Correcting reporting errors and salary overpayments

On March 1, 2020, amendments to the Canada Pension Plan (CPP) came into force that affect employers who overpaid salary because of a clerical, administrative or system error. Employers can now recover the CPP contributions withheld and remitted on salary overpayments directly from the Canada Revenue Agency. This will allow employees to repay only the net amount.

Canada Pension Plan (CPP) recovery and overpayment

If, during the year, you deducted more CPP contributions from the employee's earnings than you should have and you could not reimburse the overpayment:

  • Do not adjust the amounts you report on the T4 slip. We will credit the excess CPP contributions to the employee when they file their income tax and benefit return.
  • Fill out Form PD24, Application for a Refund of Overdeducted CPP Contributions or EI Premiums, to apply for a refund of your CPP overpayment. Send it to your national verification and collection centre with your paper-filed T4 information return or mail it separately if you have filed your return electronically.

Make your request no later than four years from the end of the year in which the CPP overpayment occurred.

For more information about CPP overpayments, see CPP overpayment and recovering CPP contributions.

Employment insurance (EI) recovery and overpayment

If, during the year, you deducted more EI premiums from the employee than you should have and you could not reimburse the overpayment:

  • Do not adjust the amounts you report on the employee's T4 slip. We will credit the excess EI premiums to the employee when they file their income tax and benefit return.
  • Fill out Form PD24, Application for a Refund of Overdeducted CPP Contributions or EI Premiums, to apply for a refund of your EI overpayment. Send it to us with your paper-filed T4 information return or mail it separately if you have filed your return electronically.

Make this request no later than three years after the end of the year in which the EI overpayment occurred.

For more information about EI overpayments, see EI overpayment and recovering EI premiums.

Salary overpayments

If you make an overpayment of salary, wages, or other remuneration to an employee, how you correct this will often depend on the reason the employee was overpaid and the year in which the employee repaid the amount.

You may need to correct overpayments in the following situations:

Note

If you let your employee repay an overpayment in instalments, you may have to calculate a taxable interest benefit. For more information, go to Loans – interest-free and low-interest.

Employee did not perform their duties

Your employee should repay you the gross amount of the salary overpayment when all of the following conditions are met:

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

Note

If the salary overpayment is the result of a clerical, administrative, or system error, follow the instructions under Clerical, administrative, or system error.

Examples of when an employee did not perform their duties 
  • you paid your employee a maternity leave top-up amount, but she did not return to work as required under the terms of her collective agreement
  • you advanced vacation leave credits, but the employee quits working for you before earning the credits
  • you paid a signing bonus to your employee, but he did not work for the time agreed to in his employment contract

If your employee does not repay you, include the salary overpayment and the deductions withheld on the overpayment on the employee's T4 slip. No other action is required.

Even if your employee repays you in the same year or a different year, you still have to include the salary overpayment and the deduction withheld on the employee's T4 slip. You cannot adjust the slip or the payroll records to reduce the total employment income or source deductions by the amount of the repayment.

After your employee has repaid the salary or wages, you can give them a letter confirming the tax year when the overpayment was included in their income, as well as the date, the reason, and the amount of repayment you received. With that letter, the employee will be able to claim a deduction on line 22900 of their income tax and benefits return in the year the amount was repaid.

Note

Your employer's share of the Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums is not refundable. 

Example of how to report an overpayment when an employee didn't perform his duties

In September 2019, Peter became ill and could not work. You continue to pay his regular salary. In February 2020, he begins to receive payments from a wage-loss replacement plan and repays you the amount of salary he received from September 2019 to February 2020. Do not make any adjustments to his 2019 T4 slip or to his current-year pay records to reflect the amount of repayment. Instead, Peter can claim a deduction for the repayment on his 2020 income tax and benefit return by providing a copy of the letter you gave him confirming the date and the amount he repaid you and the year the amount was included in income.

Clerical, administrative, or system error

If you overpaid salary, wages, or remuneration to your employee because of a clerical, an administrative, or a system error, you may elect to have the employee repay the net amount of the salary overpayment to you. The net amount is the gross amount, less the following amounts you withheld on the salary overpayment:

  • income tax
  • Canada Pension Plan (CPP) contributions
  • employment insurance (EI) premiums 

Note

If you did not overpay the salary becayse of a clerical, an administrative, or a system error and the employee did not work, follow the instructions under Employee did not perform their duties.

