Filing your tax return is getting easier but many Canadians still procrastinate even beyond the April 30 deadline (or May 2 this year because April 30 falls on a weekend). If you do not owe tax, there are usually few consequences for filing late in Canada with some exceptions. Though a late filed return may result in your government benefits delayed.
For people expecting a refund, it may seem like a bonus payout from the government and feels great for a few moments until you realize it is money you overpaid the government in 2015. You are getting it back several months later with no interest. Once you understand this, tax refunds may not seem like a good idea after all.
Ideally, you should aim to have a zero balance when you prepare your return - so you don't owe and you don't have to pay. That means you have paid the right amount of tax during the year. This is not always possible but it should be your tax planning goal.
Review your TD1 Form
You may want to review your tax situation and figure out how to stop overpaying the government. If you are an employee, you may have completed a TD1 Form for your payroll department. They use this form to determine how much tax should be withheld from your paycheque by outlining the tax credits you would be eligible to claim. But this form should be updated when your situation changes. For example, if you get married and your spouse does not earn income, you can update your TD1 Form to reflect the fact you can claim the spousal amount.
This could also apply to students in their first job. If you have a large carry forward amount of tuition credits to claim in a tax year, you can indicate these credits on your TD1 Form and your tax withholding will be adjusted by your employer. This means you get a little bit more every paycheque rather than waiting for a refund when you file your return months later. However, you need to remember to adjust your TD1 Form once you exhaust your carry forward tuition and education credits.
For taxpayers who regularly make large Registered Retirement Savings Plan (RRSP) contributions every year, you cannot use the TD1 Form to adjust your tax withholdings. Your employer is legally obligated to calculate your tax withholdings based on your TD1 - they cannot make special adjustments. But you can complete a T1213 Form Request to Reduce Tax Deductions at Source with supporting paperwork and ask the Canada Revenue Agency (CRA) for a reduction. If the CRA approves, you can ask your payroll department to make the change. You are required to complete this process every year with a few exceptions.
Understand your refund
If you do find yourself with a large tax refund in 2015, make sure you understand how you got there. The government does not give you money back unless there is a reason. For example, you may have changed jobs in 2015 and your new employer could have deducted your withholdings as if you hadn't worked at your old job. This can lead to a refund once you file your return.
If you cannot figure out how you got a big refund, make sure you go back and check your calculations. Even if the government sends you a cheque, it does not mean they approve your submission. They start reviewing returns at the beginning of the summer and if they find an error, you will receive a Notice of Reassessment and a tax bill. No matter how you prepare your return, you become responsible for the forms as soon as you put your signature on the line or hit 'send'.
Tax refunds are a sign of poor tax planning. If you are experiencing life changes in 2016, it could be worth reviewing your situation before it is time to file your return. It is always better to keep your money rather than overpaying your taxes every year.
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