When most employees receive their T4 slip, they focus on the tax hit and contributions to the Canada Pension Plan and employment insurance.
Rarely do they check whether the employer made an error until an accountant catches it or they receive a notice from the Canada Revenue Agency.
Accountants say it’s not uncommon for small businesses to make mistakes on T4s, either because the employers don’t understand what benefits are taxable to employees, or they simply forget to include them.
“It’s more common that most people think,” says Gabrielle Loren, Gabrielle Loren, a chartered professional accountant and partner, business development, at the B.C.-based accounting firm Loren Nancke & Co.
“Smaller employers get caught up in some things, larger employers in others. If they use a payroll service, there are even no guarantees there,” Ms. Loren says. “That’s why CRA has a payroll division.”
Here are five common mistakes employers make on T4s that employees should be aware of.
Employers need to include on a T4 slip what they pay to cover an employee’s life, accidental death and dismemberment (AD&D) and critical illness insurance.
“It needs to be included because it’s a taxable benefit,” says Chris Gory, president and employee benefits adviser at Toronto-based Insurance Portfolio Financial Services.
Mr. Gory cites the example of an employee whose company each month pays $10 for life insurance, $5 for AD&D and $10 for critical illness coverage. At the end of the year, the $300 ($25 x 12 months) needs to be added as taxable income if the employer has paid 100 per cent of the premiums.
That means an employee who earns $100,000 a year and receives $300 in insurance benefits will be taxed on the sum of $100,300.
Health and wellness spending
More companies are offering employees cash each month to spend on health and wellness activities, such as a gym membership or personal trainer.
These benefits are taxable, unlike benefits an employee might receive as part of a health plan, such as $500 in annual massage benefits. Some employers forget to add the taxable wellness benefits to the T4 slips, says Mr. Gory. That could be in part because it’s a newer perk offered to employees that not all businesses fully understand yet.
It’s similar for B.C. companies that cover the monthly medical services plan (MSP) cost for their employees. The problem arises when the employer doesn’t include the MSP paid as a taxable benefit on the T4.
“If they don’t fill out the right boxes ... it could come back to bite [them],” Ms. Loren says.
Employees who receive a commission as part of their earnings should make sure the employer recognizes it on the T4. If not, it could limit the amount an employee can deduct for out-of-pocket expenses required to earn the commission, such as business travel or meals.
Ms. Loren says employers need to fill out a T2200 form, which declares conditions of employment, including whether an employee needs to spend his or her own money in the course of doing business. Employees can’t prepare their own T2200; the employer has to provide it.
“I can’t count the number of times we had to go back to the employer and ask for the T2200 and ask them to amend the T4 to include commissions,” says Ms. Loren. “It’s really easy when you’re still working for the same employer, but it can get more difficult if you leave, especially if it was a bad breakup.”
Some employers offer their workers a car allowance if they use their own vehicle for business purposes. Employees need to pay tax on that benefit. For example, a $500-a-month car allowance would mean a taxable benefit of $6,000 a year.
Once again, the employer needs to provide a form T2200 that allows the employee to deduct car expenses used for business, such as gas or insurance.
“The mistake is when an employer doesn’t include it on the T4,” or doesn’t provide the T2200, says Ms. Loren.
Sending employees on all-expenses-paid vacations doesn’t happen that often, but when it does, employers need to include the value of that benefit on an employee’s T4.
“Because it’s not a direct benefit to the employer, and is a direct benefit to the employee, they have to pay tax on the value of that trip,” says Ms. Loren.
She recalls the CRA cracking down on a large pharmaceutical company a few years back when it didn’t include the vacation benefit on its employees’ tax forms. “It can still be a good for the employee,” she says. “You’re further ahead having a taxable benefit as an employee than paying for something with the after-tax money.”
Still, Ms. Loren says employers should be upfront with employees about the tax implications of a trip that’s not directly business-related.
Mr. Gory says employees shouldn’t be afraid to ask about any of the benefits they receive – and the potential tax implications. “Take ownership of your plan,” he says.