Appendix: (CAN) Canadian Tax Method Calculations

This appendix discusses:

Click to jump to parent topicUnderstanding Canadian Tax Methods

This section discusses:

Click to jump to parent topicBonus Tax Method

This calculation method depends upon whether the bonus payment is included with the regular earnings (using the annualized tax method) or the bonus payment is paid on a separate cheque.

Note. Any payment that is using the bonus tax method is referred to as a "bonus payment" for the purpose of this documentation.

Click to jump to top of pageClick to jump to parent topicBonus Included with Regular Earnings

When bonus is included with Regular Earnings (annualized tax method), in addition to the 3 Calculation Steps outlined, the first 2 Steps are to calculate pay period income taxes on the Regular Earnings using the Annualized Tax Method.

Calculation Step 1 – Determine annual taxes payable by annualizing the Regular Earnings.

Calculation Step 2 - Determine pay period income taxes for the Regular Earnings.

The following table shows how the system calculates the tax payable when the bonus is included with regular earnings:

Calculation Step

Calculation Input

Calculation Output

1. Determine annual taxes payable using annualized earnings including the bonus payment.

The following will derive annual taxable gross:

(CIT taxable earnings gross year-to-date [YTD], including YTD bonus) + (current annualized tax method earnings Х no. of pays remaining in the year including the current period) + (current bonus payment)

Perform tax calculation and the result will be annual income taxes which for this exercise will be Base Amount A.

2. Determine annual taxes payable using annualized earnings excluding the current bonus payment.

The following will derive annual taxable gross:

(CIT taxable earnings gross YTD, including YTD bonus) + (current annualized tax method earnings Х no. of pays remaining in the year including the current period)

Perform tax calculation and the result will be annual income taxes which for this exercise will be Base Amount B.

3. Determine pay period income taxes payable on the bonus payment.

The following will derive pay period income taxes on the bonus payment: (Base Amount A – Base Amount B)

Pay period income ax payable on bonus payment.

4. Determine pay period income taxes for the Regular Earnings and the Bonus payment.

The following will derive pay period income taxes for both Regular Earnings and the Bonus payment:

Pay period income taxes on the Regular Earnings + Pay period income taxes on the Bonus payment

Total pay period income taxes for this combined payment (cheque).

Click to jump to top of pageClick to jump to parent topicBonus Paid on a Separate Cheque

This table shows how the system calculates the tax payable when the bonus is paid on a separate cheque with no regular earnings:

Calculation Step

Calculation Input

Calculation Output

1. Determine annual taxes payable based on estimated annualized earnings including the bonus payment.

The following will derive projected annual taxable gross: (CIT taxable earnings gross YTD, including YTD bonus) + (pay period pay rate from the employee's Job Data record X No. of pay periods remaining in the year including the current pay period) + (current bonus payment)

Perform tax calculation and the result will be annual income taxes which for this exercise will be Base Amount A.

2. Determine annual taxes payable based on estimated annualized earnings excluding the current bonus payment.

The following will derive projected annual taxable gross:

(CIT taxable earnings gross YTD, including YTD bonus) + (pay period pay rate from the employee's Job Data record X No. of pay periods remaining in the year including the current pay period)

Perform tax calculation and the result will be annual income taxes which for this exercise will be Base Amount B.

3. Determine taxes payable on the bonus payment.

(Base Amount A – Base Amount B)

Tax payable on bonus payment.

The estimated projected earnings from the employee's Job Data record is calculated by this formula: (annual rate from the employee's Job Data record / no. of pays in the year to derive a pay period rate) × number of pays remaining in the year including the current period.

Click to jump to parent topicCommission Tax Method

In order for the Commission Tax Method to work as designed, the Commission group boxes must be completed on the Quebec Income Tax Data page.

If the Commission group boxes are not completed, the tax calculation process defaults to the Annualized Tax Method.

The following outlines the method that is used in calculating CIT (federal and provincial excluding Quebec) and QIT using the commission tax method.

Note. Any payment that uses the commission tax method is referred to as a "commission payment" for the purpose of this documentation.

