Paying Yourself a Salary After the Fact: T4 and Payroll

Can I now pay myself a salary for money I already took out?

A past withdrawal stays what it was until something changes it; a journal entry, even one dated earlier, does not turn it into salary. The CRA looks at what the transaction actually was, not at the account name (shareholder loan folio, paragraph 1.14). What the corporation can do now is pay real salary through payroll: a person paying salary must withhold tax and remit it (Income Tax Act, s. 153). The T4 year follows the date the salary is paid, not the date of a resolution or entry (RC4120). The corporation may then apply the net pay against what you owe it. Tax and CPP come off the gross, so clearing a balance takes more gross salary than the balance, and you are taxed on the gross.

Which row applies is a question of fact, set by the agreement and records when the money moved. A case is not simple if the corporation has no payroll account, the withdrawals span more than one corporate year, a balance is past the one-year deadline, the T2 is unfiled, more than one shareholder took money, someone involved lives outside Canada, you cannot tell which row applies, or the corporation is in Quebec.

Gather the shareholder ledger, bank statements, year-end financial statements, any resolution or agreement setting your pay, and any CRA letters.

What do I set up first to run payroll?

The corporation needs a CRA payroll account under its business number (one it asks for at the same time if it has none), registered before its first remittance is due, which is usually the 15th day of the month after the first pay with deductions (CRA: payroll account registration). Register online through the CRA's Business Registration Online service, which needs a CRA account, or mail Form RC1 if you cannot complete the registration online (CRA: how to register).

Before the first payment, collect your social insurance number and your completed federal Form TD1, plus the provincial or territorial TD1 if one applies (T4001).

Someone has to run each payroll: you can do it yourself with the CRA calculator, or authorize a payroll provider or firm to act for the corporation (T4001). The corporation stays responsible.

Quebec: an employer with employees in Quebec also registers with Revenu Québec for source deductions (Revenu Québec: Employer's Kit). It deducts QPP and QPIP and sends those, with Quebec income tax, to Revenu Québec. Federal tax and EI go to the CRA (T4001). The CRA calculator does not work out Quebec provincial deductions (CRA calculator).

How are the deductions worked out, and what does the corporation remit?

Deductions come off the gross salary, and the corporation sends the amounts it withheld together with its own share. Outside Quebec:

The CRA's payroll calculator works out federal, provincial and territorial deductions; enter the actual pay date and province of employment (CRA calculator). The CRA has a separate method for bonuses and other irregular amounts (CRA: bonuses and irregular amounts). Whether one lump sum that settles months of pay follows that method or regular pay periods is a judgment to make before running the payroll, not a default.

CPP is deducted from age 18 through 69. An owner aged 65 to 69 who receives a CPP or QPP retirement pension can give the corporation a signed Form CPT30 to stop contributions (T4001).

On EI, the CRA lists as not insurable the employment of a person who controls more than 40% of the corporation's voting shares (T4001). Whether your pay is insurable depends on your relationship to the corporation; Owner-only payroll covers it.

Can the salary clear what I owe the corporation?

Part of it. The corporation owes you the gross salary, but it must hand the withheld tax and CPP to the CRA, so only the net pay is available to apply against your balance.

For the application to count as repayment, the CRA looks for a set-off (an agreement and entry that cancel what you owe against what the corporation owes you) that legally discharges the debt, evidenced by the agreements and accounting records, and says repayments made by applying salary, bonus or dividend payments owed to the borrower are not treated as part of a series of loans and repayments, even if you borrow again later (folio, paragraphs 1.82 and 1.86). The loan exception turns on repayment within one year after the end of the corporation's tax year in which the loan was made; Shareholder loans covers that rule. Repaying principal through salary does not erase a taxable interest benefit on a low-interest or interest-free shareholder loan for the time it was outstanding, even within that window (Income Tax Act, s. 80.4(2)); Shareholder loans covers the interest and reporting. To record the entries, see the shareholder loan account.

