It's been a really tough year for a lot of my friends here in Western Canada. Towards the end of last year, news stories about job losses in Alberta were the most important newsmaker of the year. It's unfortunately a familiar story for a lot of employees who work in the oil patch.
But beyond that, it's also hitting newsrooms across Canada and other provinces, where people are falling on tough economic times.
When people come into my office, I hate to hear "Caroline, it's been a rough year and I had to go on EI. I can't wait for my refund." In reality, there's a very good chance they're not getting one and could possibly owe money this year.
Of course, being off work isn't always all bad. For some who take a year to be with their newborn child, having access to EI benefits and premiums can be a good thing.
If you have gone or are about to go on parental leave, know that Service Canada does not necessarily withhold enough tax from your EI payments to cover your tax bill. The amount of tax deducted from these benefits doesn't take into account any salary or top-up benefits you received from your employer prior to going on mat leave. True to form, I find that a lot of clients, especially those who took parental leave, are being caught off guard by owing money.
So, a good rule of thumb to avoid this situation is to set aside five per cent of EI the payments you receive so that, come tax time, you are at least in line with the minimum federal tax bracket. Ten per cent would be even better if you can manage it.
But what else should a person do or know about managing their taxes while on EI?
A good place to start is understanding how much you made last year. Your tax obligation will be based on your total income. That includes employment income, investment income, business income and government benefits.
So, for example, if you were employed from January to August of last year and earned $45,000, you are in what is commonly referred to as the second tax bracket which is taxed 22 per cent federally. When you add in provincial tax, your total taxable income could be up around 30 per cent.
If you were laid off in August and received EI for the last four months of the year, you must keep in mind the government is only withholding 10 per cent, but because your total income for the year will still have you in the second tax bracket, you will owe approximately an additional 20 per cent at tax time.
Finally, while times are tough, make sure you understand all the implications if you withdraw early from your RRSP. While the need for temporary relief may be great, it will actually come back to haunt you at tax time. Not only will you have to pay a withholding tax at the time of withdrawing funds, come May 2 it's also considered taxable income.
I wish it could be that, as a tax pro, I'm always providing people with advice during the happier times of life. But the truth is, even the hardest situations have tax implications and require that people take some time to focus on preparing as best they can to ensure they come out whole at tax time.
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