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1
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PURPOSE
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1.1
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The purpose of this directive is to provide client departments
with the appropriate policies and procedures regarding employee
requests for a reduced amount of income tax to be withheld
at source.
This directive amalgamates the information contained in
the directives noted in sub-section 2.1 herein and provides
additional information to clarify the related policies and
procedures. Please note that the policies and procedures
have not changed.
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1.2
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In this text, use of the masculine is generic and applies
to both men and women.
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1.3
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A notice of information to employees has been included
with this Compensation Directive and will be posted to the
following Web site 5 days after the publication date of
this document:
Internet -- http://www.pwgsc.gc.ca
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2
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CANCELLATION
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2.1
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This directive cancels:
- Services Pay Directive 1988-050 (34) "Requests for a
Reduction of Income Tax at Source- Section 153(1.1) Income
Tax Act" dated July 21, 1988;
- Services Pay Directive 1988-094 (58) "Requests for a
Reduction of Income Tax at Source- Section 153(1.1) Income
Tax Act- Additional Credit K3" dated December 1, 1988;
and
- Services Pay Directive 1989-004 (03) "Request for a
Reduction of Income Tax at Source" dated January 9, 1989.
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3
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BACKGROUND
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3.1
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Under certain circumstances, an employee may be subject
to excessive income tax deductions at source. This situation
could occur if the employee is able to claim deductions
or credits when filing his income tax return when these
deductions or credits are not taken into consideration in
the calculation of income tax at source. An employee in
this situation may wish to request a reduction in the amount
of income tax withheld at source.
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4
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POLICY
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4.1
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Section 153 (1.1) of the Income Tax Act states that
if the deduction of tax from a payment causes undue hardship,
a lesser amount of tax can be withheld from that payment.
If the employee satisfies the requirements, the Canada Customs
and Revenue Agency (CCRA) may authorize employers to take
into account various additional exemptions or additional
tax credits when calculating source deductions of income
tax. Some examples of these additional exemptions and additional
credits include, but are not limited to:
- Charitable donations, gifts to a government and other
gifts;
- Tuition and examination fees.
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4.2
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Employees interested in having reduced source deductions
of Federal income tax need a letter of authority issued
by the CCRA. To obtain a letter of authority, the employee
must submit a written request, or send a completed CCRA
form T1213, Request to Reduce Tax Deductions At Source
for Year(s) ______, to the Client Services Division
of a Tax Services Office. The employee should include documents
that support his request as to why less tax should be deducted.
For example, if the employee regularly contributes to an
RRSP in the year, he should provide documents showing the
amounts contributed.
The T1213 form is available online at the following CCRA
Internet address: http://www.ccra-adrc.gc.ca/E/pbg/tf/t1213/
An employee may also visit or contact his local CCRA Tax
Services Office to obtain the form or additional information.
The addresses and phone numbers for the CCRA Tax Services
Offices are available at the following Internet address:
http://www.ccra-adrc.gc.ca/contact/tso-e.html
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4.3
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Section 1016 of the Quebec Taxation Act also authorizes
reduced source deductions of income tax deducted under similar
situations. An employee who both resides and works in the
Province of Quebec needs a letter of authority issued by
the Ministère du Revenu du Québec (MRQ) to
have his Quebec income tax reduced at source. To obtain
a letter of authority issued by the MRQ, the employee must
submit a completed form TP-1016-V, Application for a
Reduction in Source Deductions of Income Tax, to an
office of the MRQ.
The TP-1016-V form is available online at the following
MRQ Internet address: http://www.revenu.gouv.qc.ca/eng/formulaires/tp/tp-1016-v.asp
An employee may also visit or contact his local MRQ office
for the form or additional information. The addresses and
phone numbers for MRQ offices are available at the following
Internet address:
hhttp://www.revenu.gouv.qc.ca/eng/nous_joindre/index.asp
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4.4
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Once the employee submits his request to the CCRA (and
the MRQ for the employee who works and resides in Quebec),
his application will be processed and he will be notified
of the decision(s) by mail. The employee should allow four
to eight weeks for his request to be processed.
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4.5
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The CCRA and the MRQ respond to requests for a reduced
amount of income tax to be withheld at source in similar
manners. If the request is refused, the employee will receive
a refusal letter detailing the reasons why the request was
denied. If the request is approved, the employee will be
issued a letter of authority. This letter of authority will
stipulate a specific amount on which income tax can be reduced.
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4.6
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Once the CCRA (and the MRQ for the employee who works and
resides in Quebec) authorizes a reduced amount of income
tax to be withheld at source, the employee must provide
his compensation advisor with the letter(s) of authority.
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4.7
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An income tax exemption is available for alimony payments
that are required to be deducted at source pursuant to court
orders dated on or after May 1, 1997. An employee
is required to submit a letter of authority issued by the
CCRA to his compensation advisor to receive a Federal tax
exemption on these payments. An employee who both works
and resides in the Province of Quebec will need to submit
a completed form TP-1015.3, Source Deductions Return
(refer to line 14), to his compensation advisor to receive
a Quebec income tax exemption. This form is available on-line
at http://www.revenu.gouv.qc.ca/eng/formulaires/tp/tp-1015_3-v.asp or through an office of the
MRQ.
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5
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PROCEDURES/INSTRUCTIONS
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5.1
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The compensation advisor should not initiate the reduction
of income tax at source before the letter of authority is
received. The letter of authority should be retained with
the employee's records for audit purposes.
If the compensation advisor receives the letter of authority
after the payment has already been issued to the employee,
the CCRA and MRQ have advised that the employer cannot cancel,
reverse or reissue the payment for the specific purpose
of refunding the income tax withheld from that payment.
