Tax season is now in full swing. To date, the Canada Revenue Agency (CRA) has received nearly five million personal tax returns, with an estimated 25 million more returns yet to be filed. And, so far, two-thirds of all those earlier filers have received a tax refund, with the average refund for the 2022 tax year being $2,172.
This, of course, raises the question, Why do our clients get a refund each year? Is it because of savvy tax planning on their behalf? Or is it actually a sign of poor tax planning? After all, a tax refund is a signal that an individual has loaned their money to the government, interest-free, for up to 16 months!
A tax refund typically arises when the amount of tax owing on a return is less than the amount of tax withheld from a client’s income during the year. Employment income is the most common type of income from which tax is deducted at source, and thus employees are most often the ones who get significant tax refunds each year. But tax is also withheld from other payments, such as RRSP withdrawals as well as RRIF withdrawals beyond the annual minimum required withdrawal amount.
For employees, the amount of tax withheld is calculated by their employers by taking into account various credits to which they’re entitled, but without taking into account various deductions they might ultimately claim when they file their tax returns.
The first way to reduce taxes withheld by an employer is to ask your clients to reach out to their employers to revisit Form TD1 Personal Tax Credits Return, along with its provincial (or territorial) equivalent, which they would have filled out when they first started working. This form lists the various credits to which they’re entitled, such as the basic personal amount, the disability amount and the spouse or common-law partner amount, among others. If a client’s personal situation has changed since they started working, making them eligible for one or more of these credits, they may wish to complete updated TD1 forms and submit them to their payroll department so their tax deductions at source may be reduced for the rest of 2023.
But the root cause of a tax refund for many Canadians are tax deductions taken when filing their 2022 returns, such as RRSP contributions, deductible spousal support payments, interest on money borrowed for investment or business purposes, or child-care expenses, which aren’t reflected when tax at source is deducted by an employer.
If that’s the case, now is a great time to remind clients to consider filling out CRA Form T1213 Request to Reduce Tax Deductions at Source, which must be sent to the CRA and, once approved, authorizes the client’s employer to reduce the amount of tax withheld at source for the balance of 2023.
Using these methods will improve a client’s cash flow throughout the year — and eliminate their tax refund next filing season.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto.