What Happens in a Payroll Examination – A Complete Guide by a Montreal CPA Firm Near You

Introduction

A payroll examination is one of the most serious types of audits conducted by the Canada Revenue Agency (CRA) and Revenu Québec. Unlike a PIER report or a basic payroll review, a payroll examination is a full audit of all payroll activity—focusing on employee vs contractor classification, source deductions, taxable benefits, remittances, payroll records, vacation pay, overtime rules, and compliance with federal and provincial legislation. During a payroll examination, auditors may review several years of records, interview management, and compare payroll filings to bank statements, GST/HST returns, ROEs, and workers’ compensation filings. Understanding what happens during a payroll examination is critical to protecting your business from penalties, reassessments, and interest charges.

Legal and Regulatory Framework

Payroll examinations are governed by multiple pieces of legislation:

• Income Tax Act – income tax withholding and T4 reporting
• Canada Pension Plan Act – CPP rules for pensionable earnings
• Employment Insurance Act – EI rules for insurable earnings
• Tax Administration Act (Québec) – QPP, QPIP, RL-1 reporting
• Employment Standards Acts – minimum labour requirements
• Workers’ Compensation Acts – CNESST/WSIB/WCB payroll reporting
• Excise Tax Act – payroll remittance and compliance procedures

Under these rules, CRA and Revenu Québec may:

• request payroll records for up to 7 years
• interview employees or management
• review time sheets, schedules, and contracts
• inspect taxable benefits and allowances
• examine worker classification
• cross-check payroll with T4, RL-1, GST/HST/QST, and corporate tax returns
• reassess unpaid CPP/QPP, EI/QPIP, and income tax
• charge penalties and interest

These powers create a strict framework for payroll examinations.

Key Court Decisions

Payroll examination outcomes are shaped by important court rulings:

1. Soper v. Canada

Directors were held personally liable for unpaid payroll deductions—even after a business shut down—reinforcing the seriousness of payroll compliance.

2. Royal Winnipeg Ballet v. Canada

The employer misclassified workers as contractors. CRA reclassified them as employees and reassessed CPP/EI. The court upheld the reassessment, demonstrating how payroll examinations frequently uncover worker classification errors.

3. Hickey v. Canada

The employer argued payroll errors were accidental. The court confirmed that payroll deductions are strict obligations and upheld penalties.

4. Caron v. Québec

Revenu Québec imposed penalties for inaccurate RL-1 reporting. The court supported these penalties, emphasizing that payroll documentation must be precise.

These cases demonstrate that payroll examinations carry high legal consequences for employers.

Why CRA and Revenu Québec Target This Issue

Payroll examinations are initiated because payroll errors impact government trust funds. Authorities target employers who:

• misclassify contractors who should be employees
• under-remit CPP, EI, QPP, or QPIP
• fail to report taxable benefits
• pay employees “off the books”
• use non-compliant payroll software
• fail to issue T4 or RL-1 slips
• pay cash wages without remitting taxes
• underreport payroll to CNESST/WSIB/WCB
• fail to maintain proper payroll records
• commit repeated payroll errors or discrepancies

CRA cross-checks payroll with:

• GST/HST filings
• corporate returns
• bank deposits
• ROEs
• CPP/EI records
• federal and provincial databases
• workers’ compensation filings

This makes payroll one of the most audited areas of business compliance in Canada.

Mackisen Strategy

At Mackisen CPA Montreal, we manage payroll examinations from start to finish, ensuring your business is protected, compliant, and fully represented. Our structured process includes:

1. Pre-Audit Payroll Review

• examining payroll ledgers for accuracy
• confirming CPP/EI/QPP/QPIP calculations
• reviewing taxable benefits
• verifying employee vs contractor classification
• reconciling payroll remittances with CRA accounts
• comparing payroll totals to T4/RL-1 and GST/HST filings

2. Preparing an Audit Package

• organizing pay statements, time sheets, contracts, and ROEs
• compiling remittance records
• ensuring all payroll documentation is complete
• preparing explanations for discrepancies

3. Managing Communications

• acting as the employer’s representative
• responding to auditor requests
• explaining payroll policies and procedures
• negotiating deadlines and clarifications

4. Correcting Errors

• recalculating payroll where needed
• filing amended T4s and RL-1s
• remitting outstanding CPP/EI/QPP/QPIP amounts
• applying for taxpayer relief to reduce penalties and interest

5. Audit Defence & Resolution

• providing legal-grade documentation
• negotiating reduced assessments
• preparing objection filings if required
• implementing compliance systems for future years

6. Preventive Measures

• quarterly payroll health checks
• compliance training for HR/payroll staff
• worker classification audits
• taxable benefit reviews
• CNESST/WSIB/WCB alignment

This ensures your payroll withstands CRA and Revenu Québec scrutiny.

Real Client Experience

A Montreal construction company underwent a payroll examination after hiring many “contractors.” CRA reclassified the entire workforce as employees and demanded three years of CPP/EI. We challenged several classifications, reduced the assessment significantly, and implemented a compliant payroll structure.

A retail business failed to remit taxable benefits on RL-1 slips. Revenu Québec assessed penalties. We corrected all filings, trained staff, and prevented future errors.

A clinic paid some employees in cash. CRA examined payroll and found discrepancies. We reconstructed payroll, corrected all source deductions, and negotiated penalty relief.

A restaurant repeatedly filed late payroll remittances. CRA initiated a payroll audit. We rebuilt payroll documentation, corrected past filings, and established a proper remittance schedule.

Common Questions

Employers often ask whether a payroll examination always results in reassessment. Not always—but most do unless payroll is clean.

Others ask whether CRA interviews employees. Yes—especially in worker classification cases.

Some ask whether payroll software ensures compliance. Only if configured accurately and reviewed regularly.

Another question: Can CRA audit multiple years? Yes—typically 3–4 years, and more if gross negligence is suspected.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps employers survive payroll examinations with confidence. We protect your business from reassessments, penalties, and compliance risks by delivering expert representation and detailed payroll corrections.