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1988-056-e.html
SERVICES PAY DIRECTIVE: 1988-056 (37)
August 1, 1988
Ottawa,
Canada
K1A 0S5
SUBJECT: Income Tax Deductions at Source
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1
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PURPOSE
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1.1
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This directive supersedes Services Pay Directive 1986-164 (56) dated December
23, 1986 which provided clarification on the methods of calculating income tax
deductions at source in the DSS pay systems.
Changes from the above-mentioned directive are identified by a vertical
Line.
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2
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BACKGROUND
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2.1
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The Department of Supply and Services administers the pay systems for Federal
Government employees where Treasury Board is the employer and for a number of
separate employers or Crown Corporations. The calculation of Statutory
Deductions, including Income Tax deductions at source, is an integral part of
the pay systems and as such is a responsibility of the Department of Supply and
Services.
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3
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CANCELLATIONS
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3.1
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This supersedes the instructions promulgated via Services Pay Directive 86-164
(56) dated December 23, 1986.
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4
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PROCEDURES/INSTRUCTIONS
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4.1
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All provinces and territories in Canada, except Québec, have Provincial
Income Tax Acts that are administered by the Department of Revenue Canada -
Taxation. That department issues guidelines to employers concerning the
withholding of both Federal and Provincial or Territorial Income Taxes from
payments issued to employees. The Federal Government is considered as an
employer and must adhere to these guidelines are the Income Tax Deductions at
Source Tables by Province and Territory and the Machine Computation of Income
Tax Deductions. Within the DSS pay systems the machine computation formulae are
utilized.
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4.2
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The machine computation formulae, although complex, provide for an acceptable
approximation of tax deductions for employers using a computer system to effect
payments for their employees. Presently within the pay systems, two formulae
must be used, one for all regular pay and one for all supplementary payments
such as retroactive revisions.
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4.3
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Effective July 1, 1988, a new formula to determine the
tax to be withheld from regular payments was implemented in the pay systems.
The new formula for regular pay takes into consideration only the amounts being
paid for that particular pay period. Some of the amounts taken into
consideration when arriving at an employee's taxable income are: the employee's
gross income, any taxable benefits such as the employer's share of Provincial
Health Care Plans, contributions to the Public Service Superannuation and Union
Dues.
For income tax purposes the maximum allowance deduction for PSSA arrears
contributions (i.e. $3500 per year maximum allowable deduction) is prorated
equally over all pay periods in the year to avoid excessive fluctuations in an
employee's tax from one pay period to the next. Effective with the 1986
taxation year, there was and continues to be no restriction for the current
PSSA contributions (i.e. the maximum of $3500 does not apply). Since income tax
is deducted according to the province or territory of employment, the
employee's physical location of work is also a factor. Furthermore the
employee's personal tax credit status and some deductions and other tax credits
must be considered in determining the payable. Since salaries, deductions and
credits are unique to each employee, each case must be dealt with on an
individual basis. Comparison of taxes between two employees, can only be done
when the circumstances are identical.
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4.4
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Effective July 1, 1988 a new formula for withholding tax
from supplementary payments was implemented within the pay systems. The new
formula for computer users to determine the amount of tax to be withheld from
supplementary payments provides a more precise approximation of tax to be
deducted at source. This formula involves two basic calculations to determine
the required tax to be withheld. The first calculation takes all salaries paid
by the federal employer to the employee to date plus the estimated taxable
salary that will be paid for the balance of the year thus providing a projected
estimate of the employee's annual taxable income. The second calculation takes
into consideration all amounts as mentioned in the first calculation plus the
supplementary payment itself. The tax to be withheld from the supplementary
payment is the difference between the tax payable on the first calculation and
the tax payable on the second calculation. The rates of tax are based on the
annual taxable income and are adjusted according to the province or territory
of employment.
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4.5
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Many Departmental Personnel staff and employees utilize the manual tax
deduction tables as a basis for comparison with pay system deductions. However,
the tax deductions provided in the manual tables are based on the mid-point of
various income and credit ranges whereas exact amounts are used in the machine
computations, and are consequently more accurate.
