Canadian Payroll Reporter

6 Canadian HR Reporter, a Thomson Reuters business 2019 News March 2019 poised to make it easier for all employees in the public and pri- vate sectors to pay back overpay- ments to their employer. In January, the Finance De- partment released draft amend- ments to the Canada Pension Plan (CPP), Employment Insur- ance 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 remuner- ation that occurred because of a system, administrative, or cleri- cal 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 pro- vincial income tax deductions. Currently, under federal tax rules, if an employer overpays an employee due to a system, ad- ministrative, 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 it- self, as well as amounts that the employer deducted and remitted to the Canada Revenue Agency (CRA) for Canada Pension Plan (CPP) contributions, employ- ment insurance (EI) premiums, and income tax deductions. It is up to the employee to re- cover the excess CPP contribu- tions, EI premiums, and income tax deductions from the CRA. "This procedure may put an unfair burden on affected em- ployees and may require them to make repayments that are larger than the amount they received from their employer, creating uncertainty and potential finan- cial hardship," said a Finance De- partment 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 af- fect all overpayment situations. They would only apply to overpayments resulting from a system, administrative, or cleri- cal 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 ex- ample, an employee who has taken a paid vacation quits be- fore fully earning the vacation entitlement). Here, the employee would still have to repay the gross amount of the overpayment. The proposals would not af- fect situations where an em- ployee 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 errone- ously sent in before the last re- mittance of the year is due. The proposals would also only apply if the employee repays the employer, or makes arrange- ments 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 overpay- ment, 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 re- pay more than the net amount because of CPP and EI maxi- mum earnings rules. Since CPP and EI are de- ducted up to annual maximum amounts, the total the CRA re- funds 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 re- mitted on the overpayment if an employee would have been required to make the maximum CPP contributions and pay the maximum EI premiums regard- less 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 overpay- ment," 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 pro- posals become law, it will put into place a mechanism for deal- ing 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 pre- miums that they can recover from the CRA," said the agency. "Once the T4 slips are pro- cessed, 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 gov- ernments agree to them. This is because, by law, the federal, pro- vincial, and territorial govern- ments 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 af- ter the government implement- ed 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 rep- resenting federal workers, said over 200,000 civil servants have been affected. "For three years and counting, thousands of workers across the country have received overpay- ments 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 employ- er, the government has forced these workers to reimburse the gross amount of the overpay- ment (CPP payments, income tax deductions, etcetera) — sig- nificantly more than the amount they received," he said. "Not only has this been a fi- nancial burden, but it has result- ed in years of tax return prob- lems for thousands of workers." The enormity of the problems with Phoenix led to several in- vestigations, including a report by Canada's auditor general call- ing Phoenix "an incomprehen- sible failure." Since 2016, the federal gov- ernment 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 im- plications. While the federal government has implemented other mea- sures to help its workers cope with repaying the Phoenix over- payments, including not requir- ing repayments until employees receive all outstanding payments owed to them and they have had three consecutive pay periods of correct pay, the proposed legis- lative 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 consul- tations, 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 leg- islation does not come into force at the same time. Phoenix issues have affected 200,000 workers from OVERPAYMENT on page 1 News "Not only has this been a financial burden, but it has resulted in years of tax return problems."

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