Frequently Asked Questions – 2018 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 or 2017 personal income tax return go to Frequently Asked Questions - 2016 Tax Implications of Phoenix payroll issues or Frequently Asked Questions - 2017 Tax Implications of Phoenix payroll issues.

For CRA telephone support with respect to the tax implications of Phoenix payroll issues, please call 1-888-556-5083 (9:00 am – 5:00 pm EST).

Who to contact for T4 issues

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 Accessing and managing your tax slips.

What to do if you were underpaid or overpaid?

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1. How do over/under payments in 2018 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 2018 will be the amount reported on your 2018 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 2018 (in the case of pay that is too low) or recovered from you in 2018 (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 2018 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 2018, please see below.

Note

Your employer considers a repayment or an arrangement to repay to have been made in 2018 if the overpayment was recorded in Phoenix as required by your employer. To find out if your overpayment is recorded in Phoenix, see Question 23: How can I see if my overpayment was created in Phoenix?.

2. How does an emergency salary advance or a priority payment received in 2018 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 2018, the gross salary and payroll deductions related to the emergency salary advances or priority payments will be reported on your 2018 T4. If you received emergency salary advances/priority payments in 2018 and you started receiving payments from the Phoenix pay system in 2018, your employer will report only the Phoenix payments on your 2018 T4 if the emergency salary advances/priority payments were recovered from you in 2018.

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 2018 caused by Phoenix pay system errors affect my 2018 personal income tax?

You are not considered to have received an overpayment in 2018 if you only received emergency salary advances and priority payments in 2018.

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 2018.

If you receive an overpayment in 2018 caused by Phoenix pay system errors and repay it in 2018, the overpayment will not be reported as employment income on your 2018 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 2018 if the overpayment was recorded in Phoenix as required by your employer. To find out if your overpayment is recorded in Phoenix, see Question 23: How can I see if my overpayment was created in Phoenix?.

b. You make an arrangement in 2018 to repay the overpayment in 2018, in 2019 or over both years.

If you receive an overpayment in 2018 caused by Phoenix pay system errors and make an arrangement in 2018 to repay it in 2018, in 2019 or over both years, the overpayment would not be reported as employment income on your 2018 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 2018 if the overpayment was recorded in Phoenix as required by your employer. To find out if your overpayment is recorded in Phoenix, see Question 23: How can I see if my overpayment was created in Phoenix?.

c. You make an arrangement in 2019 to repay the overpayment in 2019 before your 2018 T4 is issued (normally in February).

If the overpayment is discovered in 2019 before the 2018 T4 is issued, and you make an arrangement in 2019 to repay this amount, the proposed legislative changes will allow your employer to report your correct annual earnings and tax withholdings on your 2018 T4 and allow you to repay your employer only the net amount.

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 2018 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 when you file your T1 General 2018 (personal income tax return).

Note

Your employer considers a repayment or an arrangement to repay to have been made in 2018 if the overpayment was recorded in Phoenix as required by your employer. To find out if your overpayment is recorded in Phoenix, see Question 23: How can I see if my overpayment was created in Phoenix?.

d. You receive an overpayment in 2018 but it is not discovered until 2019. You then make an arrangement after the 2018 T4 is issued to repay the amount in 2019.

If you received an overpayment in 2018 caused by a Phoenix pay system error but it is not discovered until 2019, the overpayment will have been included on your 2018 T4. When your employer recovers the overpayment in 2019 or when you make an arrangement to repay the overpayment in 2019, your employer will provide you with an amended 2018 T4.

The proposed legislative changes will allow your employer to issue you an amended 2018 T4 reporting your correct annual earnings and tax withholdings for 2018. Your employer will share the amended T4 with the CRA. The changes will also 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 2018 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 when your T1 General 2018 (personal income tax return) is reassessed.

For information on filing your T1 General 2018 (personal income tax return) when you have received both an original 2018 T4 and an amended 2018 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 2018 if the overpayment was recorded in Phoenix as required by your employer. To find out if your overpayment is recorded in Phoenix, see Question 23: How can I see if my overpayment was created in Phoenix?.

e. How will an overpayment in 2018 caused by Phoenix pay system errors affect my 2019 entitlement to government benefits and credits?

Your 2019 entitlement to government benefits and credits (for example, Canada Child Benefit, GST/HST credits) is based on your income reported on your T1 General 2018 (personal income tax return).

If the overpayment is not reported as employment income on your original 2018 T4 (as described in Question and Answer 3a, b, and c above) and you use this T4 to file your T1 General 2018 (personal income tax return), the overpayment should have no impact on your 2019 entitlement to government benefits and credits.

