Preparing Returns for Status Indians Whose Employers Wonít Issue Accurate T4 Slips

One of the most frustrating areas of tax return preparation is preparing a return properly when the employer won't issue a T4 slip with the proper numbers. In my practice, this issue comes up with two government departments (one provincial and one federal) who claim that they cannot re-issue T4 slips but instead issue a letter along with the T4 slip which indicates the portion of the employee's income that is not subject to income tax because it is earned on a reserve and the taxpayer is a status Indian.

The first step in the process of preparing an accurate return is to prorate the proper amounts on the T4 slip, according to the percentage provided by the employer. In addition to the employment income shown in Box 14, the following amounts need to be prorated:

  • CPP pensionable earnings in Box 26 and the resulting CPP premiums in Box 16 (although the employee may elect to participate in CPP on the exempt earnings) 
  • RPP Contributions in Box 20
  • Pension Adjustment in Box 52
  • Union Dues in Box 44.

If you miss prorating the RPP and union dues deductions, CRA will eventually reassess the return to disallow the portion of the RPP contributions and union dues that relate to the non-taxable income. In my experience though, they do not prorate the pension adjustment unless you request them to do so.

File the return, either by EFILE (in which case you need to put the non-taxable portion of the income in Box 71 as well) or on paper. If filing on paper, be sure to include a copy of the letter from the employer. Either way, the return should pass initial assessment as filed.

However, you can expect that some time in the summer your client will receive a Notice of Reassessment as the numbers reported don't match the numbers on the T4 slip and the matching program has automatically made the ìcorrectionî. That reassessment can easily be reversed by contacting CRA and straightening out the situation. For an EFILE return, the letter from the employer will be needed at this time.

If the taxpayer has a spouse and children, you can expect that the spouse's return will likely be reassessed as well to move claims for child care expenses and reporting of the UCCB if they become the lower-income spouse as a result of the taxpayer's reassessment. Once the taxpayer's reassessment is reversed, the spouse's can be as well.

The whole process is not only frustrating for the preparer but also for the client.