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1 |
PURPOSE
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1.1 |
The purpose of this directive is to provide
information on the introduction of a new income tax calculation method,
"Tax on Income" (TONI). It will be used to calculate provincial income tax
for any province and territory that choose to utilize this new method. This
new method does not apply to the calculation of Québec income tax.
In addition, this directive will provide information on the new provincial
forms, "Personal Tax Credits Return" (TD1), for the provinces affected by
TONI and the new elements created in the Regional Pay System (RPS) to store
the information reflected on the provincial TD1s.
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While the detailed income tax formula for this
new calculation method and the amount of the various credits on the new
provincial TD1s are not yet available, this directive will provide Compensation
Advisors with the necessary information to prepare for this change including
communication to employees.
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Additional information will be publicized in
a subsequent directive once it is provided by Canada Customs and Revenue
Agency (CCRA).
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1.2 |
In this text, use of the masculine is generic
and applies to both men and women.
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2 |
BACKGROUND
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2.1 |
Under current Tax Collection Agreements (TCAs),
all provinces and territories, except the province of Québec, set
their tax rates as a percentage of the Basic Federal Tax. This method of
calculating provincial income tax is called "tax-on-tax". The provincial
governments have examined the current tax method and determined that it
no longer meets their needs. As a result, the TCAs were amended to allow
the provinces and territories to impose provincial income tax directly on
the taxable income.
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2.2 |
This new income tax calculation method will
provide provinces and territories with the opportunity to establish their
own income tax brackets and rates which will be totally independent from
the federal income tax brackets and rates. As a result, the federal income
tax bracket and rate changes will no longer affect the amount of provincial
income tax to be withheld at source.
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2.3 |
All provinces announced that they will switch
from the current "tax on tax" method to the new TONI income tax calculation
method. Income tax for Nunavut, the Yukon Territory and the Northwest Territories
will continue to be calculated on a "tax-on-tax" basis. There is no change
to the method of calculating federal income tax for employees working in
Québec or outside Canada. The method used to calculate provincial
income tax for employees working in Québec and residing in another
province remains the same.
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3 |
POLICY
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3.1 |
General |
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As of January 1, 2001, the TONI method of calculating
provincial income tax will apply to income tax withholding at source for
the following provinces: Newfoundland, Prince Edward Island, Nova Scotia,
New Brunswick, Ontario, Manitoba, Saskatchewan, Alberta and British Columbia.
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The TONI method of calculating income tax at
source involves two separate calculations based on the employee's projected
taxable income earned with the employer; one calculation to determine
the federal income tax to be withheld and the other calculation to determine
the amount of provincial income tax to be withheld. The definition of
taxable income will not change and will be the same for both the
federal and provincial income tax calculations.
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3.2 |
Reduction of Taxable Income |
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CCRA will continue to issue the Letter of Authority
(tax waiver letter) indicating the amount that is exempt from tax under
section 153(1.1) of the Income Tax Act. This amount will continue
to reduce the taxable income used to calculate both the federal and
provincial income tax for all provinces and territories with the exception
of the provincial tax for the province of Québec. This amount will
continue to be reported in element 43 "Federal Hardship Tax Exemption Amount"
in the RPS.
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The amount claimed as a "Deduction for living
in a prescribed zone", on the federal TD1 will continue to reduce the
taxable income used to calculate both the federal and provincial income
tax for all provinces and territories with the exception of the province
of Québec. This amount will continue to be reported in element 83
"Federal Prescribed Area Tax Exemption" in the RPS.
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3.3 |
New K3P Factor |
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A new non-refundable provincial tax credit identified
as the K3P factor will be used in the TONI provincial income tax formula.
This K3P factor is referred to as "Other Annual Provincial Non-refundable
Tax Credits" and refers to tax credits such as medical expenses or charitable
donations. While this factor is similar to the federal K3 factor which is
used in the federal income tax calculation, the K3P will be different than
the federal amount and it is based on the province of work. The authorization
to departments to provide the employee with a K3P credit will be in the
form of a letter from CCRA. Refer to Subsections 4.2 and 4.4.
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3.4 |
Tax Credits for CPP/QPP Contributions, EI
Premiums and Personal Tax Credits Amounts |
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Deductions of Canada Pension Plan (CPP) contributions,
Québec Pension Plan (QPP) contributions and Employment Insurance
(EI) premiums, as well as the provincial non-refundable personal tax credit
amounts will be multiplied by the lowest provincial tax rate to calculate
the provincial tax credit for the year.
