Can CRA Call Payroll Taxes Late Over Salary Allocation?
A corporation pays its payroll. It calculates income tax, CPP, and EI on the salaries it has recorded. It sends the money to CRA on schedule. Every deadline is met and every dollar arrives.
Then a CRA auditor reviews the bank records, decides the salaries were allocated to the wrong people, and assesses a ten percent penalty for late remittances.
That is not a hypothetical. It is what happened in Sussex Group – Allan Sutton Realty Corp. v. The King, 2024 TCC 1, decided by Justice Jean Marc Gagnon on January 8, 2024 under the Informal Procedure. The case is short, but it sits on top of three ideas that every owner-managed corporation in British Columbia should understand: how salary allocation drives remittance obligations, what it actually means for an employee to have received income, and what happens to a penalty when the Crown cannot prove the numbers behind it.
The facts
Allan and Angela Sutton operated a licensed real estate corporation. Angela was the managing broker. Allan was the key producing agent. Both worked in the business full time, and both drew remuneration from it.
Their compensation practice was common among owner-managed corporations. Through the year, payroll was estimated and source deductions were remitted on those estimates. At year end, the couple determined the final salary figures based on each person’s contribution to the business over the year.
For 2018, that exercise produced remuneration of $192,000 for Allan and $165,000 for Angela. T4s were issued on those amounts and the corporation’s source deductions were reported and paid.
The complication was operational rather than tax-driven. Almost all of the payment cheques were deposited into Allan’s personal bank account. Of the total remuneration allocated to Angela, only about $12,675 went anywhere else. She had authorized the arrangement, treated the account as a shared household account, and paid her own expenses and the couple’s joint expenses out of it.
What CRA did
CRA reviewed the corporation’s trust accounts and drew a conclusion from the deposit pattern. If the money went into Allan’s account, CRA reasoned, it was Allan’s remuneration. On that view, Angela’s actual salary was roughly $12,675, not $165,000.
CRA then did what follows logically from that premise. It reallocated the remuneration between the two employees, recalculated the source deductions that should have been withheld for each of them, and compared the recalculated obligations against what the corporation had actually remitted through the year.
Under the revised allocation, the corporation had under-remitted in respect of Allan and over-remitted in respect of Angela. Because withholding obligations attach to each employee separately, the shortfall on one side was not cured by the surplus on the other. The revised figures also disturbed the monthly remittance pattern, which meant that amounts CRA now considered owing had been paid after their due dates.
That is a late remittance. Late remittance triggers a penalty under subsection 227(9) of the Income Tax Act. CRA assessed the corporation $5,858, representing ten percent of the amount it considered to have been remitted late.
The statutory machinery, briefly
Two provisions do the work here.
Subsection 153(1) requires a person who pays salary, wages, or other remuneration to withhold the prescribed amount and remit it to the Receiver General within the prescribed time. The obligation is tied to payment of remuneration to a specific person. It is not a bulk obligation measured against total payroll.
Subsection 227(9) imposes a penalty where a person fails to remit as required. The penalty escalates with lateness and, for the amounts at issue in this case, ran at ten percent.
Putting those together explains why CRA’s position had internal logic. If the remuneration paid to each employee changes, the amount required to be withheld for each employee changes, and the schedule against which remittances are measured changes with it. The corporation had not withheld a dollar less than it should have in total. It had, on CRA’s view of the facts, withheld the wrong amounts for the wrong people at the wrong times.
This is the point most owner-managers miss. CRA is not only asking whether payroll money reached the Receiver General. It is asking whether the deductions match the remuneration each individual actually earned and received.
What happened at trial
The corporation appealed. And here the case turns on something other than tax policy.
When CRA assesses a penalty, the Crown carries the burden of establishing the facts that justify it. This is a departure from the general rule in tax appeals, where the taxpayer must demolish the Minister’s assumptions. Penalties are different, and the Crown has to prove its case.
At trial, the Crown called no CRA auditor. It called no witnesses at all. Its case rested on bank statements and copies of cheques.
Justice Gagnon was not persuaded. The review that produced the reallocation had been conducted without speaking to Allan, to Angela, or to the corporation’s accountant. Nobody from CRA had asked why the deposits were structured the way they were, or whether Angela had authorized them, or what the couple’s arrangement actually was. The Court described the exercise as selective.
Both Suttons testified. Their evidence was consistent: they each worked full time in the business, the year-end allocation reflected their respective contributions, and Angela had directed her remuneration into the shared account and used it for her own expenses and the household’s.
Angela’s characterization of her own position was that she was constructively receiving her income through that account.
Constructive receipt: what “received” means
That phrase carries real legal weight, and it is the doctrinal core of the case.
An amount does not have to pass through an individual’s own bank account, or through her hands in cash, before she is treated as having received it. The question is whether she has derived the benefit of the amount. Where funds are made available to a person, or applied at her direction and for her benefit, she has received them for tax purposes even though the deposit sits somewhere else.
