The CRA asserts that earnings don’t stop being CPP pensionable or EI insurable, just because the employment relationship is over.
My experience is that most payroll practitioners follow logic something like this to determine if CPP or EI source deductions are required. Is the person in pensionable/insurable employment? Are the earnings otherwise CPP pensionable/EI insurable? Only if the answers to both questions are yes, are CPP contributions/EI premiums taken. But the key point is that most payroll people wouldn’t ask whether earnings are pensionable or insurable, if there is no current employment relationship.
Here’s an example. John retired from his employer in October 2012. Under the terms and conditions of his former employment, John was entitled to commissions on sales that closed after he retired. The employer paid the resulting commissions on March 15, 2013.
Would you take CPP or EI source deductions in these circumstances? There are slightly different rules for each.
For CPP purposes, the test for “employment” effectively appears twice in the rules defining what earnings are pensionable. First, to be pensionable, the earnings must be “from pensionable employment”. Second, the earnings must be “income from employment” for income tax purposes.
Notice that in both tests, the wording isn’t “from employment in the year the payment is received”; in both cases, it’s just “from employment”. If you read the CPP and income tax legislation this way, the requirement to report earnings in T4 Boxes 14 and 26 doesn’t go away, just because there may be a gap between the performance of services and when any related earnings are paid. The CRA asserts this is true, even if the employment and payment fall in different tax years.
Does this change for taxable benefits? The example above has a gap in time between employment and the related commission earnings. But what happens if the employment income is not a payment, but are taxable benefits?
The CRA provides guidance on this point, but only for group term life insurance. Code 119 is to be used to report employer paid group term life insurance premiums for retirees and other types of former employees, on the T4A (see page 19 of the latest RC4157 guide). Note the difference between reporting this taxable benefit on a T4A versus on a T4. The T4A is not used to report CPP contributions or pensionable earnings, as the T4 is. By implication, the CRA considers that group term life insurance benefits provided to former employees are not subject to CPP (or EI). Again, since they are silent on other forms of taxable benefits provided to ex-employees, it would seem the CRA doesn’t distinguish between other taxable benefits provided during employment and after the end of that employment.
For EI purposes, it is even clearer that earnings don’t change from being insurable to not, just because the employment relationship has ended. The Insurable Earnings and Collection of Premiums Regulations define insurable earnings as “all amounts … paid … by the … employer in respect of that [insurable] employment”. When you take this definition, together with that of the term “employer” (“a person who pays or has paid earnings of an insured person”), it’s very clear that otherwise insurable earnings don’t lose that character just because they are paid after the end of employment. In particular, the term “in respect of” implies that any relation between the employment and earnings, including a former employment relationship, is sufficient to make the earnings insurable.
So what practical implication does this have for EI and CPP source deductions and reporting? There are really two implications.
First, with the exception of group term life insurance, if an amount would be T4 reportable during active employment, it’s T4 reportable if the amount is a payment made, or a taxable benefit provided, after the end of that employment. Only in the case of group term life insurance is employment income, received after the end of employment, reported on a T4A. If an earning is employment income, reported in Box 14 on the T4, this also means, of course, that it’s generally included in all other payroll taxes based on employment income, such as the Ontario Employer Health Tax.
Second, you need to be sensitive to possible changes in the province of employment. Clearly, a former employee does not report to work at an employer’s permanent establishment, once the person is no longer working. As such, the province of employment rules say that where there is no reporting to work, the province of employment is determined by the location from which the employer processes payroll. If an employee reported to work in Saskatchewan, during active employment, that province is the province of employment. However, if after the end of employment, the person receives employment income, processed by the employer in Ontario, that province is now the province of employment. Note, different rules apply for retiring allowances and other payments subject to the lump sum method (https://alanrmcewen.com/2012/10/31/whats-the-province-of-employment-when-paying-a-retiring-allowance/).
Where the report-to and payroll-processed-in provinces are not the same, this means a change in the provincial income tax rates used for source deduction purposes and a change in the province reported in Box 10 on the T4. If the active employment and post-employment taxable income are in the same tax year, this means 2 T4s will be required for that year.
If this is really what the CRA intends as the required treatment, then it should be much clearer about describing these requirements in the various guides that are affected.
Alan McEwen is a payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached firstname.lastname@example.org, (905) 401-4052 or visitwww.alanrmcewen.com for more information. This article was first posted to Canadian HR Reporter and Canadian Payroll Reporter on December 11, 2012.