CRA Payroll Examinations and Worker Status Rulings

The CRA called about a trust account examination. What happens next?

A trust account examination checks whether your business reported pay and benefits, withheld the required payroll amounts, and remitted them. The CRA can also examine whether people paid as contractors were employees. It may review GST/HST at the same time; a broader income-tax audit follows a different process (CRA: trust accounts examinations).

Confirm the caller's identity through a published CRA number before sharing records. Ask which payroll account, periods and issues are under review, what records the officer wants, and when they are due. The examination can occur at your workplace or through online document submission. If you cannot meet the stated date, contact the assigned officer promptly to ask for more time. The CRA may make adjustments using the information it has if you do not supply the requested records (CRA: examination process).

At the end, the officer discusses the findings. The CRA may issue corrected or added T4 slips, a payroll examination statement, and a separate notice of assessment if there is a balance owing. Reconcile the statement and any separate assessment promptly. The CRA says an amount owing on the statement is past due and payable immediately; if you cannot pay in full, ask about a payment arrangement while tracking any assessment appeal deadline (CRA: examination results).

Which payroll, contractor and bank records should I gather?

Gather records for the specific people and periods in the CRA request, then reconcile gross pay, deductions, remittances and slips. The CRA identifies payroll journals, T4 and T4A returns, bank statements, cancelled cheques, cash journals, general ledgers, and documents about taxable benefits and other workers as possible examination records (CRA: books and records).

Keep the CRA letter, ruling or notice beside your reconciliation. If records are missing, ask the officer about acceptable substitutes, such as copies from a bank or supplier, rather than leaving unexplained gaps (CRA: missing documents).

The CRA says my invoicing contractor was an employee. What must I correct?

Read the ruling or examination findings for the named worker, the periods covered, and whether the work was pensionable, insurable, or both. A CPP/EI ruling applies to specified periods; if the working terms later change, another ruling may be needed (CRA: after a ruling).

If a ruling instead removes CPP or EI coverage, correct the slips and check for a refund. The employer can request its overpaid share on Form PD24 within four years after the CPP year or three years after the EI year; the worker can claim their overpayment on a return or request a reassessment (CRA: after a ruling; CRA: refund limits).

Rebuild each affected pay period from the payments actually made. Calculate the payroll deductions and employer contributions that apply, compare them with the remittances and slips already filed, and correct the payroll account and worker reporting as directed by the CRA. An examination officer may add or amend T4 and T4A slips when a worker's status changes; give the worker the copies the CRA sends (CRA: examination results). The worker's own return may also need reassessment because employment and self-employment expenses differ (CRA: reassessments after payroll reviews).

If the worker had an interruption of earnings or Service Canada requests it, check whether you must issue a Record of Employment (ROE). Reconstruct insurable hours and earnings; a corrected T4 does not replace an ROE. An electronic ROE is normally due within five calendar days after the pay period of interruption; a paper ROE is due within five calendar days of the interruption or when you learn of it (CRA: ROE timing).

An invoice or a contract calling someone self-employed does not settle employment status. For how to assess a new working relationship before a ruling, see Running payroll.

Will my business owe both the worker's and employer's CPP and EI shares?

If CPP or EI should have been deducted but was not, the employer is responsible for both shares, even if it cannot recover the worker's share. Penalties and interest may also apply. Whether CPP, EI, or both apply depends on the worker and the ruling, so do not assume every employee owes both (CRA: failure to deduct).

There is a narrow exception when an earlier written CRA ruling said no deduction was required, the employer gave materially correct information, and a later appeal reverses that ruling. For the earlier period, CPP section 21(3) and EI section 82(5) protect the employer from the worker share and related interest or penalties; its own share remains payable without interest or penalties.

For high pensionable earnings, reconcile second additional CPP contributions (CPP2), or the corresponding QPP contributions for Quebec employment. Each has a worker and employer share (CRA: CPP2; Revenu Québec: QPP).

For Quebec employment, check QPP instead of CPP, the reduced Quebec EI rate, QPIP, and Quebec income tax. Reconcile Revenu Québec's separate RL-1 slips and RL-1 summary; after reviewing them, it may send an LMU-141, LMU-150 or LMU-142 statement or an assessment (CRA: employment in Quebec; Revenu Québec: RL-1 filing guide).

