Tax Matters

Jamie Golombek

As managing director of tax and estate planning with Canadian Imperial Bank of Commerce's wealth advisory services division in Toronto, Jamie Golombek is quoted frequently in the national media as an expert on taxation.

Getting a tax refund is a sign of poor tax planning, so help clients reduce the taxes their employers withhold for the rest of 2017

By Jamie Golombek |

With Mon. May 1 being the personal tax-filing deadline for most of our clients' 2016 taxation returns (the self-employed and their spouses or partners have until June 15 to file), it means many of your clients will receive their tax refunds within a matter of weeks. Yes, that's right — most Canadians are still getting a refund come tax time, with the average refund for 2016 (as of the time of writing) being $1,637.

I've often written that getting a tax refund is a sign of poor tax planning. Although $1,600 is certainly nothing to sneeze at, what's more concerning is clients who routinely get back thousands of dollars each year in tax refunds.

Take the case of one client, Paul, for example. He's an Ontario resident who earns $200,000 annually and who maxes out his annual RRSP contribution. That means he would have contributed $25,370 to his RRSP for the 2016 taxation year. Paul also made $6,000 in charitable contributions and deducted $2,000 of interest expense on a margin loan. Paul is filing by midnight May 1 and his refund for 2016 will be close to $16,000, which he should receive in a couple of weeks.

Of course, the Canada Revenue Agency (CRA) pays interest on tax refunds. However, that's only starting on May 31, which is 30 days after the tax-filing deadline — assuming the return is filed on time. Even if Paul files on the May 1 deadline, he will likely get his refund well before May 31, meaning that at least part of his $16,000 of overpaid taxes has been sitting with the CRA interest-free for as long 17 months — if we consider that taxes are withheld from his paycheque bi-weekly dating back to January 2016.

Now, imagine if Paul had access to the $16,000 throughout 2016? This money could have been used to invest in his RRSP, TFSA, or his kids' RESP. And with the S&P/TSX 60 index's return of more than over 20% during the 2016 calendar year return, think of the tax-free or tax-deferred  returns he could have earned inside any of these plans had Paul received these funds throughout the year — perhaps via reduced tax withholdings at source.

By encouraging your clients to complete CRA Form T1213, Request to Reduce Tax Deductions at Source, they can reduce the taxes their employers withhold for the rest of 2017 and avoid getting the same, large, interest-free refund next year.

Just note that the T1213 form is commonly used to take into account RRSP contributions, child-care expenses, support payments, employment expenses, carrying charges and interest expenses on investment loans, medical expenses and charitable donations.