People are often confused about why a change in employment during the year can affect their tax situation. For many, this confusion arises because all income earned was employment income, with taxes deducted at source. On the surface, it feels like there should be no additional tax to pay.
In practice, changing jobs may or may not affect your taxes. In many cases, the deductions remain accurate and nothing changes at filing. In other cases, differences arise because each employer calculates deductions independently, using only the information available to them at the time.
These differences are usually small, but they can result in a balance owing or a refund once all income is combined and reconciled on the tax return. Understanding how this happens helps explain why a job change can sometimes affect your tax outcome, even when nothing else in your situation has changed.
1. Your New Employer Starts Fresh
When you change jobs, your new employer does not know:
how much income you earned earlier in the year
how much tax has already been deducted
what tax credits have already been applied
So they simply start deducting taxes based on the information available to them, which is:
your salary with the new employer
the TD1 form you complete when you start
From their perspective, this is the only information they are allowed to use.
2. How Your Pay Is Calculated
Income tax is deducted based on the tax bracket your salary appears to fall into. In addition to income tax, other amounts such as CPP and EI are deducted based on your earnings.
After these deductions, federal and provincial tax credits are applied before arriving at your take-home pay.
There is also an annual limit to how much CPP and EI you are required to contribute. Once those limits are reached, the deductions stop for the rest of the year.
However, when you change employers mid-year, both employers may deduct CPP and EI because neither knows what the other has already deducted. This can result in over-contributions, which are later reconciled when you file your tax return.
3. Why the TD1 Form Matters
This is where the TD1 form becomes especially important.
The TD1 (Personal Tax Credits Return) is used to determine how much federal and provincial income tax should be withheld from your pay. It accounts for personal tax credits that reduce the amount of tax deducted, such as:
the basic personal amount
spousal credits
caregiving credits
tuition credits
Every employee is required to complete a TD1 when starting a new job, and they can update it during the year if their situation changes.
When someone changes jobs during the year, a common issue arises. Certain credits, especially the basic personal amount, may be applied more than once. In effect, the same annual credits are spread across two employers.
4. How Two Employers Can Lead to a Balance Owing
When two employers both apply the same tax credits, it can result in less tax being deducted overall. This often shows up as a slightly higher take-home pay during the year, but it can lead to a balance owing once everything is reconciled at tax time.
Here’s a simple example.
Assume Tunde, a Nigerian newcomer to Canada, worked for two employers in the same year.
From January to June, Tunde worked for Employer A and earned $40,000.
From July to December, he switched jobs and earned another $40,000 with Employer B.
His total income for the year was $80,000.
At both jobs, Tunde completed a TD1 form claiming the basic personal amount, which for simplicity we’ll assume shelters $15,000 of income from tax.
Each employer, acting independently, applied this credit when calculating his deductions.
Employer A calculated tax as if Tunde would earn only $40,000 for the year and applied the $15,000 credit.
Employer B did the same.
In effect, $30,000 of Tunde’s income was treated as tax-free during the year, even though only $15,000 should have been.
Because of this, less tax was deducted from his pay cheques across the year, and his take-home pay was slightly higher than it should have been. Nothing looked wrong at the time.
When Tunde filed his tax return, however, the CRA combined his income from both employers and recalculated the tax owing based on the correct single set of credits. The result was a balance owing, not because he earned extra income or made a mistake, but because too little tax had been withheld during the year.
This is one of the most common reasons people owe tax after changing jobs, even when all their income came from employment and taxes were deducted at source.
Conclusion
Changing jobs during a year does not automatically affect your taxes. In many cases, the correct amount of tax is still deducted, and no adjustment is required at filing.
However, when income is split across employers, deductions are calculated in isolation. This can lead to situations where tax credits are applied more than once, or where CPP and EI contributions are duplicated. These differences are only reconciled when all income is combined on the tax return.
Understanding how employers calculate deductions, and how credits are applied across multiple jobs, helps explain why a balance owing can arise even when all income is employment income and taxes were withheld at source.