For most of us, tax-filing season is over. (The self-employed have until June 15 to file). And judging by statistics released by the Canada Revenue Agency earlier this week, most of us have, indeed, filed on time.
As of the 2015 personal tax return filing deadline — May 2 this year, since April 30, the usual deadline, fell on a Saturday — the CRA had already received approximately 23.6 million returns. Based on the 28.8 million returns it received last year, that means the CRA has received approximately 82 per cent of the number of returns it’s expected to receive for the 2015 tax year.
Of the returns processed to date, 61 per cent indicated a refund for 2015, with the average refund being $1,671. Only 19 per cent of returns processed showed a balance owing (average $4,653) with the remainder being nil returns.
If you’re one of the Canadians that is getting a refund, rather than giving yourself a pat on the back to celebrate your windfall, it’s perhaps time for some introspection. In other words, why did you receive a tax refund in the first place? After all, a tax refund is a signal that you’ve loaned your money to the government, interest-free, for up to sixteen months!
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. 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 your employer by taking into account various credits to which you are entitled, but without taking into account various deductions you may ultimately claim when you file your tax return.
The first way to reduce your taxes withheld by your employer is to revisit Form TD1, “Personal Tax Credits Return,” along with its provincial (or territorial) equivalent, which you would have filled out when you first started working. This form lists the various credits to which you are entitled, such as the basic personal amount, the disability amount and the spouse or common-law partner amount, among others. If your personal situation has changed since you joined, making you eligible for one or more of these credits, you may wish to complete updated TD1 forms and submit them to your payroll department so your tax deductions at source may be reduced for the rest of 2016.
But the root cause of a tax refund for many Canadians are tax deductions that you take when you filed your 2015 return, such as your RRSP contribution, deductible spousal support payments, interest on money borrowed for investment or business purposes, or childcare expenses, which aren’t reflected when your tax at source is deducted by your employer.
If that’s the case, consider filling out CRA Form T1213, “Request to Reduce Tax Deductions at Source,” which must be sent to the CRA and, once approved, authorizes your employer to reduce the amount of tax withheld at source for the balance of 2016.
Using these methods will improve your cash flow throughout the year — and eliminate your tax refund next filing season.