If the overpayment is reported as employment income on your original 2018 T4 (as described in Question and Answer 3d above) and you use this T4 to file your T1 General 2018 (personal income tax return), the overpayment may impact your 2019 entitlement to government benefits and credits. However, when your employer issues you an amended 2018 T4 that reports your correct annual earnings for 2018 (that is, the overpayment is removed), the CRA will proactively reassess your T1 General 2018 (personal income tax return) and recalculate your 2019 entitlement to government benefits and credits as a result of your amended 2018 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 Accessing and managing your tax slips.

f. How will an overpayment in 2018 caused by Phoenix pay system errors affect the taxation of spousal support payments I received or paid in 2018?

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 2018 if you are overpaid in 2018. Once the amended 2018 T4 is issued that reports your correct annual earnings for 2018 (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 each of the 2016, 2017 and 2018 taxation years.

If you received an overpayment in each of the 2016, 2017 and 2018 taxation years, each overpayment is treated separately for income tax purposes in the relevant tax years.

A 2016, 2017, or 2018 overpayment may affect your personal income tax in the year you received the overpayment and your entitlement to government benefits and credits (for example, Canada child Benefit, GST/HST credits) in the year after the overpayment was received. For more information on how overpayments could affect your personal income tax or entitlement to benefits and credits, please refer to the following:

4. What if I was underpaid in 2018 and do not receive my corrected salary until 2019?

a. Will the underpayment in 2018 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 2018, but is only paid to you in 2019, that payment will be reported on your 2019 T4 even though it was owed for 2018. In this case, you could pay lower income taxes than usual in 2018 and higher income taxes than usual in 2019. For a numerical example, please refer to Question and Answer 6c below. 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 2018 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 2019 entitlement to government benefits and credits is based on your income reported on your 2018 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 2019 will be reported on your 2019 T4 even though they were owed to you in 2018. In this case, your 2018 income may be lower than usual and your 2019 income may be higher than usual. If your 2018 income is lower than usual, you may be entitled to more government benefits and credits in 2019.

If your 2019 income is higher than usual, your 2020 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 2018 affects my personal income taxes and my entitlement to government benefits and credits?

Where there is a decrease in your taxes in 2018 or an increase in your benefits and credits in 2019 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 2019 the amounts you were underpaid in 2018 and you pay a higher rate of taxes in 2019 or there is a reduction in your benefits and credits in 2020, 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 2018 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 2018 results in you paying a lower rate of income taxes than usual in 2018, the spousal support payments you received in 2018 will be taxed at this lower rate.

If you receive in 2019 the amounts you were underpaid in 2018 and you pay a higher rate of income taxes in 2019, the spousal support payments you receive in 2019 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. For more information on whether compensatory payments received under the Phoenix Claims Process are taxable, please refer to Question and Answer 6 below.

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 expenses I incurred due directly to Phoenix pay system errors?

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 2017 as a direct result of Phoenix pay system errors and there was an increase in your government benefits and credits in 2018, you keep the increased benefits and credits that you received.

If you received in 2018 the amounts you were underpaid in 2017 and there is a reduction in your government benefits and credits in 2019, 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 2019 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. Additional income tax payable

If you earned salary in 2017 that was not paid until 2018 as a direct result of Phoenix pay system errors, you may have more income tax payable over the two years because you may be in a higher income tax bracket in 2018. For example, if your regular annual salary was $90,000 for 2017 and 2018, but you were paid $80,000 in 2017 and $100,000 in 2018, your income tax payable for 2017 and 2018 could be more than it would have been had you not been underpaid in 2017. See the numerical example below.

Underpaid in 2017 Not underpaid in 2017 Difference
2017 2018 Total 2017 2018 Total
Gross salary $80,000 $100,000 $180,000 $90,000 $90,000 $180,000
Income tax payable* $17,750 $23,250 $41,000 $20,250 $20,250 $40,500 $500

*For illustration purposes only. Assumes a tax rate of 20% on income under $45,000, 25% on income between $45,001 and $90,000 and 30% on income over $90,000. It also assumes no credits or other deductions.

Payments you receive from your employer for additional income tax payable ($500 in the example) are not taxable.

d. Interest or penalties assessed

If you are assessed interest or penalties directly as a result of Phoenix pay system errors, you filed your 2018 personal income tax return on time (see Questions and Answers 7 & 8  below), and you could not have expected that your amended 2018 T4 would result in you having an amount owing, any reasonable payments you receive from your employer for these amounts are not taxable.

e. Phoenix Claims Process

If any of the situations described in Question and Answer 6a to 6d above apply to you, 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.

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.

7. If I was affected by Phoenix pay system errors in 2018, should I delay filing my T1 General 2018 (personal income tax return)?

If you were affected by Phoenix pay system errors, you are still required to file your T1 General 2018 (personal income tax return) by April 30, 2019 to avoid a late filing penalty and interest charges, if applicable. If you or your spouse has self-employment income in 2018, the deadline will be June 17, 2019. However, if the employee has a balance owing for 2018, that amount must be paid on or before April 30, 2019.

