Through the Pensionable and Insurable Earnings Review (or PIER), the CRA has established a good method for figuring out if you’ve withheld enough money for CPP and EI; they’ll deal with the employee directly for any tax overage or shortage.
As a payroll administrator, the best thing you can do before submitting your T4s is to run your own PIER. Ensuring your data is clear and correct before sending it to the CRA will avoid the hassle of a CRA review, and ultimately, make your company’s year-end a breeze to handle.
Calculating insurable earnings
Start with the insurable part of the Pensionable and Insurable Earnings Review. Calculating insurable earnings is as simple as multiplying insurable earnings by 1.88%. There is no exemption for insurable earnings.
Note: If an employee is EI or CPP exempt, their insurable or pensionable earnings (as appropriate) MUST be equal to 0. Entering a number greater than 0 will cause confusion and will likely prompt a review to be manually entered on the T4 itself if processing a paper T4.
Calculating pensionable earnings
Calculating Pensionable Earnings is a little more difficult. Everyone is entitled to a $3500 annual exemption. This is then prorated across the number of pay periods the employee works, or number of months the employee is not CPP-exempt. If an employee only works for half the year, they only receive half the exemption. So you’ll need to know how many pay periods an employee worked.
To calculate CPP, take the employee’s box 26, and subtract the annual exemption (3500) divided by the number of pay periods in the year, multiplied by the number of pay periods the employee worked. You then multiply that number by 4.95% to arrive at their CPP for the year. This is how the CRA does it, but watch out, as it can cause some issues.
For a monthly employee, the CPP exemption is 3500 / 12, for $291.67. However, if an employee makes less than the exemption in a pay period, this can result in a “false positive” or other errors. For instance, if an employee makes $200 and has the monthly exemption of $291.67, their CPP for that period would be (200-291.67)*.0495, which is -4.54 and incorrect! If you carry this through the year, it can show a possible overpayment. Any issues identified by a PIER should be investigated per pay period, as a false positive can be a result of low earnings.
Identifying and correcting errors
Using the above two formulas, you can quickly identify any potentially problematic employees. If it’s before December 31st, you can often easily correct these errors by deducting or paying back extra EI or CPP to employees—if they’re legitimate errors.
You can, of course, submit T4s with these errors and let the CRA sort it out; in the event of an underpayment, you’ll just pay them the missing money, and in the event of an overpayment, they’d pay back the employee and refund the money to you.
Want more information and guidance on conquering year-end without a hitch? Download our free ebook, The Year-End Guide for Canadian Payroll Pros.