Webinar: What to expect during a Payroll Examination 2.0
Slide 1: What to expect during a payroll examination 2.0
Hello and welcome to “What to expect during a Payroll examination, 2.0.” I’m your presenter, Russell.
This webinar will be of interest if you are:
- An employer;
- A trustee;
- A payer of other amounts related to employment.
This webinar was originally presented in 2018 and updated here, based on questions and comments. This webinar will be available at CRA's Businesses video gallery.
Slide 2: Outline
Let’s get going – today, we’ll explore some components of payroll compliance, including the payroll examination processes. Examinations are one of the ways the CRA ensures employers are applying the tax laws correctly and are meeting their obligations. This helps to keep the tax system fair for everyone. In this webinar, we’ll be discussing:
- What is a payroll examination, and why does CRA conduct them
- How to determine if you are an “Employer,” and your payroll obligations
- How to avoid common payroll errors, and why it’s important to keep good records
- How to prepare for a payroll examination
- And, what’s involved in the payroll examination process, with some examples
Slide 3: What is a payroll examination?
At the CRA, we administer tax, benefits, and related programs, and ensure compliance by applying the law fairly on behalf of governments across Canada. This contributes to the ongoing economic and social well-being of Canadians.
Canada’s tax system is based on self-assessment. Employers have a key role to play in supporting compliance by deducting taxes and other amounts from employees’ income, and remitting them to the CRA throughout the year.
A payroll examination reviews the employer’s books and records to ensure that all taxes, CPP contributions, and EI premiums have been properly deducted, remitted, and reported to the CRA.
It also verifies that all income and employer-provided benefits have been reported.
Slide 4: Reasons for payroll examinations?
A payroll examination may be conducted for many reasons. For instance, if an employer has not made the required remittances, or if there is a discrepancy between what was remitted throughout the year and what was reported on the T4 slips, a payroll examination may be conducted to reconcile any discrepancies and raise assessments for any unremitted CPP, EI and Income Tax.
A payroll examination may also be conducted to verify if an employer is providing employees with taxable benefits, such as parking, automobile benefits, or personal living expenses, but not withholding the required CPP, EI, and income tax for their value.
The value of a benefit is generally equal to its fair market value. That is the price that can be obtained in an open market between two unrelated individuals or companies completing a transaction. The cost that you pay for the property, good, or service may be used if it reflects its fair market value. You must be able to support the value of a benefit if you are asked.
Lastly, an employee may file a complaint with the CRA if they did not receive a T4 slip, or if they do not agree with the amounts on the T4 slip, and they are unable to resolve the issue with their employer The CRA may conduct a payroll examination to resolve the issue.
Slide 5: Definition of an “Employer”
Generally, you are considered to be an employer if:
- you pay salaries, wages (including advances), bonuses, vacation pay, or tips to your employees
- you provide certain taxable benefits, such as an automobile or allowances to your employees
In most cases, the people you pay wages to are considered “employees.” You are responsible for deducting, remitting, and reporting taxes, CPP contributions, and EI premiums from the amounts you pay them. If you are not sure whether an individual is an employee or is self-employed, you can request a ruling from the CRA.
Slide 6: What are your payroll obligations as an employer?
As an employer, you have certain obligations, such as:
Slide 7: Open a Payroll Account
You are required to open a payroll account to identify your business when you remit source deductions. You can do this by using CRA’s secure online My Business Account service, by sending a request to your nearest tax services office or tax centre, or by calling CRA’s business enquiries line.
Slide 8: Get Employee Data
You are also required to obtain Social Insurance Numbers and completed federal and provincial TD1 Personal Tax Credits Return forms from employees. These forms are used to determine the amount of tax to be deducted from an employee’s income. A new form must be completed within seven days of any changes made to the employee’s personal tax credit amounts, and must be kept with the employer’s records.
Slide 9: Calculate and Withhold
You are required to calculate each employee’s income, including salary, wages, taxable benefits, allowances, and other remuneration. Then, calculate and withhold CPP contributions, EI premiums, and income tax deductions based on the amounts paid to employees. You must also calculate the employer’s share of CPP and EI.
You should hold these amounts in trust for the Receiver General and keep them separate from the operating funds of your business, until they are remitted to the CRA. Make sure these amounts are not part of an estate in liquidation, assignment, receivership, or bankruptcy.
For employees working in Quebec, employers must deduct Quebec Pension Plan contributions instead of CPP contributions. Those amounts, along with Québec income tax and Québec parental insurance plan premiums, must be forwarded to Revenu Québec.
Slide 10: Remit funds to CRA on time
You are required to remit employee deductions and the employer share of CPP and EI by the appropriate due date for your remitter type. These types are quarterly, regular, threshold 1 accelerated, and threshold 2 accelerated.