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3.5 |
Lump Sum Rates |
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The lump sum rates, formerly known as gratuity
tax rates, will not change for provinces utilizing the TONI method. The
federal lump sum rate calculation method will continue to apply. Refer to
section 4.10 of Compensation Directive 1999-017
(dated March 25, 1999) titled "Income Tax Information Concerning Retiring
Allowances, Returns of Pension Contributions, Transfers to Registered Retirement
Savings Plans (RRSPs) and to Registered Pension Plans (RPPs)".
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3.6 |
Requests for Additional Deduction of Income
Tax |
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There is no change to the process to request
additional federal income tax deduction. An additional income tax deduction
will continue to be requested on the federal TD1 form.
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3.7 |
Remittance and Reporting of the Provincial
and Federal Income Tax |
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CCRA will continue to administer and collect
the provincial income tax in the same manner. The provincial and federal
income tax will continue to be remitted as one amount to CCRA. The federal
and provincial income tax will continue to be reported as one amount on
the employee's pay stub, T4 and any other output documents issued by Public
Works and Government Services Canada (PWGSC) to client departments, e.g.
The Payroll Register.
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3.8 |
New Provincial Personal Tax Credits Return
(TD1) |
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A specific TD1 form for each province will be
created by CCRA where the provincial non-refundable personal tax credit
amounts are different from the federal non-refundable tax credit amounts.
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The provincial TD1 forms should be available
in November 2000 at CCRA Tax Services Offices and in the Forms and Publications
Section of CCRA's Internet site at www.ccra-adrc.gc.ca.
When they become available on CCRA's Internet site, a broadcast message
will be issued by PWGSC to inform client departments.
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Employees will be required to complete the provincial
TD1 that corresponds to their province of employment. The RPS will
be programmed to automatically use the employee's existing credits to determine
the employee's provincial credit amount equivalents to provide for a transition
period until such time as employees have filed a new Provincial TD1. The
completion of the new provincial TD1 is considered mandatory for all employees
whose non-refundable tax credit amounts are above the basic personal amount.
These employees should complete the new provincial TD1 and forward it to
their Compensation Advisor. |
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IF THE CURRENT AMOUNT REFLECTED IN THE RPS FOR THE EMPLOYEE IS
THE FOLLOWING: |
THE AMOUNT OF THE PROVINCIAL CREDIT PROVIDED BY THE RPS FOR THE
EMPLOYEE WILL BE THE FOLLOWING: |
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Zero |
Zero |
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$7,331 (the Federal Basic credit) |
The Provincial Basic credit according to the employee's province
of work |
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$13,556 (the Federal Basic credit plus either the full Spousal Amount
credit or the full Equivalent-to Spousal amount) |
The Provincial Basic credit plus either the full Spousal Amount
credit or the full Equivalent-to Spousal Amount credit according to
the employee's province of work |
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An amount that corresponds to Non-indexed Federal tax credits |
The non-indexed Provincial tax credits will be identical to the
non-indexed Federal credits currently reflected in the RPS for all
provinces under TONI with the exception of Ontario where these credits
will be considered as indexed credits |
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An amount less than the Federal Basic credit |
The Provincial Basic credit according to the employee's province
of work |
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An amount greater than the Federal Basic credit but less
than the Federal Basic credit plus either the full Spousal Amount
credit or the full Equivalent-to Spousal amount |
The Provincial Basic credit according to the employee's province
of work plus the Federal amount currently reflected in the RPS less
$7,331 |
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An amount greater than the Federal Basic credit plus either
the full Spousal Amount credit or the full Equivalent-to Spousal amount |
The Provincial Basic credit plus either the full Spousal Amount
credit or the full Equivalent-to Spousal Amount credit according to
the employee's province of work, plus the Federal amount currently
reflected in the RPS less $13,556 |
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3.9 |
Exemption from Federal and/or Provincial
Income Tax |
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In situations where the amount of provincial
tax credits is more than the expected total employment income from all sources
for the year, employees may request on the new provincial TD1 that
no provincial tax be deducted. As the amounts of provincial non-refundable
tax credits may differ from the amounts of federal non-refundable tax credits,
employees may be exempt from either or both provincial or federal tax.
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4 |
PROCEDURES/INSTRUCTIONS
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4.1 |
Income Tax Formulas under TONI |
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Effective January 1, 2001, the RPS will be modified
to incorporate the new income tax formulas for the nine provinces under
TONI. Refer to Subsection 3.1.
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4.2 |
New Master Employee Elements to Report Information
for Provinces under TONI |
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Three new elements have been created
to record the information from the new provincial TD1 and the amount authorized
as the K3P factor for a province under TONI. The amount of these new elements
can be viewed in the Data Base Master on the Statutory Deduction Set (SDS)
screen. These amounts can be modified using the Pay Status Change (STC)
screen.
