How Does Changing Jobs Affect your Tax Return?

Moving from one employment to another

Not every employer provides you with the TD1. Most employers assume that you can claim the full Basic Personal Amount. However, if you move to a new job within the tax year, the new employer will not correlate with the old one. You must submit a new TD1 to request deducting taxes from the first dollar you earn. Failure to do so might result in more taxes owed by the end of the tax year.

Furthermore, both employers might deduct the full amount of CPP and EI for each job resulting in overpayments in the tax year. Since you cannot over contribute, you must claim the overpayment as a credit on your income tax return.

When you leave a job partway through the year, don't forget that at tax time you'll need to report income from both employers. Make sure you have the T4 slip from your former employer as well as your current one — filing with only one T4 means the CRA will see unreported income and may reassess your return.

What to do with a group retirement plan when you leave

If you had a group RRSP or a workplace pension with the employer you're leaving, be careful before cashing it out. Withdrawing a group RRSP as cash means the plan administrator withholds tax on it, the full amount is added to your taxable income for the year, and you permanently lose that RRSP contribution room — often making it the most expensive option. Instead, you can usually transfer the funds directly into a personal RRSP, into a new employer's group plan (if it accepts incoming transfers), or leave them with the existing provider; a direct transfer keeps the funds tax-sheltered and isn't treated as income.

The same idea applies to some employer pensions. A defined contribution pension can typically be transferred to a locked-in retirement account (a LIRA, or an LRSP for federally regulated plans), and a defined benefit pension's commuted value can often be transferred to one as well, subject to transfer limits. These transfers preserve the tax-deferred status of the funds, unlike taking a lump-sum cash payout.

Changing jobs from employment to self-employment

If you decide to open your own business as self-employed, you will have to calculate the deductions on your own. For CPP you complete the Schedule 8 – Canada Pension Plan Contributions and Overpayment. This form is completed and submitted with your income tax return. Quebec residents must complete the 5005-S8 Schedule 8 – Quebec Pension Plan Contributions(for QC only). CPP contributions usually are divided between you and the employer. Since as a self-employed individual you are your own employer, your CPP deductions will double.

EI contribution is optional for self-employed. it covers parts of the employment EI: Maternity Benefits, Parental Benefits, Sickness Benefits, Family Caregiver Benefit for Children, Family Caregiver Benefit for Adults, and Compassionate Care Benefits. Once you claim any of these benefits in any given year, you will not be able to opt-out of the program in the future. So make sure you can be covered before you start contributing to the program.

You have to calculate your tax dues and any GST/HST owing to CRA. It is a good practice to set money aside from your business income to prepare for the tax season. If you hire employees, you need to calculate their payroll deductions and submit related slips to CRA. You will need to open a payroll account with CRA, collect the TD1 forms from your employees, and deduct applicable taxes, CPP, EI, etc.

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