Filing your personal income tax return online is convenient, easy, and secure. To help you file electronically, the CRA provides a list of certified desktop and online software products, and web service options, including those that are free of charge. If you register for My Account, you will have access to the secure Auto-fill my return service. If you use certain tax software products, it automatically fills in parts of your return, with information that the CRA has on file for you.

Note

If you have questions about how to use your certified software product, including how to manually enter or override figures in the software, contact the software product company directly.

8. What if I was affected by Phoenix pay system errors—what information should I use to file my personal income tax return?

Please see the scenarios below to assess what information you should use to file your T1 General 2018 (personal income tax return):

a. I don’t receive an original 2018 T4 before the T1 General 2018 (personal income tax return) filing deadline.

If you do not receive a 2018 T4 before the T1 General 2018 (personal income tax return) filing deadline, you are still required to file your return by the filing deadline to avoid a late filing penalty and interest charges, if applicable, or interruptions to the payment of government benefits and credits (for example Canada Child Benefit and GST/HST credits). You should file using estimated amounts based on your pay stubs or statements.

b. I receive both an original 2018 T4 and an amended 2018 T4 before filing my T1 General 2018 (personal income tax return).

If you receive an original 2018 T4 and an amended 2018 T4 before filing your T1 General 2018 (personal income tax return), you should use the amended 2018 T4 to file your 2018 personal income tax return.

c. I expect to receive an amended 2018 T4 but I don't receive it before the T1 General 2018 (personal income tax return) filing deadline.

If you expect to receive an amended 2018 T4 and don't receive it by the T1 General 2018 (personal income tax return) filing deadline, you should use the most recent 2018 T4 you received to file your personal income tax return. Please note that the CRA will not consider you to have filed a false return if you file using the most recent 2018 T4 you received from your employer. If you do not want to file using the most recent 2018 T4 you received, you may file using estimated amounts based on your pay stubs or statements.

Your employer will share the amended T4 with the CRA who will reassess your personal income tax return to reflect the amended 2018 T4 with the correct 2018 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 2018 T4, and will provide information to explain the adjustments, including information relating to the balance owing, or refund due.

d. I expect to receive an amended 2018 T4 with my correct 2018 earnings. However, I filed my T1 General 2018 (personal income tax return) using my original 2018 T4 and received my Notice of Assessment. Should I file an objection to the assessment?

If you are expecting to receive an amended 2018 T4, then filing an objection to the Notice of Assessment would not be the most effective way to resolve T4 issues caused by Phoenix payroll system errors. Your employer will share the amended 2018 T4 with the CRA who will reassess your personal income tax return to reflect the amended T4 with the correct 2018 earnings. The CRA will recalculate your refund amount or balance owing, as well as entitlements to government benefits and credits (for example Canada Child Benefit and GST/HST credits). Your Notice of Reassessment will reflect the corrected amounts, based on the amended 2018 T4, and will provide information to explain the adjustments, including information relating to the balance owing, or refund due.

While filing an objection is not the most effective way to resolve T4 issues caused by Phoenix payroll system errors, it is still your right to do so for this or any other issues with your Notice of Assessment. Further, if you decide to file an objection to your Notice of Assessment, but you miss the deadline because you were waiting for your amended 2018 T4, you can apply for a time extension to file the objection. The application for a time extension to file an objection must be made within one year after the expiration of the time limit to file an objection. You can apply by writing to the Chief of Appeals at your Appeals Intake Centre (please see What if my objection is past the time limit? on the page Income tax objections), or by using the My Account online services. You will have to explain why you did not file your objection on time and provide the facts and reasons of your objection.

For more information on how and when to file an objection, please go to Income tax objections.

e. You receive an amended 2018 T4 but have already filed your T1 General 2018 (personal income tax return).

If you receive an amended 2018 T4 after you filed your T1 General 2018 (personal income tax return), you should wait until your 2018 assessment is finalized and you receive 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 2018 personal income tax return electronically through EFILE or NETFILE, you or an EFILE service provider can change your personal income 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 most recent amended 2018 T4, and will provide information to explain the adjustments, including information relating to the balance owing, or refund due.

f. I live in Québec and work outside the province of Québec. If I expect to receive an amended 2018 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 2018 T4 with Revenu Québec who will reassess your Québec income tax return to reflect the amended 2018 T4 with the correct earnings.

Understanding Your T4

For help in understanding your T4 and to determine if it is accurate, please consult  Accessing and managing your tax slips

9. Repaying an 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 contributions, and EI premiums (“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 2018 because of Phoenix pay system errors and I heard that under the proposed legislative changes I may only have to repay the net overpayment. Is that true?

Yes, the proposed legislative 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 2018 T4 and you will have to repay the net amount plus these amounts.

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

a. I have not received an amended 2018 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 2018 T4 with your correct earnings and withholdings, but you still have personal income tax, interest, or penalties owing that you believe are a direct result of Phoenix payroll system errors, 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. 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.

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