The Canada Revenue Agency distinguishes two broad classes of employee compensation: employment income and other related amounts. The T4 reports employment income and the T4A reports the remainder.

What is Reported in a T4?

The T4 reports:

• Salaries;
• Wages;
• Tips and gratuities;
• Bonuses;
• Vacation pay;
• Employment commissions;
• Taxable benefits or allowances;
• Deductions withheld during the year; and
• Pension adjustment amounts for employees who accrued a benefit for the year under a registered pension plan or deferred profit-sharing plan.

Pitfalls

Employers often do not complete the CPP and EI boxes correctly. If the employee is exempt from either, the exempt box should be ticked. An employee must be over 18 to pay CPP. Once the employee starts collecting a CPP pension, no further deductions should be made. An employee under the age of 18 usually has to have EI amounts deducted.

Low-interest or interest-free loans to employees or shareholders are taxable benefits. A prescribed interest rate, which is set quarterly, is used to calculate the amount to be taken into income. The rate for the first quarter of 2008 is 4%. An appropriate withholding tax should be deducted by the employer.

Making sure the right items are reported correctly on the T4 is important for several reasons:

• Employment income is the basis for the calculation of other line items such as the RRSP contribution limit for next year, Canada Pension Plan contributions and child care expenses, to name a few.
• The employer must withhold and remit income taxes, CPP and EI at source rather than have the employee report “other earned income” at the end of the year.
• The CRA wants to ensure that employers pay their share of CPP and EI.
• The amount of employment income paid to employees and/or owner/managers may trigger the payment of other taxes, such as a provincial payroll tax, depending on the provincial jurisdiction.

What is Reported in a T4A?

The T4A reports income types that do not fall under the definition of employment income. These types include:

• Pension or superannuation;
• Lump sum payments;
• Self-employed commissions;
• Annuities;
• Retiring allowances;
• RESP accumulated income payments;
• Fees or other amounts for service;
• Death benefits;
• Research grants;
• Payments under a wage-loss replacement plan; and
• Certain benefits paid to partnerships or shareholders.

If an employer is paying taxable group life insurance benefits to former employees or retired employees, T4As must be filed even if the total benefits paid in the calendar year do not exceed $500.

If you are unsure whether payments or benefits should be assigned to a T4 or a T4A, contact your chartered accountant for guidance. The appropriate allocation will ensure your business provides accurate information to employees for tax planning purposes, meets CRA requirements, and eliminates any possible penalties and interest.

Amendments

If, after filing the T4 and T4A Summaries, it is discovered that additional amounts should have been allocated to the employee's income, the employer will need to file an amended slip with the CRA.

Avoid Mistakes to Avoid Penalties

By recording the various types of employee remuneration correctly, management can avoid CRA penalties and interest. Attention to the categories in these two broad classes of compensation will pay off in the time saved reclassifying items and paying penalties and interest later. For difficult decisions, consult your chartered accountant.