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4.6
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With the introduction of the new tax reform measures, the
computation of federal tax payable tax brackets and taxable income ranges have
been reduced to 3 from 10 and some exemptions and deductions have been
converted to non-refundable tax credits. Personal exemption amounts have been
replaced by federal tax credit amounts. This means that an employee's personal
tax credit is equal to 17% of that which is reflected on line 12 of the
employee's TD1. Other deductions such as CPP/QPP and UI are now considered tax
credits equal to 17% of that which was actually deducted. PSSA remains a
deduction of the total amount that was actually deducted. Furthermore, the
total amount of Union Dues collected will also be considered as a deduction
from the employee's gross earnings.
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4.7
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Prior to the implementation of tax reform, all exemptions
and deductions (PSSA, CPP/QPP and UI) were applied directly to the employee's
gross earnings thereby reducing the employee's annual taxable income. The tax
payable was then computed based on the employee's taxable income. Effective
July 1, 1988 with the new tax measures, those amounts considered as deductions,
such as PSSA and Union Dues, are deducted from the employee's gross earnings.
This will determine the employee's annual taxable income. Tax payable by the
employee is then calculated based on the employee's taxable income. The
employee's tax credits as reflected on his/her TD1, 17% of CPP/QPP and UI are
then applied directly to the employee's tax payable.
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5
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ADDITIONAL INFORMATION
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5.1
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A payment is taxable and is reported in the year that the instrument or cheque
is dated. For this reason it is requested that Departmental staff ensure that
supplementary cheques are given to employees as soon as they are received from
the Paying Office, especially at the calendar year end. This will alleviate any
problem of employees requesting amendment of T4s due to the physical receipt of
payments in a taxation year subsequent to the year in which the cheque is
dated; this of course cannot be done.
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5.2
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Numerous queries have been received from departments concerning the
relationship between PSSA and Canada/Québec Pension
Plan.
i) Effective January 1, 1966 there was
a detailed integration of the Canada/Québec Pension Plan and the Public
Service Superannuation Plan. As a direct result, federal public servants became
eligible for a pension under both plans.
To avoid pyramiding of the contributions by the employee,
i.e. 6.5% to the Superannuation Account and 2.0% to the Canada/Québec
Pension Plan, the PSSA was amended to reduce the percentage payable by the
employee to 4.5% during the period he/she was making or would have been
required to make contributions to the Canada/Québec Pension Plan.
Hence, the combined deduction for both plans equals 6.5% of the employee's
salary.
Please note: PSSA contributions are
also required at the integrated rate even though the individual may not be
making CPP/QPP contributions (i.e. on LWOP, member of a religious
order).
ii) The Superannuation Act states
when an employee becomes a contributor, he/she is required to contribute to the
Superannuation Account, by reservation from salary or otherwise, six and
one-half percent of their salary minus an amount equal to the amount which
would be required under the Canada/Québec Pension Plan. Furthermore,
he/she is required to contribute an additional one percent of his/her salary to
the Supplementary Retirement Benefit Account. Since for PSSA purposes,
contributions are based on salary and not a fixed ceiling, there is no
attainable per annum.
iii)
Canada Pension Plan deductions are based on 2.0% of the
employee's yearly contributory salary or wages.
As there is no maximum salary per pay period, premiums must be taken to the
fullest extent possible each and every time pensionable remuneration is paid
and continues until such time as the maximum yearly premium is
reached.
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5.3
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In order to ensure the integrity and accuracy of the Pay System, tax
calculations are verified periodically by DSS staff.
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6
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INQUIRIES
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6.1
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As for any other deduction/entitlement, it is the responsibility of
Departmental Personnel to answer income tax inquiries on behalf of their
employees.
For additional information Departmental Personnel may
request from their District Taxation Office, a copy of the MC49 Machine
Computation of Income Tax Deductions, Canada Pension Plan Contributions and
Unemployment Insurance Premiums; which details the methods and formulae used to
determine tax to be withheld at source.
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6.2
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Any Departmental Personnel queries on the foregoing may be directed by
telephone to Advisory Services - Pay Bernard Potvin (819) 956-2064 or Jan
Norris (819) 956-2063.
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Original Signed by
E.S. Zenowski
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E.S. Zenowski
Director
Personnel Products Branch
Accounting, Banking and Compensation
Directorate
Reference: CJA 9007-7
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