Canadian Tax Methods Calculations
This topic discusses:
Using Payline one-time deductions for entering before-tax deductions.
Calculating annual taxable income using the annualized tax method.
Calculating annual taxable income using the bonus tax method.
Calculating annual taxable income using the annualized and bonus tax methods.
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 topic 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).
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:
Regular pay period taxable earnings = 2,500.00 CAD
Pay period taxable benefits = 75.00 CAD
Pay period before-tax deductions (these are before-tax deductions the employee is enrolled in) = 200.00 CAD
Pay Period Taxable Earnings = 2,375.00 CAD
Annual Taxable Income = $2,375.00 x 26 pay periods = 61,750.00 CAD
Payline One-time Deductions (before-tax, Plan Type 4x) = 1,500.00 CAD
Adjusted Annual Taxable Income = 60,250.00 CAD
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.
This topic 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:
Regular pay period taxable earnings = 0.00 CAD
Bonus Tax Method taxable earnings = 15,000.00 CAD
Pay period taxable benefits (Benefit and General Deductions Taken were set to NONE) = 0.00 CAD
Pay period before-tax deductions (Benefit and General Deductions Taken were set to NONE) = 0.00 CAD
Pay Period Taxable Earnings are not applicable but the tax calculation process uses the employee's Job Record (Compensation) to derive a pay period taxable income. For this exercise, Pay Period earnings are 2,500.00 CAD and YTD Taxable Income is $40,000.00 with 10 pays remaining in the year, which includes the current pay period.
Annual Taxable Income = (Derived Pay Period Taxable Income 2,500.00 CAD x Pays remaining in the year 10) + YTD Taxable Income 40,000.00 CAD + the Bonus Tax Method taxable earnings 15,000.00 CAD = 80,000.00 CAD
Payline One-time Deductions (before-tax, Plan Type 8x) = 7,250.00 CAD
Adjusted Annual Taxable Income = 72,750.00 CAD
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:
The regular annualized tax calculation, which in this case would produce zero taxes for the pay period.
An initial bonus tax calculation including the bonus payment.
The bonus tax calculation excluding the bonus payment where the net of these two bonus tax calculations is the income tax on the bonus payment that is set up to be taxed on the bonus tax method.
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.
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. 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" topic. The Bonus Tax Method follows the steps outlined in the "Calculating Annual Taxable Income Using the Bonus Tax Method" topic 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:
Regular pay period taxable earnings = 2,500.00 CAD
Pay period taxable benefits = 75.00 CAD
Pay period before-tax deductions (these are before-tax deductions the employee is enrolled in) = 200.00 CAD
Pay Period Taxable Earnings = 2,375.00 CAD
Annual Taxable Income = (2,375.00 CAD– 450.00 CAD) x 26 pay periods = 50,050.00 CAD
Payline One-time Deduction (before-tax, Plan Type 8x) = 1,500.00 CAD (to be applied in the Bonus Tax Calc)
Payline One-time Deduction (before-tax, Plan Type 00) = 450.00 CAD (to be applied against Pay Period Taxable Income)
Adjusted Annual Taxable Income = 50,050.00 CAD
The annualized tax calculation uses 50,050.00 CAD to derive the pay period income taxes.
Bonus tax calculation:
Regular pay period taxable earnings = 2,500.00 CAD
Bonus Tax Method taxable earnings = 15,000.00 CAD
Pay period taxable benefits (Benefit and General Deductions Taken are set to NONE) = 75.00 CAD
Pay period before-tax deductions (Benefit and General Deductions Taken are set to NONE) = 200.00 CAD
Payline One-time Deduction (before-tax, Plan Type 8x) = 1,500.00 CAD (to be applied in the Bonus Tax Calculation)
Payline One-time Deduction (before-tax, Plan Type 00) = 450.00 CAD (to be applied against Pay Period Taxable Income)
Pay Period Taxable Earnings are applicable and the tax calculation process uses this information to derive a pay period taxable income. For this example, the Pay Period earnings are 2,500.00 CAD and the YTD Taxable Income is 40,000.00 CAD with 10 pays remaining in the year, which would include the current pay period.
Annual Taxable Income = (regular pay period taxable earnings 2,500.00 CAD + taxable benefits 75.00 CAD – before-tax deductions 200.00 CAD – Payline One-time Deduction for Plan Type 00 450.00 CAD) x Pays remaining in the year 10) + YTD Taxable Income 40,000.00 CAD + the Bonus Tax Method taxable earnings 15,000.00 CAD = 74,250.00 CAD
Payline One-time Deductions (before-tax, Plan Type 8x) = 1,500.00 CAD
Adjusted Annual Taxable Income = 72,750.00 CAD
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.