What better time to get a head start on a year’s worth of tax savings than with 2024 just around the corner. This is particularly true if you’re an employee, like me, who has taxes withheld from your paycheque each pay period by your employer, yet you end up with a significant tax refund the following spring.
As I’ve said many times, if you’re like most Canadians who get a tax refund each year, rather than giving yourself a pat on the back to celebrate your windfall, perhaps it’s time to revisit your tax strategy. After all, a tax refund is essentially an interest-free loan to the government for up to 16 months.
A couple of years ago, when interest rates on short-term cash were basically zero, not having that extra cash flow throughout the year was only beneficial if you were going to use those funds to pay down high-interest debt or invest in equities with the hope of a decent rate of return.
But with money market funds currently yielding around five per cent, getting some extra cash flow regularly throughout the year in the form of reduced employer tax withholdings, and then simply investing that extra cash in a money market fund or high-interest savings account can add up.
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 the source and so employees are most often the ones who get significant tax refunds each year. But tax is also withheld from other payments, such as registered retirement savings plan (RRSP) withdrawals as well as registered retirement income fund (RRIF) withdrawals (above the required annual minimum).
Your employer calculates the amount of tax withheld from your paycheque by taking into account certain specified credits to which you are entitled, but without taking into account various deductions and other credits 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 your employer, making you eligible for additional credits, consider updating your TD1 forms for 2024, and submit them to your company’s payroll department so your tax deductions at source can be reduced for 2024.
But for most of us, the root cause of a tax refund can be attributed to various tax deductions and credits that we claim when we file our return. The most common deductions and credits that give rise to a refund include RRSP contributions that are not made via automatic payroll deduction, deductible spousal support payments, interest on money borrowed for investment or business purposes, child-care expenses and significant charitable donations.
If you expect to have any of these deductions or credits in 2024, now is the perfect time to complete Canada Revenue Agency Form T1213, Request to Reduce Tax Deductions at Source. The form must be sent to the CRA and, once approved, you will receive an authorization letter that you can give to your payroll department that will allow your employer to reduce the amount of tax withheld at source for the 2024 tax year, taking into account the various deductions and credits you’ll be entitled to claim when filing your 2024 return.
Then, instead of waiting until May 2025 to get your 2024 tax refund, you can effectively begin receiving it via each paycheque through reduced tax withholding.
A quick warning, however, based on personal experience. You need to apply for this T1213 waiver each and every year, and you need to give the CRA ample time to review and send back your authorization letter.
I’ve been doing this for more than a decade, and while I’m ultimately successful, it sometimes takes a while (weeks or months). Last year (for 2023), the CRA didn’t process my T1213 until July 2023, despite my having sent it to them in late 2022.
For my 2024 authorization, I thought I would get ahead of the game and I sent the CRA my T1213 form on July 26, 2023, giving the CRA more than 22 weeks to review and process it.
I was excited when I received a brown envelope with a letter from the CRA on Sept. 29, 2023. Surely, this was my 2024 authorization, arriving well in time for my employer to process the reduced tax withholdings in time for the first payday in 2024.
Alas, it was not to be. Incredulously, what could have been my CRA authorization turned out to be a letter telling me my request could not be approved as it was sent to them too early. “We are unable to process requests for the following year until December 1 of the preceding year,” the CRA said.
The CRA told me to resubmit my T1213 request by Nov. 1, 2023, which would provide them with “enough (but, apparently, not too much) time to review your request and send a letter before the beginning of the year.”
On Oct. 16, 2023, I resubmitted my T1213 for 2024. I got a phone call last week from a CRA agent who confirmed that everything was in order and, sure enough, I received my authorization letter this week.
While I’ve already missed my payroll department’s deadline for the first payday of 2024, it should be able to process my form in time for the second payroll date, allowing me to begin getting my 2024 tax “refund” in the second half of January, which is a lot sooner than waiting until May 2025.