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Element 86 "Provincial Tax Credits Non Indexed
Amount" |
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This element will be used to report the provincial
tax credit non indexed amounts from the provincial TD1. The specific
item on each provincial TD1 to be reported as non indexed amounts
will be published in a subsequent directive when this information becomes
available. This element will be identified on the STC and SDS screens as
"PROV-TAX-CR-NON-IND".
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Element 87 "Provincial Tax Credits Indexed
Amount" |
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This element will be used to report the provincial
tax credits indexed amount from the provincial TD1. The specific
item on each provincial TD1 to be reported as indexed amounts will
be published in a subsequent directive when this information becomes available.
This element will be identified on the STC and SDS screens as "PROV-TAX-CR-IND".
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Element 88 "Provincial Tax Credit Additional
Amount" |
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This element will be used to report the amount
specified as the K3P factor in the authorizing letter from CCRA. Refer to
Subsection 3.3. This element will be identified on the STC and SDS screens
as "ADDTNL-PROV-CREDIT".
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4.3 |
Renaming Existing Master Employee Record
Elements |
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4.3.1 |
To avoid confusion with the existing elements
used to report information for the calculation of the Québec income
tax from the Source Deductions Return (TP-1015.3-V) and amounts authorized
by the Ministère du Revenu du Québec, the following elements
have been renamed by replacing the word "provincial" with "Québec".
These elements will continue to be used to report information for the calculation
of Québec income tax for employees working and residing in Québec.
The amount reported in these elements can be viewed in the Data Base
Master on the SDS screen. These amounts can be modified using the STC screen.
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Element 44 renamed as "Québec Tax
Exemption Additional Amount" |
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This element is identified on the STC and SDS
screens as "ADDTNL QUE EXM".
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Element 84 renamed as "Québec Tax
Credit Amount" |
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This element is identified on the STC and SDS
screens as "QUE TAX CREDIT".
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Element 85 renamed as "Québec Tax
Credit Additional Non-refundable Amount" |
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This element is identified on the STC and SDS
screens as "QUE-N-REF-T-CR".
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4.3.2 |
Again, to avoid confusion, the following elements
used to calculate the federal income tax and provincial income tax for the
Yukon Territory, the Northwest Territories and Nunavut have been renamed
by incorporating the word "federal". These elements will continue
to be used to report information for the calculation of the federal income
tax and provincial income tax for the aforementioned territories. The amounts
reported in these new elements can be viewed in the Data Base Master on
the SDS screen. These amounts can be modified using the STC screen.
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Element 80 renamed as "Federal Tax Credits
Non Indexed Amount" |
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This element is identified on the STC and SDS
screens as "FED-TAX-CR-NON-IND".
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Element 81 renamed as "Federal Tax Credits
Indexed Amount" |
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This element is identified on the STC and SDS
screens as "FED-TAX-CR-IND".
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Element 82 renamed as "Federal Tax Credit
Additional Amount" |
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This element is identified on the STC and SDS
screens as "ADDTNL FED CREDIT".
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Please note that element 43 "Hardship Federal
Exemption Amount" identified on the STC and SDS screens as "HARDSHP FED
EXM" and element 83 "Federal Prescribed Area Tax Exemption" identified on
the STC and SDS screens as "FED PRESCRD AR EXM" have not changed.
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4.4 |
Provincial Tax Credit Amount Authorized as
K3P Factor |
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Employees who have obtained a letter from CCRA
authorizing an amount as the K3P factor should provide a copy of the letter
to their Compensation Advisor. The amount authorized in the letter should
be input in the new element 88 "Provincial Tax Credit Additional Amount".
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Where the letter from CCRA is received after
the first pay period of a calendar year, the following calculation should
be done to determine the amount to enter in element 88 for the remaining
pay periods in the year: |
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- Multiply the amount authorized in the letter from CCRA as the K3P
factor by the number of pay periods in the year;
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- Divide the amount by the remaining pay periods in the year and
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- Enter the result in the element 88 "Provincial Tax Credit Additional
Amount".
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Employees working in a province affected by
TONI and who have already provided their employer with a copy of a letter
authorizing a federal tax credit amount (K3 factor) for taxation year 2001,
should be informed that it will be necessary to obtain another letter from
CCRA reflecting the amount of the provincial tax credit (K3P) factor. This
action is necessary if the employee wishes to be accorded that particular
provincial tax credit.
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Employees who currently have a Letter of Authority
for a federal tax credit amount (K3 factor) that expires beyond the year
2000, should be informed to obtain an additional Letter of Authority for
the K3 and K3P factors for taxation year 2001. A listing reflecting the
amount in element 82 "Federal Tax Credit Additional Amount" (K3 factor)
will be issued to assist Compensation Advisors in identifying the affected
employees.
