Most Canadians will generate employment income at some point in their adult life. Employment income requires cooperation from both the employer and employee:
- The employer is responsible for deducting the source deductions periodically which include contributions from both the employer and employee. They are also responsible for paying the source deductions to the Receiver General on a monthly basis.
- The employer is also responsible for generating T4s and other employee related schedules to CRA at the end of the calendar year.
- The employee is responsible for filing their tax return at the end of the year, which includes reporting their employment income and other sources of income.
- Employees with multiple sources of income also have the responsibility of ensuring they are being deducted enough taxes. Otherwise, without adjusting their source deductions today, they could owe the Government during tax season.
Most employers would deduct the following source deductions:
- Income Tax
- Employment Insurance Premiums
- Canadian Pension Plan
- Medical/ Dental Benefits (If it is split contributions)
Other deductions that could appear; depending on your place of employment and job:
- Union Dues
- Repayments of Payroll Advances.
Residents of Quebec are deducted Quebec Tax Payable, Quebec Pension Payable, and Quebec Parental Insurance Plan on their pay cheques.
The following is a quick summary of the major source deductions and other programs:
Upon starting any job, one of the forms you and/or the employer are responsible for is filing a TD1 (Personal Tax Credit Returns) for federal income tax, as well as a provincial form. The following CRA link has the 2014 forms listed both federal and the individual province forms:
The employer determines the amount of income tax that will be deducted over the year using this form. A great way to ensure you are being deducted enough taxes on each pay period is to use the CRA Payroll Deductions Online Calculator. CRA has a free Online Calculator that does require any personal information:
If you have multiple source of employment income, you should be aware that your total income will place you in a high income bracket; thus having to pay more income tax. For those who have multiple sources of employment income, ensure you have done the following steps:
- Ensure you are claiming the basic tax credits, on your TD1 forms, with your main employer. All other employers claim 0 on the TD1 forms (as instructed on the actual form). If you have employers who process your TD1 forms, and you have employment elsewhere; ensure they are not claiming basic tax credits. This will prevent you from being under contributing; therefore, causing you to owe during tax season.
- Be proactive with your source deductions. Add up your total monthly employment income and income tax deductions then multiply both by 12 to forecast your total employment income and income tax payments for the year. Compare those figures to an employment tax table, if there is a variance, contact the payroll department of your employer(s) to adjust your source deductions. Or, brace the shortfall before submitting your tax return by setting those funds aside in anticipation of paying CRA. There are many income tax calculators online, but for your reference check out the Ernst & Young 2014 Tax Calculator:
Speak with a tax professional if you are concerned about owing the Government.
Canadian Pension Plan – CPP
Regardless of your employment status, employee or self-employed, all Canadians generating employment income must contribute to CPP. The Canadian Pension Plan provides pensionable income at retirement. Canadians are advised not to rely solely on their CPP as the current generation gap between baby boomers and their children/ grandchildren may not leave enough for today’s youth at retirement.
CPP does provide other services; however, Canadians are advised to have sufficient savings and insurance policies to cover disability, estate transfers, and final expenses. At age 65 you are entitled to collect CPP (full allowable pension – depending on average income), as long as you have been contributing throughout years of employment. Individuals may also apply for Old Age Security to assist with securing a retirement income that potentially allows retired Canadians to cover at a minimum their bare necessities.
Canadians wishing to kick start their retirement early can collect their CPP; however, they will have a 42% reduction in their monthly pension compared to those who waited until age 65. Furthermore, those who wish to wait until age 70 could earn an additional 42% on their monthly pension.
Employment Insurance – EI
Love or hate it, many Canadians may never use Employment Insurance; however, it is a standard source deduction that employers withhold. Employment Insurance provides benefits within the following categories:
- Regular Benefits
- Available to individuals who lose their jobs through no fault of their own (for example, due to shortage of work, seasonal layoffs, or mass layoffs) and who are available for and able to work, but can’t find a job.
- Maternity and Parental Benefits
- Provides support to individuals who are pregnant, have recently given birth, are adopting a child, or are caring for a newborn.
- Sickness Benefits
- For individuals who are unable to work because of sickness, injury, or quarantine.
- Compassionate Care Benefits
- available to people who have to be away from work temporarily to provide care or support to a family member who is gravely ill with a significant risk of death.
Eligibility of regular benefits is determined by the following:
- have paid premiums into the EI Account;
- lost your employment through no fault of your own;
- have been without work and without pay for at least seven consecutive days in the last 52 weeks;
- have worked for the required number of insurable hours in the last 52 weeks or since the start of your last EI claim, whichever is shorter;
- are ready, willing, and capable of working each day; and
- are actively looking for work (you must keep a written record of employers you contact, including when you contacted them).
Those who do not qualify:
- voluntarily left your employment without just cause;
- were dismissed for misconduct; or
- are unemployed because you are directly participating in a labour dispute (strike, lockout, or other type of dispute).
Canadians are encouraged not to depend solely on Employment Insurance as benefit periods may be cut short with very little notice. Those who are applying for EI benefits are required to submit documentation immediately to avoid unnecessary delays and reductions in benefits due from late submissions.
Having an emergency account, that covers 6 months of one’s bare necessities (should equal 50% of their take home pay), could provide peace of mind and flexibility to attain a new job without being forced into taking the first job offer.
Protecting Your Employment Income
As an employee, you have rights. It is important to know what your rights before starting work with any employer. Labour standards are regulated provincially and vary from province to province. These rights protect both the employee and employer and cover the following issues:
- Compensation: Wages, overtime rates, stat holiday pay, etc.
- Vacation: Entitlement, Vacation Pay, etc.
- Termination of Employment: Definition, liabilities incurred, etc.
- Hiring Employees
- Leaves and Jury Duty
- Other Legal Responsibilities
Employers may insist their employees sign an employment agreement. Everyone should be aware if their rights are being compromised with the contents of the employer’s employment contract. Employees should take the time to review their provincial labour standards, it is an investment of time that could avoid costly consequences down the road. The following table has links to the official labour standard sites:
- British Columbia
- New Brunswick