Click to jump to top of pageClick to jump to parent topicCIT Commission Tax Calculation

This table shows how the system calculates the tax payable (CIT) on a commission payment:

Calculation Step

Calculation Input

Calculation Output

1. Establish the net annual taxable income from the Commission group box on the Canadian Income Tax Data page.

(income reported in the Commission group box) – (expenses reported in the Commission group box)

(after calculation) Annual taxable income.

2. Determine annual taxes payable.

Apply the annualized tax method to the annual taxable income

(after tax calculation) Annual tax payable.

3. Determine pay period taxes payable.

[(commission payment on current cheque) / (income reported in the Canadian Income Tax Data page)] Х annual tax payable

(after calculation) Tax payable on the current commission payment.

Click to jump to top of pageClick to jump to parent topicQIT Commission Tax Calculation

Unlike the federal Statement of Commission Income and Expenses For Payroll Tax Deductions (TD1X) that is used to estimate the net annual taxable income amount, the Quebec Statement of Commissions and Expenses For Source Deduction Purposes (TP-1015.R.13.1-V) establishes a ratio to annualize the current cheque's commission payment.

For Quebec provincial tax, the current cheque's commission earnings is annualized using the ratio determined by the income and expenses reported in the Commission group box on the Quebec Income Tax Data page.

This table shows how the system calculates the QIT payable on a commission payment:

Calculation Step

Calculation Input

Calculation Output

1. Derive the ratio to apply to the current cheque's commission earnings amount to calculate annual income.

[(income reported on the Quebec Income Tax Data page) – (expenses reported on the Quebec Income Tax Data page)] / (income reported on the Quebec Income Tax Data page)

(after calculation) Ratio of commissions to be included.

2. Apply the derived ratio against the current cheque's commission payment to determine the annual taxable income.

(ratio of commissions to be included) Х (commission payment on current cheque) Х (annual factor)

(after calculation) Annual taxable income.

3. Determine the QIT payable for the pay period.

Apply the annualized tax method on the annual taxable income

(after tax calculation) Tax payable on the current commission payment.

Click to jump to parent topicLump Sum Tax Method

The lump sum tax method determines the withholding for the payment (earnings code set up using the Lump Sum Tax Method) using the corresponding rate(s) specified on the Federal CIT Lump-Sum Rates (federal Canadian income taxes lump-sum rates) group box or Quebec (QIT) Lump-Sum Rates (Quebec [Quebec income taxes] lump-sum rates) group box on the Tax Rates, Credits, and Other page.

This table shows how the system calculates the lump sum tax method:

Calculation Step

Calculation Input

Calculation Output

1. Establish the applicable tax rate to use from the Tax Rates, Credits and Other page - Federal (CIT) Lump Sum Rates and if Quebec applies, also use the Quebec (QIT) Lump Sum Rates.

Select the applicable rate to use based on the amount of the payment; for Quebec, also select the appropriate rates (CIT and QIT)

Selected tax rate(s).

2. Determine the CIT payable for the payment ; if Quebec, determined both CIT and QIT payable for the period.

(Lump-sum payment) Х (selected rate(s))

(after tax calculation) Tax payable on the current lump-sum payment; if province is Quebec, both CIT and QIT are calculated.

Click to jump to parent topicCanadian Tax Methods Calculations

This section discusses:

Click to jump to top of pageClick to jump to parent topicUsing Payline One-Time Deductions for Entering Before-Tax Deductions

Consultation with the Canada Revenue Agency (CRA) has prompted PeopleSoft to revise our treatment of one-time before-tax deductions associated with specific taxation methodologies. This section discusses the revised methods that PeopleSoft uses to handle before-tax one-time deductions and provides examples of each method.

PeopleSoft's basic methodology is to derive Pay Period Taxable Gross as: Taxable Earnings plus Taxable Benefits less Before-Tax Deductions.

The calculation methodology the system uses to derive Annual Taxable Income depends on the tax method that is used (annualized, bonus, or both annualized and bonus on a single cheque).

Click to jump to top of pageClick to jump to parent topicCalculating Annual Taxable Income Using the Annualized Tax Method

For the regular annualized tax method, the calculated Pay Period Taxable Gross is multiplied by the number of pay periods in the year.

