When you work for an employer, he will automatically deduct Canada Pension Plan contributions, Employment Insurance premiums and incomes tax from your pay cheque. However, when you file your tax return you may end up owing taxes or receiving a refund. If you prefer to avoid either of these situations and end the year financially balanced, you can ask your employer to change the amount of tax deducted from your pay cheque.
Reducing the Amount of Tax Deducted
When you file your taxes, there are several deductions you can claim. These deductions lower your taxable income and potentially qualify you for a refund. While many taxpayers enjoy having a lump payment once a year, others prefer to keep their money throughout the year.
If you fall into the latter category, you can request that your employer reduce the amount of tax withheld from your pay cheque. Some deductions that can push you into this category include charitable donations, employment-related expenses and child care deductions.
Additionally, if you donate money to a Registered Retirement Savings Plan on your own rather than through your employer, you may also want to consider reducing the amount of your deducted taxes.
Form TD1
To change the amount of income tax deducted by your employer, fill out a Form TD1. The form is available for download online from CRA although your employer may already have this form available to you. Simply fill in the blanks for credit amounts such as spousal or dependant credits, tuition, disability and caregiver amounts. These amounts give your employer a view into how much income tax should be deducted at the source and your employer can adjust your tax withholding accordingly. Return this form to your employer – not CRA.
In addition to totalling all of your anticipated credits, the form TD1 is also the way to have extra income tax deducted if you think you will have a balance owing at tax time due to other income circumstances.
Increasing Income Tax Deductions
Depending on your situation, you may end up with a balance due on your tax return even if the correct amount of tax is deducted by your employer. For example, if you own a small business in addition to your job, you may anticipate owing taxes on income from your business. If you want to avoid a lump sum of taxes owed when you file your return, you can ask your employer to withdraw extra taxes from your pay cheque.
Similarly, if you have a part-time job in addition to your regular full-time job, each employer withdraws payroll taxes from your cheque as if it is your only job. When you file your taxes, the combination of your two jobs may push you into a higher tax bracket and could result in a tax bill.
If you anticipate a high tax bill in April, fill out the “additional tax to be deducted” section of the TD1 and return the form to your employer.