If you have ever had a job in Canada you’ve likely received a T4 slip at some point in your life, whether it was for a summer student job or as a full-employee in your career.
But what exactly is a T4 slip and why is it important that it is prepared? (You can download a copy of a T4 Slip here)
A T4 slip is a mandatory requirement by CRA (Canada Revenue Agency) for all employers to provide to their employees as well as file with CRA. There are two parts to the T4 Filing process
- Preparing the T4 Slip that is provided to the employee
- Preparing the T4 Summary that is provided to CRA
In its simplest terms, the T4 slip is an information slip reporting how much you, as an employer, has paid to its individual employees in a calendar year. The T4 slip reports not only the wages we most often think of as our income, but also any other expenses paid out on our employees behalf, such as RRSP contributions, or medical and dental benefits or car allowance. All of these subsidiary payments are considered taxable benefits to your employees and therefore must be reported to CRA.
The T4 slip provided to the employee outlines all monies that are paid to them in the form of salary, wages (including termination pay in lieu of notice) bonuses, vacation pay, tips and gratuities, honorariums, director’s fees, management fees, and executor’s and administrator’s fees received to administer an estate). All of these types of income are reported in Box 14 of the T4 Slip.
The remaining boxes on the T4 Slip breakdown the individual deductions/payments made to the employees. It is important that deductions are made for CPP, EI and Income tax from the employee’s paycheque throughout the year to avoid you being charged “Failure to deduct” penalties.
(CRA can assess you a penalty of 10% of the amount of CPP, EI, and income tax you fail to deduct. If this happens more than once in a calendar year, they can apply a 20% penalty to the second or later failures if they were made knowingly or under circumstances of gross negligence, so you definitely don’t want to get on their bad sideJ)
The T4 Summary is prepared for the purposes of CRA to summarize the total wages you paid and deductions you made across all of your employees. They will compare the amounts deducted for CPP, EI and Income tax on this report against the source deductions remittances you made throughout last year. The calculations that are required in the T4 summary will show you whether you under or over-remitted throughout the year. If you have under remitted your source deductions, you should make the shortfall payment to CRA either with the return or through your banking institution as soon as possible to avoid any additional penalties.