Payroll Insights: Avoiding Payroll Pitfalls at Year-End
October 1, 2025
Sector:
As 2025 winds down, Canadian employers are turning their attention to T4s, bonuses, and benefits reporting. While payroll may feel routine during the year, year-end is where small mistakes can snowball into costly compliance issues, CRA penalties, or frustrated employees.
Below are the most common payroll pitfalls businesses face — and how to avoid them.
1. Missing Taxable Benefits
Not all compensation comes as a salary. Employers often overlook:
Group health and dental premiums paid by the company
Personal use of a company vehicle
Cell phone or internet allowances
Gift cards or bonuses outside payroll
Why It Matters
These taxable benefits must be included on T4 slips. Missing them can trigger CRA inquiries and employee reassessments.
2. Incorrect Vacation and Statutory Pay
Vacation pay and statutory holiday pay rules vary by province and are often misapplied when:
Employees take vacation as time off vs. payout
Hourly vs. salaried staff are treated the same
Terminated employees don’t receive final vacation entitlements
Pro Tip
Keep vacation and stat pay accruals updated monthly so year-end isn’t a scramble.
3. Late or Incorrect CRA Remittances
Payroll remittances (CPP, EI, and income tax) must be accurate and on time. Common errors include:
Missing a remittance deadline due to holidays
Incorrect calculation of bonus withholdings
Not adjusting when CRA updates deduction tables mid-year
Penalty Alert
CRA penalties can reach 20% for repeated lateness — a costly mistake for any business.
4. Forgetting Retroactive Adjustments
Raises or wage increases announced mid-year sometimes aren’t applied retroactively. At year-end, this creates:
Employee complaints about underpaid amounts
Adjustments needed on T4s
Messy journal entries to reconcile payroll with bookkeeping
5. Rushing Year-End Prep
Year-end payroll prep isn’t just about slips — it’s about clean data. Employers often rush and miss:
Confirming employee names, SINs, and addresses
Cross-checking taxable benefit totals
Reviewing reconciliations between payroll and general ledger
Start Early
Starting now (October) gives your business time to resolve discrepancies before February deadlines.
Final Thoughts on Payroll Compliance
Payroll is one of the most scrutinized areas of compliance — and mistakes are costly. By tackling benefits, remittances, and vacation accruals now, you’ll save yourself the stress of last-minute corrections.
At Kreston GTA, we help Canadian businesses prepare for payroll year-end with accuracy and peace of mind.
Need Help With Year-End Payroll?
For more information on payroll year-end compliance — and how we can support your business — explore our payroll services or contact us for a personalized consultation.
News and Insights
Tax Court Rules on Salary vs Shareholder Loans: Case Study Insights
June 28, 2025
Sector:
Why Small Businesses Must Prioritize Accurate Bookkeeping
As a Chartered Professional Accountant (CPA, CA) in Canada, I have seen firsthand how technical tax rules and financial reporting requirements can challenge even the most diligent business owners. A recent Tax Court of Canada ruling in Malamute Contracting v. The Queen provides crucial insight on the sometimes-blurry line between salary and shareholder loan payments, and highlights why accurate financial record keeping is not just best practice—it’s a necessity for compliance and long-term success.
Case Background: The Malamute Contracting Story
Malamute Contracting, a company specializing in kitchen and bathroom renovations, is owned and operated by David and Danielle Lynch. Like many Canadian small businesses, the Lynches split their responsibilities, with David managing operations and Danielle handling the books. Unfortunately, their approach to recording and remitting employee payments attracted the scrutiny of the Canada Revenue Agency (CRA).
Payroll vs. Shareholder Advances: The Payments in Question
From January 2018 through March 2019, Malamute issued regular biweekly cheques to the Lynches, often labeling them as “payroll.” While the payment amounts were usually consistent, Danielle’s limited experience in bookkeeping meant that tax and Canada Pension Plan (CPP) remittances were made only for January and February 2018. Thereafter, payments were recorded as shareholder advances, and no further remittances were made.
CRA’s Assessment and Legal Position
The CRA took the position that all payments after February 2018 were, in substance, salary—not shareholder loans. This meant Malamute was responsible for missed payroll source deductions, including income tax and CPP, plus penalties for non-compliance. The essence of the CRA’s argument was that the character of payments at the time they are made—rather than later adjustments in the books—determines their tax treatment.
Key Findings: The Role of Bookkeeping Expertise
During trial, it became clear that Danielle Lynch’s well-intentioned, but ultimately flawed, bookkeeping practices played a pivotal role in the dispute. She used an online government calculator to estimate withholding taxes, causing inconsistent cheque amounts and misapplied remittances. Lack of professional bookkeeping guidance led directly to the CRA’s adverse assessments.
Technical Takeaways and Practical Implications
Nature of Payments: The Tax Court of Canada emphasized that the tax treatment hinges on the true character of payments when they are made. Recording a payment as a shareholder loan after the fact will not override its original intent or usage if it was, in reality, salary.
Financial Documentation: Small businesses must maintain meticulous records, contemporaneously documenting payment types, justifications, and supporting calculations for all owner withdrawals.
Remittance Obligations: Failing to remit payroll deductions on time can result in significant interest and penalties, even when errors are inadvertent or made by inexperienced staff.
Professional Advice: Engaging a CPA or a professional bookkeeping service is invaluable. Tax rules governing owner-manager compensation are complex and evolve frequently, particularly in the context of tax planning for incorporated businesses.
Broader Implications for Canadian Small Businesses
The Malamute Contracting case should serve as a cautionary tale for small businesses and entrepreneurs across Canada. It demonstrates how the lack of technical expertise—even with the best intentions—can expose owners to unnecessary risk. Accurate bookkeeping and strategic compensation planning are essential to avoid costly disputes with the CRA.
How Kreston GTA Can Help Small Businesses Remain Compliant
At Kreston GTA, we recognize the mounting pressures faced by financial reporting teams and owner-managers in Canada’s evolving tax environment. Our team of highly skilled CPAs, tax specialists, and advisors provides a full spectrum of services tailored to ensure your business remains compliant and strategically positioned for growth. Our offerings include:
Cloud Bookkeeping and Payroll Services: Automate and streamline your processes with expert oversight.
Personal and Corporate Tax Preparation: Ensure every deduction and credit is optimized.
Tax and Estate Planning: Minimize long-term tax liabilities and protect your legacy.
Assurance and Audit: Reliable public and non-public financial statement audits.
Comprehensive Advisory Services: Access to industry-leading professionals for all your business needs.
Conclusion: Invest in Professional Bookkeeping to Avoid Tax Surprises
The lesson from Malamute Contracting v. The Queen is clear: small business owners must treat accurate, timely, and technically sound bookkeeping as a critical part of their business strategy. Whether dealing with salary vs. shareholder loan issues or broader tax compliance questions, seeking ongoing professional guidance is the best defence against unwanted CRA attention and costly errors.
For more information on how Kreston GTA can support your business’s financial health, contact us today or visit our page on Bookkeeping. Also, discover our Tax Planning Solutions for small businesses.
Tax Court Rules on Salary vs Shareholder Loans: Case Study Insights
April 16, 2025
Sector:
Tax Court of Canada Decision Highlights the Importance of Accurate Financial Record Keeping
Written by a Chartered Accountant in Canada
Accurate financial record keeping is a fundamental pillar of any successful business, especially for small to medium-sized enterprises (SMEs) in Canada. A recent decision by the Tax Court of Canada sheds light on the crucial distinction between salary and shareholder loans, offering a valuable lesson for business owners in maintaining proper documentation and compliance with the Canada Revenue Agency (CRA).
Case Background: Malamute Contracting v The Queen
The case of Malamute Contracting v The Queen revolved around a small Canadian business specializing in kitchen and bathroom renovations. Owned and operated by David and Danielle Lynch, Malamute Contracting became the focus of a CRA audit due to inconsistencies in how payments were issued and classified within the company’s records.
From January 2018 to March 2019, Malamute issued biweekly cheques to its owners labeled as “payroll.” While this might seem straightforward, the nature and classification of these payments soon became a contentious issue. Initially, proper tax and CPP remittances were made for January and February 2018, after which remittances stopped and the payments were treated as shareholder advances.
CRA’s Position and Assessment
The CRA’s audit determined that payments made after February 2018 should have been classified as salary, not shareholder loans. This meant Malamute Contracting was required to withhold and remit income tax and Canada Pension Plan (CPP) contributions. The company’s failure to do so resulted in significant reassessments and penalties.
Bookkeeping Errors: The Rookie Mistake
The trial revealed that Danielle Lynch, despite her best intentions, lacked experience as a bookkeeper. Her method involved estimating taxes for each cheque using a government website, which led to uneven cheque amounts and incorrect remittances.
This rookie error, while common among small business owners, had serious consequences. Inaccurate payroll processing and poor record-keeping practices triggered unwanted CRA assessments and penalties, highlighting the importance of professional bookkeeping services.
Implications for Canadian Small Businesses
This decision underscores a critical principle: the tax treatment of a payment is determined by its character at the time it is made. In other words, how you document and process payments—whether classified as salary or shareholder loans—directly impacts your tax obligations.
Small businesses in Canada must therefore ensure:
Meticulous documentation of all payments
Consistent payroll processing and remittances
Clear records distinguishing between salary, dividends, and shareholder loans
Failure to comply can result in costly audits, reassessments, and penalties. Businesses must be aware that even unintentional misclassifications can have significant tax consequences.
Practical Steps to Avoid Common Bookkeeping Pitfalls
As a Chartered Accountant in Canada with extensive experience assisting SMEs, I recommend the following best practices:
1. Implement Professional Bookkeeping Solutions
Utilize cloud bookkeeping and payroll services to automate and streamline your financial processes. This reduces the risk of manual errors and ensures timely CRA remittances. For more guidance, explore our cloud bookkeeping solutions.
2. Regularly Review Shareholder Transactions
Regularly review and reconcile all shareholder advances and personal withdrawals from the business. Ensure these are correctly classified to avoid unintended tax liabilities.
3. Seek Expert Tax Advice
Engage a qualified professional for personal and corporate tax preparation and advice. Proper planning can help you optimize your tax position and avoid costly mistakes. Consider our tax services for comprehensive support.
4. Maintain Clear, Detailed Records
Keep detailed records of all payments, including supporting documentation for their classification. This transparency is invaluable during a CRA audit.
5. Ongoing Training & Support
Train your financial staff or bookkeeper to stay current with CRA regulations and best practices. Ongoing training minimizes errors and improves compliance.
The Value of Professional Support
The Malamute Contracting case is a cautionary tale for small businesses. It demonstrates that inexperience in financial management and bookkeeping can expose business owners to unnecessary risk and financial penalties.
At Kreston GTA, our team of highly qualified Chartered Professional Accountants (CPAs) and advisors have the expertise to help your business:
Navigate complex CRA rules
Optimize your tax strategy
Ensure proper classification of all payments
Mitigate the risk of audits and penalties
Contact us today at info@krestongta.com to learn more about how we can help your business thrive with compliant, accurate, and professional financial record keeping.
Frequently Asked Questions
1. What is the main difference between salary and shareholder loans? Salary is employment income and subject to payroll deductions and remittances, while shareholder loans are advances or withdrawals that must be properly documented and repaid, or they can be reclassified as income by CRA.
2. Why did the CRA assess penalties against Malamute Contracting? The CRA assessed penalties because the company misclassified salary payments as shareholder loans and failed to make required payroll remittances.
3. How can Canadian small businesses avoid similar issues? By maintaining clear, detailed financial records, using professional bookkeeping services, and ensuring correct classification of all payments.
4. What are the consequences of inaccurate bookkeeping? Inaccurate bookkeeping can lead to CRA audits, reassessments, fines, penalties, and additional taxes owed.
5. Where can I find professional bookkeeping and tax advice in Canada? Kreston GTA offers cloud bookkeeping and tax services tailored to small businesses and entrepreneurs across Canada.
News and Insights
Real Estate Insights: Navigating the Flipped Property Rules
April 7, 2025
Sector:
Navigating the Flipped Property Rule: What Canadian Real Estate Investors Need to Know
In the ever-evolving Canadian real estate market, understanding the complexities of property taxation is more important than ever, especially with the Canada Revenue Agency (CRA) and Revenu Québec intensifying their scrutiny of real estate transactions. With the federal government committing $73.1 million to strengthen enforcement over the next five years, investors and homeowners alike must ensure tax compliance in the housing sector. In this article, we’ll provide a comprehensive overview of the flipped property rule, its key effects, and advanced tax strategies to avoid unexpected liabilities.
Introducing the Flipped Property Rule: Key Changes for 2023 and Beyond
In the 2022 Federal Budget, new rules specifically targeting flipped residential properties were introduced and came into force on January 1, 2023. Under these changes, “property flipping”—the act of purchasing and reselling homes within a short period for profit—faces stricter tax treatment. Now, any gain on a property sold within 365 days of purchase is classified as business income, meaning it is fully taxable and ineligible for preferential capital gains rates or the principal residence exemption. Furthermore, any corresponding losses are denied, with only reasonable expenses permitted as tax deductions.
