Tax Withholding and EI benefits

I have written about tax withholding before for the Globe and Mail. In this post for the Economy Lab, I outline the history of withholding, the economic rationale for withholding, and some unintended consequences of withholding. While many accountants and economists abhor withholding, I demonstrate the key benefits of having withholding as part of our tax system.

Today, I want to talk about the relationship between EI and withholding, specifically EI maternity leave benefits. This is a topic of interest to me as I received EI maternity leave benefits in 2013 and as I sit down to do my taxes, I am again reminded of how fortunate I am to have the knowledge I have about the tax system. See, this year I am going to owe CRA a small amount, unless I choose to make a last minute RRSP contribution or can find some additional business expenses. This is an usual position for me, as usually I am in a refund position due to substantial medical expenses or at or near a $0 owing position otherwise.

I am in a tax owing position this year because of my EI mat leave benefits. How you say? Does not ESDC withhold taxes on EI mat leave benefits? Why yes it does, but for reasons that I think need to be revisited, that withholding does not take into account a common position many people are in while on EI mat leave benefits. For many employees, their employer pays a top-up to employees on mat leave. ESDC, however, does not take this into account when deciding on the amount to withhold. It is possible to have this corrected by filling out a TD1 form, but the form does not contain a box for employee top-ups. Instead, the employee can fill out the last box, directing ESDC to withhold a specific amount, but that would require the employee to guess at how much extra needs to be withheld. How many of us would get that amount right?

Given the amount of communication between my employer and ESDC in order for me to collect mat leave benefits, why is there not also communication to ESCD that I am getting an employer top-up and to increase their tax withholding? It is much simpler for my employer to report this information at the time of my application than it is for me to fill out a new TD1, guess at the additional withholding amount, and submit the TD1 to ESDC.

Fortunately for me, I knew I was going to owe a little bit at tax time, and I set this money aside. So I am not caught off guard, but I wonder how many parents are? How many parents fill out their taxes after receiving mat leave benefits and are shocked to see that they owe several hundred or thousand dollars? How many of them, some of whom are still on mat leave, have that money set aside to pay? Given that we know that people in a tax owing position are more likely to engage in tax noncompliance, this seems something that we can and should avoid.

So I call on ESDC to make a small modification to their system of communication between themselves and employers and require employers to report if an employee top-up is being provided and to modify their tax withholding calculations based on this information. Doing so eases the tax time financial burden of these individuals and will increase tax compliance rates.

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4 thoughts on “Tax Withholding and EI benefits

  1. If the employer is paying you a top-up, then shouldn’t the employer do the withholding as part of its more general withholding for wages, CPP and EI? Does the top-up count as income for CPP and EI contributions?

    • The employer withholds tax on the income they pay, ESDC withholds tax on the income they pay. Neither, however, withhold as though you are receiving the others income which means withholding is too low overall given our progressive income tax regime.

      The topup does count as income for CPP and EI and is withheld by the employer.

  2. You could just give your employer a new TD1 and check the box that says you’ve already claimed your non refundable credits with another payer.

    • The main problem discussed here is not related to credit but comes from EI withholding assuming that EI is your only income. It is not. Therefore the marginal tax rate used for EI withholding is far too low for the circumstances.

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