Switching Jobs? How It Affects Your Taxes

Landing a new job or being laid off can change more than your day-to-day routine—these transitions can also affect your taxes for the year. Whether it’s a welcome raise, severance, unemployment benefits or a relocation, several common tax issues often get overlooked. Below, tax professionals explain key ways job changes may influence your tax return and practical steps you can take to avoid surprises.

How a new job affects taxes

A higher salary at a new job can push you into a higher marginal tax bracket, increasing the tax rate applied to income above certain thresholds. For the 2025 tax year, the federal rate starts at 14.5% on taxable income up to $57,375, with higher rates applying to income above that level. If your pay increases, consider tax-efficient strategies to reduce your taxable income and blunt the immediate impact.

Common options include contributing to a registered retirement savings plan (RRSP) or making eligible charitable donations to claim a tax credit. If you had an employer pension or a workplace RRSP at your previous job, financial professionals generally advise transferring those funds into another registered product rather than cashing them out. Cashing out can create an immediate tax liability on the withdrawn amount.

If your move to a new job required relocating at least 40 kilometres closer to the workplace, you may be able to claim eligible moving expenses. These can include the cost of movers, travel expenses, and temporary accommodations while you settle in. Note that moving expenses can only be deducted against income earned at the new workplace, and keeping receipts and documentation is essential.

Also be mindful of standard payroll deductions. Employers typically withhold Canada Pension Plan (CPP) and employment insurance (EI) contributions directly from paycheques. If you change jobs during the year, your new employer usually has no visibility into contributions made with a previous employer and will calculate deductions as if the new job were your only employment. That can lead to over-contributions and later refunds when you file your tax return. It’s a good idea to track year-to-date CPP and EI amounts and review pay stubs so you know where you stand.

Understanding severance tax deductions

Severance or a lump-sum buyout paid when you are laid off is treated as employment income, and employers normally withhold tax at source when paying these amounts. That withholding is intended as a protective measure: because employers may not know your full-year income picture, they withhold an amount to reduce the risk that you will owe a large balance when you file your tax return.

Keep in mind that the amount withheld is not always the same as the final tax you owe. When you prepare your tax return, your total taxable income for the year—salary, severance, EI and other income—will determine your final tax bill or refund. If you receive a severance or buyout, retain documentation and consider working with a tax professional to ensure the payment is reported correctly.

In some cases, severance may be structured as a retiring allowance. When eligible, a portion of a retiring allowance can be transferred directly into an RRSP or another specified retirement account, deferring tax on that amount—provided you have sufficient contribution room. Employers sometimes offer this option to older workers or under negotiated arrangements.

When EI benefits get taxed back

Employment insurance (EI) benefits are taxable income. If you don’t withhold tax while you receive EI, you may end up with a tax balance owing when you total all income for the year. A practical rule of thumb is to set aside roughly 15% of your EI payments to cover taxes, reflecting the first federal tax bracket rate of 14.5% for 2025.

During tax season, individuals who received EI should receive a T4E slip that details the benefits paid. In some situations, if your total annual income—including severance, EI and other earnings—exceeds a certain threshold, you may be required to repay part of your EI. For example, if combined income for the year is higher than the 2025 threshold of $82,125, a portion of EI benefits could be clawed back on your tax return. Keep records and consult your T4E to confirm amounts reported.

Read more about taxes:

• Tax time can be stressful—the right account can keep your money growing
• Smart strategies to maximize your tax return
• Should you claim capital cost allowance on a rental property?
• How to claim the Canada Caregiver Amount due to infirmity

Practical steps to reduce tax surprises after a job change:

• Review pay stubs and year-to-date contributions to CPP and EI when you start a new job.
• Track and keep receipts for moving expenses if you relocated for work.
• Consider transferring workplace pensions or RRSPs rather than cashing out to avoid immediate taxation.
• Set aside roughly 15% of EI payments for potential tax liability if you receive benefits.
• Talk to a tax advisor or use reliable tax software to assess the tax treatment of severance, retiring allowances and other payments.

Job changes bring many opportunities but also tax implications that can be managed with a bit of planning and record-keeping. Staying informed and proactive can help you minimize tax surprises and make the most of the financial transition.