for the period before closing.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
- 02Canada Revenue AgencyGovernmentEmployers’ Guide – Payroll Deductions and Remittances
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