A guide to T4 fraud

With the deadline for employers to prepare and file T4s with CRA approaching (the deadline is the last day in February), I thought I would write someone on how the system works, how it can be manipulated by evil-doers, and how you can protect yourself from this scam as an employer or an employee.

By reading this post, you must agree to use your accounting powers for good, and not evil.  This is not a guide on how to steal, but rather a guide on how to prevent others from stealing from yourself.

First a little background

Throughout the year , as an employer pays their employees, they are deducting CPP, EI and tax from the paycheques.  The employer is also required to kick in some EI and CPP, and the total amount is remitted to the CRA usually monthly.  When these monthly source deduction remittances are sent in to the CRA, no detail is provided as to which employees are paying how much.  It would probably be just too much work for CRA to track the deductions of every employee for every pay period.  So instead, a T4 reconciliation is prepared at the end of the year (actually the February of the following year).  This reconciliation compares the total amount of deductions listed on each T4 issued to the amount of source deductions remitted to CRA during the year.  If there is a difference, the employer pays it (or receives a refund if the difference is in their favor).  A copy of each T4 issued is also sent in to CRA.

The scam

Let’s say that I am an employee, perhaps the bookkeeper for a business, who is given the task of preparing the T4’s.  If I am crooked, I could mess with the T4 summary in order to put some extra cash in my pocket.  How it works is that I would simply reduce the amount of deductions reported on one (or perhaps many) employees, and increase the deductions on my own T4 by a corresponding amount.  Since the amounts added and subtracted are the same, this will cause no overall difference on the T4 reconcillation. For example, box 22 on an employee’s T4 could be reduced by $500, and that $500 added back on to my own T4 box 22.  Then when I file my own taxes, I would receive a larger refund than I would otherwise be entitled to.

This opportunity for fraud is possible because CRA does not track a running total of how each employees deductions withheld during the year.  It is also a  sneaky scam in that cash is not outright missing.. instead the theft is hidden through the CRA and personal income tax returns.

How to protect yourself

If you are an employee receiving a T4, you can protect yourself against this fraud by comparing your final pay stub of the calendar year to the T4 you received.  The amounts for CPP, EI and tax withheld should match the amounts reported on your T4.  If they don’t… talk to your employer about it immediately.

As a business owner/employer,  the best way to avoid this from happening is to have your T4s prepared by someone who is not also receiving a T4. If you use a payroll service, they will usually prepare the T4s and summary for you, which is ideal.  Another good choice would to have your accountant prepare the T4s for you.

If neither of these is an option, it is important to compare the T4s issued to a summary of employee deductions withheld during the year to ensure each employee gets the money that was deducted from them.

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