ARCHIVED CD 2000-033

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Appendix A

November 21, 2000

SUBJECT: New Income Tax Calculation Method--TONI

1. PURPOSE

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.

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.

Additional information will be publicized in a subsequent directive once it is provided by Canada Customs and Revenue Agency (CCRA).

1.2 In this text, use of the masculine is generic and applies to both men and women.

2. BACKGROUND

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.

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.

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.

3. POLICY

3.1. General

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.

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.

3.2. Reduction of Taxable Income

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.

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.

3.3. New K3P Factor

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.

3.4 Tax Credits for Canada Pension Plan (CPP) / Quebec Pension Plan (QPP) Contributions, Employment Insurance (EI) Premiums and Personal Tax Credits Amounts

Deductions of CPP contributions, QPP contributions and 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.


3.5. Lump Sum Rates

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)".

3.6. Requests for Additional Deduction of Income Tax

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.

3.7 Remittance and Reporting of the Provincial and Federal Income Tax

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.

3.8. New Provincial Personal Tax Credits Return (TD1)

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.

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 Canada Revenue Agency Web site . When they become available on CCRA's Internet site, a broadcast message will be issued by PWGSC to inform client departments.

| 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:
| 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

3.9. Exemption from Federal and/or Provincial Income Tax

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.

4. PROCEDURES/INSTRUCTIONS

4.1. Income Tax Formulas under TONI

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.


4.2 New Master Employee Elements to Report Information for Provinces under TONI

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.

Element 86 "Provincial Tax Credits Non Indexed Amount"

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".

Element 87 "Provincial Tax Credits Indexed Amount"

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 amount s 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".

Element 88 "Provincial Tax Credit Additional Amount"

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".

Renaming Existing Master Employee Record Elements

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.

Element 44 renamed as "Québec Tax Exemption Additional Amount"

This element is identified on the STC and SDS screens as "ADDTNL QUE EXM".

Element 84 renamed as "Québec Tax Credit Amount"

This element is identified on the STC and SDS screens as "QUE TAX CREDIT".

Element 85 renamed as "Québec Tax Credit Additional Non-refundable Amount"

This element is identified on the STC and SDS screens as "QUE-N-REF-T-CR".

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.

Element 80 renamed as "Federal Tax Credits Non Indexed Amount"

This element is identified on the STC and SDS screens as "FED-TAX-CR-NON-IND".

Element 81 renamed as "Federal Tax Credits Indexed Amount"

This element is identified on the STC and SDS screens as "FED-TAX-CR-IND".

Element 82 renamed as "Federal Tax Credit Additional Amount"

This element is identified on the STC and SDS screens as "ADDTNL FED CREDIT".

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.

4.4. Provincial Tax Credit Amount Authorized as K3P Factor

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".

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:

  • Multiply the amount authorized in the letter from CCRA as the K3P factor by the number of pay periods in the year;
  • Divide the amount by the remaining pay periods in the year and
  • Enter the result in the element 88 "Provincial Tax Credit Additional Amount".

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.

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.

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.


4.5. New Provincial TD1 Forms

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.

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.

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.

4.6 Take-on-Strength (TOS) Situations

When an employee is 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.

4.7 MSA and Transfer-In (TIN) Situations

When a Miscellaneous Staffing Action (MSA) is processed and data is entered in element 20 "Geographic Location" or when a 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.

4.8. Exemption from Federal and/or Provincial Income Tax

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 to carry out the following actions:

  • 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";
  • 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".

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.

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.

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.

4.9. Employees Terminating Employment

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 .

5. INQUIRIES

5.1 Any request for information regarding the foregoing should be addressed to your PWGSC Compensation Services Office.


Original Signed by
R. Jolicoeur

R. Jolicoeur
Director General
Compensation Sector
Government Operational Service

Reference: CJA 9007-7