Government employees who’ve been contending with the beleaguered Phoenix payroll program now face a fresh headache: tax season.
“If they get one that’s not, we’re encouraging them to get in touch with us and we’ll make sure they get the right T4,” she added.
The ministry has been working closely with the Canada Revenue Agency and unions representing public servants to draft online guidelines detailing how to deal with erroneous and amended paycheques at tax time.
But the process remains anything but straightforward.
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“There is zero chance that there won’t be problems at tax time,” said Debi Daviau, president of the Professional Institute of the Public Service of Canada, which represents scientists and professionals in the public sector.
Tens of thousands of current and former federal workers have been overpaid, underpaid or not paid at all since the government rolled out its new, consolidated Phoenix payroll system last spring.
Especially concerning from a tax point of view is the case of public servants who received more money than they should have. Phoenix has overpaid nearly $70 million to more than 26,000 employees and reached repayment agreements for only $22.3 million, or about a third of the funds, CBC reported.
Those who have not yet arranged for repayment may now face a much higher tax bill for money they will eventually have to return.
The CBC reported two instances of overpayments worth more than $100,000, with one former researcher reportedly receiving as much as $662,777 in one lump sum.
The government appears to be prioritizing the processing of overpayment cases, said Daviau, but reaching a repayment arrangement remains a hurdle.
It isn’t just a matter of picking up the phone and notifying the federal government of the payroll error, she noted. First, you have to be one of the lucky ones who actually manages to get someone on the phone. Then the government has to assess exactly how much has been overpaid and come up with a repayment plan, which Daviau estimated could take between six weeks and a year.
Many public servants don’t even have access to the information they need to assess whether they’ve been overpaid and by how much, she added.
Even those who were underpaid or unpaid may have to shoulder higher taxes, if they resorted to cashing out some of their investments as emergency funds.
In general, many of the federal workers who have already spent hours on the phone trying to sort out their paycheques now face a tortuous tax filing process that may require assistance from a professional tax preparer.
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“People find taxes complicated to begin with, but trying to track and ensure that you file these tax adjustments now is going to be a burden,” said Daviau.
Here’s an overview of the CRA guidelines.
Those who repaid or made arrangements to repay the money in 2016 shouldn’t face any issues. They will receive tax slips reflecting their correct salary amounts, according to the CRA.
Those who reached a repayment agreement in 2017 will have to pay extra tax but will likely receive a refund after filing their return.
Those who received smaller paycheques in 2016 will likely see lower income taxes in 2016 and a higher tax bill in 2017, when make-up payments for the previous year come in.
Still, people who had to sell some of their investments in order to keep up with bills may face some unpleasant surprises. If the withdrawals came out of a TFSA, there are no tax implications. However, if the emergency funds came out of RRSP accounts, that money will likely count as extra taxable income. The withdrawal will also shrink the amount of contribution room available.
Those who sold investments outside TFSAs and RRSPs may also see higher taxes.
Thankfully, there is no tax on compensation paid by the government to employees that faced fines as a result of missing bill payments.
Who might need to file an amended return
Workers affected by Phoenix might want to avoid filing their taxes early this year. That’s because if they send in their returns and then receive a second, amended tax slip from the government, they will have to file their taxes all over again after receiving the CRA’s Notice of Assessment.