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How To Reduce Tax Deductions At Source: Canada

Updated on September 6, 2011

What are "Tax Deductions at Source"?

Simply put, tax deductions at source are the witholding taxes that your Employer takes off your pay cheque each month. The great news is that you do have some control over being able to reduce the amount of tax deductions, especially if you usually receive a tax refund. This information will help any Canadian Employee to take immediate steps to apply for reducing tax deductions so that you can enjoy more of your money sooner!

The reason behind your Tax Refund

We all enjoy getting a nice tax refund every year, it's a little bit of extra money to put to some good use. But did you ever stop to ask yourself why you were getting a tax refund anyway? The simple truth is that you paid too much tax to the Canada Revenue Agency at source and they have a legal obligation to repay you this money. In other words, the tax deductions from source (your pay cheque) are higher than they need to be. It's like you've given the Canada Revenue Agency an interest-free loan. Unfortunately, the CRA don't pay you a single cent interest on your hard earned money, even though they've gladly held it for you in safe keeping over the year. Perhaps getting a tax refund doesn't sound like such a good idea after all?

Let's look at how it's possible to reduce your tax deductions at source by planning a little bit ahead. The process to reduce your tax deductions at source sounds as though it may be complicated, but it's really quite easy to follow these simple steps.


The Tax Benefits of an RRSP

The main reason that most Canadians enjoy a tax refund at the end of the year is due to the tax shelter benefits of contributing to an RRSP (Registered Retirement Savings Plan). If you do make regular contributions to an RRSP, then instead of receiving a lump-sum refund at the end of the year, you can ask the Canada Revenue Agency for approval to reduce your tax deductions at source, thereby lowering your witholding taxes each and every month. This gives you more money on your pay cheques spread out over the course of the year. The extra cash will make it much easier for you to make regular contributions to your RRSP and to hit your 18% target much much sooner. Having more money to invest sooner will greatly impact your potential for a higher return in the long run.

Apply to the Canada Revenue Agency

To apply to the Canada Revenue Agency for approval to reduce your tax deductions at source, you must fill out form T1213, "Request to Reduce Tax Deductions at Source". The best time to submit the T1213 form is around November when you have a good idea of what your tax-deductable items will be for the following year. The CRA take a few weeks to process your request so by doing this you should receive your approval letter well before the start of the new year.

Supporting Documentation

To file your request you must have supporting information to validate your case to reduce your tax deductions at source:-

1. Details of how much money you intend to contribute to your RRSP. It helps if you have a pre-authorized contribution plan that you can give supporting documentation of. Remember, you are referring to the following year so if you intend to maximise your RRSP contributions and you have a good idea of what your current earnings are then you could explain on your form that you intend to contribute 18% of earnings and provide them with a supporting figure.

2. Supporting documentation for any other non-refundable tax credits you expect to claim, such as child care expenses, support payments, employment expenses, and interest expenses on investment loans.

3. Your personal information and details about your Employer.

Once you have gathered all the information you need, you are ready to submit your form to the Canada Revenue Agency. Your local tax office information can be found on the CRA website.

Give the Approval Letter to Your Employer

Once you receive your approval letter from the CRA, you will need to give the letter to your Employer and keep a copy for yourself. Do this as soon as you receive the letter so that your Employer can start to reduce your tax deductions at source in plenty of time for your first pay cheque of the year. It's always a good idea to follow up with your Employer just to make sure that payroll has processed the change in tax deductions. You will certainly notice the difference when you get more money on your pay cheques!

Enjoy your money now, rather than waiting over a year for a tax refund!



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    • Cloverleaf profile image

      Cloverleaf 6 years ago from Calgary, AB, Canada

      Great advice, Mark :-)

    • profile image

      Mark Randall 6 years ago

      When claiming different deductions on your taxes it is always important to make sure that you keep documentation or receipts. For example, if you are donating to a charity make sure that you ask for a voucher. This way if there is any question about it on your taxes you will have the appropriate information to back it up.