How to Avoid the Business Payroll Trust Examination: All you really need to know about CPP, EI, & Income Tax Payroll Remittances
The objective of the Trust Accounts Examination (TAE) is to maintain the integrity of the tax system with respect to the reporting of employment income and taxable benefits, the withholding and remitting of payroll related amounts, and the proper characterization of workers, through a combination of taxpayer education and responsible enforcement.
Employers have responsibilities they must fulfill. Employers who do not comply with the payroll requirements may have to pay a penalty for the deductions not withheld and face other consequences.
Employment status directly affects a worker’s entitlement to EI benefits under the Employment Insurance Act. It can also affect how a worker is treated under other legislation such as the Canada Pension Plan and the Income Tax Act. Because of this, it is important that employers know whether a worker is an employee or a self-employed individual.
The facts of the working relationship as a whole decide the employment status. However, the CRA generally considers you 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
CPP, EI, and Income Tax Payroll Remittances
The employer is responsible for deducting, remitting, and reporting payroll deductions. These deductions include CPP contributions, EI premiums, income tax, and taxable benefits and allowances. These amounts are held in trust until they are remitted to the Receiver General.
The steps that an employer must fulfill to meet his payroll tax obligations are the following:
- Find out if you need to make payroll deductions;
- Set up a new employee and collect SIN number;
- Open a payroll program with the CRA
- Calculate deductions and contributions;
- Pay/Remit CPP, EI, and income tax source deductions;
- Pay/Remit employer’s share of CPP contributions and EI premiums
- Send payroll information return (T4/T5) on or before the last day of February of the following calendar year;
- Prepare Record of Employment when an employee stops working or has an interruption of earning;
- Keep paper and electronic records for at least 6 years.
While there is much to be said about each of the steps above, this article will focus on what employer’s need to know about CPP contributions, EI deductions, and Income Tax source deductions.
Canada Pension Plan (CPP) Deductions
The Canada Pension Plan (CPP) provides contributors and their families with partial replacement of earnings in the case of retirement, disability, or death. All employed or self-employed individuals who work in Canada outside of Quebec contributes to the CPP. In Quebec, employees and self employed individuals pay into the Quebec Pension Plan (QPP).
Employers are responsible to deduct CPP contributions from their employees’ pensionable earnings. This includes salary, wages, bonuses, commissions, and other remuneration. Employers must also contribute an amount equal to the CPP contributions were deducted from employees’ remuneration.
Each year, the CRA determines the following:
- The maximum pensionable earnings from which you deduct CPP ($57,400 for 2019)
- The year’s basic exemption, which is a base amount from which you do not deduct CPP contributions ($3,500 for 2019)
- The rate you use to calculate the amount of CPP contributions to deduct from your employees’ remuneration (5.10% for 2019)
An employer stops deducting CPP contributions when the employee’s annual earnings reach the maximum pensionable earnings or the maximum employee contribution for the year ($2,749.90 for 2019).
Since Canada’s Department of Finance has determined through its 2012 study that families are at risk of under-saving for retirement, an enhanced CPP contribution rate has been enacted as of January 1, 2019. This enhanced CPP contribution rate for employers and employees has increased from 4.95% to 5.10%. See chart below for enhanced CPP rates from 2019 to 2023.
Once fully in place, the CPP enhancement will increase the maximum CPP retirement benefit by about 50 per cent, helping to significantly reduce families’ risk of not saving enough for retirement
For more about CPP contribution rates, maximums, and exemptions here:
|Year||Employee/Employer increase||Self-employed increase||Employer/Employee Rate||Self-Employed Rate|
An employer must deduct employment insurance (EI) premiums from each dollar of insurable earnings up to the yearly maximum. This includes salary, wages, bonuses, commissions, cash advances, taxable benefits and allowances, and other remuneration.
Employers who have deducted the maximum for the year do not deduct any more premiums, even though the excess remuneration is still considered insurable. For 2019, the maximum annual insurable earnings are $53,100. This means that an insured worker will pay EI premiums in 2019 on insured earnings up to $53,100 compared to the 2018 limit of $51,700.
Each year, the CRA determines:
- The maximum annual insurable earnings from which you deduct EI($53,100 for 2019)
- A premium rate that you use to calculate the amount to deduct from your employees (1.62% for 2019)
In 2019, the employee EI premium rate will be $1.62 per $100. This premium rate and the maximum insurable earnings increase means that insured workers will pay a maximum annual EI premium in 2019 of $860.22 compared with $858.22 in 2018. Correspondingly, beginning in January 2019, the maximum weekly EI benefit rate will increase from $547 to $562 per week.
Employer’s EI Contribution
Employers must contribute 1.4 times the amount of the EI premiums that they have deducted from your employee’s remuneration.
Deducting Income Tax
Employers are responsible for deducting income tax from the remuneration or other income paid to employees. There is no age limit for deducting income tax and there is no employer contribution required.
Employees can choose to have more tax deducted from the remuneration they receive in a year. This is beneficial to part time employees, who can avoid having to pay a large amount of tax when they file their income tax and benefit returns, especially if they have worked part-time for different employers during the year.
