Frequently Asked Questions – 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.

What to do if you were underpaid or overpaid?

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Who to contact

The CRA assesses your income based on the T4 provided by your employer. If you have any questions regarding the preparation and filing of your T4, and you are or were being paid by a department served by the Public Service Pay Centre in Miramichi, please contact the Public Services and Procurement Canada (PSPC) Call Centre at 1-855-686-4729. If your department is not served by the Public Service Pay Centre, contact your compensation advisor. For more information from PSPC regarding tax slips go to https://www.tpsgc-pwgsc.gc.ca/remuneration-compensation/paye-centre-pay/trop-payes-overpayments-eng.html.

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 (7:00 am – 9:00 pm EST).

For CRA telephone support, please call 1-888-556-5083 (9:00 am – 5:00 pm EST).

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) should have no income tax or government benefit and credit (for example Canada child benefit and GST/HST credit) implications. In addition, if you made an arrangement with your employer in 2016 to repay an overpayment in a later year, there should be no income tax or government benefit and credit implications.

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

Note

Your employer considers a repayment or an arrangement to repay to have been made in 2016 if the overpayment was recorded in Phoenix in 2016.  To find out if your overpayment is recorded in Phoenix, go to Canada.ca/phoenix, select “Year-end tax slips for the public service” and see question 19.

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 received only 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 received emergency salary advances/priority payments in 2016 and you started receiving payments from the Phoenix pay system in 2016, your employer will report only the Phoenix payments 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:

a. 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 implications related to this overpayment.

Note

Your employer considers a repayment to have been made in 2016 only if the overpayment was recorded in Phoenix in 2016.  To find out if your overpayment is recorded in Phoenix, go to Canada.ca/phoenix, select “Year-end tax slips for the public service” and see question 19.

b. 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 implications related to this overpayment.

Note

Your employer considers you to have made an arrangement in 2016 to repay when the overpayment is recorded in Phoenix in 2016.  To find out if your overpayment is recorded in Phoenix, go to Canada.ca/phoenix, select “Year-end tax slips for the public service” and see question 19.

c. 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.

Note

Your employer considers you to have made an arrangement to repay before your 2016 T4 is issued if the overpayment is recorded in Phoenix before your 2016 T4 is issued. To find out if your overpayment is recorded in Phoenix, go to Canada.ca/phoenix, select “Year-end tax slips for the public service” and see question 19.

d. 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.

Note

Your employer considers you to have made an arrangement to repay when the overpayment is recorded in Phoenix.  To find out if your overpayment is recorded in Phoenix, go to Canada.ca/phoenix, select “Year-end tax slips for the public service” and see question 19.

e. How will an overpayment in 2016 caused by Phoenix pay system errors affect my 2017 entitlement to government benefits and credits?

Your 2017 entitlement to government benefits and credits (for example, Canada Child Benefit, GST/HST credits) is based on your income reported on your T1 General 2016 (personal income tax return).

If the overpayment is not reported as employment income on your 2016 T4 (as described in Question and Answer 3a, b, and c above) and you use this T4 to file your T1 General 2016 (personal income tax return), the overpayment should have no impact on your 2017 entitlement to government benefits and credits.

If the overpayment is reported as employment income on your 2016 T4 (as described in Question and Answer 3d above) and you use this T4 to file your T1 General 2016 (personal income tax return), the overpayment may impact your 2017 entitlement to government benefits and credits.  However, when your employer issues you an amended 2016 T4 that reports your correct annual earnings for 2016 (that is, the overpayment is removed), the CRA will proactively reassess your T1 General 2016 (personal income tax return) and recalculate your 2017 entitlement to government benefits and credits as a result of your amended 2016 T4 earnings.

In the event that you experience a temporary reduction in benefits due to delays in receiving your amended T4, you may be entitled to submit a claim for out-of-pocket expenses through the Phoenix Claims process. Each claim will be considered on its individual merits and settled based on valid receipts and other supporting documentation.

Understanding Your T4

For help in understanding your T4 and to determine if it is accurate, please consult Public Services and Procurement Canada’s website.

f. How will an overpayment in 2016 caused by Phoenix pay system errors affect the taxation of spousal support payments I received or paid in 2016?

Spousal support amounts you received or paid (that meet all the related criteria under the Income Tax Act) are taxable to the recipient in the year received and deductible by the payor in the year paid.

There are no expected income tax implications for support payments you received or paid in 2016 if you are overpaid in 2016. Once the amended 2016 T4 is issued that reports your correct annual earnings for 2016 (that is, the overpayment is removed), spousal support payments you received will be taxed at the usual income tax rate, or spousal support payments you paid will be deducted at the usual income tax rate.

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

a. Will the underpayment in 2016 affect my personal income taxes?

The T4 system is based on actual amounts you are paid and receive in a calendar year. Therefore, if an amount was 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.

b. Will the underpayment in 2016 affect my entitlement to government benefits and credits?

