Why a Large Tax Refund May Be Costing You Money
Most (if not all) of us would be thrilled to see a big tax return. Who doesn’t want money back each spring? However, you might want to rethink that in some instances as a sizeable tax return could be doing you a disservice. You may be asking yourself how this could be, and a common example is your employer may be withholding more than the ideal amount of tax at source. This means there is an opportunity cost for lost on money that could have been invested or enjoyed earlier as CRA does not pay interest on money they owe to you before you file your taxes.
You might be familiar with the Form TD1, 2026 Personal Tax Credits Return which allows your place of employment to properly deduct taxes from your paycheques. There also happens to be a Canada Revenue Agency (CRA) Form T1213 (Quebec taxpayers must also complete Form TP-1016-V) which allows for a reduction on the amount of income tax your employer/place of employment is deducting from your pay.
When and how could this be helpful?
If applicable, this allows you to increase net pay immediately rather than wait for a lump sum tax refund at the end of tax season. Potential deductions available for you to choose from on the T1213 (TP-1016-V) include:
RRSP Contributions: Regular contributions to a personal RRSP.
Child Care Expenses: Eligible childcare expense deductions
Support Payments: Deductible spousal or child support payments.
Employment/Medical Expenses
Carrying charges and interest expenses on investment loans
Donations: Charitable donations
Clergy Residence: Deductions for clergy members.
To qualify, you’ll need to submit a filled copy of the T1213 form to the CRA. Once approved, CRA will provide you with a letter of authority with which you can then submit to your employer to adjust the tax deducted from your pay.
A common example we see each year that utilizes this form is near year end when bonuses are being paid. You can pre-emptively complete this form and have it approved by CRA should you wish to roll the full bonus into your RRSP for a greater deduction as no taxes will be withheld at source. We also see these forms being used for those facing OAS claw back as the T1213 OAS variant can help you be re-approved for OAS payments if your prior year income was higher than current year income.
This update could improve cashflow and assist with day to day decision making as the cost of living rises – whether it be paying bills or even lifestyle enhancements such as upgrading to a bigger car since there’s a new family member, or planning a trip that was previously not in the budget. For those who prefer to continue socking away cash and investing for the long term, you’ll be able to take advantage of compound investing even more by leveraging the opportunity to redirect the increased take home pay to your TFSA account if it hasn’t been maximized yet.
To illustrate how all this can come together, let’s look at an example. Suppose we have Amy who lives in Ontario with an annual income of $70,000 and she is looking to contribute $7,500 to her RRSP. By filing a T1213, and based on the current tax rates for her income bracket, she would be eligible for a reduced withholding taxes amounting to approximately $185 monthly. Now if we were to redeposit that back into a TFSA, this small change could mean a yearly contributed amount of $2,220. Taking this amount invested over a 30 year horizon, this small monthly change compounded at an average 7% annual investment growth model could grow to just over $225,700 of tax free gains over her career.
Alternatively, that extra $185 a month could also serve monthly cash flow expenditures to provide lifestyle benefits such as covering an expense you’ve been putting off, signing up for the local health club, or an extra night or two out each month.
If your financial circumstances have changed since you originally determined your tax deduction at source, or if you are looking for a more efficient way to manage monthly cash flow, reviewing whether a T1213 applies to your situation may be worthwhile. When used appropriately, this strategy can help you access more of your income throughout the year rather than waiting for a refund after filing your tax return.
Written By: Clement Leung
