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Pensionable pay periods

I can’t seem to find an answer on the web (CRA or otherwise):

If you employ a summer student or employee on a short-term basis, and you pay them every 2 weeks, let’s say for 10 weeks (5 pay periods), how do you calculate the amount of CPP to deduct? The formula/procedure provided by CRA says to divide the basic exemption by the number of pay periods:

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/payroll-deductions-contributions/canada-pension-plan-cpp/manual-calculation-cpp.html

Should I be using 5 pay periods or 26?

This also affects how Tax Cycle calculates the amount in box 16 of the T4 slip:

Hey, it is the number of pay periods that would be for the whole year. The $3,500 is a yearly exemption, so you have to allocate it equally to each pay period in the year. In this case it would be 26 and sometimes 27.

John

Thanks @john4
But then, why does Tax Cycle have 2 fields to enter this info? When would you have the “Number of pensionable pay periods” different from the “Type of pay period”?

Hey Nelson, I believe that is to handle the times when the pay periods total 26, but someone turned 18 during the year. That is another question. Was this person under 18? If they were they do not pay CPP.

John

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@john4
Ok, I see. Thanks!

Maybe I’m misinterpreting what @john4 is saying, but my answer is slightly different. The way you have it showing in Taxcycle is correct, that is if the company pays biweekly and this employee was paid 5 times. @john4’s answer is correct if this employee was actually paid all year long (i.e. 26 times). If you do the manual calculation that you referenced in the CRA link, you will find that you come up with $146.18, which is what Taxcycle calculates.

AMENDED

The “Type of pay period” refers to the frequency of pay based on the calendar year and is used to determine the basic exemption per pay period for CPP (regardless of whether or not they worked for the full year).

The “Number of pensionable pay periods” is the number pay periods that include pensionable earnings. TaxCycle takes the basic exemption per pay calculated above and multiplies it by the number of pensionable periods to arrive at the basic exemption applicable for the year.

If someone turns 18 in the year, a portion of the year would be exempt from CPP and only those pay periods after their 18th birthday would be pensionable. A similar situation applies when a person turns 70 in the year. In this case the CPP contribution is prorated based on the number of pensionable periods that are applicable.

CRA has an example for how this is calculated prorated CPP examples .

If an employee only works for a portion of the year and they are between 18 and 70 (or otherwise not CPP exempt), the basic exemption would be applied based on the formula Basic Exemption ($3,500) / number of pay periods in the year (26) X the number of pay periods paid.

Appendix 3 - CPP Year End Verification

Sarka

** Thanks all for this great discussion.

Thanks, @sarka
So in the case where the employee is, say 22, and worked for 10 weeks in the summer, paid every 2 weeks, I should still enter 26 in both fields. Correct?

@Nezzer “So in the case where the employee is, say 22, and worked for 10 weeks in the summer, paid every 2 weeks, I should still enter 26 in both fields. Correct?”

No, this is incorrect. As I noted in my prior response, the number of pensionable pay periods is = 5

@sarka “The “Number of pensionable pay periods” is the number of those periods in the calendar year to which CPP calculations apply based on whether or not the employee is required to contribute to CPP (regardless of whether or not they worked for the full year).”

I disagree. It does matter if they work the full year or not. “Number of pensionable pay periods” is the number of pay periods they were actually paid while they were pensionable (i.e. > 18 yrs old and <70 yrs old and not otherwise CPP exempt). Let’s take an extreme case to illustrate my point. Suppose a company pays monthly and an employee is pensionable for the whole year and is paid $3500/month, but only works one month. If you input “12” in both “type of pay period” and “number of pensionable pay periods”, taxcycle will adjust the CPP contributions to nil, and you might be tempted to say this is correct, especially if this is the only employer that this person works for for the whole year (given that $3500 is the basic exemption). But this is not true. If this employee worked for the same pay for 12 different employers throughout the year, clearly the CPP contributions required by this employee is not going to be nil. The amount that should actually be withheld each month (or by each employer in my example) is $163.63. If the person really does get paid only once from one employer for the whole year, that person will get it all back on their T1 as an overcontribution…and the $163.63 company CPP contribution is simply a gift to the federal government. The company always loses.

Play around with the payroll online calculator or follow the manual calculation for CPP steps to confirm all of this for one’s self.

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You sound quite confident about that @byron.johnson, but @sarka works for TaxCycle, so now I’m not sure who to believe. Maybe I should contact the CRA DTS…see if they can make it any more confusing :roll_eyes:

BTW, the numbers entered in my screen shot are the actual numbers I used to generate paycheques for this individual, and those numbers were calculated in Sage 50, so I’m worried about 2 things:

  1. Is Sage 50 not to be trusted for payroll calculations?
  2. Did I generate the wrong paycheque amounts, and consequently my client (the employer) may get a PIER?

