Published Work > All T4's are not created equal


1 Jul 2007

Originally Published by The TaxLetter Vol. 25, No. 7, July 2007   www.adviceforinvestors.com

 

 

All T4’s are not created equal

Eileen Reppenhagen, CGA

 

The T4 slip looks official, complete with CanRev logo and all those mysterious coded boxes showing various deductions. The numbers look "about right." So most employees glance only fleetingly at their T4, if at all, before handing it to their accountant or tax preparer, who then diligently picks up the figures, usually without question. Too bad. The T4 isn’t always correct. And if it’s wrong, it could be costing you money.

But a T4 slip, used properly, can be another powerful tool to ensure you pay only the tax you must, and not a penny more. So here’s a quick lesson on T4 tax tips, tools, and strategies you and your accountant can use to ensure your T4 is telling the whole story — and that CanRev isn’t grabbing more than it should from every paycheque.

Do you compare your pay stubs to your T4 each year? Company auditors audit the financial statements, not T4 production. CanRev will probably not review your T4 calculations. It may audit the calculation of your CPP and EI, but unless you complain or the benefits are understated for the shareholder’s personal use of company assets, it isn’t likely anyone will check your gross income calculation.

There is no requirement for your employer to disclose what is added to your gross income. You are left to guess at what exactly is included in Box 40. Of course, you can always ask, but who wants to annoy the payroll administrators? You rely on them for a bi-weekly stipend.

Disability benefit plans

Once upon a time, when I was an accounting student, the accountant at my new job asked me to research (shop) for shortand long-term wage-loss replacement or disability benefit programs. I called all the major players within about an hour, asking questions and requesting

quotes from Sun Life, London Life, and so on. Each sounded a tad puzzled, but said they would get back to me. No one did.

After lunch, the accountant called me into his office. The owner had received a panic call from his insurance broker telling him that his staff were about to unionize! Of course, we were merely shopping for quotes to present a proposal to bolster staff hiring and retention.

In our youthful naiveté, we had no idea you didn’t buy direct, and that you dealt through brokers. Like a mortgage broker, an insurance broker is paid a commission by the insurance company for bringing in your business.

In the next month, we learned some other key lessons, too — that there are several important options with very different consequences for employees:

Employee-paid premium: If the employees pay for the premiums on long-term disability insurance, claims are paid out taxfree. There is no T4 at the end of the year. The company does not expense the premiums because it doesn’t pay the premiums. If the company adds more income to your Box 40 to increase your income to compensate for the premiums paid, then it can expense the additional salary.

Employer-paid premiums: Premiums paid by the employer are not a taxable benefit to the employee, but benefits paid on a claim are taxable income to the employee. If you have a claim, you are paid wage-loss benefits net of CPP and tax. A T4A arrives in February to report income as wage-loss replacement in Box 28. The company expenses the premiums because it pays them. There is not normally a taxable benefit to the employee for a group plan. If your employer adds this to your T4 income, ask why.

Private health plans

Most employees with an extended health and dental plan don’t bother to make a claim for the medical expense tax credit on their tax return. They assume they won’t be able to meet the income threshold — medical expenses must exceed $1,925 (in 2007) or 3% of net income, whichever is less, to be eligible for the Medical Expense Tax Credit.

But consider this: The lower-income spouse/partner in Canada typically earns less than $30,000 annually, and 3% of $30,000 is $900. The lower income spouse can claim health insurance premiums and any extra costs paid by either spouse, such as "co-insurance payments," or expenses not covered or only partially covered by insurance. This can add up to a lot more than $900 in a given 12-month period.

Take a look at the numbers. Private health insurance premiums often can range from $900 per year to as much as $2,000 or more. For a typical plain-vanilla private health insurance plan, add co-payments of 20% for drugs, 50% for dental, and everything over $200 for glasses, and you have a hefty claim. There is no ceiling on the amount you can claim. If you support dependent relatives, you can claim up to $10,000 of what you paid for them against 3% of their net income.

Medical insurance premiums for out-of-country travel also qualify, whether you’re a snowbird living in Florida for the winter or a vacationer taking a week in Disney World during spring break.

For seniors

Claims for premiums paid for private health services plans will also interest seniors who are splitting pension income — especially for cases where one spouse/partner never paid tax and the other had a threshold that was too high.

With the new pension splitting option, each spouse may be able to claim for medical expenses to draw down their taxes payable to nil. For example, say that in previous years one spouse reported net income of $40,000 and the other $10,000. Now, if each spouse reports net income of $25,000, the 3% medical expense threshold for each spouse will be $750. Significant medical expenses could reduce both taxpayers’ tax payable to nil. You can easily calculate who claims how much medical expense using computer tax software like QuickTax.