Key Takeaways:
Properties sold within 12 months of purchase are automatically deemed to be flipped unless an exception applies.
Gains are taxed at your full marginal rate as business income, not as capital gains.
The principal residence exemption does not apply.
Losses cannot be claimed, except for reasonable selling expenses.
For more on tax compliance and reporting, visit our Tax Services page.
Exceptions to the Flipped Property Rule
While the flipped property rule is broad, there are notable exceptions to protect Canadians from unforeseen personal or financial hardships. Exceptions include:
Force majeure events such as death, marital breakdown, family additions (e.g., birth, adoption), serious illness or disability, insolvency, job relocations, involuntary termination, personal safety threats, or government expropriation.
Legislative update (August 2024): Property transfers upon a beneficiary’s death are now excluded from the flipped property rule.
Each exception must meet strict documentation and substantiation requirements. If you’re unsure whether you qualify for an exception, consulting a Chartered Professional Accountant is highly advisable.
What Activities Can Be Caught by the Flipped Property Rule?
The rule applies to a wide range of scenarios, impacting both individuals and corporate entities:
Corporate Transactions
Amalgamations: If two corporations amalgamate and one holds a residential property for less than 365 days, the transaction is deemed a taxable disposition—taxed as business income, not a capital gain.
Corporate Wind-ups: When a parent corporation receives residential property from a subsidiary held for less than 365 days and the subsidiary is wound up, this too is taxed as business income.
Section 85 Rollovers: Transfers of residential property to a related corporation under section 85 of the Tax Act for properties held less than 365 days are also caught. The same applies to individual-to-corporation transfers.
Estate Freezes: Estate freezes involving real property require a careful analysis to determine if the flipped property rule is triggered, especially if the property was acquired less than 365 days before the transaction.
Note: In all these examples, the 365-day clock resets with each new transfer.
While the flipped property rule applies to properties held for less than 365 days, it’s essential to recognize that CRA may still deem a disposition to be business income even if you held the property longer, based on the facts and circumstances. Factors include frequency of transactions, renovations, financing arrangements, and your stated intentions.
Strategic Guidance and Professional Advice
Navigating these complex rules requires precision and expertise. The line between capital gains and business income can be razor-thin and fact-dependent. For any real property transaction—especially those involving corporate structures or family trusts—consult a Chartered Accountant for tailored advice. At Kreston GTA, our experienced team of tax advisors and CPAs are ready to help you achieve full compliance and optimize your tax position.
At Kreston GTA, we understand the pressure on financial reporting teams and real estate investors in this dynamic landscape. Whether you need help with tax planning, impairment testing, or sophisticated estate strategies, our team of audit and advisory professionals is here to support you. We offer:
1. What is the flipped property rule in Canada? The flipped property rule treats gains on residential properties sold within 12 months of purchase as fully taxable business income, disallowing capital gains treatment and principal residence exemption except in certain cases.
2. Are there exceptions to the flipped property rule? Yes. Exceptions include major life events like death, job relocation, marital breakdown, disability, and certain legislative-transfers, such as upon a beneficiary’s death.
3. How does the rule affect corporate property transactions? Amalgamations, wind-ups, rollovers, and estate freezes involving properties held less than 365 days are considered business income events, with the 365-day period resetting upon each transaction.
4. Can I claim a loss on a flipped property? No, losses on properties deemed to be flipped are denied except for allowable selling expenses.
5. Is the 365-day rule the only factor the CRA considers? No, even after 365 days, the CRA can still classify a property sale as business income based on intent and transaction details.
News and Insights
Navigating Uncertainty: Financial Reporting and Going Concern Implications of Tariffs for Canadian Businesses
March 30, 2025
Sector:
Navigating Tariff Uncertainty: Financial Reporting Implications for Canadian Businesses
As global trade tensions continue to evolve, Canadian businesses are increasingly challenged by the financial reporting implications of tariff uncertainty. While immediate issues such as supply chain disruptions and cost management are urgent, the requirements for financial reporting and disclosure under Canadian GAAP (ASPE or IFRS) are just as critical and must not be overlooked.
In this article, we examine how tariffs affect the assessment of going concern, asset valuation, and disclosure obligations for organizations operating in Canada. Drawing on the expertise of Kreston GTA—a leading mid-sized Canadian accounting firm advising clients across industries—we provide technical guidance on maintaining compliance and transparency in an unpredictable trade environment.