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Similarly, as is the current procedure for the
K3 factor, the authorization of an amount as the K3P factor is valid for
the calendar year indicated in the letter from CCRA. It is suggested that
Compensation Advisors bring forward a reminder at year end to remove or
modify the amount entered in element 88 as applicable.
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4.5 |
New Provincial TD1 Forms |
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Departments should inform their employees working
in a province affected by TONI of the requirement to complete the new provincial
TD1. Refer to Subsection 3.8.
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The RPS will automatically impose, in the employee's
new element 87 "Provincial Tax Credits Indexed Amount", the indexed tax
credit amounts as described in Subsection 3.8. Again, please note that the
tax credits are based on the employee's province of work for purposes of
calculating income tax deductions at source. Client departments will be
informed via broadcast message when the automatic update has been implemented
in the RPS.
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Once notified of the automatic update, Compensation
Advisors may complete an STC screen to input the amount(s)
from employee's completed provincial TD1 in the elements 86 and 87 as applicable.
Please note that element 87 should be updated only in cases where the
amount is different than that which is reflected in element 87. While
it will be possible to enter this information in the new elements sometime
in November 2000, these amounts will only be used for payments dated on
or after January 1, 2001. To avoid inaccurate provincial income tax deductions,
it is very important that these actions be input in the RPS prior to the
processing of any payment dated 2001. Additionally, Compensation Advisors
are cautioned not to enter amounts in element 87 prior to being notified
by broadcast message that the system has been automatically updated
with the provincial personal basic amount and spousal amounts, where applicable.
The broadcast message(s) will include what lines on each provincial TD1
are considered as indexed amounts.
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4.6 |
TOS Situations |
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When an employee is taken on strength (TOS),
the provincial basic personal amount will automatically be imposed by the
RPS. Should an employee request a different amount on the provincial TD1,
Compensation Advisors will be required to input this amount in element 86
and 87, as applicable. It should be noted that the completion of a provincial
TD1 for these employees is mandatory.
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4.7 |
MSA and TIN Situations |
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When a Miscellaneous Staffing Action (MSA) is
processed and data is entered in element 20 "Geographic Location" or when
a Transfer In (TIN) is processed, a warning message WE5 "POSSIBLE ADJUSTMENT
REQUIRED TO TAX CREDIT ELEMENTS" will be issued to the department. Compensation
Advisors should ensure that the employee completes the new provincial TD1
for his new province of employment if applicable.
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4.8 |
Exemption from Federal and/or Provincial
Income Tax |
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At this time, the RPS does not have the facility
to totally exempt an employee from federal tax only or from provincial tax
only. Refer to section 3.9 of this directive for the policy. Therefore,
until such time as the RPS is modified, Compensation Advisors will be required
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- where an employee should be totally exempt from federal income tax
only, the amount 99999 should be input in element 82 "Federal Tax Credit
Additional Amount";
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- where an employee should be totally exempt from provincial income
tax only (other than Québec), the amount 99999 should be input
in element 88 "Provincial Tax Credit Additional Amount".
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It is suggested that Compensation Advisors bring
forward a reminder at year end to remove the amount entered in element 82
or 88 by amending this tax credit to zero, if it is no longer applicable.
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Where an employee is totally exempt from both
federal and provincial income tax, Compensation Advisors are to continue
to input a code 4 in element 42 "Income Tax Status". Again, it is suggested
that Compensation Advisors bring forward a reminder at year end to ensure
that this exemption still applies.
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There is no change in the procedure to reduce
taxable income at source for the purposes of calculating federal income
tax. Furthermore, CCRA's Letter of Authority (otherwise known as a tax waiver),
in which the amount authorized is stated, will be the authorizing instrument
which will provide the identical reduction of taxable income at source for
the purposes of calculating provincial income tax. As the definition of
taxable income is identical for both federal and provincial purposes, the
amount reported in element 43 "Hardship Federal Exemption Amount" will be
used for the calculation of both federal and provincial income tax.
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4.9 |
Employees Terminating Employment |
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When an employee terminates his employment and
will be in receipt of a monthly pension benefit, Compensation Advisors are
to request that the employee complete the new provincial TD1, as well as
the federal TD1. As the employee will no longer be employed, the provincial
TD1 should be completed based on his province of residence.
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5 |
INQUIRIES
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5.1 |
Any request for information regarding the foregoing
should be addressed to your PWGSC Compensation Services Office.
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R. Jolicoeur
Director General
Compensation Sector
Government Operational Service