Hello, thank you for joining me for this webinar about salary overpayments.
Today’s webinar is the second in the three-part series about payroll deductions. My name is Hanna and I will be your presenter today.
I would like to mention that today’s webinar will be recorded and posted on the Canada Revenue Agency (CRA) website at a later date.
In previous webinars that we presented and that are available on the CRA’s website, we addressed the following topics:
- the difference between being an employee and being self-employed
- payroll basics, such as
- how payroll works
- the bonus method and
- the filing and beyond
- and finally, we had a deeper look at the Canada Pension Plan (CPP) and employment insurance (EI).
During today’s webinar on salary overpayments, we will discuss the following topics:
- an overview of circumstances
- the CRA’s administrative policies
- our policy when an employee did not perform his or her duties and
- the employer’s responsibilities
We will also discuss:
- the repayment letter
- the policy on clerical, administrative and system errors
- situations when the employee should repay net or gross salary
- what happens when the error and the repayment are in the same year and
- when the error and the repayment are in different years
Let me first introduce the salary overpayment topic by reviewing some pertinent legislation. Subsection 5(1) of the Income Tax Act says that:
“(…) a taxpayer’s income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by the taxpayer in the year.”
If an employee has to reimburse salary or wages that they received for a period when they did not perform their duties of office or employment, it does not change the nature of those amounts.
If an employee is being overpaid or receives salary, wages or other remuneration they are not entitled to, how you correct this will depend on the reason the employee was overpaid in the first place and the year in which the employee repays the amount.
These policies have been in place since 2000. You can find them in our Employer’s Guide RC4120 - "Filing the T4 Slip and Summary"under the heading "Salary Overpayments" or on our website under the same heading.
The CRA has two administrative policies on how to process salary overpayments. If you prefer, you can also look at them as salary repayments from employees. All salary overpayments (or repayments) fit in to one of these two policies.
The first policy is called “Employee did not perform duties” and it applies when the employee reimburses an employer in the same or a later year for wages or salaries paid while the employee was not working or did not comply with the conditions of the contract.
Let’s look at examples where this policy applies.
An employee received salary while off work but the employee does not meet the contractual obligation to return to work after the period of leave. An example is an employee who receives a top-up while on maternity leave but does not return to work.
An employee is sick and received retroactive payments from a wage-loss replacement plan in addition to a salary received for the same period.
An employee was advanced vacation leave credits, used the credits, but quit working before the credits were earned.
Another example that is not shown on the slide is where an employee received a signing bonus and had to repay it because he or she did not work for the agreed period of time.
Now, let’s look at the employers’ responsibilities when these situations arise:
When the salary is paid, the employer must withhold the payroll deductions, as they normally would, and give the employee a T4 slip at the end of the year.
When the employer realizes that the employee did not perform his or her duties or fulfill a contractual obligation, the employer needs to decide if the employee has to repay some or all of the salary and, if so, the amount of repayment.
Then, the employer must ask the employee to repay the gross amount of the overpaid salary. This applies no matter when the salary was initially paid or when the employee repays it.
The employer cannot adjust the payroll records or amend the employee’s T4 slip. This type of overpayment is not an error. Remember that the employee was receiving a salary when the amounts were paid. To put this into perspective, if the particular event that is now causing the employee to repay the salary had not happened, no repayment would be needed.
The employer’s share of CPP contributions and EI premiums is not refundable.
And finally, the employer must give the employee a repayment letter, in the year in which he or she repays the amount of salary overpayment.
What does the employer have to include in the repayment letter?
The letter has to include the tax year in which the overpayment occurred and was included in the employee’s income (that is, on the T4 slip). The letter also has to include the date, the reason and the amount the employee repaid during the year.
The employer should give the repayment letter to the employee in the year they repaid the salary. If the employee repays the salary in installments over several years, the employer will have to give the employee a repayment letter for each of these years.
You might be asking yourself:
- What will the employee do with this letter?
- How will the employee’s income be modified if the employer cannot change the T4?
Well, the employee will file the repayment letter with their personal income tax and benefit return in the year the amount was repaid and will claim a deduction at line 229 for “other employment expenses” using the amount of repayment shown in the letter.
By claiming this deduction, the employee will reduce their taxable income. It should generate a refund of the income tax deductions that were withheld on the overpayment. The amount of the refund will, of course, always depend on the employee’s personal tax situation at the time.
Note that workers’ compensation benefits repaid to the employer have different rules. See the T4001, Employers’ Guide – Payroll Deductions and remittances, under the heading, “Workers’ compensation claims” for more information.
Zachary received a signing bonus for his employment contract in 2015.
He quit his job and had to repay the bonus the next year.
