Frequently Asked Questions – 2017 Tax Implications of Phoenix payroll issues

For information about income tax and/or government benefit and credit implications of certain situations related to your 2016 personal income tax return go to Frequently Asked questions - 2016 Tax Implications of Phoenix payroll issues.

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 Preparing to file your 2017 taxes.

1. How do over/under payments in 2017 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 2017 will be the amount reported on your 2017 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 2017 (in the case of pay that is too low) or recovered from you in 2017 (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 2017 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 2017, please see below.

Note

Your employer considers a repayment or an arrangement to repay to have been made in 2017 if the overpayment was recorded in Phoenix as required by your employer (for more information, go to Tax and repayment information for employees and select "Overpayments received in 2017".) To find out if your overpayment is recorded in Phoenix, see question 24 on Preparing to file your 2017 taxes.

2. How does an emergency salary advance or a priority payment received in 2017 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 2017, the gross salary and payroll deductions related to the emergency salary advances or priority payments will be reported on your 2017 T4. If you received emergency salary advances/priority payments in 2017 and you started receiving payments from the Phoenix pay system in 2017, your employer will report only the Phoenix payments on your 2017 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 in 2017 caused by Phoenix pay system errors affect my 2017 personal income tax?

You are not considered to have received an overpayment in 2017 if you only received emergency salary advances and priority payments in 2017.

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 2017.

If you receive an overpayment in 2017 caused by Phoenix pay system errors and repay it in 2017, the overpayment will not be reported as employment income on your 2017 T4. There should be no tax implications related to this overpayment.

Note

Your employer considers a repayment or an arrangement to repay to have been made in 2017 if the overpayment was recorded in Phoenix as required by your employer (for more information, go to Tax and repayment information for employees and select "Overpayments received in 2017".) To find out if your overpayment is recorded in Phoenix, see question 24 on Preparing to file your 2017 taxes.

b. You make an arrangement in 2017 to repay the overpayment in 2017, in 2018 or over both years.

If you receive an overpayment in 2017 caused by Phoenix pay system errors and make an arrangement in 2017 to repay it in 2017, in 2018 or over both years, the overpayment would not be reported as employment income on your 2017 T4. There should be no tax implications related to this overpayment.

Note

Your employer considers a repayment or an arrangement to repay to have been made in 2017 if the overpayment was recorded in Phoenix as required by your employer (for more information, go to Tax and repayment information for employees and select "Overpayments received in 2017".) To find out if your overpayment is recorded in Phoenix, see question 24 on Preparing to file your 2017 taxes.

c. You make an arrangement in 2018 to repay the overpayment in 2018 before your 2017 T4 is issued (normally in February).

If the overpayment is discovered in 2018 before the 2017 T4 is issued, and you make an arrangement to repay this amount, your 2017 T4 will report your correct annual earnings for 2017. However, if any tax withholdings on the overpayment are still reported on your 2017 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 2017 (personal income tax return), you will receive the refund to which you are entitled.

Note

Your employer considers a repayment or an arrangement to repay to have been made in 2017 if the overpayment was recorded in Phoenix as required by your employer (for more information, go to Tax and repayment information for employees and select "Overpayments received in 2017".) To find out if your overpayment is recorded in Phoenix, see question 24 on Preparing to file your 2017 taxes.

d. You receive an overpayment in 2017 but it is not discovered until 2018. You then make an arrangement after the 2017 T4 is issued to repay the amount in 2018.

If you received an overpayment in 2017 caused by a Phoenix pay system error but it is not discovered until 2018, the overpayment will have been included on your 2017 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 2017 T4.

Your amended 2017 T4 will report your correct annual earnings for 2017. However, any tax withholdings on the overpayment will still be reported on your amended 2017 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 2017 (personal income tax return) when you have received both an original 2017 T4 and an amended 2017 T4, please refer to Question and Answer 8 below.

Note

Your employer considers a repayment or an arrangement to repay to have been made in 2017 if the overpayment was recorded in Phoenix as required by your employer (for more information, go to Tax and repayment information for employees and select "Overpayments received in 2017".) To find out if your overpayment is recorded in Phoenix, see question 24 on Preparing to file your 2017 taxes.

e. How will an overpayment in 2017 caused by Phoenix pay system errors affect my 2018 entitlement to government benefits and credits?

