Why relying on your T4 slips to calculate income could lead to a nasty tax surprise

THE RULES ON PREPARATION OF THE SLIPS ARE STRICT, DEADLINES ARE TIGHT AND THE PENALTIES FOR NOT FILING OR FILING INCORRECT SLIPS ARE SEVERE.

If you’re an employee, it’s reasonable to assume that the total amount you received as pay during the year, including the value of any bonus or taxable benefits, is properly reflected on your T4 tax slip issued by your employer following the end of each calendar year. But, what if your employer makes a mistake and omits some of the income it paid you from the total employment income on your T4 slip? Are you still responsible for the tax owing? What about any arrears interest charged on the income not reported?

While most of us don’t give our tax reporting slips a second thought, filing them away in a drawer until it’s time to prepare our tax return, the issues regarding an incorrect T4 slip and the taxpayer’s responsibility came before the Tax Court recently in the case of a Quebec truck driver.

The T4 slip, known formally as the “Statement of Remuneration Paid,” is one of numerous tax reporting slips that a payor is legally required to complete to report income and various other amounts such as tax withheld, when amounts are paid to employees or other recipients. The rules surrounding the preparation of the slips are strict, the deadlines are tight and the penalties for not filing or filing incorrect slips are severe. Yet, mistakes do happen.

In the case before the court, the taxpayer worked for five different companies in 2013, each of which issued a T4 slip reporting, in total, about $40,000 of employment income before any deductions withheld at source.

In filing his 2013 return, the taxpayer reported gross income from employment of $16,577 from one of the companies but when that corporation’s payroll accounts were audited by the Canada Revenue Agency, it turned out that the company’s “wage book was insufficient” and that a gross salary of $7,994 had been omitted from the T4 slip issued to the employee and was consequently not reported on the employee’s 2013 tax return.

The CRA performed an analysis of the taxpayer’s 2013 bank account statements which revealed deposits totalling approximately $36,600 of wages. The taxpayer testified that the only T4 he had received from that company for the 2013 taxation year was for $16,577 and he included this amount in his 2013 income. He stated that he never received an amended T4 from the company that took into account the additional $7,994 in employment income.

The CRA representative testified the corporation’s accounting records were “weak and non-existent for one period in 2013.” She contacted the company’s accountant, but even he mentioned that he had difficulty obtaining information from his client.

The CRA auditor compared the cheques issued to the employees against the wage book and noted that the total amount of the cheques issued to employees exceeded the total of the wages entered in the wage book and, consequently, on the T4s prepared by the accountant. As it turned out, the T4s for 12 employees did not match the amounts on the cheques issued by company for the 2013 taxation year.

Upon noticing the discrepancy, the CRA auditor sent written notification to the company’s owner inquiring about the difference between the total amounts of the cheques issued to certain employees and the total wages entered in the wage book and requested that the owner contact her to discuss the situation.

The owner never replied to the CRA’s request and, as a result, the CRA amended the T4s of the 12 employees with deficient T4 slips. The taxpayer was one of these 12 employees.

The CRA sent the company the amended T4s for the 12 employees and it was then the company’s responsibility to send the amended T4s to the employees affected by the changes.

It appears that the company may not have done so as the taxpayer stated that he never received an amended T4 for 2013. In addition, the paystubs issued to him “were difficult to understand, as was the record of employment provided.”

The taxpayer testified that since he worked for several employers in 2013, he relied on the T4s received from the company in question as well as from his other employers to complete his 2013 income tax return. It was therefore “difficult for him to take into account that the T4 issued by (the company) did not match the amount he had received from it as employment income.”

At trial, once the taxpayer understood the situation and that, indeed, $7,994 of employment income had mistakenly not been included on his T4, he agreed that this amount had been correctly included by the CRA in calculating his income for 2013.

The only issue left to be resolved, therefore, was the arrears interest charged by the CRA. The judge recommended that, under the circumstances, the CRA should forgive the arrears interest involved saying, “It would seem unfortunate that (the taxpayer) must now pay the interest due to his employer’s errors and negligence.”