Questions and Answers – Tax Implications of Phoenix payroll issues

The government is committed to resolving all pay issues as quickly as possible. The Canada Revenue Agency (CRA) is aware of the issues with the public service payroll system, Phoenix. Below you will find answers to questions many of you may have about income tax and/or government benefit and credit implications of certain situations.

For details on how to avoid tax implications or government benefit and credit implications in the event that you were overpaid by Phoenix, visit the Phoenix website or contact 1-855-686-4729.

For CRA telephone support, please call 1-888-556-5083 (9:00 – 5:00 Eastern Standard Time).  

1. How do over/under payments affect my personal income tax?

The employment income (T4) system is based on actual amounts paid and received in a calendar year. This means that the total amount you are paid by your employer in 2016 will be the amount reported on your 2016 T4 even if it is lower or higher than it should have been.

However, any pay errors caused by the Phoenix payroll system that are corrected and either paid to you in 2016 (in the case of pay that is too low) or recovered from you in 2016 (in the case of pay that is too high) will have no income tax or government benefit and credit (for example Canada child benefit and GST/HST credit) implications in most cases. In addition, if you make an arrangement with your employer in 2016 to repay an overpayment in a later year, there will be no income tax or government benefit and credit implications in most cases.

For information on what could happen if corrections, payments and recoveries are not made in 2016, please see below.

2. How does an emergency salary advance or a priority payment received in 2016 because of Phoenix pay system errors affect my personal income tax?

Under the Income Tax Act, a payment received for employment services performed is employment income.

The T4 system is based on actual amounts paid and received in a calendar year.

If you only received emergency salary advances or priority payments in 2016, the gross salary and payroll deductions related to the emergency salary advances or priority payments will be reported on your 2016 T4.

If you receive both an emergency salary advance/priority payment and a salary payment from the Phoenix payroll system for the same period without any recovery of the emergency salary advance/priority payment, then please refer to Question & Answer 3 below.

3. How does an overpayment caused by Phoenix pay system errors affect my 2016 personal income tax?

You are not considered to have received an overpayment in 2016 if you only received emergency salary advances and priority payments in 2016.

An overpayment may include receiving:

  • the same salary payment twice,
  • an emergency salary advance/priority payment and salary payment from the Phoenix payroll system for the same period,
  • salary payment at a higher salary rate than entitled, and
  • pay while on unpaid leave or after termination.

Please see the scenarios below to assess how an overpayment will affect your personal income tax:

  1. You repay the overpayment in 2016.

    If you receive an overpayment in 2016 caused by Phoenix pay system errors and repay it in 2016, the overpayment will not be reported as employment income on your 2016 T4. There should be no tax or government benefit/credit implications related to this overpayment.

  2. You make an arrangement in 2016 to repay the overpayment in 2016, in 2017 or over both years.

    If you receive an overpayment in 2016 caused by Phoenix pay system errors and make an arrangement in 2016 to repay it in 2016, in 2017 or over both years, the overpayment would not be reported as employment income on your 2016 T4. There should be no tax or government benefit/credit implications related to this overpayment.

  3. You make an arrangement in 2017 to repay the overpayment in 2017 before your 2016 T4 is issued (normally in February).

    If the overpayment is discovered in 2017 before the 2016 T4 is issued, and you make an arrangement to repay this amount, your 2016 T4 will report your correct annual earnings for 2016. However, any tax withholdings on the overpayment will still be reported on your 2016 T4. This will mean that if your only income is your federal salary, you may be entitled to a refund of the tax withholdings on the overpayment. When you file your T1 General 2016 (personal income tax return), you will receive the refund to which you are entitled.

  4. You receive an overpayment in 2016 but it is not discovered until 2017. You then make an arrangement after the 2016 T4 is issued to repay the amount in 2017.

    If you received an overpayment in 2016 caused by a Phoenix pay system error but it is not discovered until 2017, the overpayment will have been included on your 2016 T4. When your employer recovers the overpayment in 2017 or when you make an arrangement to repay the overpayment in 2017, your employer will provide you with an amended 2016 T4.

    Your amended 2016 T4 will report your correct annual earnings for 2016. However, any tax withholdings on the overpayment will still be reported on your amended 2016 T4. This will mean that if your only income is your federal salary, you may be entitled to a refund of the tax withholdings on the overpayment. Your employer will share the amended T4 with the CRA.

    For information on filing your T1 General 2016 (personal income tax return) when you have received both an original 2016 T4 and an amended 2016 T4, please refer to Question and Answer 8 below.

4. What if I am underpaid in 2016 and do not receive my corrected salary until 2017?

The T4 system is based on actual amounts you are paid and receive in a calendar year. Therefore, if an amount is owed to you in 2016, but is only paid to you in 2017, that payment will be reported on your 2017 T4 even though it was owed for 2016. In this case, you could pay lower income taxes than usual in 2016 and higher income taxes than usual in 2017. Your total income could include income from other sources (for example, investments), not just employment, so the overall tax effect cannot be determined until all the facts are considered.

