Year-end complexity reaches new levels

In an ordinary year, executing payroll year-end is a challenge. Running a year-end close requires reconciliations to payroll accounts, adjustments to employment insurance (EI) and Canada Pension Plan/Quebec Pension Plan (CPP/QPP) rates, and calculations are needed for workers’ compensation and other government remittances — all under tight deadlines and with exacting standards for accuracy.

The year 2020, to put it mildly, will be anything but ordinary. COVID-19 has changed the employment landscape. Financial uncertainty has taken a toll in skyrocketing unemployment and injecting uncertainty into business operations from coast to coast.

For those in payroll and HR who oversee payroll year-end, this will certainly be the most complex year-end ever.

“They will now have to navigate payroll anomalies caused by widespread layoffs, re-hirings and employee furloughing,” says Janet Grossett, manager of compliance services and professional development at the Canadian Payroll Association (CPA).

The association’s Payroll InfoLine has seen a dramatic rise in inquiries due to the COVID-19 pandemic, she says, with many people seeking clarity on what the seemingly daily announcements by federal and provincial governments will mean for year-end processes.

Some of the challenges that payroll and HR professionals might come up against during year-end include:

Canadian Emergency Wage Subsidy (CEWS)
When the federal government introduced the CEWS, it was meant as a stop-gap for employers struggling through the pandemic. Responding to layoffs being made by employers whose businesses were financially impacted, the feds greenlit the CEWS to minimize job losses. Under the program, employers could rehire furloughed employees or maintain active employees and use the CEWS to subsidize 75 per cent of employee wages for up to 24 weeks.

Complicating matters was the fact that the CEWS was introduced alongside the Canadian Emergency Response Benefit (CERB), a subsidy providing financial support for employees who had been laid off.

“The subsidies were broadly applied, with simplified applications to expedite getting funds to businesses and individuals struggling financially,” says Steven Van Alstine, vice president of the CPA. “The government took a ‘Pay first, ask questions later’ approach when approving subsidy applications. As a result, there will certainly be compliance errors in the administration of the subsidies that will have to be dealt with at year-end.”

The challenge will be twofold. First, there will need to be reporting or a reconciliation by employers to ensure that they met the criteria for the CEWS, even though they were initially approved. This means that there is likely to be an increase in payroll audits down the road, with the government looking to ensure that employers met the eligibility criteria and properly calculated their subsidy.

Second, many laid-off workers applied for the CERB, only to then be rehired by their employers who had received funding through the CEWS. The government will want to ensure that individuals are not double-dipping by collecting both the CERB and CEWS, and employers will likely be asked to report social insurance numbers for employees receiving support under the CEWS.

Workers’ compensation deferrals
Financial pressures on businesses stemming from COVID-19 propelled most provincial workers’ compensation boards to implement premium deferrals for 2020. As is traditionally the case with many of these boards across the country, employers are required to estimate their payroll for the coming year so that the board can invoice premiums.

Of course, no one could have predicted that a global pandemic would so severely impact the workforce. As a result, a host of employers will find their estimates are significantly off-base. Over- or underestimating payrolls is likely to result in penalties incurred by employers.

The huge fluctuations to company payrolls in 2020 thus present an added challenge for HR and payroll professionals who oversee premiums. And while workers’ compensation boards might reduce or remove penalties, there has not yet been any indication that they will delay reporting or payments.

Employers that have provided estimates to their workers’ compensation board and experienced layoffs should re-examine their payroll estimates to see if revisions are required. If they are needed, it is possible to file an amendment at any point.

“Because no one knows the long-term implications of COVID-19, some businesses are waiting to make amendments. As a result, the re-examination of estimates may become part of the year-end process,” says Grossett. 

Some employers also believe that processing an amendment is unnecessary, thinking that workers’ compensation boards will decide to reduce or remove penalties for incorrect estimates. Grossett disagrees. “It is still better to amend and refile your estimate, as it could substantially lower the premium payment that is required from your business.”

Pandemic pay reporting
Many provinces introduced additional “pandemic pay” to support front-line workers in fields such as health care and social services. In most provinces, this pay took the form of a top-up to regular wages. Ontario, for example, offered essential workers an additional $4 per hour.

Much like the federal programs, pandemic pay programs were implemented quickly to get money flowing to those who needed it, with few conditions and little guidance to those administering payroll. As a result, there is uncertainty as to how it will be reported at year-end.

Without additional guidance, the professionals handling payroll must assume that, from the perspective of the Canada Revenue Agency (CRA), additional funds will be treated like regular income, subject to the usual withholdings. Still, many questions remain.

“Those handling payroll year-end want to know: Are the additional funds vacationable (that is, are they earnings on which vacation pay is calculated)? Is it necessary to include this additional payment in overtime premiums?” says Tina Beauchamp, payroll compliance advisor on the CPA’s InfoLine. “Because these are government-mandated subsidies, there is a high likelihood that employers will be able to make a claim to the government to access rebates to fund additional pandemic pay. Still, the government has not yet provided guidance for employers to address these questions.”

Changes relating to conditions of employment
Traditionally, the payroll department has been required to prepare a T2200, Declaration of Conditions of Employment form (TP64-3 in Quebec) for employees required to work primarily out of their home as a condition of employment. The form allows workers to claim expenses incurred in doing their jobs remotely.

These forms are usually prepared by the employer in the year-end period and provided to employees prior to the personal tax filing deadline each year.

As a result of the pandemic, many companies have been forced to move their entire workforces to remote settings, greatly increasing the number of employees working from home and making it likely that payroll and HR professionals will have to now fill out these forms for each employee who requests to claim employment expenses.

Many payroll and HR professionals worry that the length of the form and volume that will need to be created will present a significant administrative burden.

Managing year-end complexity
Now, more than ever, payroll professionals need to equip themselves with the resources and information to navigate these complexities. This alone is a feat of will. The answers to these important questions will likely come piece-meal from government. Professionals should take advantage of resources and training such as those offered by the CPA to keep up to date.  

Alison Rutka is a communications specialist at the Canadian Payroll Association in Toronto. For more information, visit payroll.ca/covid19 or contact [email protected].