Canadian Payroll Reporter

2 Canadian HR Reporter, a Thomson Reuters business 2015 News July 2015 | CPR Employers should conduct internal audits reporting source deductions and to see if it has any unreported employee income. The agency also checks the organization's GST/HST documents to make sure it is charging, recording, reporting and remitting tax as required. The CRA also reviews em- ployee benefits to make sure that if any are taxable, the employer is properly assessing them. It may also review the status of workers to determine if they are employ- ees or self-employed. While exams and audits are similar, the CRA says an audit is a more thorough review. During an audit, the CRA takes a de- tailed look at two calendar years of an employer's records. The agency says many em- ployer examinations and audits uncover unreported taxable benefits and other income, re- sulting in employers having to pay additional CPP contribu- tions and EI premiums and the CRA reassessing employee tax returns. In its 2013-14 report, the CRA says it found $958.6 million in source deductions non-compliance by examining employers' books and records. Besides looking at records re- lated to source deductions, the agency will want to see docu- ments such as appointment books, logbooks and vouchers, to determine if they support the employer's payroll records. The CRA examines electronic and print records. Employers are generally required to keep re- cords for six years from the end of the last tax year to which they relate. Electronic records and supporting documents must be in a format CRA software can read. Any encrypted records must be unencrypted and the CRA may photocopy printed records. Be prepared Instead of scrambling at the last minute, employers should regu- larly check to make sure they are properly documenting informa- tion and keeping detailed re- cords even if they are not being audited, says Carswell payroll consultant Elle Kamensky. "Keep your records organized and easily accessible." It's not just about T4s or timesheets, says Annie Chong, manager of Carswell's Payroll Consulting Group. "Go back to the beginning when (a) person is hired as a new employee and make sure that there is a contract of employ- ment in place that defines what an employee's responsibilities are, what they are going to be earning in income and how that translates into source deduc- tions and taxable benefits." Once the CRA completes a trust accounts examination, it will provide the employer with a statement of account, followed by a notice of assessment, setting out whether the employer owes any amounts for source deduc- tions and whether any penalties or interest will apply. The em- ployer may have to amend T4 and T4A slips and the agency may reassess employees' per- sonal income tax returns. For an employer compliance audit, the CRA auditor will give the employer a proposal let- ter at the end of the review that sets out any adjustments. If the employer does not agree with the proposal, it has 30 days to respond. Afterwards, the audi- tor will send the employer a final letter that explains the results of the audit and whether there are any further adjustments. Then, the CRA will send the employer a notice of assessment. If an employer does not agree with a notice of assessment for an examination or an audit, it has 90 days to file an objection. Whether or not an employer agrees with an assessment, it should pay any amounts owing right away to avoid further pen- alties or interest. To determine which employ- ers to audit, the agency says it uses a risk-assessment system that "selects files to audit based on a number of conditions such as the potential for errors in tax returns or indications of non- compliance with tax obligations. The CRA also looks at the in- formation it has on file and may compare that information to similar files or consider informa- tion from other audits or inves- tigations." Employers can reduce their chances of being audited by fol- lowing good payroll practices, says Chong, such as making sure employee payments and deduc- tions are correctly calculated, taxable benefits are properly as- sessed, remittances are paid on time and year-end reporting is done accurately and on time. Internal audits To help ensure they comply with the law, Chong and Kamensky suggest employers conduct inter- nal audits of payroll processes. Chong adds that small, target- ed audits are also helpful. This could be done in the fall before year-end processing gears up or close to Jan. 1 or July 1 when pay- roll changes often occur. "Once you have implemented the new tax rate or information, take a handful of employees and conduct your own audit. Calcu- late an employee's pay, making sure that what is deemed pen- sionable, insurable, taxable or things that are subject to a tax break are set up properly on your payroll," she says. "You can cross-reference this against the CRA's PDOC (Payroll Deductions Online Calculator) because what you want to do is to compare and make sure that the net values, based on how it is set up on your payroll system versus if you were to do this manually, match up. Any discrepancies will allow you to go back and fix what- ever the issues are." Payroll professionals should also regularly check records to make sure they match the infor- mation the CRA has on file. "Every time you remit to the CRA and you get the statement back from the CRA, there is an audit process there, too, because you want to ensure that you are reconciling against the CRA statement so that you are not un- derstating on your deductions. You can do this on a monthly ba- sis or a quarterly basis, depend- ing on how frequently you remit to the CRA." As part of an internal review, Chong suggests employers make sure departments that deal with employee information regularly communicate with each other and know each other's respon- sibilities. Otherwise, problems could arise in a CRA audit. Employers sometimes get into trouble when they pay in- centive gifts and awards (such as employment anniversaries) through accounts payable and do not inform payroll, she says. "The AP folks are processing these invoices (for the gifts or awards) and HR is presenting them to the employees, but pay- roll doesn't get the records," says Chong. If the gift or award is a taxable benefit, payroll does not have the chance to assess it or report it on an employee's T4. Poor records or not knowing the rules are not excuses. "The CRA doesn't care if your AP folks or HR folks don't talk to your payroll people," Chong adds. It is not just the payroll de- partment that needs to comply with CRA rules, but the entire organization, she says. However, payroll has a key role to play in educating other departments. "Payroll has a responsibility to communicate with the internal players what the rules are," says Chong. "Taxable benefit assess- ment, for example. If you are go- ing to be processing something in AP, (payroll) needs to know that (to) figure out whether some of that has an impact on an employee's T4." By regularly checking to make sure payroll is processed cor- rectly, relevant information is shared with payroll and the em- ployer is keeping accurate and detailed records, employers can help to ensure a CRA audit will run smoothly, she says. "Even if you are audited by the CRA, you don't run the risk of being caught for not doing something if you are doing it cor- rectly from day one." from CRA on page 1 "Payroll has a responsibility to communicate with the internal players what the rules are... Taxable benefits, for example. If you are processing something in AP, payroll needs to know that."

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