THE QUESTION
Cash flow is tight right now. Can I dip into my payroll deductions account to pay my employees?
THE ANSWER
There is always a temptation when your business is struggling and you are trying to make ends meet to dip into your payroll funds, but doing so can really come back and bite you. The funds you are deducting for income tax, Canada Pension Plan, and Employment Insurance for your employees is considered "trust" money. You are collecting this money on behalf of the government and is not your money to spend, so Canada Revenue Agency (CRA) almost views this as "stealing." In a way, you are and are also taking from your employees. You are probably printing on their payroll advice statements and tax forms the deductions you are supposed to make on their behalf. They are not yours to spend, even if they are used to help keep the business going.
Another mistake many business owners can make is believing incorporation makes them immune from personal liability, but this is not the case. There is "Director's Liability" which allows CRA to hold the directors (which usually includes the owner) of a corporation personally liable for the amounts owed unless they can show they took all reasonable steps to ensure compliance. We have worked with the CRA on an incorporated client's behalf, where the CRA officer wanted to know the personal assets of the owner just in case they could not work out a payment plan. You do not want to end up with a lien on your home or car for touching these funds.
You might be asking yourself how long it will take the CRA to find out you have not paid them the deductions owing. This is like a roll of the dice. You could be found out immediately after choosing not to pay one month, or it could be as much as a year down the road after the initial missed payment. Once you sign up for a payroll number and add employees, the government expects to see payments from the business on a regular basis unless you inform them that you do not have employees. If there is a silver lining, being found out sooner rather than later is going to be better for you.
When you fall behind on your obligations, the CRA will assess penalties and interest charges. Once this happens, it becomes problematic to seek loans from most financial institutions. It is not advisable to open up your business to a long and continuing battle with the CRA, as this can end up having long-lasting adverse effects on your business, your employees, you personally, and the directors of your business.
If you are going to miss or already have missed a payment, it is important that you contact the CRA before they contact you. You do not want to have the weight hanging over your head of sitting and waiting for that dreaded call. If you are forthcoming with the CRA they are willing to work with you, as it is not in their best interest for you to go out of business. To find out how the penalties, interest, and consequences for not remitting or paying your payroll taxes can affect your business, visit the CRA website.
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Karen Fischer is business consultant and adviser with RK Fischer & Associates, a firm that helps entrepreneurs generate growth and profitability for their business.