Improving Your Cash Flow – Tax Tip
Many people look forward to receiving an income tax refund each spring. However, a refund means the taxpayer has overpaid taxes and it may be a sign of lack of tax planning. In simplistic terms, a taxpayer who receives a refund has been “loaning” the government money. A refund means that you have had less money, and poorer cash flow, over the past year, than you should have had.
Typically, large refunds are as a result of RRSP contributions or other deductions such as for childcare, or spousal support. For instance, because periodic spousal support is tax deductible to the payor in Canada, high income earning spousal support payors can receive more than half the support paid back from the Canada Revenue Agency upon their taxes being processed.
Fortunately, the CRA allows for taxpayers to apply to have less tax withheld at source, if they know that they are going to receive a large refund. In other words, employee taxpayers can complete a form that will increase their net pay, and therefore improve their cash flow.
For instance, a support payor who pays $3,000.00 per month in spousal support a year, and earns in the range of $125,000.00 per year, could improve cash flow by approximately $1,000.00 per month, depending on several variables.
The form, T1213, is called “Request to Reduce Tax Deductions at Source.” Once your request is successfully processed, the CRA will send a letter of authority, which your employer’s payroll officer will then use to adjust your pay deductions. The form typically must be completed once a year although in certain situations, support payors can apply for a two-year period.