Testing accuracy of source deductions

One of payroll’s essential duties is to ensure employees are paid accurately.

Among other things, this means assuring payroll source deductions — income tax, Canada Pension Plan (CPP) and employment insurance (EI) — are being calculated properly. The essential tools for this task are the Canada Revenue Agency’s (CRA) Payroll Deductions Online Calculator and Revenu Quebec’s WinRAS. The government publications that provide the technical details behind these tools are also important: the CRA’s T4127 and Revenu Quebec’s TP-1015.F guides.

For payroll, having these in your toolkit leaves you free to the focus on the input values required for your test plans. The goal should be to systematically develop a test plan that covers all of the data values relevant to your own particular situation.

The following are the minimum factors that should guide any such systematic development:

• the provinces of employment
• the payroll frequencies with which you pay
• the expected range of gross taxable income

Provinces of employment

For example, if you only pay in two provinces, there is little point in testing the accuracy of source deductions in all 13 provinces and territories. However, if you’re testing on behalf of a software or systems vendor, you may want to consider testing in all of these. Further, if you pay retiring allowances or pension income, remember the province of employment for these is determined by the province of residence at the time of payment. This may change the jurisdictions you need to include in testing.

Payroll frequencies

Similar considerations apply to the payroll frequencies to test. For example, although CPP basic exemption (BE) is $3,500 on an annual basis, it’s the pay period equivalent that’s actually used in both income tax and CPP source deductions. For example, the BE for 26 biweekly pay periods in the year is $134.61. This means, for a biweekly payroll, your test scenarios should include at a minimum pensionable income at each of the following levels:

• $134.61, no CPP contributions
• $134.62, a contribution of $0.01, the minimum required
• $134.91, the same minimum contribution
• $134.92, a required contribution of $0.02

This data set accomplishes two purposes: First, testing the minimum contribution required when the pay period basic exemption amount has been exceeded, and, second, testing the rounding required (to the nearest whole penny, with amounts at exactly .005 rounded upwards).

The above example is based on a payroll with 26 periods per year. Should you also pay in other frequencies, you would need to add to your test plan the equivalent values from each of these other pay period frequencies.

Gross taxable income

The third factor you need to consider, the range of gross pay period income, is tied up with the two factors we have already considered: province of employment and pay period type.

The province of employment determines both the tax brackets — the range of income subject to any one tax rate — and the income tax rates that apply for each bracket. These brackets are based on annual income and the default rule is to multiply pay period income by the number of pay periods per year, to get to annual taxable income.

While there is only one set of income tax brackets and rates for federal purposes, each province or territory has its own set of brackets and rates.

For example, if your employees work a range of hours from 30 to 40 per week and are paid between $12 and $18 an hour, the gross income you would normally expect in a biweekly pay period would range from $720 (12 x 30 x 2) to $1,440 (40 x 18 x 2). On this basis, the pay period income you might want to test would range from $400 to $2,000.

If this biweekly income was earned in Ontario, in the tax year 2013, this biweekly income rage would mean annual gross taxable income of $10,400 to $52,000. For 2013, this means you need to at least test annual taxable income at each of the following levels:

• $39,723.00
• $39,723.01

The purpose of selecting these two values is to test the boundary condition between the first two Ontario provincial income tax rates. Given the range of income described above, it probably wouldn’t make much sense to test the other income tax brackets used in Ontario. On the other hand, if you pay in multiple provinces, you would have to test the tax brackets in each for the range of annual income described above. In British Columbia, based on the annual income estimates above, this would include:

• $37,568.00
• $37,568.01

The above is an outline of the steps needed to produce a comprehensive test plan, to ensure the accuracy of income tax, CPP and EI source deductions.

The point is you should drive the requirements of your test plan from the specific payroll circumstances that apply. The factors listed above — province of employment, pay period frequency and range of annual income — are just part of those circumstances. Other things you should consider are any benefit deductions, such as savings or registered pension plans (RSPs) that reduce the income subject to source deductions.