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Employment income

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Employment income is the most common income type on Canadian returns and the one with the least room for the taxpayer to shape it. It is taxed as received, reported on a T4, and largely settled by deductions taken at source before the money arrives. What surprises taxpayers is the breadth of what counts — salary is only the start, and taxable benefits from an employer are employment income too — and the narrowness of what may be deducted against it. An employee cannot deduct the expenses a self-employed person can, and explaining that boundary clearly heads off a great many misconceived claims.

How to work through this tutorial

This follows employment income from the employer to the assessed return: 1. Establish what counts as employment income, including taxable benefits. 2. Understand what is withheld at source and why the return usually settles up small. 3. Learn the narrow set of employment deductions, and the certification most of them require. 4. Understand why an employee cannot deduct what a self-employed person can. 5. Handle the common special cases — tips, multiple employers, severance. 6. Check your work against the common errors. 7. Verify every specific against CRA's published guidance before relying on it.

What counts as employment income

Employment income is what an employee receives by virtue of their employment. Salary, wages, commissions, bonuses, gratuities, honoraria and vacation pay all count, and so does a great deal that does not look like pay. **Taxable benefits** are the part taxpayers underestimate. Where an employer provides something of value to an employee — the personal use of a company vehicle, certain allowances, employer-paid premiums for some kinds of insurance, gifts and awards beyond permitted limits — the value is generally employment income and appears on the T4. Not every benefit is taxable. Some are specifically excluded, and the boundary is set out in CRA's employers' guide on benefits and allowances rather than derivable from principle. A taxpayer asking whether something their employer gave them is taxable is asking a question with a published answer. The timing rule is that employment income is taxed when received rather than when earned. Someone paid in January for work done in December reports it in the year of payment. Allowances and reimbursements are commonly confused. Broadly, a reimbursement of an actual expense on presentation of receipts is treated differently from an allowance paid regardless of what was spent. The distinction determines taxability, and taxpayers routinely describe one while meaning the other.

Deductions at source

Employers withhold from each payment: income tax, Canada Pension Plan contributions (or Quebec Pension Plan for Quebec employment), and Employment Insurance premiums. All appear on the T4. Withholding is an estimate. It is calculated from the pay period as though the employee's circumstances were constant across the year, using the information on their TD1 form. Where circumstances differ — several employers, part-year work, other income, credits the TD1 did not capture — the estimate will be off, and the return corrects it. That is worth explaining, because taxpayers often treat a balance owing as evidence of an error. Usually it is evidence that withholding did not know something. Two employers each withholding as though they were the only one is the classic case, and it produces a balance owing every time. An employee who consistently receives a large refund is lending money to the government interest-free, and can ask their employer to adjust withholding. One who consistently owes can do the reverse. CPP and EI have annual maximums. An employee with more than one employer in a year can over-contribute, because each employer withholds up to the maximum independently, and the excess is recovered through the return.

What an employee may deduct

The set of employment deductions is deliberately narrow. Employment income is largely taxed on the gross amount. The deductions that exist include annual union or professional dues, and certain employment expenses where the employee was required by their contract of employment to incur them and was not reimbursed. The second category covers things like supplies consumed directly in the work, and in defined circumstances a portion of home office or vehicle costs. The gatekeeper is certification. Most employment expense claims require the employer to certify the conditions of employment on a prescribed form — confirming that the employee was required to incur the expense and was not reimbursed. Without that certification the claim is not supportable, and this is the single most common reason such claims are denied. An agent should be direct about that: the question is not whether the taxpayer really spent the money, but whether the employer will certify that the employment required it. Those are different questions and only the second one determines the claim. Certain occupations have their own rules — commissioned salespeople, transport employees, tradespeople, artists — with deductions unavailable to employees generally. If a caller belongs to one of these groups, their rules govern rather than the general position.

Why an employee is not a business

The most frequent misconception in this topic is that an employee can deduct what a self-employed person can. They cannot, and the difference is structural rather than a matter of degree. A self-employed person is taxed on profit — revenue less the expenses incurred to earn it — so the deduction rules are broad because expenses are intrinsic to how the income is measured. An employee is taxed on what they receive, and deductions are exceptions the Act grants specifically. Anything not granted is not deductible, however reasonable it seems. This is why commuting costs are not deductible for an employee, why clothing generally is not, and why an employee who bought a computer to do their job may find no deduction available. Taxpayers who work alongside contractors doing similar work see the difference and reasonably ask why. The answer is that the two are taxed on different bases, and the contractor also carries obligations and risks the employee does not — instalments, their own CPP at both rates, no EI, no employer withholding. Whether someone is an employee or self-employed is itself a determination with defined criteria, not a matter of what the parties called the arrangement. Where that is genuinely in question, it goes to a determination process rather than being settled on the return.

Common special cases

**Tips and gratuities** are employment income whether or not they pass through the employer and whether or not they appear on a T4. Controlled tips distributed by the employer are on the slip; direct tips generally are not, and remain reportable. This is a common omission and an area where slip-based reasoning fails. **Multiple employers** produce the withholding mismatch described above and potential CPP and EI over-contributions recovered on the return. **Severance and retiring allowances** are not ordinary employment income and have their own treatment, including the possibility of transferring part to an RRSP in defined circumstances. Confirm the rules before advising — the transfer room depends on years of service and on when that service occurred. **Wage-loss replacement benefits** may or may not be taxable depending on who paid the premiums, which is exactly the kind of question a taxpayer cannot answer without asking their employer. **Stock options and equity compensation** have their own regime and should be routed rather than answered generally. **Employment outside Canada**, or by a foreign employer, raises residency and treaty questions before it raises reporting ones.

Common errors

Assuming only salary is employment income. Taxable benefits, gratuities, bonuses and allowances are too. Telling a taxpayer that an employer-provided benefit is not taxable without checking. The boundary is published, not derivable. Confusing a reimbursement with an allowance. They are treated differently and taxpayers describe them interchangeably. Treating a balance owing as an assessment error when it reflects withholding that did not know about a second employer or other income. Overlooking CPP or EI over-contributions for someone with more than one employer. Advising an employment expense claim without establishing that the employer will certify the conditions of employment. Certification, not the spending, determines the claim. Applying the general employment deduction rules to an occupation with its own regime — commissioned sales, transport, trades, artists. Suggesting an employee can deduct what a contractor deducts. They are taxed on different bases. Accepting the parties' label on the employee-versus-self-employed question. It has defined criteria and its own determination process. Assuming tips are not reportable because they are not on the T4. Treating a retiring allowance as ordinary employment income.

What to verify this tutorial against

This was drafted without a source document. The deduction rules and the taxable-benefit boundary are both published in detail and neither should be answered from memory. CRA's employers' guide on taxable benefits and allowances sets out which benefits are taxable, how they are valued, and how they are reported — it is the reference for any "is this taxable" question about something an employer provided. CRA's guidance on employment expenses covers the deductions available to employees, the certification requirement and the prescribed form, and the special rules for particular occupations. The general income tax and benefit guide for the year covers the employment income lines and the deductions available against them. CRA's guidance on employee versus self-employed status sets out the criteria and the determination process — the parties' description of the arrangement is not decisive. CRA's guidance on retiring allowances covers the transfer to an RRSP and how the eligible portion is determined by years of service. CRA's payroll guidance covers CPP, EI and income tax withholding, including the annual maximums and the recovery of over-contributions.

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