When an employee cannot work because of an employment-related injury, a workers' compensation board may award benefits as compensation for lost wages. Employers who continue to pay their employees while waiting for the workers' compensation claim to be approved, or make payments in addition to the claim, may find that payroll withholding, remitting and reporting apply to those payments.

An employer cannot amend the employee's T4 slip once the worker's compensation claim has been approved to retroactively reduce earnings in the current year or a previous-year.

As there is no distinction between self-insured and regular employers, information in Guide T4001, Employers' Guide – Payroll Deductions and Remittances and on this page applies equally to both types of employers.

Questions and Answers

I have casual and term employees who are not entitled to any additional injury-on-duty compensation. When an employee makes a claim to a workers' compensation board for lost earnings, it may or may not be approved by the board. If it is approved, the board pays the employee directly. Does the policy apply to these employees?

No, the policy does not apply to employees who are paid directly by the workers' compensation board when injured and are not compensated in any way by their employer.

Does the Canada Revenue Agency's (CRA) policy apply to payments I continue to make to the employee while a workers' compensation claim is being paid?

Yes, the policy applies to wages and salaries paid while waiting for a decision on a claim, and to payments an employer continues to pay to the employee after the claim is decided.

I have an employee whose workers' compensation claim was awarded in March 2022. The claim dates back to June 2020. In accordance with our collective agreement, I continued to pay the employee's net salary with the corresponding deductions (tax, Canada Pension Plan (CPP), and employment insurance (EI)) from June 2020 to March 2022. Can I amend the employee's 2020 and subsequent T4 slips as well as my current-year payroll records to reduce the earnings and deductions to reflect the corresponding claim?

No, since the claim was awarded in the year 2022, you cannot make retroactive adjustments to income and deductions in the current year or in 2020 and subsequent years. These payments keep their identity as salary and are always considered to be taxable, insurable, and pensionable.

When completing the employee's T4 slip for 2022, you will enter code 77 in the "Other information" area, and report the total amount of the claim. The response to the next question further explains code 77.

The employee will receive a T5007 slip from the workers' compensation board for 2022 that will include the total amount of the claim.

Could you specify what amounts are to be reported in the "Other information" area of the T4 slip and the code used to identify this payment?

Employers must report in the "Other information" area the amount received, either from the workers' compensation board or directly from the employee, which offsets previously paid salary. This will allow the employee to claim, on their income tax and benefit return, the "Other employment expenses" deduction for any amount (usually equal to the claim) that was included in income in previous years or in the current year. The code used to report the claim amount in the "Other information" area is 77.

How does the CRA define a top-up amount and what deductions are required to be withheld from this type of payment?

The CRA considers a top-up amount to be an amount you pay your employee after a claim is decided that is in addition to the benefits paid by a workers' compensation board. The top-up amount requires CPP contributions and income tax and you have to report it on a T4 slip. Exclude a top-up amount from insurable earnings if you pay it after the board accepts the claim.

A top-up amount will not include an amount you pay in addition to an advance or a loan if you pay it while waiting for a decision on a claim. The CRA considers these amounts to be employment income and you have to withhold CPP contributions, EI premiums, and income tax. The top-up and deductions have to be reported on a T4 slip in the year they are paid.

I am considering linking the top-up amounts to my employee's sick leave credits. Would the CRA consider these payments to be top-up payments?

The CRA considers any amounts paid to an employee in addition to a loan, advance or workers' compensation claim to be employment income whether paid directly to the employee or based on the employee's accumulated sick leave credits. This income requires CPP contributions and income tax deductions. EI premiums will only be withheld when a workers' compensation board has not yet decided the claim. The employee's earnings and deductions have to be reported on a T4 slip in the year they are paid.

When any employees are off work as a result of work-related injuries, I pay them an advance/loan plus a top-up amount to equal their net salary. Once a workers' compensation board approves the claim, should I report both payments on a T4 slip and include the amount of the claim in the "Other information" area?

No, you would not report the amount of the advance/loan equal to the claim on a T4 slip since it is not considered to be employment income (no deductions of tax, CPP, and EI are required). However, you would report the top-up amount you paid in addition to the advance/loan on a T4 slip in the year that it is paid.

You would not report the amount of the claim in the "Other information" area, since it does not represent an amount that was included in the employee's income in the current or a previous year. In this situation, the claim amount would be used to offset the tax-free advance that was made. Since the advance was not originally included in income, the employee in turn is not allowed a deduction from income.

I made an error calculating the advance/loan I paid to my employee and the amount of the workers' compensation claim amount was less than the amount of the advance/loan (that is, the total amount of the loan was $10,000 and the claim was $9,000). What should I do?