The employer can recover an underdeducted worker share from later pay, subject to the limit on each later deduction and the 12-month recovery limit. It cannot take its own share from the worker or reduce income-tax withholding to cover a CPP/EI shortage. If the worker no longer receives pay, that recovery route may be unavailable (CRA: recovering CPP and EI).

The CRA can charge 10% of missed CPP, EI or income-tax deductions, or 20% for a later knowing or grossly negligent failure in the same calendar year. Late remittances can draw 3% at one to three days, 5% at four or five days, 7% at six or seven days, and 10% after seven days or no remittance. Ordinarily, the penalty applies only to the shortfall above $500; a later knowing or grossly negligent failure can draw 20% on the whole shortfall (CRA: payroll penalties).

Can the CRA assess income tax I failed to deduct?

For an ordinary resident employee, income tax never deducted from pay is generally the worker's tax to settle on their return, while the employer may face a failure-to-deduct penalty and interest on the missed withholding. Tell the worker about the shortfall promptly; the worker may pay it on filing or ask for extra deductions from later pay. By contrast, income tax you actually withheld is a trust amount that your business must remit (CRA: failure to deduct and remit; Income Tax Act, section 227).

Do not treat every unpaid withholding case alike. Income Tax Act, subsection 227(8.4) makes a payer liable for tax it failed to withhold under section 153 from a non-resident worker. A treaty tie-breaker can make a worker otherwise resident in Canada a deemed non-resident under subsection 250(5). If an assessment includes the tax itself, check residence, any approved withholding waiver, payment type and stated legal basis (CRA: non-resident employees). Relief requests are covered in Penalties, interest and relief.

I paid myself, family or casual workers in cash. Does that change payroll duties?

Cash payment does not remove payroll duties when the payment is employment pay. Reconstruct dates, amounts, work performed and recipients from the cash journal, withdrawals and messages; then test each person's status and the deductions that applied. CRA examinations expressly look for casual-worker pay and amounts outside the wage journal (CRA: examination records).

If cash was employment pay, reconcile the missing deductions and employer contributions with the officer, confirm whether the CRA will add or amend T4 slips, and give workers the copies the CRA sends (CRA: examination results).

If you are a sole proprietor or partner, separate your own draw from wages paid to workers. The CRA says salaries or draws paid to you or your partners are not deductible as employee wages; self-employed CPP or QPP is handled through the owner's return (CRA: owner draws and wages).

For an incorporated owner, establish whether a withdrawal was salary, a dividend, a loan, or a shareholder benefit. A shareholder benefit is reported differently from an employee benefit and does not carry payroll withholding under the CRA's guidance; changing the label after payment does not establish what actually happened (CRA: shareholder benefits). Salary paid to an owner who controls more than 40% of the corporation's voting shares is not insurable for EI (CRA: employment exclusions). Related employees may still require CPP and income-tax deductions, although EI insurability can differ (CRA: family employees). Casual work can also be pensionable and insurable; the casual-employment exception requires work that is both casual and for a purpose outside the employer's trade or business (CRA: casual employment). For what salary a family member may receive, see Paying family members.

Which taxable benefits can create a payroll deficiency?

An omitted taxable benefit can increase T4 income and create missing income-tax or CPP deductions. Check personal use of an employer vehicle, parking, taxable vehicle allowances, gifts, meals, housing and low-interest loans against the benefit records and T4 codes (CRA: taxable benefits and allowances; CRA: examination of benefits).

The treatment turns on the benefit's form and why it was provided. Except for security options, if a non-cash taxable benefit is the employee's only remuneration, there is no pay from which to withhold income tax or CPP, and the employer need not remit its CPP share. The benefit still goes on a T4 (CRA: non-cash benefits).

My PIER notice says CPP or EI on a T4 was short. How do I respond?

A PIER compares CPP and EI required on each worker's pensionable or insurable earnings with the amounts reported on the T4. Review the named workers, earnings, exemption boxes and calculations against the payroll ledger. For a CPP gap, check any Form CPT30 election: an employee aged 65 to 69 who receives a CPP or QPP retirement pension signs it, gives the employer a copy and sends the original to the CRA. It takes effect the first day of the month after the employer receives the copy, not for earlier pay. For a separate Quebec QPP gap, a pension recipient aged at least 65 but under 73 at year end uses Form RR-50-V; it takes effect the first day of the month after the employer receives it. The PIER package requests a reply within 30 calendar days (CRA: PIER).