Your entitlement to government benefits and credits (for example, Canada Child Benefit, GST/HST credits) for a year is based on your income reported on your personal income tax return for the previous year.  For example, your 2017 entitlement to government benefits and credits is based on your income reported on your 2016 personal income tax return.

Because the T4 system is based on actual amounts you are paid and receive in a calendar year, amounts you receive in 2017 will be reported on your 2017 T4 even though it was owed for 2016. In this case, your 2016 income may be lower than usual and your 2017 income may be higher than usual. If your 2016 income is lower than usual, you may be entitled to more government benefits and credits in 2017. If your 2017 income is higher than usual, your 2018 entitlement to government benefits and credits may be reduced. Your total income could include income from other sources (for example, investments), not just employment, so the overall effect on your entitlement to government benefits and credits cannot be determined until all the facts are considered.

c. What can I do if the underpayment in 2016 affects my personal income taxes and my entitlement to government benefits and credits?

Where there is a decrease in your taxes in 2016 or an increase in your benefits and credits in 2017 as a result of the underpayment, you pay the decreased taxes and you keep the increased benefits and credits that you receive.

If you receive in 2017 the amounts you were underpaid in 2016 and you pay a higher rate of taxes in 2017 or there is a reduction in your benefits and credits in 2018, you may be eligible to submit a claim under the Phoenix Claims Process. Each claim will be considered on its individual merits and settled based on valid receipts and other supporting documentation.

d. Will the underpayment in 2016 affect the taxation of spousal support payments I receive?

Spousal support amounts received or paid (that meet all the related criteria under the Income Tax Act) are taxable to the recipient in the year received and deductible by the payor in the year paid.

If the underpayment in 2016 results in you paying a lower rate of income taxes than usual in 2016, the spousal support payments you received in 2016 will be taxed at this lower rate. If you receive in 2017 the amounts you were underpaid in 2016 and you pay a higher rate of income taxes in 2017, the spousal support payments you receive in 2017 will be taxed at this higher rate. In this situation, you may be eligible to submit a claim under the 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 out-of-pocket expenses I incurred due directly to Phoenix pay system errors?

Generally, compensation paid to you by your employer for financial loss incurred due directly to your employer's error is not taxable. Therefore, reasonable compensatory payments paid to you for out-of-pocket expenses you had to pay as a direct result of Phoenix pay system errors (that is, incomplete or inaccurate pay) will not be taxable.  For example, if you incur NSF charges, utilities penalty charges, or interest on credit cards because of an underpayment of salary due to Phoenix pay system errors, any reimbursement you receive for these expenses will not be taxable.

Where you paid out-of-pocket expenses as a direct result of incomplete or inaccurate pay, you can submit a claim under the 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 May 1, 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 May 1, 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):

a. 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.

b. 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. Please note that the CRA will not consider you to have filed a false return if you filed using the most recent 2016 T4 you received from your employer.

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.

c. You receive an amended 2016 T4 but have already filed your T1 General 2016 (personal income tax return).

If you receive an amended 2016 T4 after you filed your T1 General 2016 (personal income tax return) using the original 2016 T4, you should wait until your 2016 assessment is finalized and you received a Notice of Assessment. Your employer will have shared the amended T4 with the CRA. Once you receive your Notice of Assessment, you can choose to wait for the CRA to initiate a reassessment, or you can submit a T1 Adjustment request. If you filed your initial 2016 T1 Return electronically through EFILE or NETFILE, an EFILE service provider can submit an adjustment request for you with ReFILE. You can also 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.

d. I live in Québec and work outside the province of Québec. If I expect to receive an amended T4, will it be shared with Revenu Québec?

If you live in Québec and work outside the province of Québec, the CRA will share your amended T4 with Revenu Québec who will reassess your Québec income tax return to reflect the amended 2016 T4 with the correct earnings.

Understanding Your T4

For help in understanding your T4 and to determine if it is accurate, please consult Public Services and Procurement Canada’s website.

9. Gross overpayment

a. What is meant by a gross overpayment versus a net overpayment?

A gross overpayment is the amount of the overpayment before any deductions are made (for example, income tax, CPP/QPP, and EI (“tax withholdings”), union dues, and pension contributions). The net overpayment is the actual amount you received after all the deductions are made.

b. I received an overpayment in 2016 because of Phoenix pay system errors and I heard that I will have to repay the gross overpayment. What does that mean?

You will only have to repay more than the net overpayment if you did not repay the amount in 2016 or you did not make an arrangement in 2016 to repay the amount. In these cases, you will have to repay the net overpayment received plus the tax withholdings on the gross overpayment.

