Times are tough and suppliers are slow paying. You have bills to pay, the bank is not lending you more money but you have collected sales taxes from customers, you have paid your employees their net pay but you have not remitted the withholding taxes to the government, should you dip into those funds and use them for running the business? The answer is no, you should not dip into the trust money. You collected it on behalf of the government and if you use their money, there are significant penalties that will result.
The government tax authorities are not lenient when you use their money. They may lien your company, seize bank accounts and create havoc on the operations of the business. I have seen a company not pay sales taxes to the government over an 8 year period. The government placed a lien on the business for unpaid sales taxes and interest. The owners stated how can the government do that, we worked so hard to build up the company and they are trying to close it down. Whose money was used to build up the company? It was not theirs. The bank would not lend them money, no one would so there is the temptation to use money in your possession and hope to deal with the problem later.
The government may be able to go after the directors of the company personally to pay the trust money collected by the Company and not remitted.
The economy is slowing down, the temptation to use government money is increasing. The tax authorities are very aware that there is a greater chance that trust money can be used to help your cash flow instead of paying the government. As a result, they are monitoring the situations closely for many Companies. How aggressive are they in collecting this trust money? In Canada, it appears that each government office makes decisions on how aggressive they will pursue the collection efforts. As a result, one office may be more aggressive than another to enforce collection.
If you buy a business with cash flow problems, ensure that all the withholding taxes and sales taxes have been remitted to the government since you could become liable for this.
If you are a director who is not active in the business, you still need to monitor the company to ensure that they pay the withholding taxes and sales taxes. The government may come after you and you may have to go to court saying that you were not involved in this aspect of the business therefore should not be liable. You will have to go to court and incur significant legal costs and will have to wait for a court ruling to see if you are liable. Isn’t it easier to ensure the trust money it paid then to go to court?