Program audit provides insight into employers’ understanding of obligations
Payroll practitioners are more confident calculating taxable benefits for group term life insurance, accidental death and dismemberment (AD&D), and gifts and awards than they are for stock options, personal and living expenses, and housing-related benefits.
This is one of the findings from a recent review that the Canada Revenue Agency (CRA) conducted on its Employer Compliance Audit (ECA) Program. The agency says it carried out the evaluation to determine how well the program is achieving its mandate of maintaining the integrity of the tax system through employer education and enforcement.
The program is responsible for auditing employers to ensure that they are complying with requirements for reporting employment income and taxable benefits, withholding and remitting source deductions, and properly classifying workers as employees or self-employed individuals.
To evaluate the program, the agency analyzed CRA data from 2008 to 2014 and reviewed its guides and other documents. It also interviewed CRA staff and held online consultations last year with 1,600 payroll practitioners from organizations that are members of the Canadian Payroll Association (CPA).
Overall, the report found that the program is meeting its enforcement mandate, but provides little education support beyond what comes out of its audits.
“Most key payroll-related educational activities tend to occur in other CRA programs,” or through external sources, the report stated.
It made a number of recommendations to improve employer education and to make the program more effective and efficient. While the report’s focus is on evaluating the ECA program, it offers insight into how well employers understand and fulfill their payroll obligations.
The report indicated that taxable benefits present challenges for employers. It noted that in at least 86 per cent of audits where the ECA Program found and corrected non-compliance, employers were not properly reporting taxable benefits.
The consultations with payroll practitioners revealed which ones they are most and least confident calculating and reporting.
Overall, about 85 per cent of the payroll practitioners said they calculate taxable benefits as part of their job. When asked to self-assess their level of confidence to correctly calculate and report 14 taxable benefits applicable to them, payroll practitioners averaged 6.9 out of a possible 10.
For group term life insurance, AD&D, and gifts and awards in cash, they rated their confidence level between 7.9 and 8.5.
In contrast, the confidence level ranged between 4.1 and 5.6 for security/stock options, personal and living expenses/purchase of assets, and housing, free/low rent, board, and lodging.
One reason for the difference in confidence levels may relate to how common it is for employers to offer certain benefits.
While nine out of 10 payroll practitioners said they have to calculate and report taxable benefits for group term life, AD&D, and gifts and awards in cash, only about two-thirds listed the benefits for which lower confidence levels were reported.
The report also noted that lack of detail in CRA guides and other educational resources may contribute to the lack of confidence.
“Payroll practitioners are required to learn and understand numerous taxable benefits, and tend to lack confidence in their ability to calculate those benefits which occur less due in part to concerns with educational resources,” the report stated.
Summarizing the concerns mentioned by payroll practitioners, the report stated that, “The CRA guides lack clarity and examples that addressed their specific cases. The most commonly cited concern identified was the lack of clarity around how to distinguish between business usage and personal usage, and how this principle can be applied when it comes to automobile and motor vehicle allowances, cell phone/Internet usage, and housing and travel allowance taxable benefits.”
It added that 52 per cent of respondents who cited these concerns had at least seven years of payroll experience in their current job and 62 per cent had a payroll-relevant certification.
One challenge for the CRA’s education efforts is that different groups within the agency have different views on the level of detail needed in CRA guides and on its websites, the report said.
The report noted that there are over 70 references to the term “reasonable” in the taxable benefit guide.
In the list of 14 taxable benefits included in the consultation with payroll practitioners, the reported stated that seven referenced the term “reasonable” in the guide. Among the seven, the report found that payroll practitioners had more confidence making calculations where the guide defined what the CRA meant by “reasonable” or provided a link to an interpretation bulletin that better explained the term, and lower confidence where this did not occur.
While the program evaluation recommended that the CRA revise the taxable benefit guide to provide more guidance on the term “reasonable,” CRA management did not agree with the suggestion. It stated that the guide’s use of the term “reflects the approach taken in the Income Tax Act to recognize that there are many different situations and fact patterns that can exist in respect of taxable benefits.”
Management did agree to take steps to improve the agency’s call centre and website support for taxable benefits. It also said the CRA would continue to work with stakeholders such as the CPA to ensure that the guides are clear and concise.
When it comes to properly classifying workers, the study found that a significant number of employers do not issue T4As to independent contractors.
Of the payroll practitioners responsible for determining a worker’s status and issuing T4As, the consultation found that 28 per cent did not voluntarily complete a T4A for a recently hired self-employed worker.
Another three per cent said they only complete T4As when self-employed workers ask for them. The report stated that this has resulted in the ECA program issuing more T4As for employers as part of their audits.
It added that T4A reporting is important because data analysis shows that independent contractors who did not receive a T4A were nearly twice as likely to report no income as those who received one (31 per cent versus 17 per cent). However, the report did point out that the majority of independent contractors reported most of their income whether or not they received a T4A.
Five per cent of payroll practitioners responsible for completing T4As said they do not issue them because they do not understand the CRA’s requirements. A number of payroll practitioners also reported having trouble finding information on the topic.
“The consultation revealed that fewer payroll practitioners are finding the information they are looking for with respect to the rules around the proper characterization of workers and issuing T4A slips when compared with other payroll-related obligations,” the report stated.
The consultation found that 71 per cent of payroll practitioners said they could find information on classifying workers and issuing T4As, compared to 90 per cent who said they could find information on source deductions and 87 per cent who found answers to taxable benefit questions.
The report also said employers may not complete T4As because of contradictory messages coming from the CRA on whether it will penalize employers for not completing T4A box 048 (fees for service). While income tax regulations require organizations to file an information return if they pay fees to self-employed workers, the CRA’s T4A guide states that the agency is not penalizing employers for not completing box 048.
“ECA auditors indicated that some employers have incorrectly interpreted the lack of penalty as absolving them of their responsibility to report on fees for service,” the report stated.
In response to the report, CRA management agreed that the agency needs to clarify employer obligations for completing T4A box 048. Management said the CRA would consult on the issue with external stakeholders over the next year.