The federal Finance Department is proposing new rules for employee repayment of salary overpayments that result from system, administrative, or clerical errors.
After having to deal with payroll problems for its own workers arising from its Phoenix pay system, the federal government is poised to make it easier for all employees in the public and private sectors to pay back overpayments to their employer.
In January, the Finance Department released draft amendments to the Canada Pension Plan (CPP), Employment Insurance Act, and Income Tax Act that would allow employees to repay to their employer the net amount, rather than the gross amount, of an overpayment in salary, wages, or other remuneration that occurred because of a system, administrative, or clerical error.
The Quebec Finance Ministry has announced similar changes to its overpayment rules, which would affect remittances for the Quebec Pension Plan, Quebec Parental Insurance Plan, and provincial income tax deductions.
Currently, under federal tax rules, if an employer overpays an employee due to a system, administrative, or clerical error and the mistake is not discovered in the same calendar year that the employer made it, the employee must pay back the gross amount of the overpayment.
This includes the payment itself, as well as amounts that the employer deducted and remitted to the Canada Revenue Agency (CRA) for Canada Pension Plan (CPP) contributions, employment insurance (EI) premiums, and income tax deductions.
It is up to the employee to recover the excess CPP contributions, EI premiums, and income tax deductions from the CRA.
“This procedure may put an unfair burden on affected employees and may require them to make repayments that are larger than the amount they received from their employer, creating uncertainty and potential financial hardship,” said a Finance Department news release.
With the proposed changes, employees would repay the net amount and employers would recover the amount that they withheld and remitted to the CRA for CPP, EI, and income on the overpayment from the CRA rather than the employee.
The proposals would not affect all overpayment situations.
They would only apply to overpayments resulting from a system, administrative, or clerical error paid in 2016 or later.
They would not apply to cases where there is an overpayment because the employee did not perform their duties (for example, an employee who has taken a paid vacation quits before fully earning the vacation entitlement). Here, the employee would still have to repay the gross amount of the overpayment.
The proposals would not affect situations where an employee repays an overpayment in the same calendar year that the employer made the error.
If the employer finds the error before the end of the year and the employee repays, or arranges to repay, the overpayment before the year ends, the employee is already only required to repay the net amount. This applies as long as the employer can reduce its next payroll remittance to the CRA by the amount it erroneously sent in before the last remittance of the year is due.
The proposals would also only apply if the employee repays the employer, or makes arrangements to repay, within three years after the year the employer made the overpayment.
In addition, the employer must not have previously issued a T4 to correct for the overpayment, and the employer must elect to have the new rules apply.
Even with the proposals, the CRA said there will be situations where employees will have to repay more than the net amount because of CPP and EI maximum earnings rules.
Since CPP and EI are deducted up to annual maximum amounts, the total the CRA refunds to an employer may be less than the amount the employer remitted on an overpayment.
“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,” said a statement from the CRA.
“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,” it said.
In these situations, the CRA said employees would have to repay the gross amount, less the income tax deductions withheld.
Although the proposals have not yet been passed into law, the Finance Department said the CRA would allow employers to immediately apply them for EI and income tax deductions on the overpayments.
While the CRA said it could not issue refunds before the proposals become law, it will put into place a mechanism for dealing with them.
“As long as the employer meets the conditions, 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,” said the agency.
“Once the T4 slips are processed, the CRA will advise the employer of the amount by which they may reduce their current remittances,” it said.
The proposals affecting CPP will not apply until the federal, provincial and territorial governments agree to them. This is because, by law, the federal, provincial, and territorial governments jointly manage the CPP.
The government chose to make the proposals retroactive to 2016 so that they would cover overpayments to federal civil servants that began that year after the government implemented its Phoenix pay system.
Problems led the government to overpay, underpay, or not pay thousands of federal employees.
The Public Service Alliance of Canada (PSAC), a union representing federal workers, said over 200,000 civil servants have been affected.
“For three years and counting, thousands of workers across the country have received overpayments because of Phoenix,” said PSAC president Chris Aylward.
“But rather than limiting the burden of these Phoenix errors to calculating the overpayment and repaying it to the employer, the government has forced these workers to reimburse the gross amount of the overpayment (CPP payments, income tax deductions, etcetera) — significantly more than the amount they received,” he said.
“Not only has this been a financial burden, but it has resulted in years of tax return problems for thousands of workers.”
The enormity of the problems with Phoenix led to several investigations, including a report by Canada’s auditor general calling Phoenix “an incomprehensible failure.”
Since 2016, the federal government has earmarked millions of dollars to correct issues with Phoenix, while also starting a process to replace it with a new pay system.
Still today payment backlogs remain, with the government reporting in late December that there were approximately 490,000 transactions ready to be processed at its pay centre, including a backlog of 283,000 transactions with financial implications.
While the federal government has implemented other measures to help its workers cope with repaying the Phoenix overpayments, including not requiring repayments until employees receive all outstanding payments owed to them and they have had three consecutive pay periods of correct pay, the proposed legislative changes will have a major impact on them, said Aylward.
The Finance Department said the government would table a bill to implement the proposals after completing public consultations, which were expected to wrap up in mid-February.
The CRA said it would soon provide more information on the proposals, including how employers can comply with the new rules if all the proposed legislation does not come into force at the same time.
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