Will he receive an amended 2015 T4 slip or a repayment letter (in 2016 – year of repayment) from his employer?
He will receive a repayment letter for 2016, the year of repayment to the employer, since he was entitled to the amount at the time he received it. It was not an error! The reason he had to reimburse the amount is for not fulfilling his contractual obligations.
The second policy involves salary overpayments due to clerical, administrative or system errors, even if the employee did not perform his or her duties.
In these situations, the amount paid is not considered salary to the employee at the time of payment.
Here is a little trick to help employers figure out whether there is a clerical, administrative or system error. Ask the following question:
Is the salary overpayment caused by an “oops”? If the answer is yes, then this policy will apply.
Here are a few examples of administrative errors:
- an employee was paid $5,000 instead of $500 or
- an employee was paid a shift premium without actually working the hours. This could happen if an employee is on a negative reporting system of hours worked and has not submitted a time sheet to adjust the hours.
These examples are fairly straightforward. The extra salary that was paid to the employee was clearly paid in error, so the employee is not entitled to the additional money and should repay it.
The CRA will not consider an amount paid by mistake to be salary, wages or an advance. It was paid to the employee in error. The employee was not entitled to receive it.
These errors should not be reported on the employee’s T4 slip unless the employee does not repay the amount or does not make arrangements to repay it. We will look at that in a few moments.
There are different ways to correct this type of error depending on the years involved. Let’s look at these now.
We are often asked whether the employer should recover the net amount of the overpayment or the gross amount. Our answer depends on when the overpayment occurred in relation to when the employee repaid the salary (or made arrangements to repay it).
If the overpayment and the repayment (or arrangement to repay) are in the same calendar year, the CRA suggests that the employee repay the net amount. However, you may have a company policy that requires a different method.
If it’s not possible to recover the net amount, your employee will have to repay the gross amount. This is also the case if the overpayment and the repayment (or arrangement to repay) are in different calendar years.
Whether you recover the gross or the net salary can easily be decided by your company policy or by looking at the timing of the transactions.
In summary, the way you modify your employee’s payroll records and T4 slip is based on the way the employee reimburses the overpayment, either by repaying the net or the gross amount.
When the overpayment and the repayment (or arrangement to repay) are in the same calendar year, the employee can repay the net amount.
In this situation, you will need to adjust the payroll records to completely remove the error.
However, there should be enough time left for you to reduce your next CRA remittance so that you recover the deductions that were remitted in error for that year. If not, the employee must reimburse the gross amount.
No part of the overpayment should be included on the employee’s T4 slip.
From a math standpoint, if you add the net amount that the employee repaid and the total payroll deductions recovered from the CRA, the two combined will generally equal the gross amount, assuming that the employee has no other types of payroll deduction, such as union dues and pension.
When the salary paid in error and the repayment (or arrangement to repay) occur in different tax years, the way of adjusting the error will be different.
The employee must repay the gross amount and you must adjust the employee’s pay records to remove the error.
Keep in mind that these procedures would also apply if the overpayment and the repayment (or arrangement to repay) are in the same calendar year but you ask your employee to repay you the gross amount, for example, if an internal policy says the gross amount has to be repaid.
When the employee repays you, or makes arrangements with you to repay the amount, you should give your employee an amended T4 slip for the year in which the error happened. When you amend the employee’s T4 slip, only change the earnings that previously were reported: the employment earnings in box 14, and if applicable insurable earnings in box 24 and pensionable earnings in box 26. Leave the CPP, EI and income tax deductions as they were originally reported. This information is very important.
Because the earnings reported on the amended T4 slip are reduced, the employee should receive a refund of the excess deductions withheld in error when they file the amended T4 slip with their personal income tax and benefit return.
Under this policy, you can apply for a refund of the employer’s share of CPP contributions and EI premiums remitted to CRA. To do so, fill out Form PD24, Application for a refund of overdeducted CPP contributions or EI premiums.
The employer may request a refund of EI premiums up to three years after the end of the year in which the overpayment occurred and a refund of CPP up to four years after the end of the year of the overpayment.
On the screen, you have an example of a PD24 - Application for a refund of overdeducted CPP contributions or EI premiums.
Let’s look at an example of a salary overpayment.
Suzanne takes two days of leave without pay in 2015, but her pay was not reduced.
Her employer noticed and recovered the amount only in 2016.
Should Suzanne’s employer give her a repayment letter or an amended 2015 T4 slip?
In this situation, the overpayment is an administrative error; Suzanne was not entitled to the salary she received. Since the overpayment and the repayment occurred in two different years, Suzanne has to repay the gross amount and her employer will have to amend Suzanne’s T4 slip. Only boxes 14 and if applicable, boxes 24 and 26 should be modified. There should be no changes to the CPP contributions, EI premiums and income taxes that were deducted from Suzanne’s salary.
