Frequently asked questions in the world of payroll

The following questions were fielded by Carswell’s payroll hotline service. Answers are provided courtesy of The Canadian Payroll Manual and The Canadian Payroll Manager newsletter, published by Carswell.

Question: Our company would like to reward our employees for good attendance, safe work practices and suggestions that save the company money or result in improved working conditions. How would we treat these awards if given in the form of cash or if they are given as gift certificates?

Answer: When employees are given awards related to their office of employment, the fair market value of the award is considered a taxable benefit. If the employee receives an award in the form of cash, it would be considered income from employment and would be pensionable, insurable and taxable.

However, if the employee were awarded a gift certificate, the amount of the gift certificate would be considered a taxable benefit and would be pensionable and taxable. An award, when given in kind (other than in the form of cash), is also subject to GST/QST. You must include the amount of the GST/QST in the benefit amount.

An award might not be taxable depending on the nature of the award. If the employer were to provide a plaque or certificate engraved with the employee’s name, the fair market value would almost certainly be nil and no taxable benefit would result. On the other hand, if you gave an employee a gold watch, even if it had the company logo on it, there would still be a fair market value attached to the watch. In the event of an audit, a company that decided not to assess a taxable benefit would have to be able to justify their position.

Question: Is there a definition of full-time, part-time, temporary or casual in employment/labour standards?

Answer: As a general rule, employment/labour standards legislation does not distinguish between types of employees. More often, the definition would be contained within a company policy or union agreement, where applicable. Therefore, anyone hired that would be protected under employment/labour standards as a full time employee would be protected by employment/labour standards legislation as a part-time, temporary or casual employee.

Employment/labour standards do make provisions in the legislation for employees whose hours vary and do not work a standard workweek. This would apply mainly when calculating statutory holiday pay and wages in lieu of notice or termination pay.

Question: In order to allow some employees to work from their home, we reimburse them for the monthly cost of Internet service. Should we be assessing this amount as a taxable benefit?

Answer: Unless there is an exception within the federal Income Tax Act, the value of all benefits are generally taxable. According to a recent ruling issued by the Canada Customs and Revenue Agency (CCRA), however, it is unlikely that there is any significant taxable employment benefit as a result of having the Internet service in the employee’s home to assist them in carrying out their employment duties. As a result, there would be no taxable benefit assessed on this amount.

(Editor’s note: The above position was provided by Revenue Canada (now the Canada Customs and Revenue Agency) Views, #2001-0071185: Internet Service at Home Paid by Emp., March 21, 2001.)

Question: When hiring students for a short-term, are we required to deduct Canada/Quebec Pension Plan (C/QPP) contributions, Employment Insurance (EI) premiums or Income Tax?

Answer: The requirement for each statutory deduction follows:

Canada Pension Plan contributions: Employees under the age of 18 and over the age of 70 are exempt from CPP contributions. Employees who are collecting CPP retirement or disability benefits are also exempt from CPP contributions, provided you have proof in the form of an award letter from Human Resources Development Canada that indicates the individual is in receipt of CPP benefits. Employees who are not employed in pensionable employment are also exempt from CPP contributions.

Quebec Pension Plan contributions: Employees under the age of 18 are exempt from QPP deductions. Since Jan. 1, 1998, employers have been required to continue to deduct QPP from amounts paid (or deemed paid) to employees who are 70 years of age and older as well as those who are in receipt of a C/QPP retirement pension. Employees who are not employed in pensionable employment are also exempt from QPP contributions.

Employment Insurance premiums: All employees employed in insurable employment and receiving insurable earnings are subject to EI deductions, provided they have not reached the maximum annual contribution for the year.

Income tax: Employers must deduct income tax from all employees regardless of their age. There may be some relief for students who expect their total employment income to be below the total of the amounts they are eligible to claim on the federal or provincial TD1 forms or the TP-1015.3-V form in Quebec.

Question: Our company is currently going through a restructuring. As a result, we will be terminating some employees in a number of provinces. We have put together a severance package for these employees. Upon termination, they will receive a lump-sum payment that represents six months of their salary. Is this a sufficient payment? What deductions do we need to take from the payment?

Answer: When an employee is being terminated in any given province/territory (or under the Canada Labour Code), employers must adhere to the minimum legislated requirements set out in the employment/labour standards act of that jurisdiction. In general, the acts and their regulations set the minimum standards for individual and group terminations. The period of notice due to an employee depends on where the employee works (province/territory/under the jurisdiction of the Canada Labour Code) and how long the employer has employed the employee. Employers may choose to either have the employee work the notice period, or pay the employee wages in lieu of the notice period.

