Tax & Accounting January 16, 2019

Government proposes tax relief to employees who are overpaid

The government is consulting on proposed rules which will provide tax relief to public service employees who have been overpaid by some fault of the Phoenix pay system. That said, the changes will apply uniformly to all private and public sector employees.

The Phoenix pay system is infamous for overpaying and underpaying public service workers. Where an employee is erroneously paid too much in a taxation year, and that overpayment is discovered and rectified is a subsequent taxation year, the employee is required to pay the employer back the gross amount of the overpayment (rather than the amount net of deductions for income tax, CPP, and EI). The employee is then required to recover the deducted amounts directly from the CRA. In other words, an employee is required to pay back more than the net amount that they actually received; this could cause significant financial hardship, especially when the system can also leave a public service employee underpaid.

Currently, if the overpayment is paid back in the taxation year in which it was paid, the employee can pay back the net amount to the employer. The draft tax rules propose to extend this treatment to overpayments that are repaid within three calendar years after the year of the overpayment. Employees will repay the net amount, and instead the employer will recover the deducted amounts from the CRA. A key requirement in the proposed rules is that the amount must have been paid as a result of a clerical, administrative or system error. Moreover, the employer is required to elect in a prescribed form in order for this repayment provision to apply, and an information return that corrects the overpayment cannot have been issued prior to the election being made. These proposed rules will apply to overpayments made after 2015.

The proposals will accordingly amend The Income Tax Act, Canada Pension Plan, and Employment Insurance Act to this effect. Comments on these proposals must be submitted by February 15, 2019.
Cameron Mancell
CFP®, Senior Technical Writer at Wolters Kluwer Canada
Cameron Mancell, CFP®, is a Senior Technical Writer at the Wolters Kluwer office in Toronto. Cameron contributes to Canadian Tax Reporter, Preparing Your Income Tax Returns, and Preparing Your Corporate Income Tax Returns, among several others.
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