Applied here, the analysis is straightforward. Angela directed that her remuneration be deposited into an account she used and drew on. She was not deprived of the money. She benefited from it. The deposit destination reflected a banking convenience, not a transfer of entitlement.
The Court accepted that Angela had constructively received substantially more than the roughly $12,675 CRA had allowed her. CRA’s factual premise, that the deposit destination determined whose remuneration it was, did not survive.
The decision, and why the penalty fell entirely
Here is the part that repays close reading, because it is where the practical lesson sits.
Justice Gagnon did not go on to determine Angela’s exact remuneration for 2018. On the evidence before him, he could not confirm the precise figure. What he could confirm was that the amount CRA had used to compute the penalty was incorrect.
That left the Court in a specific procedural position. It was satisfied the penalty had been calculated on a wrong basis, but it was not in a position to substitute a correct calculation, and it does not have jurisdiction to adjust the quantum of a subsection 227(9) penalty to some other figure of its own devising. The Crown, which bore the onus, had not established the numbers on which the penalty depended.
The appeal was allowed and the penalty of $5,858 was vacated in full.
Note what that means. The corporation did not receive a reduced penalty reflecting some partially correct reallocation. It received nothing to pay. Once the Crown’s factual foundation failed and no reliable alternative figure was available, the penalty had nowhere to stand.
That asymmetry is worth remembering when deciding whether to dispute a penalty assessment. A penalty built on assumptions the Crown cannot prove at trial does not get trimmed. It can disappear.
What this means for family-run corporations
The outcome was favourable, but the corporation still went to Tax Court over a $5,858 penalty. The lesson is not that CRA will lose these arguments. It is that the arguments are avoidable.
Allocate salary to reflect actual work. The year-end true-up based on contribution is defensible, and it held up here. What makes it defensible is that both spouses genuinely worked in the business in identifiable roles. A salary allocated to a spouse who does not work in the business is a different problem entirely, and constructive receipt will not save it.
Document how the allocation was determined. Contemporaneous notes, directors’ resolutions, or a simple memorandum recording the basis for the year-end split cost almost nothing to prepare and are far more persuasive than testimony reconstructed years later.
Get deposit authorizations in writing. If one spouse’s remuneration is deposited into an account held by the other, record the direction and the reason. Angela’s authorization was accepted on her oral evidence. A signed direction on file would have made the audit shorter or prevented it.
Keep the paper trail on shared accounts. Where a shared account is used, be able to show that the spouse whose remuneration went in actually drew on it. Bill payments, transfers, and household expenses paid from the account all support constructive receipt.
Reconcile T4s, payroll registers, and remittances before filing. The mismatch that started this file was visible in the corporation’s own records. An annual reconciliation between what was allocated, what was withheld, what was remitted, and what was reported on each T4 catches this class of problem before CRA does.
Understand which side has to prove what. If you are assessed a penalty, the Crown must establish the facts supporting it. That materially changes the calculus on whether to object and appeal.
Frequently asked questions
Can CRA assess a late remittance penalty if I paid all my payroll deductions? Yes. Remittance obligations are measured employee by employee under subsection 153(1). If CRA determines the remuneration was allocated differently than reported, the required withholdings for each employee change, and amounts already paid can be treated as having been remitted late.
Does my spouse have to receive her salary in her own bank account? No. Under the doctrine of constructive receipt, an amount is received when the person derives the benefit of it, including where it is deposited elsewhere at her direction and remains available to her. Documentation supporting that direction matters.
Who has the burden of proof when CRA assesses a penalty? The Crown. Unlike the general position in tax appeals, where the taxpayer must displace the Minister’s assumptions, the Crown must establish the factual basis for a penalty.
What is the penalty under subsection 227(9)? It is a penalty for failing to remit source deductions as required, calculated as a percentage of the amount remitted late. It escalates with the degree of lateness and reached ten percent in this case.
Was this a precedent-setting decision? It was decided under the Informal Procedure, which limits its precedential weight. Its value is practical: it shows how CRA builds these assessments, and how they can fail.
Sources
Sussex Group – Allan Sutton Realty Corp. v. The King, 2024 TCC 1 (Informal Procedure), Justice Jean Marc Gagnon, January 8, 2024, Court File 2022-1462(IT)I: https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/521205/index.do
Income Tax Act, section 227 (penalty for failure to remit, subsection 227(9)): https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-227.html
Income Tax Act, section 153 (withholding at source, subsection 153(1)): https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-153.html
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We review payroll setups, remuneration allocations, remittance schedules, and year-end reconciliations so that the mismatch at the centre of this case never appears in your file. If you and your spouse both draw salary from the same corporation, that review is worth doing before your next T4 season rather than after an audit letter arrives.
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This article is general information only and is not tax, legal, or professional advice. It does not create a professional relationship between the reader and Cloudiverse CPAs Inc. or its personnel. Tax outcomes depend on the specific facts of each situation, and the law changes. Consult a qualified advisor about your own circumstances before acting on anything discussed here.