The Dividend Myth: BEWARE
Times are tough and you did not withhold tax on the money you and your spouse got out of the company. Of course, the company is probably behind on its trust account debts to the Canada Revenue Agency. (GST & Source Deductions)
Your accountant advises you that you and your spouse should report dividends on your T1 personal returns. The accountant goes on to explain that it is cheaper for you as you will not be contributing to the Canada Pension Plan and the corporation will in essence be paying half of the tax burden. This is all true however; it is only good advice if your company can pay all of it CRA debts in full.
If, on the other hand, the company cannot pay its Canada Revenue Agency’s debts you have now put your spouse on the hook, along with yourself. The Canada Revenue Agency uses Subsection 160(1) to transfer the debts jointly to both of you. If you cannot pay your way out of this, then both you and your spouse will probably be looking at an action under the Bankruptcy and Insolvency Act.
If, on the other hand, you had not paid your spouse a dividend, only you would have to seek protection under the Bankruptcy and Insolvency Art. (Depending on the debts that you may have.) A Subsection 160(1) assessment is never statute barred and can hit you at any time.
There is a time limit for the Canada Revenue Agency to memo assess the director under Director Liabilities, both under the Income Tax Act and the Excise Tax Act. Please think long and hard about allowing your accountant to give you and your spouse dividends in tough economic times. While this is a short term fix, it is financial suicide in the long run.
For advice on these matters and corporate director tax debt, please contact Cawston & Associates in Calgary.
This article was written by W. N. Cawston who has been in the Income Tax Business since 1970 when he was an employee of the Department of National Revenue (now called the Canada Revenue Agency) in Calgary, Alberta