The Ultimate Year End T4 Guide A publication by PaySavvy
Know someone who might need help with T4 s? Share this ebook! INTRODUCTION It s not quite the most wonderful time of year. While most people are out avoiding fruitcake or hanging stockings by the chimney with care, anyone involved in the payroll process, from payroll professionals to CFOS, know this as the dreaded T4 season and the ugly spectre of the CRA s February 28 deadline looms on the horizon. Navigating the entire T4 process might seem daunting, but it s only difficult if you neglect some key steps. The best way to get through it all intact is with a little bit of preparation. This guide is meant principally for payroll professionals and anyone involved in the distribution of T4s, but we hope it serves as a thorough step-by-step tutorial which could help anyone get up to speed in no time. As a bonus, we ve included a PIER that you can run in Excel to make sure you re on track (no idea what PIER means? Read on!), and find any mistakes you might have made before the CRA. Note: Throughout the guide, we ll often speak of T4s when we do, we re also talking about T4As. Parts of this guide will reference either form specifically, but the process for both remains largely the same.
What is the T4 slip? The T4 slip is a document that lists how much an employee was paid and how much money was withheld on their behalf and remitted to the CRA. It simultaneously allows an employee to complete their tax return and allows the CRA to know how much money they received (and should have paid). In short, it offers a neat summary of the employee s life at the company for the year, and makes sure that both the employee and the CRA are on the same page for when it comes to tax filing time. What gets noted on a T4 slip? In general, most taxable income, benefits, allowances, deductions, and pension plan contributions are all included, each placed in a neat little box for the CRA s computers to analyze. While you typically issue T4s to employees, there are a few nuances to keep in mind. If, for instance, you pay an employee more than $500 in a year or you collect (or are supposed to collect) CPP/QPP contributions, EI premiums, or income tax from the remuneration, you must issue a T4. As most remuneration is EI insurable, you usually need to issue a T4 if you pay an employee. An exception to this rule would be if you, as an employer, were paying an EI-exempt employee (such as a significant shareholder or family member) a nominal EMPLOYER / EMPLOYEE RELATIONSHIPS It s important to consider if you re paying an employee or a contractor. In general, employees work under the control or supervision of an employer, and have little financial risk at stake. If you are paying an employee, you are obligated to collect and responsible to remit EI, CPP, and Income Tax and remit it on their behalf. 3
amount that was either under the prorated CPP exemption ($3500 a year) or was CPP exempt. But these cases are few and far between. Since most income is insurable, in the vast majority of cases if you pay an employee you must deduct EI and therefore must submit a T4. There are a few instances where you d need to issue a T4 or T4A even if you didn t pay the employee a penny. If you provide current employees with taxable group term life insurance benefits, you must issue a T4. If you provide this to former or retired employees, you must issue a T4A. And if you provide any current, former, or non-resident employee with security options, you must issue a T4. Additionally, you must issue a T4 if you provide current employees with taxable group term life insurance benefits or provide current, former, or non-resident employees with security options. Another thing to remember is that the income you report on a T4 slip is income for the year during which it was paid, and not for when the services were performed or rendered. So, if an employee works in late December and the hours for that work are paid in early January, that income needs to be reported on the T4 for the subsequent year. This is especially important to remember because if you need to make any pay corrections, it is best to make them before the start of the next year. Your deadline is quite literally a minute before New Year s Day. So, if there are 2014 bonuses owing, make sure they get paid out in December! Finally, the T4 is issued on a province by province basis, which means if a single employee worked in multiple provinces, that employee should receive separate T4s for each province in which they worked. The $500 rule above is based on an employee basis, which means that you need to include total income from all T4s issued on behalf of a single employee. 4
What is the T4A slip? The T4A is generally used in a lot of edge-cases. Most employees won t receive T4As (though this obviously varies from industry to industry). Generally, you issue a T4A if you pay any of the following types of income, and the combined amount is over $500 (or you withheld income tax from any payment):» Pension or superannuation;» Lump-sum payments;» Self-employed commissions;» Annuities;» Patronage allocations;» Registered education savings plan (RESP) accumulated income payments;» Group term life insurance taxable benefits for former employees or retirees, regardless of the $500 threshold;» Tax-Free Savings Account (TFSA) taxable amounts paid to a recipient where the amount for the year is greater than $50;» Fees or other amounts or services; or» Other income, such as research grants, wage loss replacement plan payments where you were not required to withhold CPP contributions or EI premiums, death benefits, or certain benefits paid to partnerships or shareholders. 5
