How job changes can affect your taxes

How a new job affects taxes

Getting a new job with a pay raise could bump you into a higher tax bracket. For the 2025 tax year, the federal tax rate is 14.5% for the portion of taxable income up to $57,375. Those who earn more than that amount pay a gradually increasing tax rate on their income above that threshold.

This means you might want to consider ways to reduce a potentially larger tax bill, such as contributing to registered retirement savings or donating to eligible charities to be able to claim a tax credit.

Stefanie Ricchio, a chartered professional accountant and TurboTax spokesperson, said new employees can also look into job-related deductions, such as claiming moving expenses if they moved at least 40 kilometres to be closer to their new employer. The expenses can include anything from movers to travel costs to temporary accommodations while getting settled in the new city. But she warned that people can only deduct eligible moving expenses from the income they earned at the new job.

When it comes to some of the usual payroll deductions, most employers deduct amounts for the Canada Pension Plan and employment insurance straight off your paycheque. When you change jobs, there’s a risk you could end up over-contributing to those government safety nets. “(The new employer) has absolutely no visibility into how much you’ve already contributed through your prior job,” Ricchio said, adding that an employer usually calculates those deductions on the assumption that that’s your only job for the year. That could result in over-contributing, which may mean a refund come tax time, she said.

For those who had a pension or RRSP through their former workplace, Ricchio recommended rolling that money into another product with their bank instead of cashing them out. “If you cash out any of these plans or programs, you’re going to have to pay tax on those amounts,” she said.

Understanding severance tax deductions

Workers are generally offered severance when laid off from their job, which is considered income. Therefore, the employer will typically deduct taxes from the lump sum at the time it’s paid. The withheld amount guards people against owing money to the government from their severance payment, months after the amount might already be spent.

“It’s not meant to be representative of the tax bracket you’re in because your employer won’t necessarily know that,” she said. “It really is a protection measure to make sure something is deducted and applied as income tax for that (severance) income, so you don’t end up in a bad position when you do go ahead and prepare your tax return for the year.”

Buyouts are also considered employment income and will similarly see tax deductions at source, Ricchio said.

UFile tax specialist Gerry Vittoratos said sometimes, severance pay can be structured as something called a retiring allowance. In that case, an eligible portion of the money can go directly into a specified retirement account such as a registered retirement savings plan, which defers taxes on the amount, provided there’s contribution room in the plan. He said companies can sometimes offer a retirement allowance to older workers who are being laid off.

When EI benefits get taxed back

Many people who have been laid off apply for employment insurance, which is also considered taxable income. “If you don’t pay tax on your unemployment as you are receiving it, then you could end up in that situation where once you get the aggregate totals of all your income for the year, you’ll have a balance outstanding, if it’s over the basic personal amount,” Ricchio said. 

She recommended socking away roughly 15% of your EI payments to cover the first federal tax bracket of 14.5% for the 2025 tax year.

During the tax-filing season, taxpayers should receive a T4E slipdetailing their EI payments. People who have received EI payments might have to repay some of the money if their total yearly income exceeds a certain amount. “The government will request a portion of it back on the tax return because you made too much income to collect employment insurance,” Vittoratos said.

“It’s about people (with) lower income who get laid off and they need that (EI) income as a transition to get to the next job,” he said. For example, if the combined severance, EI and other income you earned is higher than the 2025 threshold of $82,125, the taxpayer will be required to pay back a portion of the EI benefits you received to the CRA.

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