Your 2018 entitlement to government benefits and credits (for example, Canada Child Benefit, GST/HST credits) is based on your income reported on your T1 General 2017 (personal income tax return).

If the overpayment is not reported as employment income on your 2017 T4 (as described in Question and Answer 3a, b, and c above) and you use this T4 to file your T1 General 2017 (personal income tax return), the overpayment should have no impact on your 2018 entitlement to government benefits and credits.

If the overpayment is reported as employment income on your 2017 T4 (as described in Question and Answer 3d above) and you use this T4 to file your T1 General 2017 (personal income tax return), the overpayment may impact your 2018 entitlement to government benefits and credits.  However, when your employer issues you an amended 2017 T4 that reports your correct annual earnings for 2017 (that is, the overpayment is removed), the CRA will proactively reassess your T1 General 2017 (personal income tax return) and recalculate your 2018 entitlement to government benefits and credits as a result of your amended 2017 T4 earnings.

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

Understanding Your T4

For help in understanding your T4 and to determine if it is accurate, please consult Preparing to file your 2017 taxes.

f. How will an overpayment in 2017 caused by Phoenix pay system errors affect the taxation of spousal support payments I received or paid in 2017?

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 2017 if you are overpaid in 2017. Once the amended 2017 T4 is issued that reports your correct annual earnings for 2017 (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.

g. You receive an overpayment in both the 2016 and 2017 taxation years.

If you received an overpayment in both the 2016 and 2017 taxation year, each overpayment is treated separately for income tax purposes in the relevant taxation years.

The 2016 overpayment may affect your 2016 personal income tax and your 2017 entitlement to government benefits and credits (for example, Canada child Benefit, GST/HST credits). For more information go to Frequently Asked questions - 2016 Tax Implications of Phoenix payroll issues and please see Question and Answer 3.

The 2017 overpayment may affect your 2017 personal income tax and your 2018 entitlement to government benefits and credits. For information, please refer to Questions and Answers 3a to 3f above.

4. What if I was underpaid in 2017 and do not receive my corrected salary until 2018?

a. Will the underpayment in 2017 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 2017, but is only paid to you in 2018, that payment will be reported on your 2018 T4 even though it was owed for 2017. In this case, you could pay lower income taxes than usual in 2017 and higher income taxes than usual in 2018. 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 2017 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 2018 entitlement to government benefits and credits is based on your income reported on your 2017 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 2018 will be reported on your 2018 T4 even though they were owed to you in 2017. In this case, your 2017 income may be lower than usual and your 2018 income may be higher than usual. If your 2017 income is lower than usual, you may be entitled to more government benefits and credits in 2018.

If your 2018 income is higher than usual, your 2019 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 2017 affects my personal income taxes and my entitlement to government benefits and credits?

Where there is a decrease in your taxes in 2017 or an increase in your benefits and credits in 2018 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 2018 the amounts you were underpaid in 2017 and you pay a higher rate of taxes in 2018 or there is a reduction in your benefits and credits in 2019, 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 2017 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 2017 results in you paying a lower rate of income taxes than usual in 2017, the spousal support payments you received in 2017 will be taxed at this lower rate.

If you receive in 2018 the amounts you were underpaid in 2017 and you pay a higher rate of income taxes in 2018, the spousal support payments you receive in 2018 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 2017, should I delay filing my T1 General 2017 (personal income tax return)?

If you were affected by Phoenix pay system errors, you are still required to file your T1 General 2017 (personal income tax return) by April 30, 2018 to avoid a late filing penalty and interest charges, if applicable. If you or your spouse has self-employment income in 2017, the deadline will be June 15, 2018. However, if the employee has a balance owing for 2017, that amount must be paid on or before April 30, 2018.

8. What if I receive (or expect to receive) both an original and an amended 2017 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 2017 T4 you should use to file your T1 General 2017 (personal income tax return):

a. I receive both an original 2017 T4 and an amended 2017 T4 before filing my T1 General 2017 (personal income tax return).