If you withheld Quebec Pension Plan (QPP) contributions or Quebec Parental Insurance Plan (QPIP) premiums on the salary overpayment, see Guide TP-1015.G-V, Guide to Filing the RL-1 Slip: Employment and Other Income.

Having your employee repay the net amount of the salary overpayment

You may elect to have your employee repay the net amount of the salary overpayment, if all of the following apply:

  • the overpayment was a result of a clerical, administrative, or system error
  • no later than three years after the end of the year in which you overpaid the salary:
    • you made the election in the prescribed manner
    • the employee repaid or arranged to repay the net amount of the salary overpayment
  • you did not issue a T4 slip with the employee’s correct earnings (that is, with the salary overpayment removed)
  • your business is actively operating

The CRA may ask you to provide supporting documents to verify that you meet the conditions above.

Note

The election is made by either excluding the salary overpayment from an original T4 slip or amending a T4 slip to remove the overpayment and reducing the corresponding income tax you deducted, as well as the CPP contibutions and EI premiums you withheld and remitted (when applicable).

Before the original T4 is issued

If the employee repays you or arranges to repay the salary overpayment before you issue the original T4 slip, do not include the salary overpayment or the income tax, CPP contributions, or EI premiums withheld on the overpayment on the employee’s T4 slip.

Note

If the amount of an employee's corrected earnings are at or above the maximum annual pensionable earnings, you have to include on their T4 slip the CPP contributions withheld on the salary overpayment. Also, if an employee's corrected earnings are at or above the maximum annual insurable earnings, you have to include on their T4 slip the EI premiums withheld on the salary overpayment.

After the original T4 is issued

If you issued an original T4 slip for the year you made the salary overpayment:

  • prepare an amended T4 slip for that year
  • reduce the total employment income in box 14 by the amount of the salary overpayment
  • reduce box 22 by any income tax deducted on the salary overpayment
  • if the employee’s annual earnings were below the maximum annual pensionable earnings, reduce box 16 by the amount of CPP contributions deducted on the salary overpayment (see example 1)
  • if the employee’s earnings were above the maximum annual pensionable earnings, but are below the maximum pensionable earnings after you correct the salary overpayment, reduce box 16 by the amount of CPP contributions that corresponds with the part of the salary overpayment that is below the maximum annual pensionable earnings (see example 2)
  • if the employee’s annual earnings were below the maximum annual insurable earnings, reduce box 18 by the amount of EI premiums deducted on the salary overpayment (see example 1)
  • if the employee’s earnings were above the maximum annual insurable earnings but are below the maximum insurable earnings after you correct the salary overpayment, reduce box 18 by the amount of EI premiums that corresponds with the portion of the salary overpayment that is below the maximum annual insurable earnings (see example 2)

In these situations, you will prepare an amended T4 slip for your employee. Use the CPP, EI, and income tax deductions from the employee’s original T4 slip, but reduce the employment income in box 14 by the amount of their salary repayment. You may also have to amend the EI insurable earnings in box 24 and CPP/QPP pensionable earnings in box 26 to agree with the reduced employment income that you will report in box 14.

After the CRA receives and processes the amended T4, it will credit the income tax, CPP contributions, and EI premiums remitted on the salary overpayment made in error (including your share of CPP contributions and EI premiums) to your payroll program account. You can then reduce, by the credited amount, the next payroll remittance you send to the CRA. The credited amount will be shown on your PD7A statement of account.

Note

If the employee's corrected earnings are above the maximum annual pensionable earnings, you have to include on the T4 slip the CPP contributions withheld on the salary overpayment.

If the employee’s corrected earnings are above the maximum annual insurable earnings, you have to include on the T4 slip the EI premiums withheld on the salary overpayment.

Examples – Employee repaying the net amount of the salary overpayment
Example 1 – Annual pensionable and insurable earnings are below the maximum

In 2019, your employee earned $36,000. One year later, after you issued the original 2019 T4 slip, you discover you overpaid them by $1,000 because of a system error. From the overpayment, you had deducted income tax of $100, CPP contributions of $51, and EI premiums of $16.20.