When the actual amount of the claim is known, there should always be a comparison between the actual claim and the amount of the loan/advance. Any payment that is more than the claim (in this case $1,000) is employment income in the year that the claim is paid and is reported on a T4 slip (tax, CPP, and EI deductions are required). However, if the amount of the claim is more than the loan (that is, the loan was $10,000 and the claim was $11,000), the excess of $1,000 is not taxable.

While waiting on a decision for a workers' compensation claim, I pay my employees advances that are equivalent to their accumulated sick leave credits. When the claim is decided, I convert the sick leave to advances/loans equal to the amount of the claim. Would the CRA consider such payments to be salary or loans/advances?

While the sick leave credits may determine the advance/loans you are willing to make, we will not consider them to be salary as long as they are true advances pending decision of a claim.

How will the CRA differentiate between a salary paid, and a loan/advance and top-up payment arrangement, when the employer is, or will be reimbursed by workers' compensation board?

The CRA's position is that, for workers' compensation purposes, advances/loans are not income or wages as long as they meet the following conditions:

• they are identified as loans/advances on the payroll records
• there are no withholdings made on the payment (that is, tax, CPP, and EI)

It is our position that for workers' compensation purposes, loans/advances do not require a signed agreement, a repayment schedule, or an interest rate.

The top-up portion will always be considered as salary and will require deductions at source.

Can I continue to pay my employee's regular salary with the required deductions and, at year-end, amend my payroll records to convert the payments to loans/advances and a top-up arrangement?

No, you may not adjust your payroll records. An employer who maintains an employee on salary and who withholds tax, CPP, and EI must record these amounts on the employee's pay records. These payments are deemed to be salary, considered to be employment income, and are not an advance/loan even if a pay code describes them as such or if you convert them to a loan/advance at a later date.

Would the CRA consider that employees receive a taxable benefit on no-interest or low-interest loans/advances they receive from employers in anticipation of a workers' compensation claim?

No, the CRA has a long-standing administrative position that we would not consider the interest on the loan to be a taxable benefit. However, if a claim is considered frivolous, our administrative position may not apply.

It is my policy to continue paying net salary to employees who are on a work-related injury. Does the workers' compensation claim have to be decided before I can modify my payroll records and convert the remuneration paid to a loan/advance and top-up system that would equal the employee's net salary? If not, how much time would I be allowed to complete the conversion?

No, the claim does not have to be decided to switch to a loan/advance and top-up system. Our policy is to allow a reasonable period of time, normally one pay cycle, for employers to adjust their payroll records for any new claims. This is to allow an employer time to adjust the payroll records to a loan basis, and does not represent the time that it takes for a claim to be decided.

In 2021 I paid an advance/loan equal to the anticipated workers' compensation claim plus a top-up amount, to an employee who was on a work-related injury. However, the claim was denied in 2022. As I reported the "top-up" earnings on the employee's 2021 T4 slip, should I now prepare an amended T4 for 2022 to include the advance/loan as income?

You will be entitled to collect the amount of loan/advance from the employee. However, how you treat the advance/loan will depend on whether or not the employee repays you.

1. If the employee repays you in full in 2022, you will not amend the 2021 T4 slip to include the advance/loan as income. The 2021 T4 slip will remain as originally prepared. In effect, you will not have to take any action since we consider this to be a loan that was repaid. Types of repayments could include deductions from subsequent remuneration paid to the employee, utilizing the employee's accumulated sick leave credit or other acceptable arrangements.
2. If the loan/advance is not recovered by the end of 2021, it becomes employment income and must be reported on a T4 slip for 2022 (tax, CPP, and EI deductions would be required).

What happens if the employee appeals the denial and the claim is subsequently allowed in 2022?

The workers' compensation board will report the total amount of the claim on a T5007 slip for 2022. You have to treat the claim in the following manner:

1. If, as in the first answer for the previous question, the employee repaid the loan/advance, the amount of the claim, equal to the advance/loan you paid the employee in 2021, will not be reported on a T4 slip. No adjustments are required since this amount has never been included in income.
2. If, as in the second answer for the previous question, the loan was not repaid and it was reported on a T4 slip for 2021, the employee is allowed a deduction in 2022 for the amount included in income since it is, in fact, non-taxable income. As a result, you would report the amount of the claim in the "Other information" area of the 2022 T4 slip using code 77.

Would the requirement to prepare a T4 slip change if the employee resigned on January 1, 2022?

