Why you may have a balance owing to CRA
For some of us, there can be an unwanted surprise when starting to file your most recent tax return. The dreaded balance owing. For many, a tax balance owing will come as a complete shock, as most employed individuals will be expecting a tax refund, as opposed to a tax balance owing.
Why would someone who is paid through payroll owe taxes at year end?
The simplest explanation for why an individual may owe additional taxes to CRA is because their employer(s) failed to deduct sufficient tax from their pay cheques throughout the tax year. When filing a tax return, the total income is compared to the total taxes deducted, and a tax overpayment (refund) or tax underpayment (balance owing) can be assessed. There are several, common explanations for most balances owing.
Multiple employers
Probably the most common scenario where employed individuals have a tax balance owing is because they had multiple employers during the tax year. If you are taking on multiple jobs during the tax year it is important to inform each HR department that you currently have multiple employers. Each year individuals are allowed a tax free threshold of income. Your employer will recognize the tax free threshold when calculating your tax deductions. When calculating your tax deductions, a second employer needs to know that your original employer has already accounted for your tax free threshold. If you have multiple employers who all include a tax free threshold in their tax deduction calculations, you will have a balance owing to CRA.
Receiving a raise during the tax year
If you receive a raise during the year, it can unfortunately turn the happiness of receiving a raise into the sadness of a tax balance owing to CRA. Some employers will fail to sufficiently increase tax deductions on the increased amount of income, resulting in a tax balance owing.
Simple payroll system error
Some smaller employers will process payroll ‘in house’. Unfortunately, inexperienced employers who are unsure of the ever-changing tax deduction rates can frequently fail to correctly deduct tax from their employees pay cheques, leaving their employees surprised with a tax balance owing when they file their taxes.
CERB/CRB/EI payments
The CERB and CRB payments which were introduced in 2020 as COVID relief measures are considered as taxable income. Where EI payments usually have some tax deducted at source, the Canadian Government decided that they would not deduct tax from the CERB and CRB payments. This means that individuals who received the COVID relief payments during 2020 will be required to pay tax on the payments received.
Withdrawing RRSP funds (not for home buying purposes as part of the HBP)
If you withdraw funds from an RRSP account, depending on the circumstances the financial institution from whom you have withdrawn the RRSP funds will deduct tax from the withdrawal amount. However, it is rare for the financial institution to deduct sufficient tax from the withdrawal, this will result in tax being owed when filing your tax return.
Additional income on top of employment income
If you are fortunate enough to have income sources on top of your regular employment income, it is very possible that you will owe tax on that income. Most individuals who receive self-employed income will already be prepared to pay tax in that income, however those who receive interest income on a T5 may be blindsided by that tax owed on this additional income.
If you are concerned about your tax situation, and are unsure whether you will owe additional tax when filing your tax return, why not ask a professional for assistance
At Jackstaxback we are always happy to offer assistance to those filing returns under more complicated circumstances, including when individuals have a balance owing to CRA. We will try to explain the effects of income and deductions on your tax refund or balance owing at year end, and try to provide ass much insight as possible. Feel free to contact us today for a tax return quote.