When you use Payline One-time Deductions to enter before-tax deductions for Plan Type 8x (Pension Plans) and Plan Type 4x (Savings Plans) using the Override feature, the system excludes these entries when determining Pay Period Taxable Gross, but reduces Annual Taxable Gross on a one-time basis.

Example: Annualized Tax Calculation

Annualized Tax Calculation (Bi-weekly payroll – 26 pay periods), derive annual taxable gross:

The annualized tax calculation uses $60,250.00 to derive the pay period income taxes.

Note. If one of the pay period before-tax deductions is to be entered as a one-time deduction on Payline One-time Deductions, use the Override feature for the amount to be inclusive of the pay period deduction. If you use Addition instead of Override, the total amount reduces the Pay Period Taxable Income.

Click to jump to top of pageClick to jump to parent topicCalculating Annual Taxable Income Using the Bonus Tax Method

This section applies to the bonus tax method with no annualized tax method earnings, only the single tax set (bonus). To calculate reasonable results based on the formulas provided, Pay Period Taxable Gross is established from the employee's Job Record (compensation) and multiplied by the number of pay periods remaining in the pay year plus the employee's YTD taxable gross.

When you use Payline One-time Deductions to enter before-tax deductions for Plan Type 8x (Pension Plans), Plan Type 4x (Savings Plans), and Plan Type 00 (General Deductions) using the Override feature, these entries reduce the Annual Taxable Gross on a one-time basis. Although not recommended, if Addition (instead of Override) were used and combined with the employee's enrolled amount, this would also be treated as a one-time reduction to the Annual Taxable Income.

Entries that you create for before-tax deductions for Plan Type 8x (Pension Plans), Plan Type 4x (Savings Plans), and Plan Type 00 (General Deductions) using the Deduction Subset feature reduces Annual Taxable Gross on a one-time basis.

Note. The design is intended to accommodate specific Plan Types (8x, 4x and 00). However, to eliminate the potential creation of Pay Period Taxable Income the design allows for any before-tax deductions to be entered through the Payline One-time Deductions page. ALL (all Plan Types) before-tax deductions that you enter through Payline One-time Deductions reduce Annual Taxable Income. This produces reasonable results in comparison to allowing this scenario to have multiple tax sets (annualized and bonus).

Example: Bonus Tax Method with Payline One-Time Deductions (Single Tax Set Only)

In this scenario, the employee's deductions are likely to be based on a Deduction Subset, however, to simplify this example Benefit and General Deductions Taken is set to None on Paysheets/Paylines for the employee. This stops any deductions the employee is enrolled in from being taken. However, entries that you create for before-tax deductions for Plan Types 8x, 4x and 00 in Payline One-time Deductions, reduce Annual Taxable Income rather than Pay Period Taxable Income.

Note. ALL (all Plan Types) before-tax deductions are treated as a reduction to Annual Taxable Income.

Bonus tax calculation: (Bi-weekly payroll – 26 pay periods); derive annual taxable gross:

The $72,750.00 is used in the tax calculation process, which includes the payment of the Bonus Tax Method earnings. When calculating the income taxes on the payment subject to the Bonus Tax Method, the system performs three tax calculations:

In the case of regular pay period deductions, if Taxable Benefits and/or before-Tax deductions were processed, multiple tax methods (Annualized and Bonus) would be applicable as a Pay Period Taxable Gross would have resulted. Because the Pay Period Taxable Gross would have been negligible, the results would have been distorted and likely inaccurate.

The same example can be applied using a deduction subset for the Benefits and General Deductions Taken fields on the paysheets/paylines. You can enter a deduction subset individually on paysheets/paylines or by creating an Off-Cycle Pay Calendar entry to generate paysheets/paylines with Benefits and General Deductions Taken set to Subset XXX for a pay run for bonus payments specific to the Bonus Tax Method.

The pay calculation process would be the same since the before-tax deductions (Plan Type 8x, 4x and 00) included in the SUBSET, reduce Annual Taxable Income.

Note. Although Payline One-time Deductions is not used, with only the Bonus Tax Method applicable, ALL the before-tax deductions are treated as one-time reductions to Annual Taxable Income.

