Report taxable benefits throughout the year:
Not reporting taxable benefits on a per-pay-period basis (or as they are enjoyed) could result in late remittances, fines and penalties, and year-end adjustments. According to Canada’s Income Tax Act, benefits must be included in income as enjoyed or received. Therefore, taxable benefits and allowances provided by an employer are subject to source deductions on a pay period basis.
One of the more common taxable benefits that does not meet compliance requirements involves employer vehicles provided to employees that are not reported during the year, or mileage reimbursements paid out through accounts payable (which can often be taxable when not using the reasonable rates). There is a prevailing belief that reporting a benefit received throughout the year (such as an automobile taxable benefit) only needs to be updated through payroll at the end of the year if, for instance, the employee maxes out on Canada Pension Plan (CPP) Pension Plan contributions part way through the year.
However, this belief is completely untrue. The employer is required to attribute the per-pay-period value of the taxable benefit in each pay period in order to calculate the applicable CPP and income tax due on the benefit. In the event of an audit, an organization failing to do this may be subject to fines and penalties because the CPP/QPP would be considered as a late remittance.
Best Practice: Implement an internal policy to ensure transactions related to taxable benefits go through payroll first. At the very least, transactions should be run by payroll in advance to confirm reporting requirements.
Manual cheques and/or off-cycle bank transfers must be communicated to the payroll department immediately:
Manual cheques and any type of off-cycle payments need to be processed into the payroll system immediately. When this does not happen, it usually results in problems for the payroll department at year-end. Unfortunately, some payments are communicated to payroll after the year has finished. At this point, there is a significant risk that the employer will receive a Pensionable and Insurable Earnings Review (PIER), due to deficiencies in CPP and EI.
In addition to statutory deductions, payroll also has to manually update the payroll register to include these payments so that they report to the employee’s T4. These earnings also could affect additional contributions such as Workers’ Compensation premiums.
Best Practice: Implement an internal policy requiring communication between payroll and any parties outside of payroll who issue these types of payments to employees. Ensure that such communication happens within a few days of the payments. Communication is the most important element here. Lack of communication results in extra time required for the payroll team to handle possible late remittances, penalties and interest, PIER reports, year-end adjusting, T4, and other year-end reporting adjustments.
Reporting fees for services paid to self-employed individuals:
Fees for services paid to self-employed individuals are often handled through accounts payable. However, preparation of tax forms (T4As or T5018 for the construction industry) is usually handled by the payroll department. Internal communication is therefore crucial, as all parties involved must be aware of their respective responsibilities. For example, will accounts payable issue the payments and provide payroll with reporting information? Will accounts payable handle issuing payments and issuing tax forms? Will payroll be required to issue the payments and tax forms?
Best Practice: Regularly touch base with accounts payable to ensure that the implications of payments to self-employed individuals are considered. Furthermore, verify that the status of the employee-employer relationship is being considered to ensure that there are no potential compliance pitfalls in the treatment of employees and independent contractors.
Workers’ compensation reporting and reconciling:
From a workers’ compensation perspective, not all provinces and territories carry the same deadline and reporting requirements or maximum assessable earnings, nor do they recognize insurable earnings in the same way. As a result, organizations that have employees in more than one jurisdiction in Canada need to take extra care to accurately calculate Workers’ Compensation Board premiums and perform year-end reconciliation.
Best Practice: Create reporting for each of the provinces and territories in which the organization has incorrect payrolls. Based on the types of earnings that are used in the specific province, they may be assessable in one province but not the other. Monitoring the maximum assessable earnings in each jurisdiction is easier if each province or territory is logged separately. Most payroll software or service providers are capable of generating custom-built reports that will accommodate the variability, and in the event that an in-house system is used, the time spent on creating an in-house report is well worth the investment.
Keeping on top of year-end reporting requirements is essential, and a simple chart created internally that includes all of the applicable provinces and territories, deadlines, and maximum assessable earnings will help keep every professional on track. Another great tool to help facilitate smooth year-end reporting is the CPA’s annual Legislative Rates Sheet, available on the CPA website for members at the end of 2016.
Remember, it is always a best practice to keep year-end top-of-mind year round. Treat the year-end process like an ongoing evaluation of how payroll is processed throughout the year. Do not wait until after the end of the year to look for errors that might have occurred throughout the year. Perform regular audits throughout the year to ensure that earnings, taxable benefits, and deductions are being properly reported in the correct boxes of the tax forms.
Employers must remember that they are responsible for compliance, even if they are using the services of a payroll provider. A common misconception is that a payroll service provider will ensure proper reporting and payroll compliance, when in fact, this responsibility remains with the employer, regardless of the outsourcing arrangement. Visit payroll.ca for more information and the most up-to-date payroll compliance resources to support you at year-end – and throughout the year!
These best practices come from Dialogue Magazine, a publication for members of the Canadian Payroll Association. Find out more about their member benefits at payroll.ca