No, even though no other remuneration was paid to the employee in 2021, you must report the reimbursed amount that offsets the amounts previously included in the employee’s income in the “Other information” area of the T4 slip using code 77. The employee, in turn, will claim an "Other employment expenses" deduction (repayment of salary and wages) on their 2022 income tax and benefits return based on the amount reported under code 77.

My employee has been on a work related injury leave during 2020, 2021, and 2022. I continued to pay their regular salary and to make the necessary payroll deductions based on the collective agreement. I reported the total income paid and deductions on the 2020 and 2021 T4 slips. In 2022, the workers' compensation claim was decided and the workers' compensation board issued a T5007 slip for the entire amount of the claim. What are my responsibilities as an employer for the 2022 reporting year?

No adjustments are required to the 2020 and 2021 T4 slips.

In 2022, you must prepare a T4 slip reporting the regular salary paid to the employee in the year along with the applicable deductions withheld. You must also report the entire amount of the workers' compensation claim that was reimbursed to you in the "Other information" area of the 2022 T4 slip under code 77. This allows the employee to claim an "Other employment expenses" deduction on their 2022 income tax and benefits return for the amount reported under code 77. The board will issue a 2022 T5007 slip reporting the entire amount of the claim.

I appealed the workers' compensation board's decision and in the year 2022, the entire claim was overturned. Thus, my employee is required to repay me the salary that I paid them while they were on leave since they do not have any available sick leave to convert their time to. Should I amend the 2021 T4 slip to remove the amount shown in the "Other information" area under code 77?

It is our opinion that the employer is entitled to collect the amount from the employee. The action that you will take depends on whether or not the employee repays the amount of the claim.

Amount repaid

Technically, to show a correct audit trail, the T4 slip for 2021 should be adjusted to amend the "Other information" area to nil and the employer should issue a letter indicating the repayment amount in the year of repayment. However, provided that the resulting income tax implication is nil (a debit adjustment in 2021 for the same amount as the credit for the repayment in the year of repayment), the CRA will not require that you prepare an amended 2021 T4 slip. In this case you must not issue a repayment letter.

Because of the CRA's policy, a workers' compensation board will issue an amended T5007 for 2021 showing NIL or "0" in "Box 10 – Workers' compensation benefits."

It is important to note that, while a workers' compensation board will issue amended T5007 slips for prior years to reflect the reduced amount of the claim, amended T5007 slips will not be issued to reflect an increased amount. Increased claims will be reported on the T5007 slip in the year they are awarded even if they apply to previous years. (Refer to the next question for more information on repayment letters).

Amount not repaid

Where the amount of the claim is not repaid, the employee is not entitled to a deduction for a repayment of salary or wages (equivalent to the amount reported on the 2020 T4 slip under box 77) that they took at line 22900 on their income tax and benefit return as "Other employment expenses." Consequently, the employer will prepare an amended T4 slip for the year 2020 to adjust the amount in the "Other information" area under code 77 to nil. The entire amount of the salary paid is taxable and there is no deduction for the amount equivalent to the claim that is not repaid. The employee's 2020 income tax and benefits return should be re-assessed accordingly.

In the event that the amount is subsequently repaid, the employer will issue a repayment letter for the amount repaid in the year it occurs.

One of my employees was injured at work in August 2021. According to the collective agreement, I continued to pay their regular salary and withheld the applicable payroll deductions. The claim was decided in July 2022 and the workers' compensation board denied the claim at which time the employee returned to work. I reported the earnings and deductions on a 2021 T4 slip. What adjustments do I make to the 2021 T4 slip and how do I report the income in the year 2022?

Since you continued to pay regular salary and withheld deductions, the 2021 T4 slip will remain as originally prepared. In 2022, you must prepare a T4 slip reporting the regular salary paid to the employee in the year along with the applicable deductions withheld.

If you require the employee to repay the salary they received while off work, and the employee does, you may issue a letter, in the year of repayment, indicating:

• the amount of the repayment
• the tax year to which the repayment pertains
• the type of repayment
• the reason for the repayment

This will allow the employee to take an "Other employment expenses" deduction on their income tax return in the year of repayment.

The employee appealed the decision. In 2022, the workers' compensation board then overturned the 2021 decision and granted the claim. What should I do since the employee repaid me in 2021 and took a deduction for the repayment on their 2021 income tax and benefits return?

The board will issue a T5007 slip in 2022, the year the claim was allowed. The employee will report the workers' compensation claim on their 2022 income tax and benefits return and will take the corresponding deduction.

You will not amend the 2021 T4 slip to repeat the amount reimbursed to you in the "Other information" area under code 77. The employee already took a deduction for the amount of repayment in 2021; therefore, no further adjustment is required.