This article first appeared in the summer 2004 issue of the Expert Witness.
The Insurance Amendment Act, 2003 mandates that any loss of income award must be reduced by income tax. The purpose of this addendum is to introduce the reader to Tables on Diskette (TOD), a software program provided free of charge by the Canada Revenue Agency that can be used to calculate an individual’s net income (or after-tax income). That is, one can use TOD to estimate the Canada Pension Plan (CPP); Employment Insurance (EI); and federal, provincial (except Quebec) and territorial tax deductions, based on an individual’s gross earnings. The resulting net income figure can be incorporated into a loss of income estimate that is consistent with the provisions of the amended Insurance Act.
Installing the Software on Microsoft Windows
The latest version of TOD can be obtained from the Canada Revenue Agency’s website: www.cra-arc.gc.ca/tax/business/tod. To install the software,
- Left-click on the link “Install.exe” located half-way down the web page (under the heading “How to download the “install” file to install TOD.” (Note: If you have a choice, it is better to use Internet Explorer for this purpose than Netscape Navigator.)
- Select “Open” from the file download dialog box.
- Once the file has decompressed, choose your language preference and select “OK.”
- Read the introduction page and click “Next.”
- Select the destination folder into which you would like to install TOD (or simply click “next” to accept the default).
- Select where you would like the program to be located and click “Install.” If you are unsure which option to select, “On the Desktop” will place an icon (represented by a Canadian flag) on your desktop that can be “double-clicked” to start TOD.
Using TOD to Calculate Net Income
To illustrate the use of TOD, consider an individual who has an annual gross income of $42,000. Because TOD has been designed to calculate deductions per pay period, it will be necessary to convert this annual income into a salary per pay period. For this purpose, we suggest that you calculate the individual’s monthly gross income, calculate the appropriate deductions, and then convert these figures back into an equivalent annual amount. That is, in this case, choose the “monthly (12 pay periods a year)” option and use a monthly salary of $3,500.
The first time TOD is run you will be asked to select a default language, province, and pay period. For the purposes of this example, select Alberta and Monthly (12 pay periods a year) as the default choices. Once the program is up and running,
- Left-click on “Regular Salary” located in the upper left corner of the window. You have the option to re-select province and pay-period; however, the defaults chosen when the program was initially run should automatically appear (Alberta, monthly).
- Left click the rectangular box located adjacent to “Gross salary (or pension income) for the pay period.”
- Select “Regular salary or paid vacation.”
- In the white box directly opposite enter $3,500 ($42,000 per year divided by 12).
- Click “OK” to close the window.
- Now left-click the “View Deductions” button.
- The resulting screen provides estimates of the individual’s monthly payroll deductions, including provincial and federal tax, CPP, and EI contributions. The most important of these, for the current example, is “Total tax on salary or pension income,” which provides the monthly federal and provincial taxes, $661.75. If this figure is multiplied by 12, the annual federal and provincial taxes on $42,000 can be obtained – $7,941.00.
- The figures provided for CPP, $158.81, and EI, $69.30, may also be of importance. But it must be cautioned that the maximum annual contributions for these two programs are $1,831.50 and $772.20, respectively. Although these annual contributions can be reached through monthly payments of $152.63 and $64.35, respectively, Canada Revenue deducts more than these monthly amounts from individuals who earn more than approximately $3,250 per month. Thus, if the individual’s annual salary exceeds approximately $39,000, it will not be appropriate to multiply the monthly deductions reported in TOD by 12. Rather, if the monthly deductions reported by TOD exceed $152.63 and $64.35, respectively, (as they do in the example being considered here), use $1,831.50 and $772.20, respectively, as the annual values of CPP and EI deductions.
In summary, TOD calculates that an individual with an annual income of $42,000 will pay $7,941 in federal and provincial income taxes, $1,831.50 in CPP deductions, and $772.20 in EI deductions, for a net income of $31,455.30.