Salary overpayments made in error

The government is taking action on salary overpayments because it believes that employees should not have to bear the burden of overpayments they receive in error.

On January 15, 2019, the Government released proposed legislative changes to the Income Tax Act, Canada Pension Plan Act, and Employment Insurance Act that will generally ease the burden on private and public sector employees. If adopted, the legislation will allow employers who make an overpayment of salary in error to recover the income tax, CPP contributions, and EI premiums withheld and remitted on the overpayment from the Canada Revenue Agency (CRA). This will allow employees to repay only the net amount.

Q1. What are the current rules?

Currently, employers cannot recover the income tax, CPP contributions, and EI premiums withheld and remitted on a salary overpayment from the CRA. Therefore, if an employee receives an overpayment of salary in error and does not repay, or enter into an agreement to repay, in the same year as the overpayment, the employee is required to repay the gross amount of the overpayment to his or her employer.

Q2. How will the changes affect employees who are overpaid in error?

The proposed legislation eases the burden on employees because in most cases they will be able to repay their employer the net amount of a salary overpayment received in error instead of the gross amount as is currently required. The net amount of a salary overpayment is the gross amount less the income tax, CPP contributions, and EI premiums withheld.

The proposed legislation will allow employers to recover the income tax, CPP contributions, and EI premiums withheld and remitted on the overpayments from the CRA, allowing employees to repay only the net amount of the overpayments. See Q3 for an exception.

Q3. Will there be situations where an employer cannot recover all of the CPP contributions or EI premiums withheld and remitted on an overpayment from the CRA?

Under the proposed legislation, certain employees will still be required to repay their employers more than the net amount. An employer cannot recover all of the CPP contributions or EI premiums withheld and remitted on the overpayment if an employee would have been required to make the maximum CPP contributions and pay the maximum EI premiums regardless of the overpayment. This is because the employee would have had additional CPP contributions and EI premiums withheld from a later pay had they not received the overpayment.

Employees in this situation will generally repay the gross amount less any income tax withheld on the overpayment to their employer.

Q4. How will the proposed legislation apply?

The proposed legislation will effectively extend the existing rules for overpayments repaid within the same year to overpayments repaid within three calendar years after that year (or where arrangements to repay have been made within that three year period). This will allow employees, under certain conditions, to repay their employer the net amount of a salary overpayment even where the overpayment and the repayment are made in different years.

These changes will apply if all of the following conditions are met:

  • The overpayment was made after 2015 because of an administrative, clerical, or system error.
  • The employer has not previously issued a T4 with the employee’s correct earnings (that is, with the overpayment removed).
  • The overpayment has been repaid by the employee, or an arrangement to repay the net amount has been made between the employer and employee.

Where these conditions are not met, the current rules would continue to apply.

Q5. How will employers recover the tax withholdings on the overpayment from the CRA prior to the proposed legislation coming into force?

The CRA cannot refund any amounts to employers before the proposed legislation comes into force. However, as long as the employer meets the conditions (see Q4), the CRA will allow them to issue T4 slips that exclude the overpayments and the income tax and EI premiums that they can recover from the CRA (see Q3 for an exception). Once the T4 slips are processed, the CRA will advise the employer of the amount by which they may reduce their current remittances. The CRA is not authorized to allow employers to reduce their current remittances by the CPP contributions prior to the CPP legislation coming into force. Employers should retain supporting documentation in case it needs to be reviewed by the CRA.

The CRA will provide more detailed guidance early in 2019 to employers on how to comply with the proposed legislation. Check Canada.ca regularly for the latest information.

Q6. How will employers recover the tax withholdings on the overpayment from the CRA after the legislation comes into force?

In general, once all the legislation comes into force, employers that meet the conditions (see Q4) should issue T4 slips that exclude the overpayments and the income tax, CPP contributions, and EI premiums withheld and remitted on the overpayments (see Q3 for an exception).

Once the T4 slips are processed, the CRA will advise the employer of the amount they can reduce their current remittances, request to be applied to another account, or request to be refunded to them. Employers should retain supporting documentation in case it needs to be reviewed by the CRA.

The CRA will provide more detailed guidance early in 2019 to employers on how to comply with the proposed legislation including if all the proposed legislation does not come into force at the same time. Check Canada.ca regularly for the latest information.

Q7. Will employers be able to change their payroll systems so that employees can benefit from the proposed legislation in time to file their 2018 personal income tax return?

We recognize that applying the proposed legislation could create challenges for employers. 

Existing CRA policies offer flexibility to ensure that employers can generally produce 2018 T4s that report correct earnings and withholdings. This way employees only need to repay the net amount of a salary overpayment received in error in 2018. Employees will have their tax returns assessed with the correct amount of their earnings.

The proposed legislation also allows employers the flexibility to apply the new rules only after they have been able to make any necessary changes to their systems and procedures. The CRA is committed to working with employers to ensure that these measures are implemented as smoothly as possible to minimize impacts on employees and employers alike.

Q8. Where can I get more information?

The CRA is committed to providing taxpayers with up-to-date information.  New guidelines will be posted early in 2019 on how to comply with the proposed legislation.

Check Canada.ca regularly for the latest information.

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