Putting payroll in the penalty box

Knowing the potential penalties and sharing them with an organization’s key decision-makers can be an effective way to make sure an employer follows the rules. Here is a look at some of the main payroll-related penalties the federal government can levy.

Failing to deduct or remit source deductions

The Canada Revenue Agency (CRA) can levy penalties against employers that fail to deduct amounts for the Canada Pension Plan (CPP), employment insurance (EI) or income tax. If it happens once during a year, the penalty is 10 per cent of the amount of CPP, EI or income tax the employer did not deduct.

If an employer fails to deduct more than once in a year, the agency will increase the penalty to 20 per cent if the employer knowingly failed to take deductions or failed to do so due to gross negligence.

Between April and September of this year, the CRA levied 311 penalties for failing to deduct.

If employers take source deductions from employees’ earnings, but do not send them to the CRA on time or do not remit them at all, the CRA can levy a graduated penalty that rises with the number of days the remittance is late. The penalty is three per cent if the remittance is one to three days late, five per cent for four or five days late, seven per cent if it is six or seven days late, and 10 per cent if it is more than seven days late or if no amount is remitted.

From April to September of this year, the CRA says it penalized 191,723 employers for remitting late or failing to remit. The agency says it generally only applies the late-remitting penalty to the part of the amount not remitted that exceeds $500; however, if an employer knowingly remitted late or not at all or did so due to gross negligence, the CRA says it will apply the penalty to the full amount.

If the CRA assesses a late-filing penalty against an employer more than once in a year, the penalty will rise to 20 per cent if the employer was late knowingly or because of gross negligence.

The CRA also has the authority to hold corporate directors liable, along with the corporation, for paying the outstanding amounts.

Employers that fail to file information returns on time (the CRA considers each year-end slip to be an information return) or give employees their copy of the information slip late may face a penalty.

The penalty is the greater of $100 or a graduated amount based on the number of returns by type and the number of days late. The graduated penalty ranges from $5 a day (to a maximum of $500) for six to 10 information returns to $75 a day (to a maximum of $7,500) if an employer has more than 10,000 information returns of one type to file. Employers with only one to five returns to file can face a flat penalty of $100.

The CRA says, on average, it levied about 100,000 late-filing penalties a year for T4 returns between Jan. 1, 2013 and Sept. 30, 2015.

Beginning next year, the CRA will have the authority to penalize employers that do not file certain information returns by Internet File Transfer or Web Forms when required. This includes T4s, T4As, T4A-NRs and NR4s. Employers that file more than 50 information slips of one type for a calendar year must submit returns this way.

The amount of the penalty will depend on the number of information returns of one type that an organization is required to file online. For 51 to 250 returns, the penalty will be $250. For 251 to 500 returns, it will rise to $500. For 501 to 2,500 returns, the CRA will levy a penalty of $1,500. For more than 2,500 returns, the penalty will be $2,500.

The government requires all individuals employed in Canada to have a valid social insurance number (SIN). Employers are required to obtain and record an employee’s SIN within three days of the employee beginning work. Employers that fail to make a "reasonable effort" to obtain a SIN may face fines of up to $100 for each number they fail to get.

The CRA says a reasonable effort would be to ask the employee for the SIN in writing a number of times and to record the dates you made the requests. Employers should keep a copy of the requests on file.

Just as important as obtaining an employee’s SIN is keeping the information private. Employers may not knowingly use, communicate or allow an employee’s SIN to be communicated unless the law allows it or the individual gives written consent. The penalty for violating the confidentiality requirements can be a fine of up to $5,000, imprisonment for up to 12 months, or both.

The CRA requires that employers keep adequate books and records, but it does not specify which ones to maintain, other than saying the books and records must be reliable and complete, include the information necessary to show an employer fulfilled its payroll obligations and must be supported by documents.

Failing to keep adequate books and records could result in prosecution. If convicted, the employer could face a fine of at least $1,000 in addition to other penalties and possible imprisonment.

To avoid problems, employers should ensure they keep thorough records related to payroll, including those that show earnings, benefits, allowances, deductions (and how they were calculated) and remittances. This could include keeping ledgers, banking records, journals, financial statements and completed CRA forms.

Employers are required to complete and file a Record of Employment (ROE) with Employment and Social Development Canada (ESDC) (through Service Canada) within a specified time if an employee has an interruption of earnings. Employers that fail to do this could face fines of up to $2,000 or be imprisoned for up to six months.

Employers that falsify or sell an ROE could face maximum fines ranging from $4,000 to $12,000.

Falsifying information can include issuing an ROE when there was no employment relationship or falsely reporting information on a legitimate form to allow an individual to qualify for EI benefits, such as increasing the number of hours of insured employment or reporting an employee was laid off when he actually quit or was fired.

While it is always better to follow the rules, sometimes there are situations that make that impossible. In these cases, the CRA may waive or cancel penalties.

This could happen if an employer cannot meet its obligations because of financial hardship or extraordinary circumstances or because of CRA actions.

Examples of extraordinary circumstances include floods, fires or disruptions in services (such as a postal strike). CRA actions that may qualify for penalties to be waived or cancelled include errors in processing, excessive delays in completing an audit or resolving an appeal, or situations where the agency does not let an employer know within a reasonable period that it owes an amount due to CRA processing delays.

It is up to employers to apply to the CRA to waive or cancel a penalty. The agency has a 10-year limit for filing applications. To make a request, employers need to complete and submit a form called Request for Taxpayer Relief—Cancel or Waive Penalties or Interest (RC4288), available on the agency’s website (www.cra-arc.gc.ca/menu-e.html).

The CRA will review the request and notify the employer of its determination.