Steps for handling a potentially damaging situation
Payroll professionals know they have a responsibility for ensuring an organization’s payroll practices are compliant with federal and provincial payroll legislation.
However, let’s say you join a new company and you want to make sure everything is up to standard. How should you approach the matter and what should you do if you discover something is amiss?
Step 1: Identify and document non-compliant items
The first step is to identify flawed policies and procedures. Start by reviewing one or two and broaden the investigation as time permits. Alternatively, if you are aware of a non-compliant practice, start with that one. Regardless, begin by creating a spreadsheet with a column that allows you to document the current practice.
Step 2: Document legislative requirements for the identified practice
Next, in an adjacent column, summarize the legislative requirements for the non-compliant practice. This is necessary to provide a basis for the decision maker to agree to a change. Putting the particulars in writing also facilitates confirmation of your information, if that is deemed necessary.
Summarizing legislation requires you to research applicable acts and regulations as well as government publications on the topic.
For example, when explaining legislation that requires the inclusion of a particular taxable benefit in income, it’s a good idea to review the references contained in the Income Tax Act, Canada Pension Plan (CPP) and Employment Insurance (EI) Acts.
If the matter involves Quebec employees, you may also have to reference the Quebec Tax Act, Quebec Pension Plan (QPP) and Quebec Parental Insurance Plan (QPIP.) Finally, you will want to include pertinent information contained in publications issued by the Canada Revenue Agency (CRA) and Ministere du Revenu du Quebec (MRQ), as applicable. These publications explain, in plain language, how to administer the specific requirements. To give the lawful requirements more weight, include any references contained in the legislation regarding fines or penalties.
Step 3: Identify the gap between practice, law
In a third spreadsheet column, identify the gap between current practice and the law and explain how the organization is non-conforming.
Often a non-compliant practice results in more than one compliance deficiency (such as a failure to include a taxable benefit in income frequently results in a failure to deduct and remit statutory withholdings and a failure to report the benefit in income.)
Step 4: Outline the risk
The next step is a risk assessment. What are the financial and other risks to the company if the practice is discovered in a government audit? In this additional column of the spreadsheet, be as precise and specific as possible so the reader fully understands the implications if they choose not to comply.
In the case of excluding a taxable benefit from income, state the penalty percentage for doing so. CRA can assess a penalty of 10 per cent of the amount that should have been withheld. However, they may assess a penalty of 20 per cent where the failure was done so knowingly, or a previous penalty was assessed.
Late remittance penalties may also be imposed, ranging from three to 10 per cent. Excluding a taxable benefit from income can also result in deficiencies to other government programs such as CPP, QPP, EI and QPIP. Where this is true, the employer is responsible for paying both the employee and employer shares.
The organization will also have to issue amended information returns (such as T4s/RL-1s), which may result in a reassessment of an employee’s personal tax return and the incurrence of a tax liability. This, of course, will not be viewed positively by the employee and could have an impact on morale.
Remember to also outline any provincial liability to the organization. Provincial health care levies and taxes and workers’ compensation premiums may also be due and amended annual returns will also have to be filed. All of these may also attract additional fines or penalties and interest.
Step 5: Provide recommendations
Prepare the recommendations on what has to be done to bring the practice into compliance. Include all the necessary steps that must be taken, such as:
•meeting with HR and finance and any others deemed appropriate to review the legislative requirements
•amending or creating policies and procedures
•implementing revised or new processes for payroll
•setting up new earnings codes and ensuring proper withholdings and year-end reporting obligations have been met
•developing a communication strategy (for employees and management)
•training payroll and other staff.
Step 6: Prepare the report
Organize the documentation into a report and arrange an information meeting with your manager and any others deemed appropriate. A draft report should be provided to all attendees prior to the meeting to allow them to absorb the information and prepare any questions they may have.
In the meeting everyone should establish next steps. This may be to do nothing or to proceed with making the changes in accordance with established objectives.
If management decides not to follow the recommendations, that is their prerogative.
You have done your part by formally identifying the non-compliance, outlining the risk to the organization and providing a remedial plan proposal to rectify the situation.
Kimberley Fiume is the director, client services, and compliance practice leader with LeadingEdge Payroll Group, in Newmarket, Ont. She can be reached at [email protected].
Compliance reviews: Where to start?
Understanding what the Canada Revenue Agency (CRA) focuses on when conducting a payroll audit should guide a pre-emptive review of company payments. After all, both parties share a like interest in ensuring that payroll is accurate and compliant.
One important point to keep in mind is that auditor’s like to review personal expense reports and recurring payments made to individuals from accounts payable. According to CRA these are two areas where many cases of non-compliance are detected.
Reimbursed personal living expenses may actually be taxable benefits and recurring payments to individuals may signify the existence of an employment relationship. Be proactive and meet with accounts payable to review these two areas for potential compliance gaps.
Remember, it is usually better (and less expensive) to voluntarily remedy these situations, rather than to have them arise as a result of an audit.
