When your employer drafts your paycheque, they automatically withhold your Employment Insurance (EI) premiums, Canada Pension Plan (CPP) contributions, and income tax, and they remit those payments to the Canada Revenue Agency (CRA).

The CRA calculates CPP and EI payments in a fairly straightforward manner, applying a set percentage to a certain range of earnings. The formula applied to income tax, however, is more complex. In some cases, you may end up either owing money or receiving a refund due to the amount of income tax your employer has withheld. It’s important to understand how it all works.

Establishing Your Income Tax Payments

When you start a job, you usually fill out a TD1, Personal Tax Credits Return. The information on this form tells your employer how much income tax to withhold from your paycheque. As you pay both federal and provincial income tax, you’ll fill out both a federal and a provincial or territorial TD1 form. Your employer is obligated to withhold your income tax and send it to the CRA.

Reducing or Increasing Your Tax Withheld

If you want to reduce the amount of income tax your employer withholds from your paycheque, submit Form T1213 to your nearest tax centre. Include notes about why you qualify for a reduction and any supporting documents. If you qualify, the CRA will send you a letter of authority. Give this letter to your employer so that he can reduce your tax deductions accordingly.

To increase the amount of tax withheld, simply fill out a new Form TD1, and give it to your employer. You do not have to send a copy to the CRA.

Filing Your Taxes

The amount of income tax that was deducted from your paycheque appears in Box 22 of your T4 – Statement of Remuneration slip. If you have other income sources, income tax may be withheld on these payments as well. You will receive a T-Slip that corresponds to that payment and Box 22 of the slip will show how much tax has been withheld at the source. Here is a list of common income sources and the corresponding slip you will receive:

Add all of your income tax deductions together and report that amount on line 43700 of your income tax return. When you use tax software like TurboTax, the amount of tax withheld will appear on this line when you enter your individual tax slips. 

 After you enter all your information and claimed any credits or deductions you are eligible for, if you have overpaid your income tax, you will receive a refund.  If you have underpaid, you will have a balance due and owe the CRA money.

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