Paying unused accumulated sick pay credits | Recovering outstanding source deductions
Paying unused accumulated sick pay credits
QUESTION: We have employees retiring this year and we will be paying out any unused accumulated sick pay credits. How do we treat these monies?
ANSWER: A payment made on termination for accumulated sick pay credits qualifies as a retiring allowance, with specific rules for tax treatment and year-end reporting.
Unused accumulated sick pay credits are not included for calculating Canada/Quebec Pension Plan (C/QPP) contributions, or employment insurance (EI) and Quebec Parental Insurance Plan (QPIP) premiums.
They are, however, subject to income tax deductions at the lump-sum tax rates, if the employee is not transferring any amount directly to a registered pension plan (RPP) or registered retirement savings plan (RRSP).*
In certain situations, employees may transfer some or all of a retiring allowance tax free into an RPP or an RRSP in which the individual is the annuitant. This calculated amount is in addition to the individual’s personal RRSP deduction limit.
The formula for calculating the amount eligible for transfer is:
• $2,000 for each calendar year (or portion) before 1996 during which the employee was employed by the employer
• $1,500 for each calendar year (or portion) before 1989 that the employee
(i) did not belong to the employer’s pension plan, pension fund, or deferred profit-sharing plan
(ii) belonged to a plan, but the employee’s portion was not vested in the employee when the employer paid the retiring allowance. The $1,500 amount can be prorated according to the percentage of vesting.
Employees may transfer the non-eligible portion of a retiring allowance to their personal RRSP or to a spousal or common-law partner’s RRSP if they verify that they will not exceed their personal RRSP deduction limit. The onus is on the individual to ensure that they do not exceed the limit.
At year end, report the retiring allowance in the “Other Information” area on the employee’s T4, using the following codes:
• 66 (portion of a retiring allowance that is eligible for tax-free rollover to an RPP or RRSP)
• 67 (non-eligible retiring allowance)
• 68 (eligible retiring allowances for Status Indians with tax-exempt income)
• 69 (non-eligible retiring allowances for Status Indians with tax-exempt income).
Do not include the retiring allowance in box 14 on the T4.
For Quebec employees, employers must report the entire amount of the retiring allowance in box O of the RL-1. In the code box (case O), enter code RJ.
*Note: The federal lump-sum tax rates are:
• 10 per cent (five per cent for Quebec) on amounts up to and including $5,000
• 20 per cent (10 per cent for Quebec) on amounts over $5,000 and up to and
• 30 per cent (15 per cent for Quebec) on amounts over $15,000.
The Quebec provincial lump-sum tax rates are:
• 15 per cent (if the payment does not exceed $5,000)
• 20 per cent (if the payment is over $5,000).
Recovering outstanding source deductions
QUESTION: We recently received a ruling from the Canada Revenue Agency (CRA) on some workers who began doing work for us last year. The ruling states that these workers are employees — not independent contractors, as we had been treating them. As a result, the CRA requires us to remit CPP contributions and EI premiums — both the employer’s and the employees’ portions — going back to the date they were hired. Are we allowed to recover any portion of the outstanding CPP and EI from payments we make to the workers?
ANSWER: Yes, employers may recover the employees’ portion from them, provided that the outstanding CPP contribution or EI premium does not go back more than 12 months.
The amount deducted for the outstanding contributions/premiums cannot exceed the amount the employer should have deducted from each payment. The employer is responsible for paying its share of the outstanding CPP contribution and EI premium.
Similar rules apply for QPP contributions and QPIP premiums for employers who must remit outstanding amounts to Revenu Québec.
In cases where employers should have made a deduction in a previous year and they recover it through a deduction in the current year, they should not report the recovered amount on the current year’s T4 (and RL-1 for Quebec employers).
Instead, amend the previous year’s T4 (and RL-1, if applicable). The recovered amount will not affect the current year-to-date C/QPP contributions or EI premiums.
Paying banked overtime hours
QUESTION: We are paying out banked overtime in a lump sum to some employees. Do we use the lump-sum tax rates to calculate the income tax deductions?
ANSWER: No, the lump-sum tax rates are not used for all lump-sum payments. The CRA states that they apply for very specific types of payments, such as retiring allowances, the taxable part of a death benefit, proceeds from a profit-sharing or deferred profit-sharing plan, and pension plan refunds.
To calculate income tax source deductions for overtime pay paid in a lump sum at a later date, use the bonus method.
For C/QPP contributions, multiply the lump-sum overtime payment by the current C/QPP calculation rate (5.10 per cent for CPP and 5.55 per cent for QPP) without taking into account the annual basic exemption. Remember to only take C/QPP contributions up to the annual maximum for contributions ($2,748.90 for CPP and $2,991.45 for QPP).
For EI and QPIP premiums, multiply the lump-sum payment by the current premium rates, provided that the employee has not reached the annual maximum for EI and QPIP premiums.
For 2019, the employee EI premium rate for employees outside of Quebec is 1.62 per cent. For employees in Quebec, it is 1.25 per cent. The annual maximum employee premium is $860.22 for employees outside of Quebec and $663.75 for those in Quebec.
For QPIP, the employee premium rate is 0.526 per cent and the annual maximum premium is $402.39.