A recent survey conducted on behalf of the Canadian Payroll Association (CPA) revealed that 54% of business leaders and 66% of those with direct payroll responsibilities wouldn’t know how to prepare for a payroll audit.
Most payroll audits are carried out to promote tax compliance and ensure payroll systems and procedures are set up correctly. If you’re a BC-based small business owner who’s been flagged for review, don’t assume it’s because you’ve done something wrong.
Here’s what you need to know about the various types of external payroll audits in Canada and how to prepare your business for the audit process.
There’s More Than One Type of Payroll Audit
The first thing you should understand about payroll audits is that different types of payroll audits exist – and not all of them are driven by the Canada Revenue Agency (CRA). Several organizations in Canada have the right to inspect your company’s financial records. And depending on which agency has elected to conduct the audit, different information may be required.
Canada Revenue Agency Audit
CRA audits are the most common business audits. The CRA auditor’s responsibilities include confirming compliance in making, remitting, and reporting statutory payroll deductions. Therefore, they’ll typically perform a payroll tax audit to review your payroll reports and verify your financial records match the amounts you’ve reported. You may be asked to share employee T4s, T4As, and data pertaining to taxable benefits your company provides.
Workers’ Compensation Board Audit
In British Columbia, Workers’ Compensation Board (WCB) matters fall under the jurisdiction of WorkSafeBC. This is a self-regulating system, so businesses are often audited to ensure they’re paying the correct premium amounts. WorkSafeBC auditors will want to verify your assessable payroll and industry classification and ensure you’re reporting your payroll correctly.
Union/Collective Agreement Audit
If your employees are part of a trade union – and you deduct union dues from their pay on behalf of a bargaining agent – your business may be subject to audit under the Canada Labour Code. Inspections usually include examining your employee and payroll records to ensure the amounts being collected and remitted are in line with the collective agreement.
Employment Standards Board Audit
British Columbia sets provincial standards for employee payment, compensation, and working conditions in most workplaces. Audits conducted under the BC Employment Standards Act may include reviewing your company’s employment records to determine how much you pay employees for regular hours, overtime, and vacation pay.
Ministry of Finance Provincial Health Tax Audit
As of January 1, 2019, BC-based businesses with employee remuneration exceeding $500,000 in a calendar year must register to pay the Employer Health Tax (EHT). The BC Ministry of Finance can audit your financial records to ensure you’re calculating and remitting the correct amount of tax based on your company’s annual payroll.
How to Prepare for a Payroll Audit
If an authorized agency does contact your business about conducting a payroll audit, they’ll usually provide a specific start date and supply you with a list of records the auditor will want to see. You should let your company’s payroll practitioners and human resources team know about the pending audit right away to give them ample time to gather the appropriate files and documentation.
In many cases, the audit will be held at your place of business. You should make sure you’re prepared to:
- meet with the auditor personally when they arrive to discuss your operations,
- have the auditor tour your business premises, and
- provide a private space where the auditor can readily access your company files and carry out their inspection
Each agency will have its own requirements in terms of the data they will want to review. But as a general rule, here’s what you can be expected to share during a typical payroll audit procedure.
Documents for CRA Audits
If your business is selected for a Canada Revenue Agency audit, make sure you have these records – along with any relevant source documents – readily available:
- General Ledgers
- General Accounting Journals
- Bank Account Statements
- Sales Invoices
- Purchase Invoices and Receipts
- Expense Account Statements
- CRA Payroll Deduction Remittance Reports
Documents for WCB Audits
If you’re audited by WorkSafeBC, make sure these files are ready for their review:
- General Ledgers
- Financial Statements
- Tax Returns and Information Slips
- Sales Records
- Affiliates’ and Shareholders’ Records
Documents for Union Audits
If your business is selected for a union audit, make sure the remittance slips for union dues and other required amounts listed in your employees’ collective agreement are prepared and organized.
Once you have a clear understanding of why your business is being audited, it will be easier to direct the agency representative auditor to the records they need. It is also essential that you and your payroll personnel are available during the review to answer any questions the auditor may have and to dig out any missing information.
A typical payroll audit can take 1 to 2 weeks to complete. Once the audit is complete, you can expect the auditor to:
- present their findings and identify any financial or reporting discrepancies,
- advise you of any outstanding amounts, fines, or penalties owing, and
- explain how your business can go about appealing the audit if you disagree with the results
The audit process doesn’t end until you’ve paid any amounts you might owe and have amended or adjusted your financial records.
If you’re uncertain about what you need to know before, during, or after a payroll audit, you should get clarification from the auditor or agency involved, your payroll service provider, or your accounting professional.