Overpaid workers will only pay back ‘net’ amounts under proposed new tax rules

For workers who inadvertently received too much pay, returning the money has been a nightmare

The federal government says it’s preparing to address one of the key tax issues that has caused massive headaches for government employees overpaid by its problem-plagued civil service pay system.

The Finance Department has drafted legislation that would see overpaid employees — regardless who they work for — required to repay only the amounts deposited into their bank accounts in a prior tax year.

Under current legislation, any employee who received an overpayment in a previous year is required to pay back the gross amount of the overpayment to their employer, which includes income taxes, Canada Pension Plan contributions and Employment Insurance premiums that were already deducted.

The law has caused huge problems for thousands of federal employees who were overpaid through the government’s buggy Phoenix pay system.

In many cases, the law required them to pay back to the government hundreds, and even thousands, of dollars they never received.

The Public Service Alliance of Canada, which represents the bulk of federal workers, had called on Ottawa to exempt civil servants from the tax law, given the size and complexity of overpayments made through the Phoenix system.

READ MORE: Union calls on prime minister to step into ‘stalled’ Phoenix compensation talks

Since its launch nearly three years ago, more than half of the federal civil service — or more than 156,000 workers — have been overpaid, underpaid or not paid at all through Phoenix.

For many of those who inadvertently received too much pay, returning the money has been a two-pronged nightmare. In many cases, employees were told to keep track of the money, but not to pay it back until a later date as to not further overburden the troubled pay system.

Those same employees who hadn’t paid back the overpayments until a following tax year were later told they must pay back the amounts deposited to their bank accounts, plus CPP contributions, EI premiums and income taxes that had already been deducted by their employer.

“To alleviate this burden and help affected employees, the Department of Finance Canada is releasing draft legislative proposals that would — under certain conditions — permit an affected employee to repay to their employer only the net amount of the overpayment received in a previous year, rather than the gross amount,” the department said in a statement Tuesday.

“Under the proposed legislation, the (Canada Revenue Agency) would be able to refund directly to the employer the income tax, CPP, and EI withheld on an overpayment that occurred through a system, administrative, or clerical error. As a result, affected employees — who received overpayments through no fault of their own — would no longer be responsible for recovering these amounts from the CRA and repaying the gross amount of the overpayment to their employer.”

Even though the draft legislation is only in the proposal stages, the department said public and private-sector employees can apply the new rules to their individual tax situations “immediately” for overpayments made after 2015, and that CRA will process overpayments as if the legislation has already been enacted.

The government’s goal in launching Phoenix in 2016 was to streamline multiple outdated civil service pay systems, and save taxpayers millions of dollars in the process.

But the bungled pay project was estimated by the end of 2018 to have cost $1.1 billion, including its implementation and efforts aimed at stabilizing it that have continued into this year.

Terry Pedwell, The Canadian Press

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