If you agree and pay the exact amount by the notice's deadline, the CRA says no separate response is needed. If you disagree, return the PIER with corrected information and an explanation by that date. If neither a reply nor full payment arrives, the CRA may assess the amount with penalties or interest. Do not send amended T4 slips for a PIER: the CRA prepares any amended slips and sends them to you to give to the worker (CRA: responding to a PIER).

My PD4R says T4 deductions and remittances differ. What do I reconcile?

A PD4R compares annual remittances with deductions reported on T4-type slips. It can show a debit or a credit; neither automatically proves that the slips are right. Reconcile each pay period's deductions, employer CPP/EI share, remittance dates and account number against the T4 summary and CRA payroll statement (CRA: PD4R).

You must respond to the PD4R with an explanation even if you already requested a slip correction. Reply through the CRA's notice-response service or by mail as the notice directs. An unanswered debit may become a payroll assessment (CRA: PD4R response).

Can I appeal a CPP/EI worker-status ruling, and when?

The payer and worker can each appeal a CPP/EI ruling within 90 days after being notified of it. File through the CRA's business or representative account, or send Form CPT100 or a written appeal as directed. Preserve the ruling letter, service date, contracts, invoices and evidence of how the work was actually performed (CRA: appeal a CPP/EI ruling).

A payroll assessment is separate from the ruling. Check both documents and their dates. Appeal a CPP/EI assessment within 90 days after receiving it using Form CPT101 or the CRA's online appeal service. Object to an income-tax assessment using Form T400A or the online objection service within 90 days after the CRA sends it; for an individual, the deadline is one year after the return's due date if that is later. A conversation with the examiner is not a filed appeal (CRA: payroll assessment disputes).

Check how old each assessed period is. The CRA generally cannot assess an employer for CPP more than four years after the earliest contribution due date, or for EI more than three years after the end of the year the premium was due; misrepresentation or fraud removes those limits (Canada Pension Plan, section 22(3); Employment Insurance Act, section 85(3)).

Can a corporate director be personally liable for unpaid source deductions?

Yes. A director who held office when a corporation failed to deduct, withhold or remit required payroll amounts can be assessed personally, with applicable penalties and interest, under Income Tax Act section 227.1, Canada Pension Plan section 21.1 or Employment Insurance Act section 83. The CRA must establish an unsatisfied Federal Court execution against the corporation or a claim proved within six months after liquidation starts or dissolution (whichever is earlier), or after a bankruptcy assignment or order. A director may avoid liability by showing due diligence to prevent the failure; the CRA must act within two years after the person last ceased to be a director.

A sole proprietor owes payroll amounts directly as the employer under CPP section 21, EI section 82 and Income Tax Act section 153. General partners can personally owe firm debts incurred while they were partners; for example, Ontario section 10 and British Columbia section 11 say so. Limited partnership liability varies by province and partner type.

Keep the corporate payroll records, bank and remittance evidence, board records, and any steps taken to prevent or correct the failure. A director-liability letter or assessment warrants prompt review because corporate status alone does not settle the question.

Example

Illustrative Canadian-dollar amounts only; these are assumed amounts, not a calculation of payroll rates. A business outside Quebec paid an invoicing worker C$20,000. A CRA ruling says the work was both pensionable and insurable. Reconstructed payroll shows C$1,000 of employee CPP, C$1,000 of employer CPP, C$300 of employee EI, and C$420 of employer EI should have applied. The business may need to remit C$2,720 in CPP and EI before penalties and interest, even if the worker no longer receives pay. It separately checks whether income tax was never deducted or was deducted but not remitted, and whether the CRA will issue corrected T4 slips. If the employer disputes the ruling, it tracks the ruling appeal deadline while reconciling the assessment.

Different for you?

• You are setting up payroll or assessing a worker before a ruling: see Running payroll.
• You missed contractor T4A or T5018 slips: see Reporting payments to subcontractors.
• You need penalty calculations or relief: see Penalties, interest and relief.
• The CRA is reviewing income tax beyond payroll, or you have unreported years: see Reviews, audits and voluntary disclosure.
• You paid a spouse or child: see Paying family members.
• Your employee reports for work in Quebec: Quebec income tax, QPP and QPIP involve separate Revenu Québec calculations and remittances (Revenu Québec); get bookkeeping help to reconcile both payroll accounts.
• You have a worker-status assessment, missed remittances, several affected years, or a director-liability notice: gather every notice, ruling, slip, payroll ledger, contractor agreement and payment record, then get bookkeeping help before the stated response dates.