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5.2
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The reduction amount specified in the letter of authority
must be distributed evenly over the remaining pay periods
in the year. If the reduction is applied after the start
of the taxation year, the pay system does not automatically
calculate the prorated amount. Compensation advisors should
utilize the following formula to calculate this amount:
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Prorated Amount =
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(a) x (b)
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(c)
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where (a) is the amount specified
in the letter of authority;
(b) is the total number of pay periods in the current year;
and
(c) is the number of remaining pay periods in the current
year. |
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5.3
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Once the compensation advisor has determined the prorated
amount, the next step is to determine whether the reduction
was authorized on the basis of an additional exemption or
an additional credit:
An additional exemption is based on the deductions
that the employee is entitled to claim in the calculation
of net or taxable income. In this instance, the reduction
is based on a decrease in the amount of remuneration subject
to source deductions. Some examples include, but are not
limited to, contributions to an RRSP, losses related to
a business, child support payments, and alimony payments.
An additional credit is based on the non-refundable
tax credits the employee is entitled to claim. In this instance,
the reduction is based on a decrease in the amount of income
tax payable. Some examples include, but are not limited
to, charitable donations, gifts to a government, medical
expenses, tuition and examination fees.
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5.4
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The compensation advisor should consult the letter of authority
to identify if the amount in the letter is an additional
exemption or an additional credit. Both the CCRA and the
MRQ differentiate these amounts in tax calculation formulas
and thus each is assigned a different variable (factor)
name.
In letters of authority issued by the CCRA, an additional
exemption is referred to as the F1 factor, whereas a Federal
additional credit is referred to as the K3 factor and the
Provincial additional credit (other than the province of
Quebec) is referred to as the K3P factor.
In letters of authority issued by the MRQ, an additional
exemption is referred to as the J1 factor, whereas an additional
credit is referred to as the K1 factor.
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5.5
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The compensation advisor, after carrying out the calculation
in section 5.2 above, should then ensure that the reduction
in income tax withheld at source is reported in the appropriate
status elements of the employee's Master Employee Record
(MER). The Status Change (STC) screen is used to update
these status elements. Refer to the table below for the
appropriate field(s) that may require updating. The amount
of these elements can also be viewed in the Data Base Master
on the Statutory Deduction Set (SDS) screen.
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Basis for the Authorization |
Corresponding Field on
the STC Screen to be Updated |
F1 factor |
"HARDSHIP FED EXM"
(MER Element 43: Hardship Federal Exemption Amount) |
J1 factor |
"ADDTNL QUE EXM"
(MER Element 44: Quebec Tax Exemption Additional Amount)
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K3 factor |
"ADDTNL FED CREDIT"
(MER Element 82: Federal Tax Credit Additional Amount)
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K1 factor |
"QUE-N-REF-T-CR"
(MER Element 85: Quebec Tax Credit Additional Non-refundable
Amount) |
K3P factor |
"ADDTNL-PROV-CREDIT"
(MER Element 88: Provincial Tax Credit Additional Amount)
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5.6
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Normally, the reduction in tax withholding is valid for
the current calendar year only; therefore, the applicable
status element(s) must be amended on the STC screen for
pay period one processing of the next year to reflect a
zero amount.
If the letter of authority states that the additional credit
or additional exemption is valid for an indefinite period
of time, the applicable status element(s) would only be
amended where the credit or exemption commenced after the
first pay period of the year in which the letter was received.
In this situation the compensation advisor should amend
the amount on the STC screen for pay period one processing
to reflect the stipulated amount in the letter of authority.
Compensation advisors are encouraged to create a reminder
utilizing the Bring Forward Text facility to ensure that
they review employees' files to make the necessary changes,
if required, prior to processing the first pay of each taxation
year. They should also remind employees that they may need
to obtain new letters of authority valid for the following
taxation year.
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Calculation Examples
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5.7
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Example 1: A letter of authority is issued by the
CCRA for an additional $1,000 credit (K3). The letter is
received by the compensation advisor before the beginning
of the taxation year in which the letter applies.
For the first pay of the year, the compensation advisor
should report the amount of $1,000 in the "ADDTNL FED CREDIT"
field on the STC screen. This ensures that the additional
tax credit (K3) is reflected in the MER Element 82 "Federal
Tax Credit Additional Amount".
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5.8
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Example 2: A letter of authority issued by the CCRA
is received for an additional $1,000 credit (K3) and processed
for the cheque dated July 17, 2002.
Prorated amount
$1,000 (Additional credit) x 27 (pay periods in the year)
13 (remaining pay periods)
= $2,076.92
The above calculation ensures that the employee will gain
the full $1,000 credit from July 17, 2002, to the end of
the 2002 taxation year. The additional tax credit (K3) must
be reflected in the MER Element 82 "Federal Tax Credit Additional
Amount". Therefore, the compensation advisor should report
the amount of $2,077 in the "ADDTNL FED CREDIT" field on
the STC screen.
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5.9
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Example 3: A letter of authority issued by the CCRA
is received for an additional $15,000 exemption (F1) and
processed for the cheque dated July 17, 2002.
Prorated amount
$15,000 (Additional exemption) x 27 (pay periods
in the year)
13 (remaining pay periods)
= $31,153.85
Again, this calculation ensures that the employee will gain
the full $15,000 exemption from July 17, 2002, to the end
of the 2002 taxation year. The additional exemption (F1)
amount must be reflected in the MER Element 43 "Hardship
Federal Exemption Amount". Therefore, the compensation advisor
should report the amount of $31,154 in the "HARDSHIP FED
EXM" field on the STC screen.
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6.
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INQUIRIES
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6.1
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Any inquiries on the information contained
in this directive should be addressed to your Public Works
and Government Services Canada (PWGSC) Compensation Services
Office.
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