No source deduction rate changes, no measures to reduce paperwork
THIS year’s federal budget does not contain any immediate source deduction rate changes for payroll, but it does propose a number of Employment Insurance (EI) and income tax measures that could affect employers and payroll departments in coming months.
The budget, which Finance Minister Bill Morneau tabled on Mar. 22, proposed a range of changes to EI that would mostly affect benefit claimants, such as extending the duration of benefits in certain regions of the country and relaxing the rules for claiming benefits for new workers and those re-entering the workforce.
The budget did, however, include the following proposals that may affect some employers:
• The government plans to extend its Working While on Claim Pilot Project until August 2018. The pilot project allows individuals who work while receiving EI benefits to earn the greater of $50 or 25 per cent of their weekly EI benefits before Service Canada reduces the benefits dollar for dollar. The pilot project was scheduled to end on Aug. 6.
• Service Canada will increase the maximum length of its Work-sharing Program from 38 weeks to 76 weeks. The program allows eligible employers to temporarily cutback on workers’ hours during an economic downturn. Instead of being laid off, employees share available work while receiving EI benefits for the days they are not working.
• The government will reduce the waiting period for EI benefits from two weeks to one week, beginning next January.
The budget did not contain any announcements on future EI premium rates. During last year’s election campaign, the Liberal Party said it would reduce EI premium rates from 1.88 per cent to 1.65 per cent in 2017. It also promised a 12-month EI premium holiday for employers who hire young people aged 18 to 24 years in 2016, 2017 or 2018.
The Canadian Federation of Independent Business (CFIB) said it was unhappy with the omission of the premium holiday from the budget.
"CFIB applauded the Liberals when they announced this measure, and we are deeply disappointed that they have abandoned this commitment," said CFIB President Dan Kelly.
CPP concerns
The CFIB, along with other business groups, also expressed concern about possible changes to Canada Pension Plan (CPP) contribution rates. Morneau did not propose any adjustments to CPP rates in the budget, but he left open the possibility of later rate increases.
The government plans to hold public consultations on ways to enhance the CPP. The federal and provincial/territorial governments are in discussions on possible changes to the plan, with a goal of making a decision by the end of the year.
Labour and social policy groups have called on the federal government to gradually raise CPP rates to fund more generous benefits for retirees. Business groups have generally opposed this, recommending instead that the government add a voluntary contribution to the CPP to pay for any benefit improvements.
The CFIB said it was alarmed that the government wants to reach an agreement on CPP expansion with the provinces/territories by the end of the year.
"If there was going to be one promise to defer in the budget given the state of the economy, it should have been the commitment to hike CPP/QPP payroll taxes," Kelly said.
"Two-thirds of small firms say they will have to freeze or cut salaries and over a third say they will have to reduce hours or jobs in their business in response to a CPP/QPP hike," he added.
While the budget did not propose any changes to personal income tax rates or tax brackets, it did include proposals that would affect some of the tax credits employees claim on a federal TD1, Personal Tax Credits Return.
The government plans to eliminate the education and textbook tax credits claimed on the form, as of next January. It also proposes to increase the maximum amounts that individuals can claim for living in a prescribed zone, beginning this year.
Individuals who live in the Northwest Territories, Nunavut, Yukon, or another prescribed northern zone for more than six continuous months in a calendar year may claim up to $8.25 for each day they live there or up to $16.50 per day if the individual is the only one in the household claiming the residency deduction. Residents living in prescribed Intermediate Zones can claim half of the amount. The budget proposes to raise the maximum deductions to $11 and $22, respectively.
The Canada Revenue Agency (CRA) has revised the federal TD1 to incorporate the change to the northern resident’s deduction.
Another income-tax related proposal that may affect payroll departments is a plan to reinstate a 15 per cent tax credit that applies to the purchase of shares of provincially registered labour-sponsored venture capital corporations (LSVCCs). The change would apply for 2016 and later tax years.
When calculating federal income tax deductions, payroll practitioners must subtract the LSVCC tax credit for the year, if applicable, from an employee’s annual basic federal tax. The credit is currently the lesser of $250 and five per cent of the amount deducted or withheld during the year for the employee’s acquisition of approved shares of the capital stock of a prescribed LSVCC.
The previous Conservative government announced in 2013 that it would phase-out the federal tax credit by lowering its parameters from $750 and 15 per cent to $500 and 10 per cent in 2015 and to $250 and five per cent in 2016. The tax credit was to be fully eliminated in 2017.
Stock options
One income tax proposal that was not in the budget was a change to the way the government taxes stock option taxable benefits. During the election campaign, the Liberals said they would limit the amount that employees can claim for stock option deductions. The Income Tax Act allows employees who meet certain conditions to deduct from their income 50 per cent of the amount of a taxable benefit related to a stock option.
Morneau said he left the measure out of the budget because during pre-budget consultants he heard from many in the business community that the deduction was a helpful way to attract and retain high-performers.
While payroll professionals may be relieved to know that they will not have to implement stock option deduction changes, they may have to contend with more CRA scrutiny.
The budget proposes to provide the CRA with $351.6 million over five years to improve its ability to collect outstanding taxes. Budget documents also state that the CRA will hire more auditors and tax specialists to improve tax compliance. The move could result in more audits of employers’ source deduction practices.
T4 disappointment
There was also some disappointment in the payroll community that the budget did not include measures to reduce paperwork for employers. The Canadian Payroll Association (CPA) said it was frustrated that Morneau made no mention of legislative or policy changes that would allow employers to issue electronic T4s to employees as a standard practise. Currently, employers need employees’ consent to issue their T4s electronically.
"We are disappointed that the federal government has not moved forward with this huge paper burden reduction, especially when the government distributes electronic T4s to its quarter‐million employees," said Patrick Culhane, president and CEO of the CPA.
The association said electronic T4s would save employers over $100 million a year and would not cost the government anything to implement. In addition, it said CRA data shows employers filed 88 per cent of the 26 million T4s produced in 2014 electronically and 86 per cent of Canadians filed their income tax returns electronically.
The association said it was also disappointed that the budget did not include measures to reinstate a threshold for retiree group term life insurance premiums. All employer-paid premiums for employee and retiree life insurance coverage are a taxable benefit. Before 1995, only premiums for group term life insurance policies of more than $25,000 were taxable.
"The CPA’s 2015 Employment and Retirement Benefits Survey of nearly 4,000 members identified that 62 per cent of retirees are covered under life policies of $25,000 or less. T4As are currently generated to report very small amounts of taxable benefits provided to retired employees for life insurance policies," the association said.
In addition, the CPA said it wanted to see changes to the taxable benefit threshold for moving allowances. It said, "(T)he $650 moving allowance, which has not been revised since 1984, currently reflects an unrealistically low reimbursement for moving costs. The threshold has not been adjusted for inflation and reasonableness."
The association said that in pre-budget consultations, it recommended that the federal government implement a moving allowance threshold that would be equivalent to two weeks’ salary.
"This change would also align with Revenu Québec’s policy and better reflect realistic relocation costs," it said.
