Each year you wait for your tax refund. This refund is a result of various deductions or tax credits, such as Registered Retirement Savings Plan (RRSP) contributions, that you used on your tax return to reduce your taxable income. However, you may not be aware that it is possible to increase cash flow during the year by reducing the income tax withheld on your employment income.
How to increase cash flow
if the amount of income tax withheld on your employment income is reduced, you pay less income tax over the year rather than overpaying and then applying for a refund the following year. And instead of Canada Customs and Revenue Agency (CCRA) having the use of these excess tax withholdings during the year, you get to keep your own money
This increased cash flow can help you make regular commitments, such as RRSP contributions. The RRSP deduction limit is frozen at $13,500 for 1998 through 2003. This limit will increase to $14,500 in 2004 and $15,500 in 2005, after which the limit will be indexed to increases in the average wage.
With everyday financial demands consuming so much income, it is becoming more difficult to contribute a lump sum each year. And by delaying your contribution to the end of the RRSP season, you lose the opportunity to shelter that year's investment income from tax.
The best way to reach your RRSP limit is to contribute monthly. Notify CCRA that your taxable income will be reduced by an annual RRSP contribution, thus allowing a reduction of payroll withholding taxes.
For instance, the limit of $13,500 amounts to contributions of $1,125 per month. By notifying the government of this contribution, your monthly tax bill could fall by an amount equivalent to your marginal tax rate (as much as $540, or 48 per cent of the contribution in Ontario). When combined with other available reductions described below, the savings can be substantial.
Canada Customs and Revenue Agency (CCRA) requirements
While the legislation requires that there be "undue hardship" before CCRA can reduce employee withholdings, many district offices apply this rule liberally and will routinely permit a reduction of withholdings for certain deductions and tax credits. As in the case described above, CCRA will normally permit a reduction in withholdings for RRSP contributions to be made during the year. While CCRA may request receipts showing that contributions have been made, they normally accept a letter stating that contributions will be made, which once approved by them, is forwarded to your employer's payroll department. This reduction in withholdings not only applies to RRSP contributions, but can also be permitted based on the following deductions or credits:
The procedure for obtaining the reduction in your employee withholdings may vary depending on the requirements of specific taxation offices.
Generally, to apply for a reduction in withholdings, you must send a letter to the source deductions section of the appropriate district taxation office. This letter should indicate which deductions or credits you rely on to support the reduction in withholdings in accordance with the undue hardship provision of subsection 153 (1.1) of the Income Tax Act. Copies of receipts in support of the reduction, if available, should be enclosed.
The following information should be included in the letter:
- The name and address of your employer
- The name of your employer's payroll officer
- Your social insurance number
You should also indicate whether all tax returns due have been filed and if taxes owing with respect to prior years have been paid. In a separate schedule, you should provide a calculation of estimated income from all sources for the year.
Canada Customs and Revenue Agency has form T1213, entitled "Request to Reduce Tax Deductions at Source", for this purpose.
If CCRA grants the request, it will send a letter to your employer indicating that tax withholdings can be reduced by a specific amount. A copy of this letter will be sent to you. This procedure must generally be repeated each year.
Note: If you are a member of a Group RRSP, your employers payroll department will handle your RRSP contributions and your tax deductions. However, if you do not contribute to your RRSP through payroll deductions, you need to send a letter of request to CCRA.
Residents of Quebec must send a separate letter to the Quebec Ministre du Revenu in addition to the request sent to CCRA. This should ensure Quebec taxpayers obtain both provincial and federal withholdings relief.
This Taxation Bulletin has been prepared with assistance from the Chartered Accounting firm of ERNST & YOUNG
© 1997, Fiscal Agents
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