As the mandatory retirement age of 65 is lifted across Canada, there may be an unexpected impact on after-tax cash flow. Earning even a small amount of income from employment or self-employment may trigger the Refundable Medical Expense Supplement (worth $1,000, refundable with the right combination of income and expenses).

If you have medical expenses, it may be beneficial to work as an employee or to be selfemployed to earn just enough to trigger this supplement. If you earn the right kind of income — at least $2,984 in 2007 — the supplement is paid out even if you do not owe any tax.

mandatory, but it isn’t looking hopeful. So while reporting of deductions from your pay for union dues, donations, and public transit passes is mandatory, reporting of medical expenses remains optional.

Box 85 is provided to record premiums on extended health and dental premiums paid by you, which counts towards the medical expense tax credit. Check to ensure you claimed the amount in Box 85. If you know you paid premiums, ask your payroll administrator for a letter stating the amount of the premiums to claim on the most beneficial tax return or ask them to start completing Box 85 if they aren’t doing so.

Not only can you claim the premiums on your private health plan, you can also claim the part you paid for dental care, medications, and other medical expenses. If you are not sure what you can claim, check out CanRev Guide RC4064: Medical and Disability Related Information for a complete list of over 120 medical expenses.

Transparency in the payroll world is overdue. Make sure you reconcile your T4 slip to your net pay. You pay tax at the highest tax rate on those benefits. You deserve assurances and information that verifies your T4 is calculated correctly.

 


Questions to ask your employer

What amounts are included in Box 40 and added to Box 14 on my T4?

Who pays the premiums on my long term disability plan? Do I pay the premiums so that in the event of a claim, my income is tax-free?

If I belong to an employer-paid group plan, are my premiums treated as a taxable benefit? In fact, they should be a tax-free benefit if the company pays, because in the event of a claim, I’ll be paying tax on the income.

Who pays the premiums on my extended health and dental plans (private health services plans)?

If I pay private health services plan premiums, are they reflected in Box 85 on my T4? If not, why not?

 


What’s in Box 40?  

For a complete list of what benefits are taxable and included in Box 40 and which benefits require CPP and EI coverage, check out CanRev Guide T4130, available on the CanRev Website.

The list of what’s in Box 40 might give you ideas about negotiating your next contract or company benefit program. When the company pay expenses for you, then you pay the tax on the benefit, it can put you further ahead in the cash flow game.

A case in point is provincial health premiums, which are not considered a medical expense. If the company pays the premiums, you pay tax on the benefit. You both win. The company wins, because it can deduct the expense if it passes the benefit on to you. You win, because you pay tax on the benefit rather than paying the whole premium out of your net pay.

 


How to change your T4  

If you’ve done the benefit checks, calculations, and reconciliations, and you’re sure your T4 is incorrect, your first move is to contact your company. Ask the human resources department or chief financial officer for information about your benefit plans. (Hint: Payroll clerks are probably not the right people to ask.)

If you’ve made your case for revising your T4, and your employer refuses to do so, you could contact either the insurance carrier or CanRev (1-800-959-8281) to ask for assistance communicating with the employer about an incorrect T4.

If amended T4s are issued, you will probably need to request that tax returns be reassessed. You could do this in one of three ways:

Write a letter to your District Tax Office explaining why your return should be reassessed. Include your Social Insurance Number and a brief explanation of the facts.

Complete a Form T1Adj for each year explaining which lines need reassessment and why.

Sign up for My Account at the CanRev Website ( www.cra-arc.gc.ca). This not only lets you bypass the lineups for a passport if you fill in your application online, but it also lets you ask for an adjustment to your tax return online.

Taxpayers may request an adjustment for up to 10 years under the taxpayer relief provisions. After a few months, you’d 10 separate envelopes with reassessments and the cheque or automatic deposit. Check the math; they do make mistakes.

The fact that CanRev does not mail multiple reassessments in one envelope never ceases to amaze me. Clients are freaked out by this much mail from CanRev all at once. Ah! Maybe that’s why.

CanRev will pay you a measly bit of taxable refund interest for the interim period since the adjustment was requested. Of course, it’s calculated at 2 percentage points less than what they charge you if you are late paying your tax.

 


Eileen Reppenhagen, CGA, ACG, Certified QuickBooks ProAdvisor writes and speaks about accounting and tax.  She is a regular contributor to Canadian MoneySaver, The TaxLetter and Intuit’s award winning online publications for accountants and QuickBooks ProAdvisors, ProConnection Newsletter and Advisor Advantage.  

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