Where there is an increase in taxes or a reduction in benefits as a result of an underpayment, you can submit a claim under the new Phoenix Claims Process. Each claim will be considered on its individual merits and settled based on valid receipts and other supporting documentation.

5. How do withdrawals from my Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA), or other investments because of Phoenix pay system errors affect my personal income tax?

RRSP withdrawals are included in your income in the calendar year the money is withdrawn and will likely increase the amount of income tax you might otherwise expect to pay. The contribution room for the amount of the withdrawal will no longer be available to you. Before withdrawing funds from an RRSP, employees are encouraged to speak with their relevant payroll advisors to request a salary advance.

There are no tax implications if employees withdraw amounts from their TFSAs. The withdrawn money can only be re-contributed back into their TFSA's in the following year, unless the employee had contribution room available in the current year.

If you sell investments held outside an RRSP or TFSA to access funds, the disposition of the investments may result in taxable income (e.g., interest from a bond or GIC) or there could be capital gains or capital losses resulting from the disposition of the investments.

6. Will I be taxed on any compensatory payments I receive from my employer for financial charges (NSF charges, utilities penalty charges, interest on credit cards)?

Generally, compensation paid to you by your employer for financial loss due directly to your employer's error is not taxable. Therefore, reasonable compensatory payments paid to you for financial charges you had to pay as a direct result of an underpayment of salary due to the Phoenix system will not be taxable.

Where you paid financial charges as a direct result of the underpayment of salary due to the Phoenix system, you can submit a claim under the new Phoenix Claims Process. Each claim will be considered on its individual merits and settled based on valid receipts and other supporting documentation.

7. If I was affected by Phoenix pay system errors in 2016, should I delay filing my T1 General 2016 (personal income tax return)?

If you were affected by Phoenix pay system errors, you are still required to file your T1 General 2016 (personal income tax return) by April 30, 2017 to avoid a late filing penalty and interest charges, if applicable. If you or your spouse has self-employment income in 2016, the deadline will be June 15, 2017. However, if the employee has a balance owing for 2016, that amount must be paid on or before April 30, 2017.

8. What if I receive (or expect to receive) both an original and an amended 2016 T4 because of Phoenix pay system errors—which T4 should I use to file my personal income tax return?

Please see the scenarios below to assess which T4 you should use to file your T1 General (personal income tax return):

  1. I receive both an original 2016 T4 and an amended 2016 T4 before filing my T1 General 2016 (personal income tax return).

    If you receive an original 2016 T4 and an amended 2016 T4 before filing your T1 General 2016 (personal income tax return), you should use the amended 2016 T4 to file your 2016 personal income tax return.

  2. I expect to receive an amended 2016 T4 but I don't receive it before the 2016 T1 General 2016 (personal income tax return) filing deadline.

    If you expect to receive an amended 2016 T4 and don't receive it by the T1 General 2016 (personal income tax return) filing deadline, you should use the original 2016 T4 to file your personal income tax return.

    Your employer will share the amended T4 with the CRA who will reassess your personal income tax return to reflect the amended 2016 T4 with the correct 2016 earnings. Depending on the changes, your refund amount or balance owing, as well as entitlement to government benefits and credits (for example Canada Child Benefit and GST/HST credits) will be recalculated. Your Notice of Reassessment will reflect the corrected amounts, based on the amended 2016 T4, and will provide information to explain the adjustments, including information relating to the remaining balance owing, or additional refund due.

  3. You receive an amended 2016 T4 but use the original 2016 T4 to file your T1 General 2016 (personal income tax return).

    If you receive an amended 2016 T4 but file your T1 General 2016 (personal income tax return) using the original 2016 T4, you should wait until your 2016 return is assessed to do anything. Once your Notice of Assessment is received, you can log on to My Account and submit a Change My Return request online, or complete a T1-ADJ, T1 Adjustment Request and send this to your tax centre of record, which is indicated on the Notice of Assessment. Depending on the changes, your refund amount or balance owing, as well as entitlements to government benefits and credits (for example Canada Child Benefit and GST/HST credits) will be recalculated. Your Notice of Reassessment will reflect the corrected amounts, based on the amended T4, and will provide information to explain the adjustments, including information relating to the remaining balance owing, or additional refund due.

  4. You receive an amended 2016 T4 before the T1 General 2016 (personal income tax return) filing deadline but have already filed your 2016 personal income tax return.

    If you receive an amended 2016 T4 after you filed your T1 General 2016 (personal income tax return), you don't need to file an amended personal income tax return or T1-ADJ, T1 Adjustment Request. Your employer will share the amended 2016 T4 with the CRA who will reassess your personal income tax return to reflect the amended 2016 T4 with the correct 2016 earnings. Depending on the changes, your refund amount or balance owing, as well as entitlements to government benefits and credits (for example Canada Child Benefit and GST/HST credits) will be recalculated. Your Notice of Reassessment will reflect the corrected amounts, based on the amended T4, and will provide information to explain the adjustments, including information relating to the remaining balance owing, or additional refund due.

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