Generally, the biggest use-case for T4As is for the paying of contractors, often noted in Box 020 ( Self-employed commissions. ) In the past, long-held wisdom had it that T4As were in fact optional. The reasoning for this was that the employer was not withholding funds for the CRA, and that the payee was responsible for paying their own income tax or applicable CPP / EI contributions. Since the payee was responsible, it was reasoned, whether or not they did this was the concern of the CRA and the payee, and not the payer. However, not only is it a requirement to issue T4As when necessary, the CRA has indicated they will look at T4As more closely during their payroll audits, especially when questions arise concerning the nature of an employee / employer relationship (and whether or not, in the case of some contractors, that exists). It s probably best to err on the side of caution and include any of the types of payments indicated above on a T4A. 6
Commonly used boxes on the T4 The T4 can be a mess of numbers, but we ll hit the most commonly used boxes here below. BOX 14 This is the big one. This is probably the single most important box on the T4 for most employees and the CRA. Box 14 lists an employee s taxable income for the year. What is counted as taxable income? Good question. Taxable income (noted in box 14) includes:» Salary and wages (including pay in lieu or termination notice, but excluding retiring allowances / severance pay);» Bonuses;» Vacation pay;» Tips and gratuities;» Honorariums;» Director s fees; 7
» Management fees;» Executor s and administrator s fees received to administer an estate;» Director s fees paid to non-resident directors for service rendered in Canada (i.e., a director who receives director fees but does not attend any meetings or perform any duties within Canada);» Commissions, taxable allowances, the value of any taxable benefits (including GST/HST or other taxes), and any other payments made to employees during the year (also noted in the Other Information section on a slip);» Payments made from a wage loss replacement program (WLRP) if you had to deduct CPP contributions or EI premiums;» Amounts paid under a supplementary unemployment benefit plan (SUBP), such as employer-paid maternity, parental, and compassionate care top-up amounts, even if they aren t registered with Service Canada;» Payments made out of an employee benefit plan (EBP) and amounts allocated by a trustee under an employee trust; or» Amounts pai d to emergency volunteers (i.e. firefighters, ambulance technicians) that are greater than $1000 (amounts less need not be included). If the individual was employed (i.e. not a volunteer), the whole amount is taxable and should be included. For volunteer firefighters, the exempt amount (up to $1000) is included in Other information using code 87. 8
BOX 16/17 These boxes indicate an employee s CPP or QPP contributions. The or is quite important; if an employee has both CPP and QPP contributions, this necessarily means they worked in two different provinces (one of them being Quebec), which in turn means they need a separate amount for each province. No employee should have both boxes filled out. BOX 18 Box 18 includes the employee s EI contributions that their employer remitted on their behalf. This amount will generally be 1.88% of Box 24. BOX 22 WATCH OUT! Most T4 hiccups happen because of boxes relating to EI or CPP. In general, always remember you must indicate what should have happened. If you were supposed to withhold a certain amount on employee s behalf but didn t, you should still report what you were supposed to withhold. The reason for this is that the CRA will figure it out and let you know in their PIER report (which we cover later). The trick to getting ahead with your T4s is to find your mistakes before the CRA! Box 22 indicates any amounts you have remitted on behalf of an employee to the CRA for income tax. BOX 28 Box 28 indicates CPP/QPP, EI, and PPIP exemptions. It is critical that this box be filled out correctly, or else it will create all sorts of headaches for employers and the CRA. If this box is not checked, an employee s box 14 is greater than 0, and box 24 and 26 are 0, this may result in problems (see the PIER, mentioned below). Note that you only indicate an exemption if the employee is exempt for the entire operating year. For instance, if an employee turns 70 mid-year, you would not indicate CPP exempt. You would indicate it in a subsequent year if they were CPP exempt for the entire year. 9
