CRA is auditing my business for payroll deductions — what are they looking for?
A payroll audit by CRA (sometimes conducted by CRA's Source Deduction program) examines whether your business has correctly calculated, deducted, and remitted Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax from employees' paycheques. These are collectively known as source deductions, and remitting them is a federal obligation under the Income Tax Act and related legislation.
CRA auditors will examine your payroll records, employment contracts, records of employment, Records of Employment (ROEs), and remittance history. Common issues they look for include: misclassifying employees as independent contractors (which affects whether CPP/EI apply), failing to deduct enough income tax from certain types of payments, not remitting on time, and failing to account for taxable benefits such as group life insurance or personal use of a company vehicle.
If CRA determines that you failed to make required deductions or remittances, it will assess the business for the amounts owing plus penalties and interest. Directors of corporations can be held personally liable for unremitted source deductions under the Income Tax Act if they did not exercise due diligence to prevent the failure. Payroll audits often result in significant assessments, so professional representation is advisable.
Key takeaways
- CRA payroll audits verify correct deduction and remittance of CPP, EI, and income tax.
- Misclassifying employees as contractors and taxable benefits are common issues.
- Failure to remit source deductions can result in personal liability for corporate directors.
- Respond to payroll audit requests with organized payroll records and professional support.