Which year's T4 reports the salary?

The T4 for the calendar year the salary is paid, whenever it was earned (RC4120). Paying salary now does not move an earlier withdrawal onto this year's T4. If an earlier withdrawal was really pay, it was reportable for the year it was paid, and whether an earlier-year slip is needed depends on the facts; see Late T4 and T5 slips.

The T4 and its summary are due the last day of February following the calendar year to which the slips apply (RC4120). A slip is required when CPP, EI or income tax had to be deducted, or when remuneration is more than $500. For a late slip, see Late T4 and T5 slips. The salary is employment income on your own return for the same calendar year. For Quebec employment, the employer also files RL-1 slips and the RL-1 summary with Revenu Québec, generally by the last day of February of the following year (Revenu Québec: RL-1 slip guide).

When does the corporation deduct the salary, and what is the 180-day rule?

The deduction goes in the corporation's tax year, not the calendar year on the T4, and only to the extent the salary was reasonable in the circumstances (Income Tax Act, s. 67). Salary that is still unpaid 180 days after the end of the tax year in which it was incurred is treated as incurred in the year it is paid instead (Income Tax Act, s. 78(4)).

The 180 days run from the corporation's year-end, not from the date you took the money. Section 78(4) applies only to pay that was an expense of the earlier year to begin with. Whether pay settled after year-end was incurred in that year depends on the facts, including what the corporation had agreed or resolved by year-end; the Act's text does not settle it for a particular case. If the aim is to bring the corporation's income down to the small business limit, see Bonus down to the small business limit.

Can I choose the amount and how often I am paid?

Yes, within limits. The corporation sets the amount, which is deductible only to the extent reasonable, and the pay period; the CRA's tables follow the pay period the payer uses (T4001). Each payment brings deductions and a remittance.

A new employer that meets these conditions remits quarterly unless the CRA says otherwise on its statement of account (CRA: how and when to remit). If it is unsure, the Employers' Guide says to remit monthly until the CRA confirms quarterly remitting (T4001). The monthly withholding amount is all required remittances in one calendar month, so a large catch-up salary can push a month over the limit, and a new employer that no longer qualifies becomes a regular remitter from the next calendar quarter (CRA: types of remitters). The CRA's summary names only payroll and GST/HST compliance; the regulation also requires every other return due under the Income Tax Act to have been filed on time (Income Tax Regulations, s. 108(1.4)), so an overdue T2 can mean the corporation does not qualify. A due date on a weekend or CRA holiday moves to the next business day.

What penalties apply if deductions were missed or remitted late?

The corporation can face a penalty for not deducting, a penalty for late or missing remittances, and interest.

The CRA also charges interest on amounts not deducted or not remitted (s. 227(8.3) and (9.2)), and the directors of the corporation at the time can be personally liable, with it, for amounts not deducted or not remitted, subject to a due-diligence defence; no action against a director can start more than two years after the director last ceased to be a director (s. 227.1). The day-by-day steps, interest, penalty relief, voluntary disclosure, director liability and getting current are in Late payroll remittance.

If the corporation fails to deduct CPP and EI, the CRA assesses both the employer's and the employee's share, even when the employee cannot be made to repay it (T4001). The risk is highest where past withdrawals were really pay and no payroll was run: the deduction duty attaches to the payment of salary, so those payments can fall under these rules rather than the shareholder-loan rules.

Is a dividend a simpler fix?

Sometimes, but it is a different payment. A dividend is a distribution on shares, not pay for work. It is reported on a T5, not a T4 (T5 guide).

A dividend must still be properly declared and paid, and the corporation needs to be able to pay one; Declaring and paying a dividend covers that. A dividend applied against a loan also counts as repayment under the folio. Salary and dividends are taxed, and affect CPP and RRSP room, differently: compare them in Salary or dividends.

What if several years of withdrawals, an old balance or an unfiled T2 are involved?

