Proposals address tax recovery on excess payments
Department of Finance introduced draft legislation on January 15, 2019 in response to errors made by the Phoenix payroll System regarding overpayments to public service employees. Although this legislative response was to deal with the aftermath of the Phoenix System, the proposal applies to both the public and private sector.
Salary and wages erroneously paid to employees is currently being reimbursed by the employee to the employer, which includes reimbursement of the payroll taxes that were withheld by the employer on the overpayment (Income Tax, CPP and EI). The employee then is required to apply to the Minister for a refund of the overpayment of payroll taxes. As a result, the employee could experience financial hardship while waiting to get the refund of the overpayment of payroll taxes.
The draft legislative amendments to the Income Tax Act, Canada Pension Plan and Employment Insurance Act will allow the employer to apply to the Minister for the refund instead of the employee. This will allow the employee to only reimburse the employer for the net payment received by the employee.
The draft legislation requires the employer to file an election to be reimbursed directly by the Minister, and the following criteria must be met:
- The excess amount was withheld or deducted,
- The excess amount was a result of a clerical, administrative or system error,
- Before the third year after the calendar year in which the excess amount was deducted or withheld:
- Employer elects in prescribed manner,
- The individual has repaid or made an arrangement to repay the excess amount,
- An information return correcting the excess payment was not issued prior to making the election, and
- Any other conditions specified by the Minister have been met.
Similar draft legislation exists under both Canada Pension Plan and Employment Insurance Act to allow the refund of excess CPP and EI on salary or wages made in error.
These new rules apply to excess payments of salary, wages or other remuneration made after 2015.
Comments to these proposals may be submitted to Department of Finance by February 15, 2019
Information is current to January 31, 2019. The information contained in this release is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.