ARCHIVED CD 2002-020
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Note This document has been modified. The changes are identified by a vertical line "|". Revision (|)
August 21, 2002 (Revised September 9, 2002)
SUBJECT: Reducing Source Deductions of Income Tax
1.1 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.
1.2 In this text, use of the masculine is generic and applies to both men and women.
| 1.3 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 -- Public Works and Government Services Canada
2.1 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.
3.1 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.
4.1 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:
- Registered Retirement Savings Plan (RRSP) contributions (refer to Compensation Directive 2006-002);
- Alimony payments and child support payments (refer to Compensation Directive 1997-034);
- Child care expenses;
- Medical expenses;
- Charitable donations, gifts to a government and other gifts;
- Tuition and examination fees.
4.2 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: 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: Tax services offices and tax centres - Addresses, office hours, and fax numbers
4.3 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: Revenu Québec
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:
4.4 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.
4.5 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.
4.6 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.
| 4.7 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 Revenu Québec -- Source Deductions Return or through an office of the MRQ.
5.1 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.
5.2 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:
Prorated Amount = (a) x (b) [(c)]
| 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.
5.3 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.
5.4 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.
5.5 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.
|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)
|K3 factor||"ADDTNL FED CREDIT"
(MER Element 82: Federal Tax Credit Additional Amount)
(MER Element 85: Quebec Tax Credit Additional Non-refundable Amount)
(MER Element 88: Provincial Tax Credit Additional Amount)
| 5.6 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.
5.7. 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".
5.8. 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.
$ 1,000 (Additional credit) x 27 (pay periods in the year)
13 (remaining pay periods)
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.
5.9. 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.
$ 15,000 (Additional exemption) x 27 (pay periods in the year)
13 (remaining pay periods)
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.
6.1 Any inquiries on the information contained in this directive should be addressed to your Public Works and Government Services Canada (PWGSC) Compensation Services Office.
Original Signed by
Government Operational Service
Reference: CJA 9007-7-10
- Date modified: