May: Career Transition and Finance: Adjusting Tax deduction at Source

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All Canadian residents pay income taxes. Generally, those taxes are paid through deductions at source. Employers and pension plan administrators are responsible for withholding the amounts set by the revenue agencies.

Deductions at source are sums subtracted from each amount of remuneration you receive, whether it’s a pension, an annuity or a salary. These amounts are calculated by splitting the total annual tax payment by your taxable income, depending on the frequency of payment.

If you receive only one taxable income, your pension for example, calculating your tax deduction is straightforward. Receiving several T4s makes it more difficult. The killer question: what rate of deduction should be applied to the total to be paid for the different incomes?

Indeed, each employer or pension manager assumes you have a single-source of income: theirs. The deduction is set accordingly. Hence the risk that the deductions will be insufficient for your total income.

Example: You have an employment income of $30,000 and a pension plan benefit of $30,000. For those incomes, you’ll be deducted $3,802 twice, for a total of $7,604. Added up, those sums amount to an annual income of $60,000, for which $12,900 should be paid in taxes. After filling your declarations, you’d be owing the revenue agency a tax balance of $5,296… ouch!

Now, you know why it is important to understand that your deduction rate must correspond to your total annual income tax.

In your career transition kit, you’ll find 2 forms to provide with your pension’s tax deductions instructions. The information to be completed will be minimal: last name, first name, SIN and signature. But, as explained above, it’s in your best interest to have your tax deduction adjusted if you have more than one T4. Unpleasant surprises will be avoided!

Your financial advisor would be a trusted contact to help you assess the optimal rate of deduction.

Patrice Bergeron, General Manager of the Caisse Desjardins des militaires.

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