The arrival of 2019 also marks the beginning of a new taxation year.
So, here are a couple of ideas — one for your employee clients and another for your retiree clients — that you can discuss in your first meeting of the year.
Employees generally have tax deducted at the source from each paycheque. Employers calculate the amount of taxes withheld by taking certain credits to which the employees entitled into account, but without taking into account various other credits and deductions they may ultimately claim when they file their tax return.
If your clients regularly expect a large tax refund in the spring, then January is a great time to get a head start on reducing the amount of taxes withheld by their employer. There are two main ways to do this: revisiting their TD1 form and filing a T1213.
Form TD1, Personal Tax Credits Return, along with its provincial (or territorial) equivalent are forms that employees would’ve filled out when they first started working for their current employer. The form lists 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 your clients’ personal situation has changed since they joined their current employer, 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 2019.
But, for many employees, the root cause of a tax refund are tax deductions and certain other credits that they will take when they file their 2019 return, such as their RRSP contributions, deductible spousal support payments, interest on money borrowed for investment or business purposes, child-care expenses, medical expenses and donations, which aren’t reflected when an employer deducts the taxes at source
If that’s the case, now is a great time to encourage clients to fill out CRA Form T1213, Request to Reduce Tax Deductions at Source, which must be sent to the CRA and, once approved, authorizes the employer to reduce the amount of taxes withheld at source for 2019.
Using these methods will improve the client’s cash flow throughout the year — and eliminate their tax refund next filing season. (As I’ve often said, getting a refund is a sign of poor tax planning.)
In addition, the increased cash flow that they’ll get with each and every paycheque can be repurposed toward their 2019 TFSA, RRSP or RESP contributions through an automatic investment program.
If you have clients who are at least 65 years of age but don’t have any pension income, consider advising them to convert a portion of their RRSP to a RRIF and then withdrawing $2,000 annually to take advantage of the annual pension income credit.
Remember that if these clients don’t use the credit in a particular taxation year because they didn’t have pension income, it’s lost forever (for that taxation year).
Finally, investors who hold a RRIF and are at least 65 year of age with a spouse or partner in a lower tax bracket may wish to withdraw more than the statutorily required minimum amount annually if it offers an opportunity for pension income-splitting, which can reduce the overall tax burden of the couple over multiple tax years.
This, of course, must be balanced between the trade-off of losing the continual tax shelter of investment income that comes with keeping more funds inside their RRIF. As an advisor, you can help them model this situation.