Industries Most Affected by Tariffs
Although nearly every sector is impacted by cross-border trade, certain industries experience heightened vulnerability to tariff-related uncertainty:
Automotive and Manufacturing
Heavily dependent on just-in-time parts sourced from the U.S., Mexico, and China, these sectors are now grappling with rising costs and the need to renegotiate supplier contracts. This directly affects cost of goods sold and inventory valuation. For more on our work in this sector, explore our manufacturing industry services.
Agriculture and Food Processing
Canadian exporters in agriculture face reduced demand abroad and fluctuating input prices, leading to challenges in forecasting and inventory valuation. These obstacles are further compounded by regulatory changes and global market shifts.
Technology and Electronics
With key components sourced from Asia now subject to cost increases and delays, pricing strategies and margins are directly impacted. This sector must remain agile to mitigate tariff-driven shifts in market dynamics.
Retail and Consumer Goods
Retailers, still stabilizing post-pandemic, now contend with new tariffs that create additional headwinds, affecting store-level profitability and inventory turnover. The ripple effect is particularly pronounced in financial reporting and scenario planning.
Financial Reporting Challenges: Disclosure and Judgement
When preparing financial statements, businesses must carefully consider the implications of tariffs. The mere announcement of tariffs—even if not yet enacted—may trigger disclosure requirements under IAS 10 (Events After the Reporting Period) or similar ASPE guidance.
Key Areas Requiring Professional Judgment
Asset Impairments: Are inventories now carried above recoverable value due to reduced demand or elevated costs?
Revenue Forecasts: Have customer orders declined, or has pricing power weakened, necessitating a reassessment of expected revenues?
Cost Structures: Have gross margins narrowed significantly, requiring additional commentary in the MD&A or footnotes?
CPA Ontario emphasizes that these assessments must be approached with heightened professional skepticism and meticulously documented, particularly when the full impact of tariffs is uncertain. For more information on financial reporting, visit our financial statement audit services.
Going Concern: The Silent Risk
Perhaps the most significant technical risk lies in the assessment of going concern. Entities with thin margins or restricted liquidity may find that tariffs threaten their financial stability. This is especially relevant for SMEs reliant on U.S. or Chinese imports who lack pricing flexibility.
Technical Aspects of Going Concern Assessment
Incorporate geopolitical and trade policy considerations into forecasts.
Update cash flow projections and perform debt covenant testing.
Engage legal counsel or lenders as needed to validate critical assumptions.
If management determines that material uncertainties exist but going concern remains appropriate, these must be disclosed transparently in the financial statements. Auditors may need to include an Emphasis of Matter or Material Uncertainty Related to Going Concern paragraph in their report.
The Cost of Uncertainty
Beyond technical accounting, tariff uncertainty creates a challenging environment for financial planning. This impairs access to capital, reduces investor confidence, and makes scenario planning essential. While large organizations may have robust internal controls, many smaller businesses lack the resources to respond proactively to the volatility introduced by shifting trade barriers.
How Kreston GTA Can Help Canadian Businesses
At Kreston GTA, our team of Chartered Professional Accountants has deep expertise in supporting clients through changing economic and regulatory landscapes. Whether you require assistance with impairment testing, going concern evaluations, or industry-specific disclosures, we deliver tailored solutions for your organization’s needs.
Our Value-Added Service Offerings
Proactive audit planning that considers sector-specific tariff risks
Guidance on transparent, decision-useful financial disclosures
Financial modeling to support management’s going concern assessment
Support in communication with stakeholders, including lenders and boards
1. How do tariffs impact Canadian financial reporting requirements? Tariffs can affect asset valuations, revenue forecasts, and disclosure obligations under Canadian GAAP (ASPE or IFRS), requiring careful professional judgment and timely updates to financial statements.
2. Which industries in Canada are most affected by tariff uncertainty? Industries such as automotive, manufacturing, agriculture, food processing, technology, electronics, and retail are most vulnerable to the financial reporting impacts of tariffs.
3. What are the main disclosure requirements triggered by new tariffs? New or announced tariffs may require disclosure as subsequent events or uncertainties, particularly under IAS 10 or ASPE, and may necessitate updates to MD&A or footnotes.
4. How should companies assess going concern in light of tariff risks? Companies must incorporate geopolitical factors and revised cash flow forecasts, and, if necessary, engage legal counsel or lenders to validate assumptions surrounding business continuity.
5. How can Kreston GTA support businesses facing tariff-related financial reporting challenges? Kreston GTA offers expert audit planning, financial modeling, and advisory support to ensure compliance and transparent reporting in sectors heavily affected by tariffs.
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