Income tax at source is deducted from salary, wages, bonuses, commissions, overtime, wages in lieu of termination notice, or other remuneration (including payroll advances or earnings advances, benefits and allowance, stock option benefits, honouriums, trips, gifts, director and management fees).
Amounts from which tax is deducted at source can be reduced by making contributions to registered pension plans (RPP) and/or registered retirement savings plan (RRSP) contributions, paying union dues, or living in a prescribed zone.
Calculating Payroll Deductions, CPP, and EI
The Payroll Deductions Tables helps you calculate CPP contributions, EI premiums, and federal and provincial income tax.
The Payroll Deductions Online Calculator can be used to calculate payroll deductions for all provinces and territories except Quebec for the most common pay periods, such as weekly or bi weekly.
Alternatively, you can use the following table or formula.
The following payroll deductions tables can be used to calculate -CPP, EI, and income tax deductions for Ontario-effective January 1, 2019, for common reporting pay periods.
For tables for all other provinces, click here :
Payroll Deductions Formulas, effective January 1, 2019, can be found here:
CRA Pensionable and Insurable Earnings Review (PIER)
Each year, the CRA checks the calculations an employer makes on the T4 slips that were filed on the T4 Summary to ensure that the pensionable and insurable earnings reported correspond to the deductions that were withheld and remitted.
The CRA verifies calculations so that your employees or their beneficiaries will receive the proper:
- CPP benefits if the employees retire, become disabled, or die;
- EI benefits if the employees become unemployed, take maternity, parental, adoption, or compassionate care leave, leave to care for or support their critically ill or injured child, or are injured, ill, or on leave without pay;
The CRA checks the calculations by matching the pensionable and insurable earnings reported with the required CPP contributions or EI premiums. The CRA then compares these required amounts with the CPP contributions and EI premiums reported on the T4 slips.
If there is a deficiency between the CPP contributions or EI premiums required and those the employer reported, the CRA will print the figures on a pensionable and insurable earnings review (PIER) listing.
The CRA will send the employer the listing showing the name of the affected employees, the figures used in the calculations, and any balance due.
Employers are responsible for remitting the balance due, including their employee’s share. If a payment or a reply is not received by the reply date noted on the PIER report, the CRA may issue a notice of assessment that includes applicable penalties or interest, or both.
Penalties, Interest, and Prosecution
There are penalties, interest and potential prosecution for failing to deduct or under-deduct CPP, EI, and income tax from your employee’s payroll. The employer is responsible to pay these amounts, whether or not he/she can recover the amounts from the employee.
In addition to having to pay the principal amount, the employer will be assessed for penalties and interest. As soon as the employer realizes that the proper amount of income tax was not deducted, he should let the employee know, who can either pay the amount when they file their income tax return or ask the employer to deduct more income tax at source.
Employers can recover the employee’s premiums from later payments to the employee for up to 12 months of outstanding payments.
Penalties for Failure to Deduct
The CRA can apply a penalty of 10% of the amount of CPP, EI, and income tax that the employer did not deduct. If an employer is assessed for penalties more than once in a calendar year, the CRA will apply a 20% penalty to subsequent penalties if they were made knowingly or under circumstances of gross negligence.
Penalties for Failure to Remit or Remitting Late
The employer is responsible to remit income tax, CPP and EI deductions from the employer’s income as well his own share to the Receiver General for Canada.
If the employer has failed to do so, the CRA will apply the penalty to the amount that was not remitted that is more than $500. However, if the failure to remit was made knowingly or under circumstances of gross negligence, then the penalty will be applied to the whole amount.
The penalties are as follows:
- 3% if the amount is one to three days late;
- 5% if it is four or five days late;
- 7% if it is six or seven days late;
- 10% if it is more than seven days late, or if no amount is remitted.
Failure to remit more than once in a calendar year will be assessed a 20% penalty.
Interest is assessed on both the amounts that were remitted late or not at all and on unpaid penalties. The interest rate, which is set every three months, is compounded daily.
If an employer does not comply with the deducting, remitting, and reporting requirements, he/she may be prosecuted with a fine from $1,000 to $25,000 and/or imprisonment for a term of up to 12 months.
If You Disagree with the CRA’s Ruling:
The CRA will let you know its findings related to what you owe in CPP contribution, EI premiums, and income tax in a notice of assessment or ruling letter. Business owners who do not agree with the CRA’s conclusions have 90 days after the date of the notice of assessment or ruling letter to file an appeal. While this can be done directly by the employer though their payroll program account, it is advisable to hire a tax lawyer who will explain why the employer does not agree with the ruling or assessment, the underlying basis in law and provide all the relevant facts, documents and submissions.
In addition to an appeal, a tax lawyer may recommend tax relief programs that can help to waive interest and penalties. These include the Tax Payer Relief Program to help taxpayers who are unable to meet their tax obligations due to circumstances beyond their control and the Voluntary Disclosure Program which help taxpayers who come forward voluntarily before a notice of assessment is issued.
Contact Kalfa Law to determine which is the best way to proceed if you find that you are facing a trust examination of your payroll deductions and remittances.
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-Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law 2019