I've said it before and I'll say it again: a tax refund is a sign of poor tax planning. After all, what you've essentially done is loaned your hard-earned money to the government, interest-free, for as long as 16 months!
With just under three weeks to go until the April 30 deadline for most Canadian taxpayers (if you or your spouse or partner is self-employed you have until June 15 to file), preliminary statistics released from the Canada Revenue Agency show that, as of March 31, 69% of early tax filers will be receiving a refund, pegging the average refund at $1,706.
A tax refund typically arises when the amount of tax owing on your return is less than the amount of tax withheld from your 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.
The amount of tax withheld by your employer is calculated by taking into account various credits to which you are entitled but without taking into account various deductions often claimed on your tax return.
It's too late for 2014. But, depending on your personal situation, if you're an employee, there are two primary ways you can avoid getting a tax refund for 2015: updating your Form TD1 and requesting a tax reduction at source, Form T1213.
Updating your TD1
When you first became an employee, you likely completed Form TD1, "Personal Tax Credits Return," along with its provincial or territorial equivalent. This form lists the various credits to which you are entitled, such as the basic personal amount (2015 federal amount is $11,327), the disability amount ($7,899) and the spouse or common-law partner amount (maximum of $11,327 less your spouse's or partner's estimated net income for 2015).
Let's say you got married since you first started working and completed the TD1 form. Now is a good time to update the form if your spouse's income for 2015 will be below $11,327.
The updated TD1, along with its provincial or territorial equivalent, should be submitted to your employer as soon as possible so that your tax deductions at source may be reduced for the balance of 2015.
Reducing tax at source, Form T1213
Similarly, if you're an employee that makes regular RRSP contributions (other than by direct payroll deduction), there's an easy way to get the resulting tax refund throughout the year. Simply complete CRA Form T1213, "Request to Reduce Tax Deductions at Source," in which you list various deductions that you plan to take when you file your 2015 return, such as your RRSP contribution, deductible spousal support payments, interest on money borrowed for investment or business purposes, or childcare expenses.
This form must be mailed to the CRA and, once it's approved, you will receive a formal authorization letter that you submit to your employer's payroll department, authorizing it to reduce the amount of tax withheld at source from each remaining paycheque in 2015.
Using one or both of these methods should help keep you from becoming an interest-free lender to the government.