Frequently Asked Questions – 2016 Tax Implications of Phoenix payroll issues

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.

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 the emergency salary advances/priority payments were recovered from you in 2016.

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.

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.

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.

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, if any tax withholdings on the overpayment are still 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.

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.

e. You receive an overpayment in 2016 but it is not discovered until 2018. You then make an arrangement after the 2016 T4 is issued to repay the amount in 2018.

If you received an overpayment in 2016 caused by a Phoenix pay system error but it is not discovered until 2018, the overpayment will have been included on your 2016 T4. When your employer recovers the overpayment in 2018 or when you make an arrangement to repay the overpayment in 2018, your employer will provide you with an amended 2016 T4.

If you received your amended T4 prior to January 15, 2019, 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.

If your employer had not provided you with an amended 2016 T4 with your correct earnings (that is, with the overpayment removed) prior to January 15, 2019, the legislative changes may apply. These changes allow your employer to issue you an amended 2016 T4 reporting your correct annual earnings and tax withholdings for 2016. Your employer will share the amended T4 with the CRA. The changes will allow you to repay your employer the net amount of the overpayment (see Question and Answer 9 below).

However, you may have to repay more than the net amount if your employer cannot recover all of the CPP contributions or EI premiums withheld and remitted on the overpayment. To find out when your employer cannot recover the CPP contributions and EI premiums withheld and remitted, please go to Questions 3 and 5 on salary overpayments made in error.

This means that the CPP contributions and EI premiums that your employer cannot recover from the CRA will be reported on your 2016 T4 and you will have to repay the net amount plus these amounts (see Question and Answer 9 below). You may be entitled to a refund of the CPP contributions or EI premiums withheld on the overpayment when your T1 General 2016 (personal income tax return) is reassessed.

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.

f. You receive an overpayment in 2016 but it is not discovered until 2020. You then make an arrangement after the 2016 T4 is issued to repay the amount in 2020.

If you received an overpayment in 2016 caused by a Phoenix pay system error but it is not discovered until 2020, the overpayment will have been included on your 2016 T4. When your employer recovers the overpayment in 2020 or when you make an arrangement to repay the overpayment in 2020, your employer will provide you with an amended 2016 T4.

As the overpayment was not repaid within three calendar years after the year the overpayment was made (or an arrangement to repay had not been made within that three year period), the legislative changes do not apply.

This means that if you received your amended T4 in 2020, your amended 2016 T4 will report your correct annual earnings for 2016. In addition, 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. Once you receive your amended T4 (see Accessing and managing your tax slips), you can submit a T1 Adjustment request and the CRA will reassess your personal income tax return to reflect the amended 2016 T4 with the correct 2016 earnings and withholdings. 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. For more information on how to file an adjustment, please see How to change your return.

g. 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 and e 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), you can request a reassessment of your T1 General 2016 (personal income tax return) and the CRA will recalculate your 2017 entitlement to government benefits and credits as a result of your amended 2016 T4 earnings as part of the reassessment process.

In the event that you experience a temporary reduction in benefits due to delays in receiving your amended T4, you can request an advance for government benefits to tide you over.

h. 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.

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. For more information on whether compensatory payments received under the Phoenix Claims Process are taxable, please refer to Question and Answer 6 below.

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 for the additional income tax payable under the Phoenix Claims Process. Each claim will be considered on its individual merits and settled based on valid receipts and other supporting documentation. For more information on whether compensatory payments received under the Phoenix Claims Process are taxable, please refer to Question and Answer 6 below.

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.

a. Out-of-pocket expenses

Generally, compensation paid to you by your employer for a 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) are not taxable. For example, if you incurred NSF charges, utilities penalty charges, or interest on credit cards because of an underpayment of salary due to Phoenix pay system errors, any payment you receive for these expenses is not taxable.

b. Reduced or eliminated government benefits or credits

If you were underpaid in 2016 and as a result there was an increase in your government benefits and credits in 2017, you keep the increased benefits and credits that you received.

If you received in 2017 the amounts you were underpaid in 2016 and there is a reduction in your government benefits and credits in 2018, you may be eligible to submit a claim under the Phoenix Claims Process.

Any compensatory payments you receive from your employer for the reduced or eliminated 2018 government benefits or credits are taxable. The amount will be reported on your T4 in the year the payment is received and your employer is required to withhold income tax and, if applicable, CPP and EI.

c. Interest or penalties assessed

If you are assessed interest or penalties directly as a result of Phoenix pay system errors, you filed your 2016 personal income tax return on time (see Questions and Answers 7 & 8 below), and you could not have expected that your amended 2016 T4 would result in you having an amount owing, any reasonable payments you receive from your employer for these amounts are not taxable.

d. Phoenix Claims Processes

There are various claims processes in place to compensate employees who have incurred expenses or financial losses due directly to Phoenix pay system errors.

