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In Canada, it’s your employer’s responsibility to collect taxes from their staff. These are withheld from your paycheck and sent to Revenue Canada in your name. When you start a job, you fill out tax documents. These are used to determine how much the employer issues to the Canada Revenue Agency for you. However, because of shifting tax regulations, a lot of workers feel short-changed when receiving their regular pay. To avoid any confusion, it helps to understand how the behind-the-scenes taxes work. Equipped with this information, you can both tax plan and try to get more on your regular pay.
How Does an Employer Determine How Much Tax to Withhold?
First, let’s talk about how your boss figures out how much tax to take off your regular paychecks. It starts with the TD1 forms, both federal and provincial. Based on what you write down, the employer will take a certain amount off of your cheque. On the form, you can include information about your deductions: basic personal amount, caregiving, and more.
The employer calculates your annual earnings, based on hourly wage and projected hours or your salary. Based on the cumulative federal and provincial tax rates, the employer withholds and remits to the government those monies. Other withholdings include Employment Insurance and the Canada Pension Plan. The standard TD1 forms reduce this amount by lowering the number on which the tax is calculated.
Though the forms are, for the most part, effective, they might not give them a full picture. This can result in your boss taking more off of your cheque than necessary. It might pay off at tax time, but it can seriously impact your liquid cash flow throughout the year. Thankfully, there’s the T1213, an opportunity to turn the tables.
What is The T1213 Form?
Essentially, the T1213 is a form that lets you request to have less tax withheld at the source. It works to either pay less tax on each cheque or on a specific amount of money. Far more detailed than the standard TD1 form, it gives you the opportunity to claim deductions and non-refundable credits that don’t appear on the regular form.
Among the applicable sections on the T1213 is a section for child care and medical costs. Since these are tax-deductible, you ultimately won’t be paying tax on them. Instead of correcting them during your annual filing, you can inform your employer of how much you pay in these categories. It will then be factored into your paycheque’s deductions.
The spirit of the form is to best represent your financial situation, not to cheat the system and pay less. As a result, you may be required to submit substantiating documentation to prove your claims. By informing your employer of your circumstances, using this form, your pay will better represent your actual net earnings.
How Does The T1213 Form Work?
The T1213 applies to any income directed toward a deductible expense. Take, for example, using your Registered Retirement Savings Account (RRSP) to optimize your savings and help you pay less at the source. Let’s say you earn $70,000 a year and want to max out your RRSP contributions by adding to the account every month. The annual limit is $12,600 or 18% of your annual income for the previous year.
If you decide to keep extra liquid cash and invest only 12.86%, for an annual amount of $9,000 ($750 per month), you would qualify for a monthly reduction in tax withholding. According to Ontario tax standards for the 2019 tax year, you would get an extra deduction of $222 per month.
This is a prime example of just how useful the T1213 can actually be. If you were to wait until your tax return to contribute to that savings account, you would miss out on substantial compound interest. If you add to your savings monthly, then you can steepen the exponential curve of your savings and earn drastically more in the long run.
Are you close to retirement? Check out these tax credits and deductions for seniors.
How do You Make a Request to Reduce Tax Deductions at Source?
STEP 1: Determine That You Qualify
If you’re looking through your pay stubs and notice a larger than necessary amount of tax being taken off at the source, it might be time to file a T1213. Doing so, in effect, divvies up a portion of your annual refund and returns it to your paycheque. Instead of refunding it in the long run, the government just lets you keep it right away.
Check out the minimum wage rates in your province.
STEP 2: Get Your Documents Ready
The first step is accessing the form itself. It’s actually really quick and painless to fill out, being only one double-sided page long. There are two approaches you can take. The first is to reduce withholdings on a lump sum, like that annual bonus, large commission payment, or vacation payout. If you want to do this on a regular basis, you would fill it out according to your annual salary.
STEP 3: Submit The Form
Once you’ve completed the form, you can send it to your closest Revenue Canada services. This form is then sent to your local CRA tax services office for approval. After they have checked it over and approved the form, the CRA sends out a letter of authority. The employer then adjusts your tax deductions according to the form’s indications.
Learn how to open a CRA My Account.
STEP 4: Repeat Annually
Your acceptance doesn’t re-up automatically, rather you must apply every year provided your situation remains consistent. This practice is meant to accommodate those with fluctuating situations and enables you to better handle lump sums and annual bonus structures. Always be ready to substantiate your claims upon request, keeping all relevant receipts and paperwork.
Should You File a T1213 Form?
If you file a T1213 and qualify for those source deductions, then the only impact will be a reduced refund at tax time. However, if you weren’t going to get a refund, it will result in a significantly larger tax bill all at one time. The idea is to balance how you use your true net earnings. Sure, it sounds great to get a few thousand dollars during springtime, but it can actually lose you money in the big picture.
Consider that, if you get a refund, there was no actual reason for the government to have held onto that money throughout the year. You don’t earn interest if Revenue Canada is just stashing your estimated taxes each month. Basically, you’ve loaned them hard-earned cash for no reward. That’s why, in many situations, getting a refund when you file your taxes can be indicative of suboptimal financial planning.
Let’s say you earn $40,921 every year, a dollar below the federal cutoff to be taxed at 15% and, in Ontario, to be taxed provincially at 5.05%. Your employer may withhold approximately $650 per month from your cheque. However, if you get a return every year due to deductibles like child care, you are likely overpaying.
If your annual return works out to just $1,000, that means you could have held onto roughly $83 per month. It might not sound like much, but put into high-interest savings, you can add to it significantly by factoring in compound interest.
Benefits of Filing a T1213 Form
Ultimately, this form is to regulate your monthly earnings to best reflect your true net income. Not only does it increase your access to liquid cash throughout the year, but it also gives you the chance to plan your finances better. By gaining an understanding of what you truly make — what you can spend and save — you can invest safely and make choices to make your future better.
Any chance to gain better insight into your finances poses an opportunity to improve your future situation. Considering how to approach your taxes doesn’t have to be an annual matter. The T1213 lets you approach your earnings on a more regular basis, giving you the chance to invest, save, and grow your money.
Of course, every reward comes with its own set of risks. If you were going to get a refund, then there is no real downside. Conversely, if you end up making it to a higher tax bracket than expected, you will have remitted much less and have a higher amount owing. It’s up to you to decide how to approach your money — the T1213 gives you the power to control it throughout the year.
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