If you receive an original 2017 T4 and an amended 2017 T4 before filing your T1 General 2017 (personal income tax return), you should use the amended 2017 T4 to file your 2017 personal income tax return.

b. I expect to receive an amended 2017 T4 but I don't receive it before the 2017 T1 General 2017 (personal income tax return) filing deadline.

If you expect to receive an amended 2017 T4 and don't receive it by the T1 General 2017 (personal income tax return) filing deadline, you should use the original 2017 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 2017 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 2017 T4 with the correct 2017 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 2017 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 2017 T4 but have already filed your T1 General 2017 (personal income tax return).

If you receive an amended 2017 T4 after you filed your T1 General 2017 (personal income tax return) using the original 2017 T4, you should wait until your 2017 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 2017 T1 return electronically through EFILE or NETFILE, you or an EFILE service provider can change your T1 tax return online with ReFILE using certified NETFILE or EFILE software. 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 2017 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 2017 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 2017 T4 with Revenu Québec who will reassess your Québec income tax return to reflect the amended 2017 T4 with the correct earnings.

Understanding Your T4

For help in understanding your T4 and to determine if it is accurate, please consult Preparing to file your 2017 taxes.

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 2017 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 2017 or you did not make an arrangement in 2017 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 2017 (personal income tax return).

Note

Your employer considers a repayment or an arrangement to repay to have been made in 2017 if the overpayment was recorded in Phoenix as required by your employer (for more information, go to Tax and repayment information for employees and select "Overpayments received in 2017".) To find out if your overpayment is recorded in Phoenix, see question 24 on Preparing to file your 2017 taxes.

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 2017,
  • You received a gross overpayment of $10,000 in 2017,
  • You made arrangements to repay the overpayment in late February 2018, after you received your 2017 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 2017 T4 Amended 2017 T4
2017 Employee salary $80,000 $20,000 $60,000    
2017 salary overpayment $10,000 $2,500 $7,500    
Total 2017 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 2018.

However, once your 2017 T1 General (personal income tax return) is assessed using your amended 2017 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 2017.

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 2017 and will receive credit for the tax withholdings of $2,500 when your T1 General 2017 (personal income tax return) is assessed or reassessed using your amended 2017 T4.

If you receive your amended 2017 T4 before filing your T1 General 2017 (personal income tax return), you should use the amended 2017 T4 to file your 2017 personal income tax return by the filing due date (see Question and Answer 7 above). Once your 2017 T1 General (personal income tax return) is reassessed using your amended 2017 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 2017.

If you receive your amended 2017 T4 after you filed your T1 General 2017 (personal income tax return), you should wait until you receive your 2017 Notice of Assessment. Your employer will have shared the amended 2017 T4 with the CRA. Once you receive your 2017 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 2017 T1 General (personal income tax return) is reassessed using your amended 2017 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 2017.

For more information on when you will receive an amended 2017 T4, please refer to Question and Answer 3 above.  For more information on filing your T1 General 2017 (personal income tax return) when you have received both an original 2017 T4 and an amended 2017 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 2017, the only way to recover the excess tax withholdings deducted from your 2017 overpayment, and remitted by your employer, is through the filing of your T1 General 2017 (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 2018 to repay the overpayment before your employer issues your 2017 T4 (normally in February), your 2017 T4 will report your correct annual earnings for 2017 in box 14. However, the tax withholdings on the overpayment will still be reported on your 2017 T4.

If you do not make an arrangement until after your employer issues your 2017 T4, your employer will issue you an amended 2017 T4 to report your correct annual earnings in box 14. However, the tax withholdings will not be changed on your amended 2017 T4 slip.

As a result, the tax withholdings reported on your original or amended 2017 T4 slip will be higher than they should be in comparison to your employment earnings reported in box 14 of your original or amended 2017 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 2017 (personal income tax return) and it is assessed using the amended 2017 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 2017 T4, please refer to Question and Answer 3 above.  For information on filing your T1 General 2017 (personal income tax return) when you have received both an original 2017 T4 and an amended 2017 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 2017 (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 Pay Centre or your compensation advisor and make arrangements for your specific situation.

10. What can I do if I believe I have personal income tax owing as a direct result of Phoenix pay system errors?

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.

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