If you are an employee, your employer remits income tax, as well as contributions to the Canada Pension Plan (CPP) and Employment Insurance (EI) on your behalf to the Canada Revenue Agency (CRA). Source deductions ensure that the government gets paid first - and you get paid second.
Unfortunately, many people overpay these source deductions, effectively loaning money to the government which is eventually repaid, without interest, in the form of a tax refund. (If you are self-employed or earn investment income, you must make quarterly tax installments throughout the year. Similarly, some tax payers overpay these installments.)
Contrary to popular belief, a tax refund is not cause to celebrate - it is not a gift, nor is it "found money". It is in fact your money - money that you have worked hard for and then overpaid to the government. No one intentionally overpays their taxes. You may have claimed tax credits and deductions that decreased your taxes payable but were not anticipated when your taxes were withheld at source. When you filed your tax return, the amount owing was less than what had been remitted and you were entitled to a refund.
Take the following steps immediately:
- If you are employed, carefully complete form TD1 Tax Credit Return so that your payroll department can calculate the correct amount of withholdings. Withholdings are based on the non-refundable tax credits you are entitled to, such as the basic personal amount, spousal amount, amount for dependent children, caregiver amount, tuition and education amounts etc.
- If you have other tax deductible expenditures, you should also file Form T1213 Request to Reduce Tax Deductions at Source. One of the most common deductions is for RRSP contributions. (Significant interest costs, rental losses, child care expenses or charitable donations, to name a few, are also deductible expenses that can reduce your tax withholdings.) Forced savings through payroll deductions deposited directly to your RRSP are the best way to "pay yourself first". Because your contributions are made with pre-tax dollars, instead of paying these funds to CRA as tax on your earnings, these funds are being diverted towards retirement savings. Furthermore, because the income earned in an RRSP is also sheltered from tax, your retirement savings can accumulate faster.
- By reducing your withholdings at source, you are paying yourself first, not CRA and increasing your net take-home pay. You are effectively giving yourself a raise, one that you receive with every pay cheque, all year long, not just once at tax time.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.