Year-end is where Section 87 payroll either quietly proves itself or loudly falls apart. Every manual tax adjustment made during the year, every exemption percentage applied (or missed), lands on one document: the T4. If the numbers were right all year, T4 season is routine. If they weren’t, February is when you find out – usually through a confused employee or a pensionable-earnings review from the CRA.

Here’s how exempt income should appear on the T4 and the errors that most often force amended slips.

Where exempt income goes on the T4

Employment income that’s exempt under Section 87 of the Indian Act doesn’t get reported the way regular income does. In broad terms:

• Exempt employment income is reported using Code 71 in the “Other information” area at the bottom of the T4, not in the regular employment income box.
• For partially exempt employees, the income splits. The taxable portion is reported as regular employment income; the exempt portion goes to Code 71. The two together should equal what the employee actually earned.
• A fully exempt employee’s T4 can look “empty” up top and full down below – little or no regular employment income, with the year’s earnings sitting under Code 71. That’s correct, even though it surprises people the first time they see it.

Because T4 requirements have shifted over the years (and can shift again), confirm the current year’s treatment against the CRA’s T4 guide before filing – box-level requirements around exempt income and pensionable earnings have been updated more than once.

CPP and EI at year-end: where the reconciliation bites

The income tax exemption is only one thread. The deduction boxes each follow their own logic and year-end is where mismatches surface:

• EI insurable earnings include exempt income. Section 87 doesn’t exempt Employment Insurance, so premiums should have been deducted all year and insurable earnings reported accordingly. A T4 showing exempt income but no EI is a red flag, usually a sign the payroll setup excluded too much.
• CPP pensionable earnings reflect the CPP treatment you applied. CPP has its own treatment tied to exempt income, including an employer election (the CPT124) to extend coverage. Whatever approach you adopted during the year, the pensionable earnings on the slip need to match it. Mismatches between reported income and pensionable earnings are precisely the kind of thing CRA reviews pick up.

The errors that trigger amended T4s

After enough Februaries, the same mistakes keep appearing:

1. Exempt income reported as regular employment income. The employee then appears to have unreported tax owing — or files a return that doesn’t reflect their exemption. Cue amended slips and an unhappy employee.
2. Code 71 simply forgotten. The exempt income vanishes from reporting entirely. The totals don’t reconcile against payroll records and the paper trail that protects everyone is broken.
3. The split doesn’t match the determination. The TD1-IN on file says 50% exempt; the T4 reflects 30%, because someone changed a manual adjustment mid-year and nobody updated the records. When the documentation and the slip disagree, you have a problem whichever one is right.
4. EI or CPP figures inconsistent with the income boxes. Usually inherited from a payroll setup that treated “exempt” as exempt-from-everything. EI applies regardless; CPP follows the treatment you elected.
5. Fixing it all in February. The deepest error is structural: manual adjustments all year with no running record, then a scramble to reconstruct exempt totals at deadline. Amendments become an annual tradition.

How to make T4 season boring (in the best way)

• Reconcile in the fall, not at the deadline. Before December, compare year-to-date exempt income per employee against the documented exemption percentages. A mismatch found in November is a payroll correction; found in February, it’s an amended slip.
• Keep the determination file current. TD1-INs, exemption rationale and effective dates should match what payroll actually did all year.
• Check this year’s CRA T4 guide for the current Code 71 and pensionable-earnings requirements before filing.
• Fix the process, not just the slips. If exempt income lives in manual overrides and spreadsheets, every year-end inherits every pay run’s risk. Payroll software that records the exemption once and applies the split automatically, with exempt income tracked all year and flowing to Code 71 at year-end. This turns the February scramble into a non-event. That’s exactly what Employment Hero’s built-in Section 87 support is designed to do.

Section 87 support, built into Employment Hero

This is exactly why we built Indigenous payroll support directly into Employment Hero. Record an employee’s treaty status and exemption percentage once and the correct exempt/taxable split applies automatically on every pay run — clearly marked, tracked all year and ready to flow to Code 71 reporting at year-end. No manual overrides, no reconstructing exempt totals in February, no amended slips born from a missed adjustment in June.