Beware Of The EI Tax Trap!
Employment Insurance (EI) benefits are a great thing. EI provides money when you are transitioning between jobs, are laid off, or while you are on parental leave to bond with your baby.
While this safety net is really helpful for your cash flow, at tax time EI may come back to bite you.
Most of the time, EI payments have some income tax deducted from them with each payment. Many people think that amount will be enough to "cover" their taxable income, and that they won't owe anything more. However, the amount that is normally deducted is a much lower percentage than what you will often have to pay on your taxable income for the year.
As a result, when the time comes to do your taxes and add your EI on to your other income for the year, those EI payments will be taxable at a percentage that is greater than what was withheld from the payments.
We see it quite frequently with our clients: people end up owing on their tax return in years when they have received EI benefits, whether from being laid off, on parental leave, etc..
So, our heads-up to you is to watch out for the EI tax trap! If you end up collecting EI benefits, you may want to set aside a bit of money to cover the tax hit that is likely to come at tax time.
At the very least, understand that collecting EI may lead to you owing money on your tax return. Be prepared when the time comes.