In 2020, your employee agrees to repay the net amount of the salary overpayment. You should amend their 2019 T4 slip to reduce each of the following amounts by $1,000:

  • total employment income in box 14
  • CPP pensionable earnings in box 26
  • EI insurable earnings in box 24

You should also reduce:

  • the amount of income taxes deducted in box 22 by $100
  • the CPP contributions in box 16 by $51
  • the EI premiums in box 18 by $16.20

You can reduce your next payroll remittance to the CRA by the following amounts:

  • $100 of income tax deducted on the salary overpayment
  • $51 of CPP contributions deducted on the salary overpayment
  • $16.20 of EI premiums deducted on the salary overpayment
  • your $51 share of CPP contributions
  • your $22.68 share of EI premiums
Example 2 – Annual pensionable and insurable earnings are above the maximum

In 2019, your employee earned $60,000. One year later, after you issued the original 2019 T4 slip, you discover you overpaid them by $10,000, because of a system error. In 2020, your employee agrees to repay the net amount of the salary overpayment.

You should amend their 2019 T4 slip to reduce:

  • total employment income in box 14 by $10,000
  • CPP pensionable earnings in box 26 by $7,400 (maximum pensionable earnings of $57,400 minus corrected earnings of $50,000)
  • EI insurable earnings in box 24 by $3,100 (maximum insurable earnings of $53,100 minus corrected earnings of $50,000)

You should also reduce:

  • income taxes deducted in box 22 by $2,200 (the amount deducted on the salary overpayment of $10,000)
  • CPP contributions in box 16 by $377.40 (the $7,400 difference between the maximum pensionable earnings and the corrected earnings multiplied by the 5.10% employee CPP contribution rate)
  • EI premiums in box 18 by $50.22 (the $3,100 difference between the maximum insurable earnings and the corrected earnings multiplied by the 1.62% employee EI premium rate)

You can reduce your next payroll remittance to the CRA by the following amounts:

  • $2,200 of income tax deducted on the salary overpayment
  • $377.40 of CPP contributions deducted on the salary overpayment
  • $50.22 of EI premiums deducted on the salary overpayment
  • your $377.40 share of CPP contributions
  • your $70.31 share of EI premiums

Having your employee repay the gross amount of the salary overpayment

If you do not elect to have your employee repay the net amount of the salary overpayment or you do not meet the conditions noted above, the employee must repay you the gross amount of the salary overpayment.

In this situation, prepare an amended T4 slip for your employee. Use the CPP contributions, EI premiums, and income tax deductions from the employee’s original T4 slip but reduce the employment income in box 14 by the amount of the salary overpayment. You may also have to amend the EI insurable earnings in box 24 and CPP/QPP pensionable earnings in box 26 to agree with the reduced employment income you will report in box 14.

If you had to report the CPP contributions and EI premiums withheld on the salary overpayment on the employee’s T4 slip, you can ask for a refund of your share. Do this by filling out Form PD24, Application for a Refund of Overdeducted CPP Contributions or EI Premiums, and sending it to the CRA.

You can ask for a refund of CPP contributions up to four years after the end of the year in which you deducted them. For EI premiums, you can ask for a refund up to three years after the end of the year you deducted them in.

Example – Employee repaying the gross amount of the salary overpayment

In 2019, your employee earned $36,000. One year after you issued the original T4 slip, you discover you overpaid them by $500 because of a calculation error. You do not elect to have them repay the net amount, and they agree to repay you the gross amount in 2020. You should amend their 2019 T4 slip to reduce the total employment income in box 14, as well as the CPP pensionable and EI insurable earnings in boxes 26 and 24 by $500. Do not adjust the amount of CPP contributions, EI premiums, or income tax deducted in boxes 16, 18, and 22.

You can then ask for a refund of your share of CPP contributions and EI premiums by filling out Form PD24 and sending it to the CRA. The employee will not be able to claim a deduction from income in the 2020 tax year for the repayment, but they can ask the CRA to adjust their 2019 income tax and benefit return.

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