According to the Canada Revenue Agency, the average tax refund in 2011 was $1,583. It is nice to receive a cheque from the government but a tax refund is not good, because you are only receiving your own money back. Your tax refund is money you have overpaid the government during the year. Some people call this "intaxification" -- the euphoria you feel when you get your tax refund and then realize that it was always your money anyway.
If you have a financial plan, tax planning should be part of it. Most people do not think about their taxes until they file their return. By then, it is usually too late to actually do anything that impacts the result, and you are stuck with an unexpected tax bill. Ideally, you want to neither owe money nor receive a refund when you file your tax return. You want to pay the right amount of tax during the year, rather than give the government an interest-free loan.
Pay attention to paycheques
If you are a salaried employee, your payroll department will ask you to complete a TD1 Form when you are hired. Employers are obligated to withhold tax based on how you complete your TD1 Form. In most cases, people fill out the form and never think about it again. But if your life changes, you should update your form to reflect the new situation.
For example, you can indicate your tuition carry forward amount on your TD1. If you were not able to use all your tuition and education credits while you were going to school, the amount you carried forward should be on your last Notice of Assessment. The credits usually result in a nice refund when you file your first tax return after school, but you may want to receive a little bit more on your paycheque every month instead of a lump sum when you file. If you do include your carry forward amounts on your TD1, make sure you update the form the following year when you no longer have the credits.
You should also update your TD1 if you get married and your spouse has little to no income. For example, if your spouse earned no income in 2012, the spousal amount would be $1,623 in tax savings. So updating your TD1 means an extra $135 per month, rather than the lump sum at tax time.
The same applies if you have a child, since you can claim the child amount for tax savings. And if you are a single parent with custody, you can claim the eligible dependant amount. It may not result in a huge increase in your paycheque but it is better than giving the government an interest-free loan.
Claiming other deductions
The TD1 Form does not cover all the credits and deductions that are available on your tax return. If you want your tax withholding changed because you make a large Registered Retirement Savings Plan (RRSP) contribution every year, you cannot just ask your employer to make the adjustment. You have to complete a T1213 Form Request to Reduce Tax Deductions at Source, provide supporting documentation and send it to the CRA for approval. The CRA will require proof that you are making your RRSP contributions.
You can also use the T1213 Form if you have childcare expenses, since these can also lead to significant tax savings.
Once you have received approval from the CRA, notify your payroll department and it will make the adjustments. With a few exceptions, you have to complete the T1213 Form every year, so it does require some planning.
Understanding tax events
Many events have major tax implications. Trying to figure out how to lower your tax bill on April 29 is not good planning.
Inheritances are not taxable, for example, but if you earn income from the money you receive then that income is taxable. And if you inherit a house when you already own one, you may be facing capital gains on the eventual sale of the home. If you have a stock or share that has been good to you during the year and you cashed some of your holdings, you will again be facing a capital gains amount. And bonuses or gifts from work may be considered a taxable benefit and appear on your T4.
It is important to think about your taxes outside of the last few weeks before the deadline. Life events -- both good and bad -- can change your tax situation and being aware of that will likely save you both money and headaches.