Hi Arjoon.
This may be a hard one, and I understand SAP may have to do a big re-design.
However, with regards to irregular earnings (I refer to retro earnings here, as bonus in one pay period will have not such big impact) SAP tax engine is not following the formula.
About 3-4 year back SAP used the optional method to option 1 formula for bonus/irregular earnings.
Since SAP moved into using Option 1 to optional earnings, we run into several issues. The latter one was with one of my clients that had a large past retro.
Even if we have a new note, SAP tax engine is still not following the Option 1 method formula. It would have been better it optional method formula would have been used.
In a few words... A recent fix was released, and that fix is not compliant. The special circumstance should not limit what is implemented in the tax engine released by SAP. If SAP is compliant, then it should follow the tax formula, that is simple to me.
So... we had an issue, and we discussed with SAP and well and CRA. As per SAP, and mathematically, the formula is correct. However, SAP doesn't follow the formula as prescribed clearly in the CRA guide, which I will not tag in this message as everyone has access to this info.
So... We have an issue. The issue is related to how tax-exempt deductions are carried through Arrears table. That is all so fine with all of us as we avoid all the problems with it. However, in situations where the bonus/irregular earnings are really high (due to really high retro earnings), the short cuts that SAP took into the formula will not work.
When a large retro increase carries into the early payroll period of a new year, there is nothing that SAP can do with standard settings, to deduct close to appropriate tax. This, nothing to do with what the clients setup in their system, neither T511k constants, nor T51P1 settings for R1, R2, R4.
The problem is the mathematical assumption that was taken when the tax engine was changed from optional method to Option 1 to Option 1 method. But Option 1 method cannot be truly performed in a mathematical formula unless SAP changes completely how the tax-exempt items such as pension and union dues exemptions are carried forward to the current pay period.
So, Option 1 requires that if we have a retro portion of taxable income, that should be considered in the formula at item number B in the below formula