What if I make a clerical, administrative, or system error resulting in a salary overpayment? On April 6, 2020, CRA released the updated guide RC4120 Employers’ Guide – Filing the T4 slip and Summary providing detailed instructions on these such issues.
The employer may elect to have the employee repay the net amount (gross amount less CPP, EI and income tax withheld) overpaid due to the error, provided they meet the following criteria:
- no later than three years after the end of the year in which the salary was overpaid
- the employer made the election in the prescribed manner (see below),
- the employee repaid or arranged to repay the net amount of the overpayment;
- the employer did not issue a T4 slip with the employee’s correct earnings (that is, with the salary overpayment removed); and
- the employer’s business is actively operating.
This election would reduce the cashflow burden the employee would otherwise bear.
The election is made by either excluding the salary overpayment from an original T4 slip or amending a T4 slip to remove the overpayment and reducing the corresponding income tax deducted, along with CPP and EI withheld and remitted.
Repayment after the T4 is issued
If the employee repays or arranges to repay after the original T4 is issued, the employer must amend the T4 slip appropriately, including any relevant CPP and EI adjustments.
After CRA receives and processes the amended T4, it will credit the income tax, CPP and EI remitted on the salary overpayment made in error (including the employer’s share of CPP contributions and EI premiums) to the employer’s payroll program account. The employer can then reduce the next payroll remittance by the credited amount.
Finally, CRA also provided guidance and examples for situations in which the employer does not elect to have the net amount repaid, and the gross amount is repaid instead.
ACTION ITEM: Over the course of the COVID-19 pandemic, many adjustments have been made to payroll for businesses. If a T4 correction or wage adjustment is required, consult with the detailed guidance in publication RC4120, or reach out for assistance.