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Why do your taxes go up when you collect Employment Insurance (E.I) benefits, in Canada?
I know EI contributions are tax deductible since a portion of your earned income goes in to the EI fund, thereby reducing your take-home pay. However, you pay income tax on any EI benefits you collect, just as you would pay income tax off your pay cheque from work.
Also, since EI is separate from your taxes and has its own fund paid for by employees & employers additionally to taxes and other government contributions (like Canada Pension Plan), your tax dollars aren't paying back the EI fund in any way.
So unless there's something I'm missing, I don't understand why your taxes go up either the year you collected EI or the year after, on your next tax return??
2 Answers
- GeorgeLv 67 years ago
It boils down to, it's taxable income because that's what the law says.
The rationale for writing the law that way is beyond me, but could be found if you went to the debate or other documentation that accompanied the original UI Act.
My guess as to the rationale would be on a couple of lines.
Since the premiums are taken out of your taxable income, the returns on them are included in taxable income.
Also, since it is an insurance that replaces income, the benefits are treated as income. This is similar to LTD in that if part of the premium is paid by the employer (employer's EI contribution equals the employee contribution times 1.4) the benefits are taxable income.
EI is taxed like regular income, except there is a relatively new thing, social benefit repayment, where if you collected EI in a year and your income for the year is over a limit, you have to pay back part of the EI.
Also, as I recall, EI was not subject to tax deducted at source, so any tax you owed on the EI benefits, you owed, as opposed to the tax was taken off before you saw the payment.
Your comments on the question use the phrase "like Canada Pension Plan." CPP, like EI, is included in taxable income and is only source deducted if you ask for it to be.