BOXES 24 AND 26 These two boxes are incredibly important. They indicate EI insurable earnings and CPP pensionable earnings, respectively. Both boxes have caps. Box 24 caps at $48,600 and box 26 caps at $52,500 (for 2014). These boxes cannot be higher than their caps, or else you ve made a mistake. In general, box 24 should be equal to box 14, minus any non-ei insurable taxable benefits. Box 26 must be equal to box 14. Again, if these amounts are higher than the caps mentioned above, then the amounts should be lowered to match the caps. The CRA loves these boxes, because they make it pretty easy for them to run their Pensionable and Insurable Earnings Review. In general, an employer is responsible for EI and CPP, which means that if you neglect to remit or collect these amounts, they ll want to get them from you. The employee will be responsible for any tax shortage, but you ll be on the hook for EI or CPP. CPP OR EI EXEMPT? If an employee is exempt, the CRA doesn t like seeing amounts in boxes 24 and 26. If an employee is CPP or EI exempt, they cannot have insurable or pensionable earnings. 10
BOX 40 Box 40 is one of the other big boxes on the T4, only because it tends to throw a wrench into the works. Firstly, Box 40 lists any taxable benefits paid to an employee. This would include things like transit passes, parking benefits, automobile or cell phone allowances, and any other benefits along that vein. These amounts should be added together and placed in box 40. This amount must also be included in Box 14, 24, and 26 as appropriate. Because some taxable benefits are not EI insurable, this means in some cases you won t be adding all of your taxable benefits to box 24 (however, as all taxable benefits are CPP pensionable, these amounts should be added to box 26). OTHER INFORMATION Every T4 has a section at the bottom of the slip called Other Information. Boxes not listed in the main part of the T4 get entered here, including Box 40 and 42. This means that these boxes need to be manually entered on the T4 itself. Make sure you don t double-count taxable benefits in box 14! Box 14 is basically the sum of employment income and taxable benefits whereas box 40 is the sum of taxable benefits. If you subtract box 40 from box 14, you should wind up at whatever remuneration you paid your employees. BOX 42 Box 42 lists any employment commissions paid to an employee. These are primarily helpful for an employee when filing their taxes. As with box 40, these amounts should be included on boxes 14, 24, and 26 as appropriate. 11
The Pensionable and Insurable Earnings Review (PIER) The CRA has a pretty good method for figuring out if you ve withheld enough money for CPP and EI (as discussed earlier, they ll deal with the employee directly for any tax overage/ shortage). They do this with the Pensionable and Insurable Earnings Review, or the PIER. These are obviously a nuisance to deal with, so the best thing you can do before submitting your T4s is to run your own PIER. Luckily, this is easy to do and if your payroll provider doesn t do it for you, we ve included a PIER you can run in Excel. We ve plugged in a few dummy employees, but feel free to remove them and add your own. There s no functional limit to the number of employees, either. EI / CPP EXEMPT? If an employee is EI or CPP exempt, their insurable or pensionable earnings (as appropriate) MUST be equal to 0. Entering a number greater than 0 will confuse the CRA. 12
Let s start with the Insurable part of the Pensionable and Insurable Earnings Review. For calculating insurable earnings, it is as simple as multiplying insurable earnings by 1.88%. There is no exemption for insurable earnings like there is for CPP, so this is easy. Calculating Pensionable Earnings is a little more difficult. Everyone is entitled to a $3500 annual exemption. This is then prorated across the number of pay periods the employee works, or number of months the employee is not CPPexempt. If an employee only works for half the year, they only receive half the exemption. So you ll need to know how many pay periods an employee worked. To calculate CPP, take the employee s box 26, and subtract the annual exemption (3500) by the number of pay periods in the year, multiplied by the number of pay periods the employee worked. You then multiply that number by 4.95% to arrive at their CPP for the year. This is how the CRA does it, but watch out, as it can cause some issues. PRORATING THE CPP EXEMPTION Everyone gets a $3500 exemption for the year, but if an employee works less than the full year, they re only entitled to a prorated portion of that. If an employee becomes CPP eligible or exempt during the year, you need to prorate it by the number of months they were actually eligible. For a monthly employee, the CPP exemption is 3500 / 12, for $291.67. However, if an employee makes less than the exemption in a pay period, this can result in a false positive or other errors. For instance, if an employee makes $200 and has the monthly exemption of $291.67, their CPP for that period would be (200-291.67)*.0495, which is -4.54 and is obviously incorrect! If you carry this through the year, it can show a possible overpayment. Any possible issues should be investigated at a pay period by pay period level. Using the above two formulas, you can quickly identify any potentially problematic employees. If it s before December 31st, you can often easily correct these errors by deducting or paying back extra EI or CPP to employees -- if they re legitimate errors. You can, of course, submit T4s with these errors and let the CRA sort it out; in the event of an underpayment, you ll just pay them the missing money, and in the event of an overpayment, they d pay back the employee and refund the money to you. 13