Let’s examine the following scenarios, assuming that the question above refers to an individual termination. In these examples, the assumption is made that the employer has chosen to pay the employee wages in lieu of the notice period and that this payment forms part of the six months of salary being paid to the individual upon termination.

Terminating an employee in Alberta who has been employed for six years, the province’s Employment Standards Code requires you to give the employee five weeks of written notice. Using the lump-sum payment referred to in the question, you would split the six months of salary and treat five weeks as wages in lieu of notice and the excess amount as a retiring allowance.*

If you are terminating an employee in British Columbia who has been employed for six years, the province’s Employment Standards Act requires you to give the employee three weeks of written notice. Using the lump-sum payment referred to in the question, you would split the six months of salary and treat three weeks as wages in lieu of notice and the excess amount as a retiring allowance.*

If you are terminating an employee in Quebec who has been employed for six years, the province’s Act respecting labour standards requires you to give the employee four weeks of written notice. Using the lump-sum payment referred to in the question, you would split the six months of salary and treat four weeks as wages in lieu of notice and the excess amount as a retiring allowance.*

If you are terminating an employee in Ontario who has been employed for six years, the province’s Employment Standards Act requires you to give the employee six weeks of written notice. You may also be required to pay the employee severance pay. Ontario is one of two jurisdictions that have legislated a severance pay requirement (the federal jurisdiction is the other one). Under Ontario law, employees with at least five years of service will be entitled to severance pay if:

•the employer’s total annual Ontario payroll (including related companies) is $2.5 million or more; or

•the employer is terminating 50 or more employees within a period of six months or less.

Employees entitled to severance pay must receive one week of regular wages (excluding overtime) for each year of service, to a maximum of 26 weeks. Partial years must be included and are calculated by dividing the number of completed months in the year by 12, and then multiplying the result by the employee’s regular weekly wages.

Using the lump-sum payment referred to in the question above, you would split the six months of salary in the following way, if the employee was entitled to legislated severance pay: treat six weeks as wages in lieu of notice, six weeks as legislated severance and the excess amount as a retiring allowance.* If the employee was not entitled to severance, you would treat six weeks as wages in lieu of notice, and the rest as a retiring allowance.

*Note: A retiring allowance is defined as a sum of money paid, on or after termination of employment, in recognition of long service or as compensation for loss of office. Court fees and/or damages awarded from a court settlement, excess amount of notice, unused accumulated sick pay credits and severance payments all qualify as a retiring allowance.

Legislated wages in lieu of notice payments are pensionable, insurable and taxable, as follows:

C/QPP: If paid with regular pay, wages in lieu of notice are subject to regular deductions for C/QPP by multiplying the wages in lieu of notice payment by the government-fixed contribution percentage rate, provided the employee has not reached the maximum C/QPP contribution for the year.

Employment Insurance: Multiply the payment by the government-fixed premium percentage rate, provided the employee has not reached the annual maximum for insurable earnings.

Income Tax: Calculate the income tax deduction using the bonus method of taxation. (See figure 2, bottom left for lump-sum tax rates).

A retiring allowance is not pensionable or insurable, but it is subject to income tax deductions. Deduct tax using the lump-sum tax rates. In addition, the employee may be able to transfer all or a portion of the retiring allowance tax-free directly to a registered pension fund or plan or to an RRSP in which the individual is the annuitant.

For year end purposes, wages in lieu of notice are reported on the T4 and the RL-1 (for Quebec provincial income tax reporting). A retiring allowance is reported on the T4A and the RL-1.

Question: How does the new legislation regarding maternity/pregnancy and parental leave affect those who gave birth prior to Dec. 31, 2000 as compared to those who gave birth on or after Dec. 31, 2000?

Answer: Maternity/pregnancy and parental leave for all jurisdictions detailed in figure 1 (top right.)

Question: Our company changed their name from ABC Ltd. to ABC Inc. in February 2001. We obtained a new Business Number from the Canada Customs and Revenue Agency. We also reapplied for and were granted an Employment Insurance Premium Reduction through Human Resources Development Canada (HRDC). Normally, our company shares 5/12 of the premium savings with employees at the end of each calendar year. Can we wait until the end of 2001 to share the 5/12 owing from Company ABC Ltd. or is there a specific timeframe in which we are required to pay it out?