Click to jump to top of pageClick to jump to parent topicCalculating Annual Taxable Income Using the Annualized and Bonus Tax Methods

The following describes the calculations when both the annualized and bonus tax methods are applicable on a single cheque. The initial calculation is Annualized, then Bonus and the results from the two are combined and reported on the single cheque.

Annualized tax method

For the Annualized tax method, the system calculates Pay Period Taxable Gross as usual (taxable pay period earnings plus taxable benefits less before-tax deductions). If you use Payline One-time Deductions to enter a before-tax deduction for Plan Type 8x and/or 4x using the Override feature, this deduction is used during the bonus tax method calculation. The deduction is not dependant on the payline that you enter it on if multiple paylines are applicable to segregate annualized tax method earnings versus bonus tax method earnings. This produces accurate ‘annualized' pay period income taxes.

Bonus tax method

For the Bonus tax method, the system initially determines Annualized Taxable Income inclusive of the bonus tax method payment by using the employee's pay period taxable gross per the above multiplied by the pay periods remaining in the year (including the pay period that is being run) plus the employee's YTD taxable gross plus the bonus tax method payment. With the Override Payline One-time Deduction entry for Plan Type 8x and/or 4x, this amount reduces Annual Taxable Income. In order to calculate income taxes specific to the bonus payment, the system now determines the Annualized Taxable Income excluding the bonus tax method payment by using the employee's pay period taxable gross per the above multiplied by the pay periods remaining in the year (including the pay period being run) plus the employee's YTD taxable gross. The Override Payline One-time Deduction entry for Plan Type 8x and/or 4x reduces Annual Taxable Income. This process produces accurate results provided the employee's Pay Period Taxable Gross is representative of their normal pay period taxable earnings. The resulting net of the above two calculations is the income tax on the bonus payment.

When multiple tax sets (annualized and bonus) are applicable, during the bonus tax calculations, Plan Type 00 (General Deductions) before-tax deductions when entered as Override entries on Payline One-time Deductions are not treated the same as Plan Type 8x and 4x. These (Plan Type 00) entries reduce Pay Period Taxable Gross. When the Bonus Tax Method is the only tax method applicable, Plan Type 00 before-tax deductions reduce Annual Taxable Income.

Note. To generate the best possible results when one-time reductions to Annual Taxable Income are desired, PeopleSoft recommends that you do not combine tax methods on a single cheque to create a multiple tax set situation where the Bonus Tax Method is one of them.

Example: Annualized and Bonus Tax Method on One Cheque with Payline One-Time Deductions

Provided the Annualized Tax Method earnings are representative of the employee's regular pay period earnings, the resulting income taxes should be considered reasonable and acceptable.

The pay calculation process calculates income taxes based on each tax set and combines the results. The initial tax calculation is the Annualized Tax Method. The process follows the guidelines noted in the "Calculating Annual Taxable Income Using the Annualized Tax Method" section. The Bonus Tax Method follows the steps outlined in the "Calculating Annual Taxable Income Using the Bonus Tax Method" section with an exception in the way the system processes Payline One-time Deductions for Plan Type 00 (General Deductions). With the inclusion of the Annualized Tax Method, any before-tax deduction (Plan Type 00) entries entered as Override are applied against the Pay Period Taxable Income during the calculation of the Annualized Tax Method. Therefore, when this multiple tax set situation is applicable, only Payline One-time Deduction entries for Plan Type 8x and 4x reduce Annual Taxable Income during the Bonus Tax Method calculation.

Annualized tax calculation: (Bi-weekly payroll – 26 pay periods); derive annual taxable gross:

The annualized tax calculation uses 50,050.00 CAD to derive the pay period income taxes.

Bonus tax calculation:

The 72,750.00 CAD is used in the initial tax calculation process, which includes the payment of the Bonus Tax Method earnings. The next tax calculation process will use the same as itemized above but exclude the Bonus Tax Method taxable earnings (15,000.00 CAD). The net result of these two tax calculations determines the income taxes specifically on the Bonus Tax Method taxable earnings.

Combine the annualized pay period income taxes with the income tax on the bonus payment subject to the Bonus Tax Method to derive the income taxes applicable to the single cheque.