Overview

Canada supports the General Tax Formula method of tax calculation:

With this calculation method, depending on the type of earnings paid, the tax formulas determines the tax deduction amount:

• Regular

• Nonperiodic

• Lump Sum

Regular

The regular taxation formula applies to payments made on a regular basis, for example, salary paid to an employee. This formula aggregates the total annual amount, reduces the personal exemption amount from it and then determines the tax deduction.

Nonperiodic

A nonperiodic taxation formula is used for infrequent payments that can't be annualized accurately, for example, bonus paid to an employee. In this case, the tax formula uses the annualized wage (from the regular tax run), and then adds the nonperiodic payment on top of this. The tax deducted is the difference between tax deducted from annualized regular payments, and tax deducted on the annualized regular payments plus the nonperiodic payment.

Lump Sum

Lump sum payments (also referred to as single payment) include income from pensions and Deferred Profit Sharing Plans received when leaving a plan. They also include payments like severance or retiring allowance when leaving a company. All lump sum payments should be combined when determining the composite rate to use for income tax.

Federal Tax Calculation Methods

The Federal level tax calculation methods available for regular or nonperiodic payments include:

• Federal Tax Calculation Method- Regular:

  • Option 1- General Tax Formula

• Federal Tax Calculation Method- Nonperiodic

  • Regular Bonus Calculation

  • Year to Date Bonus Calculation

Provincial Tax Calculations

The Provincial level tax calculation method for regular and nonperiodic payments include:

• Provincial Tax Calculation Method- Regular:

  • Regular Payments

• Provincial Tax Calculation Method- Nonperiodic

  • Bonus,Retroactive Pay or Lump Sum Payments- Method 1

Organizational Tax

The organizational tax attributes that Canada supports include:

• Tax Multiple Payments as One

  A payee may have multiple assignments, with each assignment consisting of different tax information. You have an option to combine all payments from the various assignments and tax them all as one payment. This is an option set at the payroll statutory unit (PSU) or tax reporting unit (TRU) level, with an override at the payroll relationship level. This option relates to both federal and provincial levels of taxes.

• Self-Adjust Methods

  The Self-Adjust Method determines the calculation of withholding for taxes taken as a percentage of earnings, until an employee's earnings reach an upper earnings limit. The Self-Adjust Method bases withholding calculations on year-to-date earnings instead of earnings this period. This method is captured at the PSU or TRU level, with an override at the payroll relationship level. This option relates to both federal and provincial levels of taxes.

  The Self-Adjust Method is applicable for the calculation of:

  • Canada Pension Plan

  • Employment Insurance

  • Quebec Pension Plan

  • Quebec Parental Insurance Plan

  The Self-Adjust Method has these three options:

  • Self-Adjust

  • No Self-Adjust

  • Self-Adjust at Maximum

• Employment Insurance (EI) Rate Per TRU

  Employment Insurance is a federal tax that applies to both employees and employers, as they both contribute to this tax. EI is calculated from the first dollar earned, with no exemption and an annual maximum contribution limit is applicable. No override is necessary for the EI rate assigned to the TRU.

  If multiple rates are required for different employee populations, you must create a new TRU for each rate. A separate Employer Account Number is issued to each new TRU to report the EI amounts.

Lump Sum Self Adjust

Federal lump sum withholding tax rates are based on an employee’s cumulative total lump sum earnings for the year. Use the option Lump Sum Self Adjust Method to specify how to handle those lump sum earnings, more specifically to apply a self-adjust method or not to those earnings.

Values for the Lump Sum Self Adjust Method available are:

• Blank (default)

• Self Adjust

• No Self Adjust

When processing, the system will consider lump sum settings in this order:

• Federal Lump Sum Rate (tax card override for employee)

• TRU Lump Sum Method

• PSU Lump Sum Method

Employees who receive multiple lump-sum payments are taxed appropriately using the following logic:

• Current lump sum is added to the YTD lump sum earnings for a cumulative total of all lump-sum payments made during the year.

• Appropriate tax rate is applied to the cumulative total to calculate the annual withholding.

• Withholding for the current payment is then calculated by subtracting the taxes already withheld from previous payments.

Note: Tips and considerations of Lump Sum Self Adjust Method:

• This feature only impacts employers who pay their employees multiple lump sum payments in the year.

• Adjustments are done within the context of the TRU.

• The Lump Sum Self Adjust method doesn't apply to Quebec because, unlike the Federal Government, Quebec treats each lump-sum payment as a single, distinct payment that's taxed independently.

• Blank and No Self Adjust represent the same behavior, which is the system default, meaning the system will perform as it does today, with no self-adjust on lump sum earnings.

• Self adjustment for the federal lump sum tax amount and rate for non-Quebec residents applies only to lump sum payments earned in Canadian provinces and territories outside of Quebec.

• Self adjustment for the federal lump sum tax amount and rate for Quebec residents applies only to lump sum payments earned within Quebec.

• Lump sum payments paid to non-residents of Canada are handled separately by the Lump Sum Self Adjust method, but since there's currently only one rate available for non-residents, there's no impact on tax calculations.