If any of the situations described in Question and Answer 6a to 6c above apply to you, please see Claims for expenses and financial losses due to Phoenix: types of claims to find out which claim process(es) could apply to you. Each claim will be considered on its individual merits and settled based on valid receipts and other supporting documentation.

If you are not reimbursed through the Phoenix Claims Process for the interest or penalties assessed by the CRA, you can submit a request for review under the taxpayer relief provisions. Go to Cancel or waive penalties or interest for more information. Be sure to include the decision letter from your department or agency and any relevant documents when submitting your request.

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.

Please see the scenarios below to assess which 2016 T4 you should use to file your T1 General 2016 (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.

Once you receive your amended T4 (see Accessing and managing your tax slips), you can submit a T1 Adjustment request and the CRA will reassess your personal income tax return to reflect the amended 2016 T4 with the correct 2016 earnings. 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. For more information on how to file an adjustment, please see How to change your return.

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. Once you receive your Notice of Assessment, 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. For more information on how to file an adjustment, please see How to change your return.

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 2016 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 2016 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 2016 T4 with Revenu Québec. If you wish to have your Québec income tax return amended, you will need to complete form TP-1.R-V, Request for an Adjustment to an Income Tax Return.

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. Do I have to repay the gross or the net amount of the overpayment?

If you repaid the amount in 2016 or made an arrangement in 2016 to repay the amount you will have only repaid the net amount.

You may also only have to repay the net amount if the legislative changes apply to your situation.

If your employer provided you with an amended 2016 T4 with your correct earnings (that is, with the overpayment removed) after January 15, 2019, the legislative changes may apply. These changes allow your employer to recover the tax withholdings deducted and remitted on the overpayment from the CRA, allowing you to repay only the net amount of the overpayment in most cases.

You may have to repay more than the net amount if your employer cannot recover all of the CPP contributions or EI premiums withheld and remitted on the overpayment. To find out when your employer cannot recover the CPP contributions and EI premiums withheld and remitted, please go to Questions 3 and 5 on salary overpayments made in error.

This means that the CPP contributions and EI premiums that your employer cannot recover from the CRA will be reported on your 2016 T4 and you will have to repay the net amount plus these amounts.

Note, the changes only apply if the overpayment is repaid within three calendar years after the year the overpayment was made (or where arrangements to repay have been made within that three year period). Therefore, if you received an overpayment in 2016 that is not discovered until 2020, the changes do not apply. You will have to repay the net overpayment received plus the tax withholdings on the gross overpayment. You can recover the tax withholdings when your T1 General 2016 (personal income tax return) is reassessed.

If you did not repay the amount in 2016 or you did not make an arrangement in 2016 to repay the amount and the legislative changes do not apply, you will have to repay the net overpayment received plus the tax withholdings on the gross overpayment. You can recover the tax withholdings when your T1 General 2016 (personal income tax return) is reassessed.

c. Can you provide a numerical example to help me understand how I get the tax withholdings that were withheld on the overpayment returned to me if I have to repay the net amount plus the tax withholdings?

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,
• Your employer issued you an amended 2016 T4 in June 2017 reporting your correct earnings (that is, with the overpayment removed) and the tax withholdings withheld and remitted on the overpayment, and
• The appropriate tax withholdings are at 25% on all payments and that there were no other deductions from the overpayment.

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. Once you receive your 2016 Notice of Assessment, 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. For more information on how to file an adjustment, please see How to change your return. 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.

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

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.

a. I have not received an amended 2016 T4 that reflects my correct earnings and withholdings and I have a balance owing.

The CRA recognizes that some federal employees may have a new tax balance owing that they believe may be linked to Phoenix pay system errors, such as overpayments for which they have not received an amended T4. In such situations, you are strongly recommended to contact the Canada Revenue Agency Debt Management Call Centre at 1-888-863-8657 (7:00am to 11:00pm EST) for assistance. When you call, it will be important to explain that you feel your tax debt relates to Phoenix pay issues and the CRA agent will work with you to ensure your tax account is managed appropriately.

b. I have received a Notice of Reassessment that reflects my correct earnings and withholdings, but I still have a balance owing.

If you receive a Notice of Reassessment that reflects your most recent amended 2016 T4 with your correct earnings and withholdings, but you still have interest or penalties owing that you believe are a direct result of Phoenix payroll system errors, you can submit a claim for out-of-pocket expenses under the Phoenix Claims Process. Each claim will be considered on its individual merits and settled based on valid receipts and other supporting documentation. For more information on whether compensatory payments received under the Phoenix Claims Process are taxable, please refer to Question and Answer 6 above.

c. What if my request for payment through the Phoenix Claims Process is denied?

If you are not reimbursed through the Phoenix Claims Process for the interest or penalties assessed by the CRA, you can submit a request for review under the taxpayer relief provisions. Go to Cancel or waive penalties or interest for more information. Be sure to include the decision letter from your department or agency and any relevant documents when submitting your request.