Tax Tip: Avoid Clawback of Your EI Benefits

Are you a high-income earner—perhaps an executive, or seasonal construction or oil rig worker—who may  suffer a loss of employment?  For the 2017 tax year, the base amount for EI repayment is $64,125.  The amount is indexed year over year and if you get caught with income over this, you’ll likely be unpleasantly surprised when you file your 2017 return .  Here’s why:

Taxpayers who receive regular EI benefits more than once in any 10-year period are required to repay them via the tax return as follows:

• the lesser of 30 percent of the benefits received
• income in excess of the base amount

For the 2017 tax year, the base amount for EI repayment is $64,125.  The amount is indexed year over year and if you get caught with income over this, you’ll likely be unpleasantly surprised when you file your return.  Here’s why:

You will experience a marginal tax rate of 62 percent on income over this clawback threshold, as a portion of EI benefits received would have to be repaid. With an RRSP contribution, however, this might have been avoided, though. Here’s an example to illustrate this:

Example > Andre was laid off late in the year and received $3,000 in regular EI benefits. His T4E slip shows he is required to repay his benefits at a rate of 30 percent because he previously made a claim for regular benefits when his former employer became insolvent. On his T1, Andre’s net income before adjustments is $67,000. He will need to repay the lesser of:

• 30% x $3,000 = $900 and
• 30% x ($67,000 – $64,125) = $862.50

As Andre lives in Ontario, his marginal tax rate is 29.65 percent (that is, he’d pay $29.65 more taxes if he earned $100 more in taxable income).

A $100 RRSP deduction would reduce his tax bill by $59.65 when the EI clawback is taken into account. Taxpayers in this situation can obviously benefit handsomely from an RRSP contribution!

The moral of this story:  use your RRSP contribution room and deduction opportunities wisely to decrease the net income upon which the clawbacks are determined. It’s too late for this year – the contribution deadline has already passed, but if you have any undeducted contributions from prior years, be sure to use them to offset the clawback on your 2017 return.

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