You're an employee. Your employer diligently withholds tax,
Canada Pension Plan (CPP) and Employment Insurance (EI), and remits
these to the Canada Revenue Agency (CRA) on your behalf throughout
the year, as required. You have just completed filing your taxes
for the previous year, and success; you are getting a refund!
But hold the excitement; perhaps it's time to stop and
consider the facts. A tax refund could simply mean that you have
overpaid your taxes for the year, and are effectively loaning
money, interest-free, to the CRA. Then at tax time, the CRA repays
this money to you under the disguise of a "tax
How did you let this happen? Well, you likely claimed tax
credits and deductions on your tax return which your employer did
not know about when your taxes were withheld at source. These
credits and deductions decreased your taxes payable so that when
you filed your tax return, the amount owing was less than what was
remitted, resulting in a refund.
So, how does your employer decide how much tax to deduct from
your pay cheque in the first place? When you begin employment, you
complete Form TD1, Personal Tax Credits Return. Form TD1
assists your employer in calculating the amount of tax to deduct
from your pay cheque based on your declaration of the
non-refundable tax credits (tuition and education amounts,
caregiver amount, spousal amount, amount for dependent children,
etc.) to which you are entitled.
Invariably however, your personal circumstances will change.
Important life events like getting married or having a baby may
increase your credit entitlement, and hence, the amount of tax
required to be withheld from your pay can in fact be lower than
when you first began your employment. You should always complete a
new Form TD1 (within seven days) whenever your personal
circumstances change such that you are entitled to additional
credits, or are no longer eligible for certain credits (I.e. your
child reaches the age of 18 and you are no longer entitled to the
amount for dependent children.) In fact, not doing so can result in
a penalty of $25 for each day the form is late, with a minimum
penalty of $100, and a maximum penalty of $2,500.
If you know you are going to have significant deductions from
your income in a certain year: RRSP contributions, child care
expenses, rental losses, support payments, employment expenses,
carrying charges, charitable donations, etc., you can complete and
submit to the CRA Form T1213, Request to Reduce Tax Deductions
at Source. This form requests permission from the CRA for your
employer to use the deductions you will be entitled to, in order to
reduce your tax withholdings in that particular year. If approved,
the CRA will provide a Letter of Authority (typically within four
to six weeks of submitting Form T1213) that would be provided to
your employer as confirmation to reduce tax withholdings. You can
also use Form T1213 to request a reduction in tax deductions at
source for certain non-refundable tax credits that are not part of
Form TD1, such as foreign tax credits, which Form T1213 does not
provide implicitly for. Note that the CRA will not usually
issue a Letter of Authority if you have a tax balance owing or have
not filed outstanding income tax returns.
Reducing your tax withholdings at source effectively increases
your net amount of pay, so you get to take home more money every
pay cheque throughout the year, when you've earned the money,
and not at tax time, after the CRA has held this money on your
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The CRA provides new housing rebates for individuals who have purchased or built a new house or have substantially renovated a house or made a major addition to a house who plan on living in it personally or letting a relative live there.
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