The Canada Revenue Agency (CRA) has updated the information on its website to give employers better instructions on how to correct salary overpayments due to clerical or administrative errors or when the employee did not perform duties.
When an employee repays an employer, in the same or a later year, for salary or wages received when the employee did not perform her duties, the repayment is considered to be a repayment of salary and wages. Examples include an employee who was advanced vacation leave credits, but quit working before actually earning the credits or an employee who was paid a signing bonus but did not work for the time agreed to in the employment contract, according to the CRA.
Employers cannot adjust the employee's T4 slip or the payroll records to reduce the total employment income or source deductions by the amount of the repayment. The employer's share of CPP contributions and EI premiums is not refundable, the agency said.
Payroll departments should give the employee a letter confirming the tax year when the overpayment was included in the employee's income as well as the date, the reason, and the amount of repayment received. The employee may claim a deduction on her personal income tax and benefits return in the year the amount was repaid.
Clerical or administrative errors
The CRA will not consider an amount to be salary, wages, or an advance in the year the employee received it if the employee is overpaid because of an administration or clerical error (mistake). If an employer discovers the error after issuing a T4 slip for the employee, the employer must issue an amended T4 slip for that year to exclude this amount.
However, the amount should be included on a T4 slip in the following situations:
•The employee says she will repay the amount and does not. Include the amount in employment income in the year the employee agrees to repay the amount but does not.
•The employee says she will not repay the amount. Include the amount in employment income in the year of the overpayment.
•The employer forgoes her right to the amount. Include the amount in employment income in the year of forgiveness.
•There was knowledge or collusion and the employee does not repay the amount. Include the amount in employment income in the year of the overpayment.
If the employee repays the employer in the same year as the overpayment, the employee may repay the employer the net amount (gross pay less source deductions) as long as the employer is able to reduce the next payroll remittance to the CRA by the CPP, EI or income tax remitted in error (including your share of CPP and EI) before the last remittance for the year has been made.
The employee should repay the employer the gross amount of the salary overpayment if the employer did not withhold CPP, EI or income tax deductions when the amount was paid to the employee or the employer is not able to reduce your next payroll remittance to the CRA for that year.
The employee should also repay the employer the gross amount if the salary paid in error and the repayment is in a different tax year. In these situations, the employer will have to include the deductions on the employee's original (or amended) T4 slip, but the payroll department should reduce the employee's total income and the CPP pensionable and EI insurable earnings by the amount of the salary repayment.
If the employer had to report the CPP and EI deductions withheld in error on the employee's T4 slip, the payroll department can ask for a refund of the employer's share of CPP contributions or EI premiums that you deducted in error by completing a PD24, application for a refund of overdeducted CPP contributions or EI premiums form.
Employers can request a refund up to four years after the end of the year in which the CPP overpayment occurred or three years in the case of an EI overpayment.
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