Correcting Salary Overpayments

Transcript

[All slides] [Real Time Messaging: For general tax questions, call CRA business enquiries line at 1-800-959-5525. 1-800-959-7775 (FR)]

1. Correcting Salary Overpayments

Hello and welcome to our Correcting Salary Overpayments webinar.

I’m First Name only, your host for today.

2. Introduction

For today, please use the question icon in the tool bar at the top of the screen to ask a question related to Correcting Salary Overpayments.

We’ll answer as many questions as we can during the webinar.

For any other tax-related questions, please call the business enquiries line at 1-800-959-5525.

Let’s get started.

3. Contents

Today, we’ll talk about:

• What is a salary overpayment
• How to correct a salary overpayment
• How to refund CPP\EI contributions

4. Definition

Let’s start by defining a salary overpayment.

A salary overpayment happens in one of two situations.

In the first situation, a clerical, administrative, or system error led to an employee being paid more than what they were owed.

In the second situation, an employee did not perform their duties or fulfill a contractual obligation and yet they had received payment.

5. Definition (continued)

In other words, a salary overpayment occurs when an employer accidentally pays someone more than their salary, or when someone does not do a job they were paid to do.

6. Definition (continued)

If there has been a salary overpayment, the employer decides if the employee has to repay some or all of the salary, wages, or other remuneration overpayments.

To learn more on mandatory deductions on benefits, see guide T4001 – Employers guide, Payroll Deductions and Remittances.

As well, it’s important to note that in the event an employee does not repay the salary overpayment they received in error, the overpayment and corresponding deductions must still be included on the employee's T4 slip.

7. Situation 1 – repayment of net salary

Now we'll walk through how to correct salary overpayments. Let's start with the first situation - an accidental overpayment.

Employers can elect to have the employee repay the net amount of the salary overpayment, which is gross pay less source deductions, if all of the following conditions are met:

• the overpayment was a result of a clerical, administrative, or system error
• the business is actively operating
• prior to making this decision, the employer did not issue a T4 slip with the employee’s correct earnings with the salary overpayment removed

8. Situation 1 – repayment of net salary (continued)

• it is no later than three years after the end of the year in which the salary was overpaid and:
  • the employee repaid or arranged to repay the net amount of the salary overpayment
  • the election is made according to the following established procedure by:
    • excluding the salary overpayment from an original T4 slip, or
    • amending the T4 slip to remove the overpayment and reducing any corresponding deductions that were withheld and remitted

In this situation, no form is required to make the election to choose this route of correcting this type of salary overpayment.

9. Example 1

Let's look at an example of the first salary overpayment situation.

Lei is a fulltime employee at 123 Lumber Yard. Last week, she received twice her paycheck. Lei then received a notice from her employer that there was a glitch in the company’s payroll software and that the overpayments would be corrected in the next pay cycle.

In this example, the salary overpayment would fall under the situation where an employee is overpaid due to a clerical, administrative, or system error. If this was less than three years before the overpayment and all the other conditions such as the business still being operational are still in effect. This would qualify for a situation where 123 Lumber Yard could elect to have Lei repay the net salary overpayment.

10. Repayment of net salary before T4

If the employee repaid or arranged to repay the salary overpayment before the original T4 is issued, the employer must not include the following on the employee’s T4 slip:

• salary overpayment (Box 14)
• income tax deducted (Box 22)
• CPP contributions (Box 16)
• EI premiums (Box 18)

This procedure would likely be the case in Lei’s accidental overpayment, as she was notified the week after the overpayment took place. Even if the week was the last pay of the year, it is highly unlikely that the employer would have issued her T4 in the first week of January.

11. Repayment of net salary after T4

If the employer already issued an original T4 slip for the year the salary overpayment was made, they must prepare an amended T4 slip and reduce the following by the amount of the overpayment:

• salary overpayment (Box 14)
• income tax deducted (Box 22)
• CPP contributions (Box 16)
• EI premiums (Box 18)
• insurable and pensionable earnings (Box 24 and Box 26)

If Lei’s employer noticed the error and notified her of the accidental overpayment two years after it occurred, 123 Lumber should still amend the T4 in the same manner.

The $210 is also considered a partial taxable benefit since reasonable travel allowances are not taxable. The CRA considers a value of up to $23 per meal, as a portion of the travel allowance, to be reasonable.