The T4 Summary The T4 summary is basically a summary of anything included on employee T4s. They re issued on a payroll account basis, which means if you have multiple payroll accounts you should have multiple T4 summaries. The T4 Summary has a set of lines which generally correspond with T4 boxes. We ll split them into employee lines and employer lines to make things easier. EMPLOYEE LINES In general, you ll be summing information from the employee T4s to come to these totals; hopefully you ve already done that work, which will make this a breeze. The employee lines and their corresponding T4 boxes are as follows: T4 Summary Line Number T4 Box Number Line 14 Box 14 Line 16 Box 16 Line 18 Box 18 Line 20 Box 20 Line 22 Box 22 Line 52 Box 52 In order to complete these T4 Summary lines, simply add up the corresponding box from your employee T4s. 14
EMPLOYER LINES: These lines all include information that you don t include on the employee T4s, so it might take a little digging around to get. The lines are: T4 Summary Line Details Line 19 Employer s EI Premiums This must be equal to line 18 (employee EI premiums) multiplied by your EI rate (generally 1.4). Line 27 Employer s CPP Premiums This must be equal to line 16 (employee CPP premiums). Lines 64 & 75 Canadian-controlled private corporations or unincorporated employers These fields should be the SIN of any proprietors or principal owners. Lines 76 & 78 Person to contact about this return These fields should give the CRA a contact person if the CRA requires clarification on the T4 Summary. Line 80 Total Deductions Reported This is the sum of lines 16, 27, 18, 19, and 22. Basically, it s the sum of all employee and employer contributions to CPP, EI, or income tax. 15
Line 82 Minus: remittances This is the amount you remitted for the year under this payroll account number. Note that if you have remittances due in January, you should remit that money as usual and not with your T4 return. Difference Subtract line 82 and 80 as above and indicate the difference here. If there is no difference, leave the below lines (84 and 86 below) blank. Line 84 Overpayment If the amount on line 82 is greater than line 80, enter the difference on line 84 and include a note indicating the reason for the difference. The CRA can transfer this amount to another account, another year, or issue a payment to you. Line 86 Balance Due If the amount on line 80 is greater than line 82, enter the difference here. Line 88 Total number of T4 slips filed Enter the total number of T4s, included with the summary. One thing to remember is that an overpayment is not necessarily great; the CRA really wants to know why you paid them too much (and why they have to pay you money!) Additionally, as noted in line 82 above, if you have remittances due in January for pay in December, that amount should be included in funds you ve remitted. If you don t include this and just attribute it as a Balance Due, you ll certainly owe interest on that amount. Finally, a quick and dirty tip is that your remittances should roughly total 30% of box 14. There will always be outliers, but this quick and dirty tip can let you know if you re on-track. 16
Distribution Ah, the easy part! There s a few methods for distributing T4s; you obviously need to submit a copy, along with the summary, to the CRA, but getting them to the employee is slightly more nebulous. Basically, you must mail a T4 to an employee, unless you have their explicit permission for them to access their T4 via a web portal or via e-mail. This means that if you are going the paperless route, it is imperative you have an employee s written (either physical or electronic) permission in order for them to receive their T4 electronically. Otherwise, the best way to get a T4 to an employee is via mail, by February 28 (and not a day later!) 17
In Closing Processing your T4s can be a huge pain. Year-end is always difficult, and with so many stakeholders and little boxes and lines on hard-to-read forms, the room for error is huge. As we ve explained throughout, one of the major keys to keeping ahead of it all is with preparation, along with a good dose of prevention by making sure to catch any errors you may have made before the tax man does. Fortunately, the process is largely one of balancing numbers, and there s a number of ways to add everything up. We have a PIER for you to use, and this can catch the vast majority of mistakes and make sure that you don t owe the CRA any money (or if you do, allow you to take corrective action before they get upset about it!). The vast majority of T4-filing issues have to do with the PIER, so tackling this early on can save a ton of heartache. Finally, throughout the guide we ve recommended an honest and frank approach. The CRA has a ton of tools at its disposal, and the last thing you ever want is a payroll audit because of a missed number here or there. By using our PIER and following payroll best practices, you can keep on the CRA s good side and get back to doing what you and your business do best. 18
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