Question

The payroll Manager, Dianne Brown, discovered that error was made in the source deduction remittance sent to the CRA last month. she has sent you an email asking for an explanation on how this error occurred and how it can be correctd. She also wants you to provide suggestions on what can be done to prevent errors from happening in the future. Send an e-mail rplying to Ms.Dianne with the information she requested.you can choose whether the error Ms.Dianne discovered was an overpayment or an underpayment.

Answer 1

The Canada Revenue Agency is serious about source deductions. The late payment penalties are severe, and if you or your clients remit the wrong amount, it’s important to know how to correct these errors.

Source deductions consist of

Employment Insurance premiums, Canada Pension Plan contributions, and income taxes withheld from employee’s paycheques as well as the employer amounts for EI and CPP.

· If you remit too much money, reduce the next remittance amount accordingly. If the over-remittance is from a previous tax year, request a refund online using the CRA’s Represent a Client service, or instruct your client to request a refund using My Business Account. You can also request a refund through the mail by attaching a note with your client’s information return or T4 slips.

· If you realize you or a client has remitted less than the amount due,

you need to take care of those errors quickly.

CRA charges Penalty for failure to remit and remitting late

We can assess a penalty when either of the following applies:

• you deduct the amounts, but do not send them
• you deduct the amounts, but send them late

Payments made on the due date but not at a financial institution can be charged a penalty of 3% of the amount due. For more information.

When the due date falls on a Saturday, a Sunday, or a public holiday recognized by the Canada Revenue Agency, we consider your payment to be on time if we receive it on the next business day.

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

Generally these penalty to the part of the amount you failed to remit that is more than $500. However, will apply the penalty to the total amount if the failure was made knowingly or under circumstances of gross negligence.

In addition, if this penalty assessed more than once in a calendar year, assess a 20% penalty on the second or later failures if they were made knowingly or under circumstances of gross negligence.

Everyone makes mistakes, and that applies to remitting source deductions. If you or a client overpays, it’s easy to arrange a credit or refund from the CRA. If you underpay, make a payment as quickly as possible to correct the error and avoid penalties.

common payroll mistakes include;

· miscalculating taxable employment income

· neglecting to report taxable employment benefits in the period in which they relate and failing to remit source deductions on time.

· Not remitting on time

· Paying employees like contractors

· Not recording taxable benefits

· Arbitrarily deducting money

Employers can miscalculate taxable income ;-

when they overlook certain taxable benefits for an employee. For example certain personal and living expenses paid by the employer need to be taxed as income. When an employee is provided free or subsidized housing the employee must pay taxes on the difference between the FMV (Fair Market Value) and the amount charged to the employee. Other areas employers should pay close attention to are amounts other than base salary (Commissions, bonus, gratuities, and vacation pay etc.).

employers report taxable benefits only at the end of the year, the employees can face income tax liabilities when they file their personal taxes. Not to mention, the non-compliance penalties and subsequent audits from the CRA (Canada Revenue Agency) and RQ (Revenu Quebec) that the employer could face. If employers schedule the applicable source deduction remittances according to the appropriate payroll schedule, then these liabilities and penalties can be avoided.

Not remitting on time

Not making your payroll remittances to CRA on time will definitely result in penalized. When it comes to payroll deductions CRA considers you to be holding that money in trust on behalf of the government. You aren’t remitting YOUR money, you’re remitting THEIR money.

Paying employees like contractors

Paying your employees as if they were contractors will result in outstanding payroll deductions, penalties and interest if your company is ever audited by CRA. If CRA scrutinizes the nature of your relationship and determines that it is an employer/employee relationship rather than a contractor/subcontractor relationship you could end up being liable for CPP and EI owing on whatever amounts were paid to that employee.

In evaluating whether someone is an employee or a subcontractor CRA applies a series of tests to the relationship and the answers are indicative of the nature of the relationship. so that you may know how they make this decision ahead of time.

Solution: Talk to CPA about the difference between employees and contractors, and make sure that your contractors are actually contractors. A conversation up front can save thousands of dollars in payments to CRA later.

Not recording taxable benefits

When CRA audits the payroll of a company they often examine the taxable benefits that employees receive from their employer. A benefit is:

- A reimbursement of personal expenses;
- Free use of property, goods, or services owned by business           

- An allowance paid to an employee.

So a vehicle allowance, or a reimbursement for public transit passes, or the use of your company’s Winnipeg Jets tickets are all considered a benefit. The difficult part is determining whether or not a benefit is a taxable benefit.

Including taxable benefits on an employees T4 slip at the end of the year is important because CRA will likely fine you as the employer for under-reporting your employee’s income, and make that employee pay additional taxes.

Solution: Talk to CPA about whether the benefits that you provide to your employees are taxable benefits. Make sure to include any taxable benefits provided in your employees income for the year.

Arbitrarily deducting money

If you are unsure of how much to withhold and remit from an employees paycheque don't risk estimating the amount. If you overpay or under deduct from an employee you are responsible for the shortfall in the remittance to CRA.

Solution: Contact a payroll provider to ensure that you are deducting and remitting. You can also calculate the amount to remit using CRA's free payroll deduction online calculator

Employers can incur different penalties ranging from 3% to 15% when they fail to remit deductions by the prescribed deadlines. These deadlines are determined by the government depending on the monthly average withholding amount from two calendar years ago.

As a best practice, payroll administrators and/or the accounting department need to create payroll schedules in preparation for the next year, and plan ahead for statutory holidays and leap years, to ensure they pay employees on time and meet their remittance deadlines.

These common mistakes can be easily avoided as long we ensure that our payroll practitioners are kept up to date on the current year material. Employers need to ensure that all income and taxable benefits are recorded and taxed correctly. This in turn will make certain that all taxable benefits are reported during the correct pay schedules. If the department that processes your remittances creates payroll calendars that provide the correct remittance schedule, can avoid penalties from CRA and RQ.