One salary payment rarely settles it. Each year's withdrawals may have their own repayment deadline, and an unfiled T2 means the corporation's own filings are behind as well. A common order is:

1. Rebuild the shareholder ledger, year by year, from the bank statements.
2. Decide for each year what the money was and whether its repayment deadline has passed.
3. Set up payroll and decide the salary amount and method.
4. File the missing T2, T4 and remittances.

The right order depends on which years are open and whether the CRA has sent notices. See Catching up on unfiled corporate returns for the filings, and Shareholder loans for years where the loan may already have been taxed.

Example

Illustrative only; all amounts are Canadian dollars. The withheld amounts are assumed figures, not a payroll calculation. The tax actually withheld on one large payment depends on the payroll method, so the gross needed to leave a given net can be higher than shown. Any separate taxable loan-interest benefit is outside these figures.

C$48,000 taken out, no payroll account

A consulting corporation with a December 31 year-end took C$48,000 out for its owner during the year. Assume the money was a genuine loan, the owner's pay is not EI-insurable, and the set-off is documented as repayment. In December it opens a payroll account and pays C$60,000 of gross salary in one monthly payroll. Assumed withholdings are C$12,000, so net pay is C$48,000, which the corporation applies against the balance in writing. Its own CPP share is about C$3,550 (5.95% of the pay above one month's basic exemption of C$291.66), so it remits about C$15,550. That remittance is far above the new-employer quarterly limit; the CRA moves such an employer to monthly remitting from the next calendar quarter, and for a December payroll January 15 is the due date either way. The T4 shows C$60,000 for that calendar year. Had it paid only C$48,000 gross, assumed withholdings of C$10,000 would leave C$38,000 net and C$10,000 still owing. Had the withdrawals been advances of pay, deductions were due as each was paid, and the penalties above could apply.

C$30,000 taken last year

The same corporation's owner took C$30,000 in Year 1 as a genuine loan and the corporation starts payroll in Year 2. The Year 2 T4 shows only Year 2 pay. The Year 1 withdrawal stays a loan until it is repaid. With a December 31 year-end, the one-year deadline for a Year 1 loan is December 31 of Year 2; net pay applied before then can meet it if the set-off is documented as repayment, and the rest is addressed in Shareholder loans.

C$5,000 a month from next month

The owner decides to take C$5,000 a month as salary starting next month. The corporation runs payroll each month. Assume monthly withholdings of C$700 income tax and C$280 employee CPP, plus C$280 matching corporate CPP (EI left out): about C$1,260 a month, above the new-employer quarterly limit. The CRA then treats the corporation as a regular remitter from the next calendar quarter, remitting by the 15th of the following month. No past withdrawal is relabelled; the balance is dealt with separately.

Different for you?

• The year-end close shows large withdrawals and no payroll account exists, or you cannot tell whether the money was a loan or pay: the salary amount, how it is paid and reported, what the corporation owes the CRA, and whether late-deduction penalties apply all turn on your records. Bring them to corporate tax help.
• The balance is older than one year past the corporation's year-end: the loan may already have been taxable; see Shareholder loans.
• The corporation's T2 or payroll returns were never filed: see Catching up on unfiled corporate returns.
• You missed remittances or paid late, or the CRA has written to the corporation about payroll: see Late payroll remittance; whether relief or voluntary disclosure is still open depends on what the CRA has already sent, so bring the letters to corporate tax help.
• You are the only person on payroll, or the question is EI: see Owner-only payroll.
• More than one shareholder took money, or a family member is on payroll: see Shareholders taking different amounts and Paying family members.
• The corporation is in Quebec, or the owner or a shareholder lives outside Canada: bring the facts to corporate tax help, or cross-border tax help where two countries are involved.
• You are planning pay in your first year: see Paying yourself in the first year.
• The shareholder account and payroll entries need rebuilding: see Recording a payroll run and Bookkeeping help.