ARCHIVED Services Pay Directive: 1988-056 (37)

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August 1, 1988

Ottawa, Canada
K1A 0S5

SUBJECT: Income Tax Deductions at Source


1.1 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.


2.1 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.


3.1 This supersedes the instructions promulgated via Services Pay Directive 86-164 (56) dated December 23, 1986.


4.1 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.

4.2 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.

| 4.3 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.

| 4.4 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.

4.5 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.

| 4.6 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.

| 4.7 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.


5.1 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.

| 5.2 Numerous queries have been received from departments concerning the relationship between PSSA and Canada/Québec Pension Plan.

  1. 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).
  2. 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.
  3. 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.

5.3 In order to ensure the integrity and accuracy of the Pay System, tax calculations are verified periodically by DSS staff.


| 6.1 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.

6.2 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.

Original Signed by
E.S. Zenowski

E.S. Zenowski
Personnel Products Branch
Accounting, Banking and Compensation Directorate

Reference: CJA 9007-7