Slide 11: Reporting Income and Deductions
You are required to report the income and deductions on a T4 information return at the end of every calendar year. This includes T4 slips for all of your employees, and a T4 summary.
A T4 slip is a statement of the employment earnings paid, and the deductions taken from each employee during the year. Copies of the T4 slips must be provided to the employees before the last day of February.
A T4 summary provides the total of employees’ earnings and deductions, plus the total share of your CPP contributions and EI premiums.
If you make other types of payments, such as pension, superannuation, self-employed commissions, or annuities, you should report them on a T4A slip and Summary.
Slide 12: Keeping Financial Information
Lastly, you are also required to keep records of your accounting and other financial information documents, and you must keep them organized.
Slide 13: Business Closure
Special rules for remitting and reporting apply in certain situations:
- If your business stops operating, you need to remit all CPP contributions, EI premiums, and income tax deductions withheld from your former employees, as well as your share of CPP and EI within seven days of the date your business ends.
- You also need to fill out and file all T4 or T4A slips and summaries using electronic filing methods within 30 days from the date your business ends, or within 90 days from the date a partner or the sole proprietor dies.
Slide 14: Common Errors to Avoid
We pulled together a short list of some common payroll errors that employers have made so that you can avoid them:
- One common mistake is failing to remit the full amount of the required source deductions by the required due date: This can happen if the employer uses the wrong provincial payroll tables, or if they do not remit the correct amount for the employer’s share of CPP or EI.
- A second error is where the deducted amounts reported on the information return do not equal the amounts that were remitted to the CRA throughout the year.
- Finally, another error is failing to report taxable benefits such as automobile and motor vehicle allowances, parking, gifts, and awards. The taxable amount should be based on the fair market value of the taxable benefit.
Slide 15:Don’t Forget…
Please note that if you’ve hired someone to handle your payroll obligations, and you wish the CRA to discuss matters with them, remember to designate them as an authorized representative. Effective February 2020, there will be a new form, Aut-01, for requesting authorizations. Please visit the Canada.ca website for more information.
Slide 16: How to prepare for a payroll examination
One of your obligations as an employer is to keep records of your accounting and other financial documents. In fact, one of the best ways to prepare for any review of your records is to maintain your books and records in an orderly fashion. This way, you can support the amounts deducted, remitted, and reported for your employees.
Generally, you must keep your records for six years from the end of the last tax year they were related to, and make them available to an examination officer when requested to do so. Some documents must be kept longer.
For - more information, please refer to Income Tax Information Circular IC78-10R5, Books and Records Retention/Destruction, as well as the other relevant publications.
Slide 17:Books and Records
Now, when we talk about keeping good books and records, what exactly are we talking about?
Books and records are organized accounting and financial documents that summarize your transactions, and include the documents to support these transactions. They may be in paper or electronic format.
Some of the books and records that an examination officer may review include, but are not limited to:
- Bank Deposit Slips
- Bank Statements
- Cancelled Cheques
- Financial Statements
- Cash Register Slips
- Vehicle Logbooks
- Minute book
- Director registry
- And, Accounts receivable and payable
Slide 18: Payroll Examination: The Process
Here’s how the payroll examination process typically occurs.
The examination officer will initiate the process by contacting you. The officer will either set up an appointment to meet with you (or your authorized representative) or request that you send the required books and records electronically through CRA’s secure online portals (My Business Account or Represent a Client).
The officer will explain which books and records will be needed for the payroll examination. Generally, a payroll examination will cover the current year and last year, but additional years may be included if needed.
The officer will examine your books and records to ensure proper deducting, remitting, or reporting of the required withholdings. If you were requested to send your books and records electronically, the officer will complete the examination without meeting with you face-to-face. The officer may also contact you by telephone to clarify the information you provided or ask for additional information.
Slide 19: Payroll Examination Results
At the end of the examination, you can expect the following:
The officer will provide you with a statement of account, called a PD 83-1, which summarizes the findings. The officer will explain the information provided on the statement of account, including any assessed penalties and interest. The officer will also explain any changes required to T4 slips.
Amounts owing at the completion of the payroll examination are due immediately to the Receiver General of Canada. If you cannot make the full payment at the time of the payroll examination, other arrangements may be permitted based on your ability to pay.
If an assessment is required, once the payroll examination is processed internally by CRA, a Notice of Assessment or reassessment will be sent to you.
The time its takes to complete an examination varies, depending on the size of the business, the cooperation of the employer or the authorized representative, and the condition of the employer’s books and records. However, for small businesses, it often takes less than a day.
Slide 20: Notice of Assessment (NOA)
If the examination officer finds any discrepancies in the amounts that were deducted and remitted, the examination may result in assessments being raised on the employer’s payroll account, and additional or amended T4 or T4A slips may be required. As a courtesy, the examination officer may amend the T4 or T4As with the necessary information; however, it is still the employer’s responsibility to provide their employees with the additional or amended T4 or T4A slips. The additional or amended T4 or T4As may result in assessments or reassessments to the affected individual’s personal tax accounts.
Slide 21: Redress Rights
Once you receive your Notice of Assessment or reassessment, you can contact the examination officer for further explanation.
If you do not agree with the Notice of Assessment or reassessment and/or the CPP/EI ruling decision, you can send a letter to the Chief of Appeals and explain why you do not agree, or use one of the following forms:
- Form CPT101 to file an appeal relating to a CPP/EI assessment
- Form T400A to file an objection relating to an income tax assessment
- Form CPT100 to file an appeal of a CPP/EI ruling decision
Your appeal and or objection must be filed within 90 days of the date of the notice of the ruling decision, or the date of the assessment. Please make sure to include all relevant facts and supporting documents, along with an explanation of why you disagree.
Slide 22 – Fatima’s Bookstore
We are now going to show you two examples of payroll examinations, to give you some additional insight on how the process works.
In the first scenario, we have Fatima who owns a bookstore in Moncton, New Brunswick. She opened the business in 2017, and has two full time employees, including herself, and one part-time employee, a 16 year old student.
Slide 23: Scenario #1 Continued
Fatima is a regular remitter, which means her remittances are due on the 15th of the month after the month she paid her employees. Fatima always makes her remittances on time; however, she was unexpectedly hospitalized for a couple of months. One of her employees took over the management of the business, but failed to send the necessary remittances to the CRA.
Slide 24: Scenario #1 Continued
Due to the missing remittances, an examination officer contacts Fatima to arrange an appointment to review her books and records.
During the payroll examination, the officer discovers that CPP and EI were not deducted from the student’s earnings.
The officer assesses the employer’s account for the amount of the missing remittances, the EI that should have been deducted, and the employer’s share of EI (1.4 times the employee’s amount) from the student’s earnings. As the student is 16 years old, no CPP is withheld as it is not required until the person is 18 years of age. EI is required to be deducted regardless of the person’s age.
The officer also assesses penalties and interest from the date the remittances were due.
The officer completes a PD83-1, Payroll Examination Statement of Account, and explains it to Fatima. Any amounts owing are due immediately. If Fatima does not have the ability to pay in full, a short term arrangement may be made, which might require Fatima to contact a Collections officer to make a payment arrangement. Interest will continue to accumulate until the amount is paid in full.
Fatima can submit a request for taxpayer relief of penalties and interest, due to her hospitalization. She may do so by submitting Form RC4288, Request for taxpayer relief. Her file will be investigated and she will be notified of the decision.
Slide 25: Example Scenario 2: Robert the Personal Trainer
Here’s another example.
Robert provides personal training services at a small, privately owned gym in Calgary, Alberta. He has worked exclusively at this gym for approximately 18 months.
Slide 26: Scenario #2 Continued
He is paid as a self-employed individual. The owner decides to relocate the gym to another city. As Robert is unable to relocate, he becomes unemployed, and submits a claim for Employment Insurance. As he was paid as a self-employed individual, Service Canada requests a ruling from the CRA . In this case, Robert’s income was ruled as pensionable and insurable.
Slide 27: Scenario #2 Continued
Since this ruling means that Robert should have been treated as an employee and not as a self-employed individual, the rulings officer will request a payroll examination to be completed to determine the amount of CPP and EI that should have been deducted. The employer will be assessed for both shares of CPP and EI (the employer and employee’s share), plus applicable penalties and interest.
If there was doubt about the employment status of other employees who work, or have worked at the gym, the examination officer may request additional rulings.
Slide 28: Resources
If you are looking for more information about your obligations, here are a few recommended publications that can help. The publications are available under Taxes on the Canada.ca website.
In addition to those publications, CRA also has an A to Z index which includes “Topics for payroll.” Please go to Canada.ca to view the “Topics for payroll” under Taxes and to view many other helpful publications.
Tax administration is as complex as life itself. If the content today doesn’t quite fit your situation, please:
- Call CRA’s business enquiries line at 1-800-959-5525
- You can also go to canada.ca/cra-videos where you’ll find all our business webinars.
We’ve come to the end of our webinar.
Thanks for joining me today. I hope it’s been helpful. Stay tuned for more webinars in the coming months! Good bye.
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