Answer: HRDC simply requires that employers share the refund in the year of the reduction or within the first four months of the following year.
As a result, Company ABC Ltd. has the option of waiting until four months into the following year, or April 2002, to share the reduction with participating employees.

This information can be found in the HRDC publication called Guide for the Employment Insurance Premium Reduction Program on p.14, line 10 of the Initial Application: EI Premium Reduction NAS-5022 (01-98)E.

Question: What is the difference between the Department of Finance and the Canada Customs and Revenue Agency (CCRA)?

Answer: The Department of Finance is the federal department primarily responsible for providing the government with analysis and advice on the broad economic and financial affairs of Canada. Specific responsibilities include: preparing the federal budget; preparing tax and tariff legislation; managing federal borrowing on financial markets; administering major federal transfers to the provinces and territories; developing regulatory policy for the financial sector and representing Canada with international financial institutions.
For more information on the roles and responsibilities of the Department of Finance, visit www.fin.gc.ca.

The Canada Customs and Revenue Agency (formerly Revenue Canada) is responsible for Canadian tax, trade and border administration. Its responsibilities include: assessing and collecting taxes, duties and levies; delivering social and economic benefits, such as the goods and services tax credit, through the tax system on behalf of the Government of Canada; administering trade agreements such as the North American Free Trade Agreement and processing commercial goods and travellers at Canada’s international borders.

For more information on the roles and responsibilities of the CCRA, visit www.ccra-adrc.gc.ca.

Question: What is the federal budget?

Answer: The federal budget is the statement by the federal minister of finance setting out the government’s projected revenues and expenditures — sometimes called fiscal projections — and the resulting surplus or deficit. It also contains an overview of the government’s economic projections, and sets out fiscal policy for the period ahead. In recent years federal budgets have generally been delivered in February.

Question: We have an employee who will be taking early retirement and the company will be paying a retiring allowance of $45,000 in recognition of her services. She will also receive full pension payment every month during her retirement. Are we still able to transfer the “eligible” portion of the retiring allowance to the financial institution of her choice if she will be in receipt of full pension payment?

Answer: The fact that the employee will be in receipt of pension payments will have no impact on the possible transfer of the retiring allowance. The employer will still be able to transfer the eligible portion of the retiring allowance.

Question: We have an employee who has not submitted their Social Insurance Number (SIN) despite numerous requests to do so. What are the employer’s responsibilities in obtaining the SIN and how would this be reported at year-end?

Answer: Subsection 237(1) of the Income Tax Act requires that the employer make a reasonable effort to obtain the correct SIN number from each employee and that the employee must provide his or her SIN number upon the request of their employer.

The employer must show evidence that they have made every reasonable effort to obtain the employee’s SIN number and a written request to the employee to provide same would be valid proof of effort made by the employer.

Each failure on the part of the employer to show that reasonable efforts were made to obtain the SIN number of any employee may result in a fine to the employer of $100 under subsection 162(5) of the Income Tax Act. Similarly, the employee may also be fined $100 for failure to provide his or her correct SIN number.

The employer will still be obligated to make the appropriate statutory deductions and report the deductions in a prompt manner.
If no SIN number is provided at the time of filing the T4, the employer will leave the area for the SIN number blank but must ensure that there is proper documentation to prove a reasonable effort was made to obtain employee’s SIN number.

Question: We terminated an employee and we are paying a retiring allowance. With the new tax method, tax-on-income (TONI), are there new lump-sum tax rates?

Answer: The TONI method has no impact on lump-sum taxation, which has remained the same method of calculation.

The rates for lump-sum taxes in all provinces are shown in figure 2 (page G12, bottom left).

Question: We have an employee who is going to be receiving a retiring allowance in installments and he is requesting additional tax to be deducted. Is there a special form he would need to file?

Answer: An employee can request this increase in taxes by completing and submitting to the employer the TD3 form, Request for Income Tax Deduction on Non-employment Income. The employer can accept this form as a confirmation to increase taxes deducted at source and will continue to deduct taxes as requested until a new submission of the TD3. This form may also be used by an employee who is receiving pension and other lump- sum payments and the same conditions apply for the increase in taxes deducted at source until the employee submits a new TD3. This form cannot be used when payments are for interest or dividends.

The print version of this article contains Figure 1 (Maternity/pregnancy and parental leave for Canadian jurisdictions) and Figure 2 (Lump-sum tax rates for Canadian jurisdictions). A library copy is available if you would like to see these charts.

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