Whether the employees earnings are corrected before or after the original T4 is issued, if the corrected earnings are above the maximum insurable/pensionable earnings, the employer must still ensure that the maximum insurable/pensionable earnings as well as the corresponding EI/CPP deductions are reported on the employee’s T4.

12. Situation 1 – repayment of gross salary

Now that we’ve gone through how the repayment of net salary works, we can move on to how and when you would handle a gross salary correction.

Employees should repay the gross amount of a salary overpayment if either of the following apply:

• the employer did not elect to have the employee repay the net amount of the salary overpayment
• the conditions to repay the net amount of the salary overpayment are not met

To go back to Lei’s example, Lei would have had to repay the gross salary if 123 Lumber had asked her to repay the gross instead of net salary. Lei would also only have to repay the gross salary if another requirement for a net salary repayment wasn’t met. An example of this could be if 123 Lumber took five years to notify Lei of the salary overpayment, which would not meet the net salary repayment requirement of having the salary overpayment corrected within three years of the year the overpayment happened.

13. Situation 1 – repayment of gross salary (continued)

When a gross salary repayment is the action taken to correct an accidental salary overpayment, the employer must do the following:

• Prepare an amended T4 slip for the employee.
• Use the CPP, EI, and income tax deduction amounts from the employee’s original T4 slip, but reduce the employment income in Box 14 by the amount of their salary repayment.
• And, if necessary, amend the insurable earnings in Box 24 and pensionable earnings in Box 26 to agree with the reduced employment income that will be reported in Box 14.

14. Situation 2 – repayment of gross salary

We've seen what to do when a salary overpayment correction is due to a clerical, administrative, or system error.

Now, we can talk about the second salary overpayment situation: when an employee did not perform their duties or fulfill a contractual obligation, for which they had received payment.

Employees should repay the gross amount of a salary overpayment if all of the following conditions are met:

• The employee did not report to work
• The employee is on a leave of absence
• The employee received a payment during the leave period that they would normally be entitled to under the terms of their employment contract or collective agreement
• The employee's circumstances have changed, and is no longer entitled to salary or wages

15. Example 2

For example, Juan works for 123 Baking Stuff Co. The company noticed that Juan did not show up to work at the bakery the previous week, but he had already received payment for the week of work.123 Baking Stuff Co. proceeds to reach out to Juan about the issue to talk about how to proceed with repayment.

In this example, since Juan was paid for work he did not do, the type of salary overpayment is from an employee not performing their duties or fulfilling a contractual obligation, of which they had received payment for.

16. Situation 2 – repayment of gross salary (Continued)

Where the salary overpayment is made because the employee was paid for work they did not do, if the employee repays the overpayment, the employer must:

• include the overpayment and corresponding deductions on the employee's T4 slip
• not adjust the slip or the payroll records to reduce the total employment income or source deductions by the amount of the repayment

17. Situation 2 – repayment of gross salary (Continued)

• provide a letter to the employee confirming the following information:
  • reason for the overpayment
  • date the overpayment was included in the employee’s income
  • date and amount of the repayment

18. Refunding CPP\EI contributions

Now that we have gone over salary overpayment corrections, let's go over how an employer can request a refund of the CPP and EI contributions afterwards.

An employer can file form PD24 to request a refund of the employer’s CPP and EI deductions if the employee repaid the gross salary in an event where the overpayment was due to a clerical, administrative, or system error.

• CPP can be refunded up to four years after the end of the year in which it was deducted
• EI can be refunded up to three years after the end of the year in which it was deducted

This means that for Lei, her employer could only request a refund of her CPP and EI contributions if she had been asked to repay her gross salary rather than the net salary amount.

In Juan’s case, since the salary overpayment was not due to a clerical, administrative, or system error, a refund of the employer’s contribution to CPP and EI cannot be requested.

19. Recap of Pertinent Information

Today, we covered the following items:

• What is a salary overpayment
• How to correct salary overpayments in the event:
  • a clerical, administrative, or system error led to an employee being paid more than their salary
  • or an employee did not perform their duties or fulfill a contractual obligation, of which they had received payment for
• How to request a refund of CPP\EI contributions after a salary overpayment

20. Thank You!

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