Under the tax laws the CRA administers, your employer is required to deduct, and remit to the Receiver General, appropriate tax withholdings on any salary and wages paid to you regardless of whether the amount was paid in error. Your employer remits the tax withholdings on your behalf and the amounts are credited on account of your tax liability for the calendar year in which you received the overpayment. After the end of the calendar year, only you can recover the tax withholdings when you file your T1 General 2016 (personal income tax return).

c. Can you provide a numerical example to help me understand how I get the taxes that were withheld on the overpayment returned to me in this situation?

Yes. Assume the following facts:

  • You received your regular annual salary of $80,000 for 2016,
  • You received a gross overpayment of $10,000 in 2016,
  • You made arrangements to repay the overpayment in late February 2017, after you received your 2016 T4, and
  • The appropriate tax withholdings are at 25% on all payments and that there were no other deductions from the overpayment.
Gross Salary Estimated tax withholdings (25%) Net amount received Original 2016 T4 Amended 2016 T4
2016 Employee salary $80,000 $20,000 $60,000    
2016 salary overpayment $10,000 $2,500 $7,500    
Total 2016 salary received $90,000 $22,500 $67,500    
Employment income       $90,000 $80,000
Tax withholdings       $22,500 $22,500

 

Gross overpayment repaid $10,000
Net overpayment received $7,500
Refund / credit tax withholdings to employee $2,500

In this example, you will repay your employer the gross overpayment of $10,000 in 2017.

However, once your 2016 T1 General (personal income tax return) is assessed using your amended 2016 T4, you will be refunded the $2,500 tax withholdings or credited with the amount as a payment on account of your tax liability for 2016.

This means that while you have to repay the gross overpayment of $10,000, you received a net overpayment of $7,500 from your employer in 2016 and will receive credit for the tax withholdings of $2,500 when your T1 General 2016 (personal income tax return) is assessed or reassessed using your amended 2016 T4.

If you receive your 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 by the filing due date (see Question and Answer 7 above). Once your 2016 T1 General (personal income tax return) is reassessed using your amended 2016 T4, you will be refunded the $2,500 tax withholdings or credited with the amount as a payment on account of your tax liability for 2016.

If you receive your amended 2016 T4 after you filed your T1 General 2016 (personal income tax return), you should wait until you receive your 2016 Notice of Assessment. Your employer will have shared the amended 2016 T4 with the CRA. Once you receive your 2016 Notice of Assessment, you can choose to wait for the CRA to initiate a reassessment, or you can submit a T1 Adjustment request. You can do so by logging 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 your Notice of Assessment. Once your 2016 T1 General (personal income tax return) is reassessed using your amended 2016 T4, you will be refunded the $2,500 tax withholdings or credited with the amount as a payment on account of your tax liability for 2016.

For more information on when you will receive an amended 2016 T4, please refer to Question and Answer 3 above.  For more 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 above.

d. Isn’t there anything that can be done so that I only have to repay the net overpayment received?

The CRA does not have legislative authority to allow your employer to recover the tax withholdings on the overpayment after the end of the calendar year to enable you to only repay the net overpayment received. The Courts have determined that once an amount is deducted from your salary and remitted to the CRA and the calendar year has ended, the amount is considered paid on account of your tax liability for that year and only you are entitled to a refund of any excess amounts deducted from your salary and remitted by your employer.

This means that after 2016, the only way to recover the excess tax withholdings deducted from your 2016 overpayment, and remitted by your employer, is through the filing of your T1 General 2016 (personal income tax return).

e. How can I recover the tax withholdings deducted from the overpayment, and remitted by my employer?

If you make an arrangement in 2017 to repay the overpayment before your employer issues your 2016 T4 (normally in February), your 2016 T4 will report your correct annual earnings for 2016 in box 14. However, the tax withholdings on the overpayment will still be reported on your 2016 T4.

If you do not make an arrangement until after your employer issues your 2016 T4, your employer will issue you an amended 2016 T4 to report your correct annual earnings in box 14. However, the tax withholdings will not be changed on your amended 2016 T4 slip.

As a result, the tax withholdings reported on your original or amended 2016 T4 slip will be higher than they should be in comparison to your employment earnings reported in box 14 of your original or amended 2016 T4.

If your only income is your federal salary, you should be entitled to a refund of the excess tax withholdings on the overpayment. When you file your T1 General 2016 (personal income tax return) and it is assessed using the amended 2016 T4, you will receive the refund to which you are entitled.

The end result is that with the refund of tax withholdings, you are made whole for the difference between the net overpayment received and the total amount repaid.

For information on when you will receive an amended 2016 T4, please refer to Question and Answer 3 above.  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 above.

f. What happens if I can’t repay the amount required because I am still waiting to file my T1 General 2016 (personal income tax return) to receive a refund of the tax withholdings?

The Government recognizes that you may be unable to repay your employer the gross overpayment when you have only received an amount net of tax withholding. Therefore, the Government is providing various repayment options to give employees flexibility in repaying the overpayment. If you are in financial hardship, you should contact the Public Service Pay Centre or your compensation advisor and make arrangements for your specific situation.

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