Understanding Trust Amounts and CRA Collections
When running a business, understanding your responsibilities around trust amounts and how the Canada Revenue Agency (CRA) handles collections is crucial. Failing to manage these obligations properly can lead to audits, penalties, and aggressive collection action. This article breaks down what trust amounts are, how they work, and what to expect if you owe them and face CRA collections.
What are Trust Amounts?
Trust amounts refer to taxes a business collects on behalf of the federal government. These amounts are held “in trust” until remitted to the CRA. The two most common types of trust amounts are:
- Payroll deductions: this includes income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums that employers withhold from employees’ paychecks; and
- GST/HST: sales tax collected from customers must be remitted to the CRA.
Businesses are expected to remit these amounts by specified due dates. Failure to do so can result in severe consequences.
Why are Trust Amounts Important?
The CRA views trust amounts very seriously because they are funds meant for government programs and services. They expect businesses to separate these funds from their operating income and remit them on time.
Using trust amounts to cover business expenses or cash flow shortfalls, understandably common during the Covid pandemic, is considered misappropriation of funds, and the CRA can take aggressive legal steps to recover the money.
CRA Collections and Trust Debts
If your business falls behind on trust remittances, CRA collections may begin:
Initial Contact
CRA typically contacts the business to alert them about the unreported and unpaid amounts. They may conduct a trust examination, an audit. You’ll be asked to pay the debt or arrange a payment plan for unpaid amounts.
No Response or Payment
If you don’t respond or fail to pay, the CRA has strong collection powers. CRA does not have to apply to a court to enforce collection as is common with private debts. They can:
- Garnish bank accounts or accounts receivable: CRA can freeze your bank accounts and redirect funds to pay the debt;
- Issue 3rd Party Requirements to Pay: force those who owe your business money to pay CRA directly;
- Register liens: CRA can register a lien on property or assets;
- Seize and sell assets: in extreme cases, they can seize your property and sell it to cover the debt;
- Hold directors personally liable: if trust amounts aren’t paid, the directors of a corporation can be held personally responsible under Section 227.1 of the Income Tax Act, RSC 1985, c 1 (5th Supp); and
- Hold third parties liable under certain conditions.
How to Handle CRA Collection of Trust Amounts
soIf you owe trust amounts and are dealing with CRA collections, here are your best steps forward:
1. Communicate Early
Don’t ignore CRA calls or letters. Respond promptly and try to negotiate a payment plan while you determine a long term plan. You will have difficulty operating your business if you fail to appease collections. The law gives collectors tremendous powers and CRA does not care if your business is destroyed as a result of collections enforcement. If you ignore CRA, in the least expect to eventually discover your business bank account has been emptied and customers with outstanding invoices have received a demand to pay CRA instead of you.
The Courts have so far made it clear that, absent exceptional circumstances, damage from legislated collections enforcement is not a basis for a successful legal claim.
2. File All Outstanding Returns
Even if you can’t pay right away, file all required GST/HST and payroll returns. The CRA is more willing to work with businesses that are compliant with filing.
3. Seek Professional Help
A Tax Lawyer can help you understand your options, negotiate with the CRA and/or appeal inflated trust amount assessments. A Tax Lawyer can manage the situation so that you appease CRA and save your business.
Contact us if you require assistance.
SpenceDrake Tax Law – Tax Lawyers
Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/blog. If you have legal questions, please consult a lawyer.