I don’t know anything about Sage 50 but
manual check for CPP deductions. for 2019 (gross - (3500/26)) x 0.51 = CPP for a biweekly pay
for 2019 (gross - (3500/24)) x 0.51 = CPP for a semi-monthly pay
for 2020 (gross - (3500/26)) x 0.525 = CPP for a biweekly pay
for 2020 (gross - (3500/24)) x 0.525 = CPP for a semi-monthly pay
based on your students yearly gross / 5 pp = $707.88/pay = $29.24 cpp should have been deducted per pay.

I suggest that you file the T4 slips based on the adjusted amounts and get your client to pay the shortage. Your client is responsible for both portions of the CPP shortage. It would be up them to try to get the employees portion back from their employee or just eat the cost.

And btw, your entries of 26 for type of pay period and 5 for number of pensionable pay periods is correct.

Hope this helps.

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Thanks @roxane.pratt and @byron.johnson. I agree that your answers match CRA’s “manual procedure”.

But, logically, if the “basic exemption” is for the first $3,500, it seems wrong that an employee should have to pay $146 in CPP when their total earnings are $3,539.

Also, if you hire a “normal” employee (i.e. permanent basis; no end date), and they decide to quit 10 weeks later, why should that be any different than hiring an employee when you KNOW they will work only 10 weeks?

If my software did the calculation incorrectly, then it’s my mistake, and I will accept responsibility. But, I’m not yet convinced that it’s wrong. Anyone know of tax court cases to back this up? (perhaps @dominique_dabolczi?)

If I knew that this was a student who only worked during the summer, I would use the calculation from Sage. If I knew (or expected) that the employee had other jobs during the year, I would use the adjusted calculation from TaxCycle. I like to run all my T4s through TaxCycle but will check to see if the adjustment suggested by TaxCycle looks correct. I will not knowingly put the employer in the situation where he pays CPP that isn’t necessary.

Hey Nelson, I now understand the confusion! Everyone is assuming then CRA is fair! When the employee files their income tax return, they will receive their portion of the overpayment of CPP back; however the employer will not! It is not that much different from when an employee switches to another employer! Taxcylcle does have a method of adjusting the amount of CPP overpayment and transferring it to income tax paid.

John

It is possible to request an overpayment of CPP from CRA - but they make it difficult enough that it isn’t in our best interests to try.

Thanks @john4, I forgot about that. I suppose if I HAD calculated $146 in CPP, and withheld it from they paycheques, the employee would get the CPP overpayment back. But, as @obhorst says - the employer would have overpaid as well. If you adjust the T4 numbers in TaxCycle, so that the “extra” CPP is reported as income tax, the EMPLOYEE would get the additional refund, not the EMPLOYER. I know that method is acceptable if the employee is a shareholder, but in this case that doesn’t apply.

I had more than one auditor tell me that you are not allowed to adjust the CPP and EI after the fact. You can only adjust it on the last pay cheque that you give your employees, but not after.

I explained to them that this doesn’t make sense to me since the T4 programs allow for adjustments and CRA approves the T4 programs. But they were adamant that you have to report on the T4 the actual deductions that were taken from their pay cheque. One auditor even told me that the department head specifically instructed them to look for these kinds of adjustments and reverse them!

If the employer overpays, they can file form PD24 to get the over-payment back.

Regarding the number of pay-periods to use, I believe it is 5. Not 26. The student only worked for 5 pay periods for client. CPP calculations and exemptions are based on pay periods.

Guide T4001 page 17:
You can also use a manual method to calculate your employee’s CPP deductions. For a single pay period, use the calculation in Appendix 2 on page 57. For multiple pay periods, or to verify the CPP contributions deducted at the end of the year before filling out the T4 slip, use the calculation in Appendix 3 on page 58.
Notes
A pay period means the period for which you pay earnings or other remuneration to an employee.
Once you have established your type of pay period, the pay-period exemption (see Appendix 2) must remain the same, even when an unpaid leave of absence occurs, or when earnings are paid for part of a pay period.

IF as has been stated that the employee worked 5 biweekly pay periods and the pay was calculated in sage (assuming everything was setup properly) then the simplest explanation for the $12.37 deduction is the this is a kid that turned 18 during this employment and only the last $377.16 was pensionable.

The bottom line is the proper use of the program to get the correct output is as Sarka has indicated. ie. Unless turning 18 or 70 in the year, if 26 pay periods in year, both entries should be at 26.