Overlapping Taxes

I bet you’re wondering, “what in the world are overlapping taxes”? This is a situation which occurs when you are earning income from more than one source and but are being taxed on each source of income as if it’s your only salary or wage. If you don’t consider how all of these income sources added together can impact your annual tax bracket, you will find yourself with a surprise tax bill. 

For example, if you are employed full time for nine months of the year and then go on maternity leave and only receive EI benefits, you can get hit with overlapping taxes. This is because the amount of tax withheld from your EI doesn’t factor in how much you’ve already earned that year and whether or not that has pushed you into a higher marginal tax bracket.  

Another situation where this would arise is if you are let go from your full-time job and issued a severance to cover a few months of income but end up going back to work before the end of your severance payment period. Woo-hoo extra money, right!? Wrong. You will need to evaluate your tax bracket for that year and tuck away extra savings to adjust for your full year income tax requirement so you’re ready for that higher tax bill when it comes.

Be sure you keep track of your income sources during any given year and look at your holistic income tax situation. Contributing to an RRSP is an excellent way to reduce your tax burden (every dollar contributed reduces your taxable income by that same amount) while simultaneously providing for your retirement.