Financial Wellness

4 Common Tax Misconceptions

By Judith Mewhort on April, 5 2023
4 minute read

Stay up to date

With the end of April rapidly approaching, many of your employees are stressing, scrambling, or otherwise procrastinating about filing their income taxes. It’s expected. Like allergies at the start of spring.

It doesn’t have to be this way. Taxes don’t have to be synonymous with stress. One issue is that many people aren’t sure about what is and is not taxable. This uncertainty leads to confusion, which leads to frustration and (you guessed it) procrastination. 

To help reduce stress in the workplace, we’ve put together a primer to share with your team to help demystify four common tax misconceptions. By the end of the blog, your employees will be able to stare down their T4 slips with newfound confidence. 

 

1. I Will Earn Less Money By Entering a New Tax Bracket

There are stories about people who supposedly started earning less money, or saw a minuscule increase on their pay cheque after receiving a raise. The apparent reason? They entered a new tax bracket. 

That’s not how taxes work. Canada’s progressive tax system is a little tricky to understand. However, the essential takeaway is that you’re only taxed at a higher rate for the money earned above the previous tax bracket.

For example, workers in British Columbia earning $50,000 a year in 2023 will owe 20.06% on the first $45,654 and 22.7%% on the balance up to the beginning of the next tax bracket. That means only  $4,346 ($45,654 + $4,346 = $50,000)  is taxed at 22.7%, not their whole income.

This tax structure ensures that high-earners pay more in taxes without seeing a decrease or flatlining of their net income when they climb into a new bracket.

A couple sitting at the table

 

2. My Bonuses and Rewards are Not Taxable

We wish. As much as we’d love to tell you that your bonus is 100% yours to keep, it must be added to your income when you file taxes. This is also generally true of monies received under an Employee Profit-sharing Plan (EPSP). Taxes owed on bonuses are typically removed upfront and will be included on your T4. So if you’re upset that your bonus isn’t quite as large as hoped, just know that your payroll administrator ripped the band-aid off before you noticed. However, if you think there’s been a mistake—that your final income didn’t include your bonus or that your company didn’t remove any taxes—speak with an accountant or someone in your HR department for clarification. 

One way to mitigate paying taxes on bonuses is to send the money directly to your retirement account. Employers with a group RRSP plan usually offer this option. Those companies without such a plan may offer to send part of your bonus to the financial institution with which you have an RRSP account.

When it comes to Benefits, generally speaking, reimbursements under a health or dental plan are not taxable to an employee.  This also includes amounts reimbursed under a Healthcare Spending Account (HSA).   However, amounts reimbursed under a Wellness Account such as childcare, transit passes, or sports equipment are considered taxable.

When it comes to Perks such as a car allowance or a golf membership, the rule of thumb is that if it benefits the employee it’s taxable.  If it's for the benefit of the employer it is not. However, this can be a grey area so if you aren’t sure, we recommend that you consult an accountant.

 

3. I didn’t get a large return. I must have done something wrong

It’s certainly fun to see a gasp-inducing number at the end of your calculations. You start planning summer vacations. Maybe consider buying that road bike you’ve been eyeing. It’s a nice reward. Seeing that you’ll only get a few dollars back isn’t as fun. Seeing that you owe money is no fun at all. 

The glass-half-full approach is to remember that a large tax return isn’t free money. It belonged to you all along—the government just took too much. Getting a small tax return means that the correct amount of taxes are being taken off each pay period. So your regular pay cheques are bigger than they would’ve been had you received a large tax return. 

A happy men at the laptop

 

4. The earlier I file, the earlier I pay

When you owe taxes, it’s natural not to want to pay immediately. People fear that the sooner they file, the sooner they pay. That’s not the case. The final date to file is April 30 in 2023 for individuals receiving T-4 income.  Self-employed proprietors have until June 15th. Whether you did your taxes in February or the end of April, the only thing that changes is how early you know how much you’ll owe. 

If you are entitled to a return, it’s actually beneficial to file early.   While you don’t have to pay money owed until the April 30th deadline, the government will pay any money it owes to you once you file (it typically takes a week or two to process). So there’s an incentive to file sooner rather than later.   Just make sure you have collected all your necessary tax slips prior to filing.   Employers must send T-4s no later than the end of February but last-minute RRSP contribution receipts and investment income slips may not arrive until the end of March.

Even if you’re only expecting a small return or do not owe any money, filing early is still worth it. Tax returns update your information for other government services. Voter registration, credits for GST rebates, and available limits for BC’s pharmacare program all get updated when you file your taxes.

common tax misconceptions

 

Final Thoughts

Taxes don’t have to be scary. With a bit of preparation and clearing of the air about common misconceptions, they can be done quite easily—either by yourself or with the help of an accountant. And besides, once they’re done, you don’t have to think about them again. At least not until next year.

Addressing Potential Liabilities in Benefit Plans

Preet Pall will provide you with the knowledge you need to navigate potential pitfalls in benefit plan management.

Learn about the common associated risks and liabilities, best practices for mitigating risks, and strategies for ensuring compliance with regulatory requirements.

Register Now!