Source deductions

Source deductions are worth checking in due diligence: amounts withheld but not remitted are owed to the CRA, and in a share purchase the company that owes them does not change. A buyer meets them when asking whether the target’s payroll remittances are current.

How they work

Under the Income Tax Act, a person paying salary, wages or other remuneration (other than amounts the section excludes) must deduct or withhold the amount determined under prescribed rules and remit it at the prescribed time (s. 153(1)). Anyone who deducts or withholds an amount is deemed to hold it separate and apart from their own property, in trust for the Crown (s. 227(4)). The CRA’s employers’ guide says the same, and says that when a corporation fails to deduct, remit or pay these amounts, its directors at the time of the failure can be liable along with the corporation, although the guide says the CRA will not hold directors personally responsible if they take action to ensure the corporation makes the necessary deductions or remittances. For employment in Quebec, the guide says different rules apply: Quebec Pension Plan, Quebec Parental Insurance Plan and Quebec provincial income tax deductions go to Revenu Québec, and CPP, EI and federal tax deductions go to the CRA.

What to check or ask

• The CRA remittance history and any balance owing on the payroll account
• Whether withheld amounts were kept separate until remitted
• Whether the purchase agreement gives you an indemnity for unremitted amounts

The share-purchase question is covered in do unpaid source deductions and HST follow a share purchase. See also payroll account.