It’s a great question, and if the answer is no we encourage you to develop a TD1 process. In fact, it is a best practice for organizations to have such process to ensure legislative obligations are in place in relation to deducting prescribed income taxes from your employees.
On Boarding / New Hire Package
As a first step, the TD1 forms (federal and provincial including Quebec Form TP-1015.3-V, Source Deductions Return) should be part of your new hire or onboarding package. It is important that you communicate and remind employees about their obligations in terms of changes to their personal tax credits. Onboarding and year-end are great opportunities to do so and fits nicely in terms of deploying an annual TD1 process.
You should explain to your employee that they must fill out federal and provincial (if applicable) TD1 forms and return them to Payroll/HR once complete. A provincial TD1 form is required if more than the basic personal amount is claimed on the federal form. The forms are used to establish income tax withholdings and both CRA and RQ will review the forms in a payroll audit. Make sure you have a timeline for the forms to be returned to Payroll. If your employee does not fill out a TD1 form, use the code that corresponds to the basic personal amount.
You should let your employees know that if they have more than one employer or payer at the same time and have already claimed personal tax credit amounts on another TD1 / TP-1015.3-V form, the employee cannot claim them again. If the employee’s total income from all sources will be more than the personal tax credits claimed on another TD1 / TP-1015.3-V form, they must check the box “More than one employer or payer at the same time” on page 2 of the TD1 form, enter “0” on line 13 on page 1 and not fill in lines 2 to 12. On the Quebec provincial form the employee should proceed to line 10 on the form and enter “0”.
As an employer, you must collect completed forms on the basis of the employee’s province of employment. In particular you should know how to deal with and be able to explain to your employee what to do if the employee lives in one province or territory and works in another.
An employee who lives in one province or territory but reports to your place of business in another province or territory might have too much tax deducted. If so, they can ask you to reduce tax deductions by getting a letter of authority from the appropriate Taxpayer Services Regional Correspondence Centre. Your employee will have to give you a letter of authority from a tax services office in order for you to reduce remuneration on which you have to deduct tax.
To obtain a letter of authority, the employee has to send Form T1213, Request to Reduce Tax Deductions at Source, or a written request to the appropriate Taxpayer Services Regional Correspondence Centre. For a complete list of these centres and their address, go to Letter of authority and click the link “Where to send the request“. The employee should include documents that support their position why less tax should be deducted at source. CRA will usually issue a letter of authority for a specific tax year. If an employee has a balance owing or has not filed outstanding income tax and benefit returns, CRA will not usually issue a letter of authority.
Similarly, a Quebec employee may request a reduction of tax at source and must apply to Revenu Quebec. The employee will need to complete and submit a completed TP-1016-V form, Application for a Reduction in Source Deductions of Income Tax.
Keep all letters of authority with your payroll records in case of audit.
There might be situations where an employee might not have enough tax deducted, again as a result of living in one province and working in another. In these situations, the employee should ask to deduct more tax by filling in the “Additional tax to be deducted” section of a new Form TD1, Personal Tax Credits Return and or line 3 Additional tax section of the TP-1015.3-V and returning Payroll.
Employees can choose to have more tax deducted from the remuneration they receive in a year. To do this, they have to provide a federal Form TD1 and TP-1015.3-V to their employer that shows how much more tax they want deducted. This amount stays the same until they give their employer a new TD1 form and or Quebec equivalent. Quebec also publishes form TP-1017-V, Request to have additional income tax withheld at source. The Quebec employee may use this form to request additional provincial income tax, or to cancel a previous additional tax request.
Similarly, you should advise part-time employees that it could be beneficial to have more income tax deducted from the remuneration they receive. The employee may be able to avoid having to pay a large amount of tax when they file their income tax and benefit returns, especially if they have worked part-time for different employers during the year.
Finally, remind the employee that they should fill out new TD1 forms within seven days of any change that may result in a change to their personal tax credits for the year. For Quebec, a new form is required within 15 days of any change/s to their personal tax credits.
As part of year-end communications, let employees know that they do not have to fill out new TD1 forms every year if their personal tax credit amounts have not changed. Inform employees that a new form is required to be completed if their personal situation has changed, or they wish to change any of the personal tax credits they are claiming.
Options for your communication:
- Communicate to all employees that new TD1 forms are only necessary if there have been changes to their personal situations. The payroll system then reverts all employees claim amounts to new basic claim amount with the first pay of the new year. You will need to validate with your system or service provider what functionality exists from a TD1 perspective. Some system functionality will also allow for automatic indexing of claim amounts.
- Some employers extract basic claim data from their system through business intelligence reporting and then structure the communication to those employees claiming other than the basic claim amount. Communication should include advising these individuals to complete new forms and submit to Payroll for processing prior to the first pay of the new year, otherwise their claim amount will be reverted to basic. As above you will need to review your system functionality in terms of TD1 resets.
Do you make TD1 forms available electronically?
Hopefully you answered this question with Yes. If not, consider doing so. As an employer, you may create a federal and/or provincial or territorial TD1 Personal Tax Credits Return form and have your employee send it to you electronically rather than send you the actual completed Form TD1.
The Canada Revenue Agency (CRA) and Revenu Quebec (RQ) cannot provide you with any advice or guidance in developing an electronic product. As long as the following conditions are met, you will be allowed to create, maintain, and store the TD1 Personal Tax Credits Return forms electronically (and Quebec equivalent). Since there will be no written signature on the TD1/TP-1015.3-V, security measures must be in place to authenticate the employee’s identity, for example a password system or an employee self-service portal.
In addition, the electronic forms have to:
- be made available and accessible to the CRA/RQ when requested and be maintained in a format that can be read by representatives of the CRA/RQ
- mirrors the CRA/RQ approved TD1/TP-1015.3-V paper form
- include a certification confirming that the information given by the employee is accurate. For example, clicking on a button saying “I agree” to a statement that is similar to the certification statement on the paper Form TD1 / TP-1015.3-V return (i.e. the information is correct and complete to the best of his or her knowledge)
- be in a format that cannot be altered. In other words changes can only be made if your employee submits a new Form TD1 / TP-1015.3-V
- include a date so you can tell when your employee submits a new Form TD1 / TP-1015.3-V to you
- meets all of the CRA’s general guidelines on record retention and on electronic records, which can be found in information circular IC78-10R, Books and Records Retention/Destruction
Finally, the use of the electronic form will not relieve you of your responsibility to review the completed forms for reasonableness. You should communicate with a tax services office if you have any concerns that a completed Form TD1 / TP-1015.3-V might contain a false or deceptive statement.