Remember, salary paid as a result of an error is not income to the employee. However, in certain situations, it could become salary. This would be the case when the employee does not repay the amount. The following four examples are situations where the amount becomes income to the employee:
- an employee agrees to repay the amount and does not or when an employer forgoes their right to the amount. In these cases, amend the T4 slip of the year the overpayment occurred to remove the income. Leave the deductions as is. Include the income in the year the employee did not repay the amount. Deductions may have to be taken again. The employer can request a refund of the previous year’s deductions by filing Form PD24.
- an employee refuses to repay the amount or there was knowledge or collusion and the employee does not repay the amount. In these cases, as long as the overpayment was included on the employee’s T4 slip, no further action is necessary.
The employers’ guide RC4120 discusses these four situations in more detail. Review the guide to learn when you have to include an overpayment in your employee’s income if you encounter any of these situations.
Marie’s employer gave her $5,000 per year, for a total of $20,000, for her university education, on condition that she returns to work at the end of her studies.
She graduated in 2015 but quit her job and did not return to work.
Her employer included the university assistance in her income and reported it on her T4 slips each year.
Marie made arrangements with her previous employer to repay the $20,000, at a rate of $10,000 in 2015 and $10,000 in 2016.
Should Marie’s employer change her T4 slips or give her a repayment letter?
This situation is clearly one where the employer must issue a repayment letter. There was no clerical, administrative or system error in her receiving the $5,000 per year in education assistance.
It was because she was not able to fulfill the condition of returning to work that she must now repay the university assistance to the employer.
Since she will be repaying the amounts in two installments, in two different tax years, she will receive from her previous employer one repayment letter in 2015 when the agreed amount is repaid and another in 2016 after she has paid the balance.
When Marie files her 2015 and 2016 personal income tax and benefit returns, years in which she would have repaid the amounts, she will be able to claim a deduction for the amounts shown in each of the repayment letters she received.
Following a keying error, Maurice received an extra $1,000 gross ($850 net) in a 2015 pay.
The error was only discovered in 2016.
Maurice has agreed to repay only the net amount, but his employer should have recovered the gross amount because two different years are involved.
Should Maurice’s employer change his 2015 T4 slipor give him a repayment letter in 2016?
Because this is a keying error, Maurice’s employer should give him an amended 2015 T4 slip. Also, since the overpayment and repayment occurred in different years, boxes 14 and if applicable, boxes 24 and 26 would be reduced by the net amount repaid. Payroll deductions would remain as they were reported on the original T4 slip.
Would you report the difference between the net amount and the gross amount as income? If so, what year, in 2015 or 2016?
In this situation, because different tax years are involved, Maurice’s employer should have recovered the gross amount. Since Maurice agreed to repay less than the gross amount, the difference must be included in his income in the year of the overpayment. In this case, it is 2015.
Let’s look at a final example:
Based on the terms of his collective agreement, Scott gets “at risk” pay during certain work assignments.
As a result of an error, he received this premium twice in 2016 and the amounts were reported on his 2016 T4 slip.
He asked his pay office to issue an amended T4 slip but did not make arrangements with his employer to repay the amount.
Should the employer amend Scott’s 2016 T4 slip?
The answer is no. Because the employee and employer have not made arrangements for the second “at risk” pay to be repaid, the full amount must remain on Scott’s 2016 slip as employment income.
To summarize, it’s not always easy to decide whether the overpayment is a salary or wage overpayment or an overpayment made in error. Identifying such an error can also be difficult. We hope you can use what you have learned today to make a proper decision. If you have any unusual situations or the overpayment has been outstanding for more than three years, call the business enquiries service at 1-800-959-5525.
If you want to learn more about any of the items covered in today’s webinar, resources are available on the CRA website. Visit cra.gc.ca and see our web pages for businesses.
If you have not already done so, subscribe to our payroll mailing list at cra.gc.ca/lists.
Listen to our payroll podcasts at cra.gc.ca/socialmedia.
Watch our recorded webinars for businesses at cra.gc.ca/videogallery.
You can also follow us on Twitter at @CanRevAgency.
The CRA has a number of tools that may help you understand what we have learned so far, as well as other payroll obligations.
They can be found on our website on the payroll pages. A particularly useful guide for today’s topics is the RC4120 Employers’ Guide – Filing the T4 Slip and Summary.
This is all the time we have. Thank you for joining me today. I hope that this webinar gave you a better understanding of how to manage salary overpayments.
Report a problem or mistake on this page
- Date modified: