Payroll Audit — Compliance and Best Practices

Introduction
Understanding payroll audit compliance and best practices is essential for every employer in Canada—especially in Québec, where payroll obligations are more complex than anywhere else in the country. Payroll audits are one of the most common types of CRA and Revenu Québec reviews because employers are responsible for withholding and remitting CPP/QPP, EI/QPIP, income tax, taxable benefits, and employer contributions accurately. Mistakes in payroll can accumulate over time and expose employers to penalties, interest, reassessments, and even director liability. This guide provides a full breakdown of payroll audit compliance and best practices so businesses can stay protected, compliant and audit-ready.

Legal and Regulatory Framework
Payroll audit compliance and best practices are governed by:

• the Income Tax Act
• Canada Pension Plan Act (CPP)
• Employment Insurance Act (EI)
• Québec Tax Administration Act
• QPP/QPIP rules
• CNESST and HSF regulations
• CRA and Revenu Québec payroll policies

Employers must:

• calculate and withhold all required payroll deductions
• remit employee and employer contributions on time
• maintain payroll records for at least six years
• issue accurate T4 and RL-1 slips
• classify workers correctly (employee vs contractor)
• record taxable benefits properly
• follow correct payroll schedules and remittance frequencies

Payroll audit compliance and best practices ensure proper adherence to both federal and Québec rules.

What CRA and Revenu Québec Look for During Payroll Audits
Payroll audits typically focus on:

• accuracy of payroll deductions
• employee vs contractor classification
• CPP/QPP calculation errors
• EI/QPIP miscalculations
• incorrect taxable benefit reporting
• late or missing payroll remittances
• bonuses and lump-sum withholding errors
• vacation pay compliance
• T4/RL-1 discrepancies
• director liability for unremitted payroll taxes
• CNESST under-reported wages
• HSF calculations for Québec employers

Understanding these areas is crucial to payroll audit compliance and best practices.

Key Court Decisions
Court rulings show how seriously payroll errors are treated:

• employers are fully responsible for payroll remittances even when errors are unintentional
• directors may be personally liable for unpaid payroll taxes
• misclassified contractors can be retroactively treated as employees
• missing documentation allows CRA and Revenu Québec to assess based on estimates
• taxable benefits must be reported even if minor
• improper QPP/QPIP deductions require full retroactive correction

Québec courts are particularly strict due to additional provincial payroll systems (QPP, QPIP, HSF, CNESST).

These rulings reinforce the importance of payroll audit compliance and best practices.

Why CRA and Revenu Québec Audit Payroll So Aggressively
Payroll represents government trust funds. Payroll audits are triggered by:

• late payroll remittances
• discrepancies between T4 and RL-1 totals
• mismatches between payroll and corporate tax returns
• employee complaints
• payroll reduction after converting workers into “contractors”
• irregular bonuses
• missing taxable benefits
• under-reported CNESST payroll
• repeated payroll corrections

Payroll audit compliance and best practices help prevent these issues.

Mackisen Strategy (Your Audit-Proof Payroll System)

Mackisen CPA employs an advanced system to ensure payroll audit compliance and best practices across both federal and Québec obligations:

1. Pre-Audit Payroll Review
We analyze:
• year-to-date payroll deductions
• taxable benefits
• CPP/QPP and EI/QPIP accuracy
• missing remittances
• HSF and CNESST compliance
• T4 and RL-1 alignment

2. Worker Classification Assessment
We confirm whether each individual is an employee or contractor using CRA and Québec legal tests.

3. Taxable Benefit Verification
Including:
• car benefits
• employer-paid insurance
• allowances
• cell phone reimbursement
• stock option benefits

4. Payroll Reconciliation
We reconcile:
• payroll registers
• remittances
• CRA PD7A reports
• Revenu Québec summaries
• CNESST annual declarations

5. Correction of Historical Errors
We issue amended T4s, RL-1s, and payroll adjustments where necessary.

6. Audit Representation
Mackisen handles all communication with CRA or Revenu Québec, ensuring clients never speak directly with auditors.

This structured approach is the foundation of payroll audit compliance and best practices.

Real Client Experience

Many businesses approach Mackisen during or after payroll audits:

• A Montréal clinic deducted EI instead of QPIP for Québec employees. Revenu Québec reassessed multiple years. Mackisen corrected the remittances and negotiated a penalty reduction.
• A construction company misclassified several workers as contractors. CRA reclassified them as employees, resulting in payroll assessments. We managed the audit and implemented compliant hiring practices.
• A retail business under-reported taxable benefits for company vehicles. After CRA questioned T4s, we recalculated all benefits and corrected the slips.
• A professional firm incorrectly calculated HSF for three years. Mackisen rebuilt the payroll system and filed amended RL-1 summaries.
• An employer missed multiple remittance deadlines. CRA added penalties and interest. We negotiated a payment plan and implemented automatic remittance controls.

These examples show why payroll audit compliance and best practices are crucial for long-term business stability.

Common Questions

• What triggers a payroll audit?
Late remittances, contractor issues, benefit misreporting, T4/RL-1 discrepancies.

• Can directors be personally liable?
Yes—especially for unpaid payroll taxes.

• What if my payroll records are incomplete?
CRA and Revenu Québec may estimate deductions, often to your disadvantage.

• Are bonuses included in payroll deductions?
Yes—subject to lump-sum withholding rules.

• Is Québec payroll harder than other provinces?
Yes—QPP, QPIP, HSF and CNESST make Québec uniquely complex.

• Do contractors need payroll?
No—but if misclassified, payroll reassessments apply.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they're entitled to. Whether you're managing a small team or a large workforce, our expert team ensures precision, transparency and protection from audit risk. When supporting clients with payroll audit compliance and best practices, Mackisen provides complete payroll reconciliation, slip preparation, remittance structuring, and audit defense.

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