The payroll restart nobody priced into closing

The situation

The seller operated a 40-employee Ontario services business and sold it by asset purchase, closing July 1. Employment continued without a gap for every transferred employee under the Employment Standards Act's deemed-continuity rule for a sale of business. Payroll administration did not continue without a gap: an asset sale makes the buyer a new employer for CRA payroll-remittance purposes, and its provider set up a fresh CRA payroll account rather than continuing the seller's existing one.

Fourteen of the forty transferred employees — senior staff and commissioned salespeople with heavily front-loaded income — had already reached their CPP and EI annual maximums with the seller by the June 30 closing date. Under a new, blank payroll account with no record of what had already been deducted, the buyer's system began deducting CPP and EI from every one of them again, from zero, on their first post-closing paycheque.

The problem

This was not required by law. It was a payroll-setup choice the buyer's provider made by default, and CRA's own published guidance describes the alternative directly: “A successor employer who has acquired all or part of a business, and who has immediately succeeded the former (predecessor) employer as the new employer of an employee, may, under certain circumstances, take into consideration the CPP/QPP, EI, and PPIP deductions already withheld by the previous employer and continue withholding and remitting those deductions as if there were no change in employer. If employees have already paid the maximum deductions, take no further deductions for the year.” The same guidance is explicit about the alternative: “If the situation just described does not apply, you must continue to deduct CPP/QPP, EI, and PPIP. You cannot take into consideration any deductions taken by the previous employer.”

Nobody asked the seller for its year-to-date payroll register before the new account went live. Once the buyer's system started deducting from zero without that data, it was operating on the second branch of CRA's own guidance — full restart, no credit for what the seller had already withheld — not by legal requirement, but because the option to do otherwise had never been exercised.

The numbers

Across the fourteen affected employees, the restart produced roughly $46,200 of duplicate employee-side CPP and EI premiums for the second half of the year — amounts already paid once, in full, to the seller. Each employee recovers their own excess through the ordinary channels: a CPP overpayment refund under the Canada Pension Plan Act, and an EI premium refund under the Employment Insurance Act, each on an application the employee files within the statutory window.

The buyer's own matching contributions on that same restarted base came to roughly $51,800 in employer CPP contributions and $34,300 in employer EI premiums — $86,100 in total. Unlike the employees' own excess, this amount had no application to file and no refund to expect.

The rule that decided it

The Canada Pension Plan Act calculates the employer's contribution independently for each employer, with no netting against what a different employer already remitted for the same person in the same year. Section 9(1)(a) sets the employer's base contribution using “the contributory salary and wages of the employee for the year paid by the employer” — paid by that employer, with nothing in the formula that looks at what a predecessor already paid. A refund mechanism exists at s.38(3.1): “if an employer applies to the Minister and satisfies the Minister that, for any year, the amount remitted by the employer as the employer's contributions with respect to an employee exceeds the contributions for the year required of the employer under section 9 with respect to the employee, the Minister may refund the amount of the excess.” The next subsection closes it here: s.38(3.2) provides that “no refund may be made of any contribution required to be made as an employer's contribution under section 9.” The buyer's contribution was calculated correctly under s.9's own formula — which means it was “required,” which means s.38(3.2) bars a refund of it.

The Employment Insurance Act has no equivalent route at all. Its general refund provision, s.96(1), reaches only “employee's premiums,” and its “Associated employers” provision at s.96(9) applies, by its own text, only “for the purposes of subsections (6) to (8.4)”: a temporary employer refund programme for 1996 to 1999 that no longer operates. SOR/97-33 s.18.1(1)(b), which defines an asset-purchasing employer as “associated” with the seller, is keyed to that same defunct programme. An employee always has somewhere to apply. An employer whose payroll restarted from zero does not.

The outcome

The $86,100 employer-side cost was absorbed as a real, unbudgeted expense of the cutover — there was no statutory or administrative route to recover it once the restarted deductions had already been remitted. The buyer's payroll provider adopted a standing practice of requesting the seller's year-to-date CPP, EI and QPIP figures for every transferred employee before any future acquisition's payroll account goes live, so the successor-employer treatment CRA's guidance permits is actually used rather than defaulted past.

The purchase agreement for the buyer's next transaction was amended to make delivery of the seller's year-to-date payroll register, for every transferring employee, a closing deliverable rather than a post-closing courtesy.

What it would have cost otherwise

Had the buyer used the seller's year-to-date payroll data at the outset — the successor-employer option CRA's guide describes — none of the $86,100 employer-side cost would have been remitted, because deductions for the fourteen already-maxed employees would simply have stopped rather than restarted. The $46,200 employee-side duplicate would also never have arisen. The entire cost traced to a payroll-setup default, not to anything the closing structure required.

The tell

The tell was timing, not amount: the fourteen affected employees were disproportionately the highest earners and most heavily commissioned — the group most likely to have already crossed the annual maximum by mid-year. A closing checklist that treats payroll transition as an afterthought, rather than asking whether any transferred employee has already reached the maximum with the seller this year, will miss exactly this group.

Takeaways

• • An asset sale makes the buyer a new employer for CPP and EI remittance purposes, even though the Employment Standards Act deems the employment itself continuous — the two continuity concepts run on different tracks.
• • CRA's own successor-employer guidance permits a buyer to continue a transferred employee's year-to-date CPP, EI and QPIP deductions rather than restarting them — but it is an option that has to be exercised, not a default.
• • Once deductions restart, the employee's excess is recoverable through their own refund application. The employer's matching CPP contribution is not: CPP Act s.38(3.2) bars a refund of any amount that was genuinely required under s.9's own per-employer formula.
• • The EI Act's employer-refund provision, tied to “associated employers” under s.96(9), only ever applied to a temporary 1996–1999 programme — there is no live statutory route to recover a duplicated employer EI premium today.
• • Make delivery of the seller's year-to-date payroll register, for every transferring employee, a closing deliverable — it is the one document that lets the buyer actually use the relief CRA's guidance already offers.

Sources

• • Canada Pension Plan, RSC 1985, c. C-8, s. 9(1) — the employer's base contribution, calculated independently for each employer on amounts it alone paid the employee.
• • Canada Pension Plan s. 38(1), (3.1) and (3.2) — the employee's overpayment refund; the employer's refund of amounts remitted in excess of what s.9 required; and the bar on refunding any amount that s.9 did require.
• • Employment Insurance Act, SC 1996, c. 23, s. 96(1) and (9) — the employee's premium refund, and the “associated employers” provision confirmed, on its own text, to apply only to the temporary 1996–1999 employer refund programme in subsections (6) to (8.4).
• • Insurable Earnings and Collection of Premiums Regulations, SOR/97-33, s. 18.1(1)(b) — defines an asset-purchasing employer as “associated” with the seller, but only for the purpose of s.96(9) above, which no longer has any live application.
• • CRA Guide T4001, Employers' Guide — Payroll Deductions and Remittances — administrative guidance describing the successor-employer option to continue a predecessor's year-to-date deductions. This is CRA administrative practice, not a statutory entitlement, and its availability is stated as conditional (“under certain circumstances”) rather than automatic.
• • Treadstone Law — Payroll Transition on Closing Day: Employee Pay in an Ontario Business Sale — general background confirming an asset sale typically requires a new CRA payroll account. It flags the account-registration point but does not address the CPP/EI maximum-restart consequence or the successor-employer continuity option this file turns on.