When an error happens and an employee is overpaid, what is best practice for correcting the mistake?
If you make a payment or an overpayment of salary, wages or other remuneration to an employee, how you correct this will depend on the reason the employee was overpaid and the year in which the employee repaid the amount.
Employee did not perform duties
If an employee was paid for work they didn't perform, when an employee repays you, in the same or a later year, for salary or wages received when the employee did not perform his or her duties, the repayment is considered to be a repayment of salary and wages. Examples include an employee who was advanced vacation leave credits, but quit working for you before actually earning the credits; or an employee who was paid a signing bonus but did not work for the time agreed to in the employment contract.
You cannot adjust the employee's T4 slip or the payroll records to reduce the total employment income or source deductions by the amount of the repayment. Your employer's share of CPP contributions and EI premiums is not refundable.
You should give the employee a letter confirming the tax year when the overpayment was included in the employee's income as well as the date, the reason, and the amount of repayment you received. The employee may claim a deduction on his or her personal income tax and benefits return in the year the amount was repaid.
In September 2013, Peter became ill and was unable to work. You continue to pay his regular salary. In February 2013, he begins to receive payments from a wage loss replacement plan and repays you the amount of salary he received from September 2012 to February 2013. Do not adjust his 2012 T4 slip to reduce the total employment income and CPP/QPP pensionable and EI or PPIP insurable earnings or the current year pay records to reflect the amount of repayment. Instead, Peter can claim a deduction for the repayment on his 2013 income tax and benefit return by providing a copy of the letter you gave him confirming the date and the amount he repaid to you and the year the amount was included in income.
Clerical or administrative errors
The CRA will not consider an amount to be salary, wages, or an advance in the year the employee received it if the employee is overpaid because of an administration or clerical error (mistake). If you discover the error after issuing a T4 slip for the employee, you must issue an amended T4 slip for that year to exclude this amount.
However, the amount should be included on a T4 slip in the following situations:
- The employee says he or she will repay the amount and does not. Include the amount in employment income in the year the employee agrees to repay the amount but does not.
- The employee says he or she will not repay the amount. Include the amount in employment income in the year of the overpayment.
- The employer forgoes his or her right to the amount. Include the amount in employment income in the year of forgiveness.
- There was knowledge or collusion and the employee does not repay the amount. Include the amount in employment income in the year of the overpayment.
Your employee should repay you the gross amount of the salary overpayment if you did not withhold CPP, EI or income tax deductions when the amount was paid to the employee or you are not able to reduce your next payroll remittance to the CRA for that year. Your employee should also repay you the gross amount if the salary paid in error and the repayment are in a different tax year. In these situations, you will have to include the deductions on the employee's original (or amended) T4 slip, but you should reduce the employee's total income, and the CPP pensionable and EI insurable earnings by the amount of the salary repayment.
If you had to report the CPP and EI deductions withheld in error on the employee's T4 slip, you can ask for a refund of the employer's share of CPP contributions or EI premiums that you deducted in error by completing Form PD24, Application For a Refund of Overdeducted CPP Contributions or EI Premiums. You can request a refund up to four years after the end of the year in which the CPP overpayment occurred, or three years in the case of an EI overpayment.
In 2012, because of a calculation error, you overpaid your employee $300. She agrees to repay this amount in 2013. You may amend the 2012 T4 slip to reduce the total employment income, as well as the CPP/QPP pensionable and EI insurable earnings, by $300. Do not adjust the amount of CPP/QPP, EI, and income tax deducted. The employee will not be able to claim a deduction from income in the 2013 tax year for the repayment, but she can amend her 2012 income tax and benefit return. You can ask for a refund of the CPP contributions or EI premiums that you deducted in error.
If you allow your employee to repay the overpayment in instalments, you may have to calculate a taxable interest benefit. For more information, go to Interest-free or low-interest loans.
Source: the Canada Revenue Agency website
- Natasha Smyth B.Sc.(Agr.), CPM
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