By the beginning of June, most Canadians have filed their individual income tax return for the 2020 tax year and received a Notice of Assessment (NOA) outlining their tax position for that year. Mid-year is very good time to assess one’s tax position for the current year and is particularly a good idea for taxpayers who have received a large refund or a bill for tax owing.

A refund, especially a large refund, means that the taxpayer has overpaid his or her taxes for the previous year and has essentially provided the Canada Revenue Agency (CRA) with an interest-free loan of funds that could have been put to better use in the taxpayer’s hands. The other outcome — a large bill — means that taxes have been underpaid for the previous year and could mean paying interest charges to the CRA.

Either way, it’s in your best interests to ensure that tax paid throughout the year is sufficient to cover taxes without overpaying or underpaying. The best-case scenario is to receive an NOA which indicates that there is neither a refund payable nor any amount owing.

All of this makes the mid-point of the tax year a good time to assess one’s current-year tax situation, make sure that everything is on track, and put in place any adjustments needed to help ensure that there are no tax surprises when filing your tax return for 2021 next spring. As the calendar year goes on, the opportunities to make a significant difference to one’s current year tax situation diminish.

The first step in doing that review is to get a sense of how much tax one will have to pay for 2021. By mid-year, most taxpayers will have a good sense of what their income will be for 2021. Consequently, where income hasn’t changed much, the amount of tax which was paid for 2020 (a number which can be found on Line 43500 of one’s 2020 NOA) serves as a good starting point. (In most cases, owing to increases in tax brackets and credits, the amount of tax payable by taxpayers whose income doesn’t change significantly between 2020 and 2021 will decrease slightly.)

There are two ways of paying taxes throughout the year. The majority of Canadians (including all employees) have income taxes deducted from their paycheques and remitted to the federal government on their behalf — known as source deductions. Taxpayers who do not have income tax deducted at source — which would include self-employed individuals and, frequently, retired taxpayers — make tax payments directly to the federal government (four times a year, in March, June, September, and December) through the tax instalment system.

Once a rough idea of one’s tax liability for 2021 is arrived at, it’s necessary to figure out whether income tax payments made to date, either by source deductions or instalment payments, match up with that tax liability figure, recognizing that by this point in the year, approximately one-half of 2021 taxes should already have been paid. If they haven’t, and particularly if there is a shortfall which will mean a balance owing when the tax return for 2021 is filed next spring, the taxpayer will need to take steps to remedy that.

Where the individual involved pays tax by instalments, the solution is simple. He or she can simply increase or decrease the amount of remaining instalment payments made in 2021 so that the total instalment payments made over the course of this year accurately reflect the total tax payable for the year. Err on the side of caution to ensure that there isn’t a shortfall in instalment payments, which could result in interest charges being levied by the CRA.

The situation is a little more complex for employees, or anyone who has tax deducted at source. Often when such individuals discover that they are overpaying taxes through source deductions, it’s because other deductions which they claim on their return for the year — like deductible support payments, child care expenses, or contributions to a registered retirement savings plan (RRSP) — aren’t taken into account in calculating the amount of tax to deduct at source. The solution for employees who find themselves in that situation is to file a Form T1213, Request to Reduce Tax Deductions at Source with the CRA. On that form, the taxpayer identifies the amounts which will be deducted on the return for the year and, once the CRA verifies, it will authorize the employer to reduce the amount of tax which is being withheld at source to take account of that deduction.

Where it’s the opposite situation and a taxpayer finds that source deductions being made will not be sufficient (meaning a tax bill to be paid next spring) the solution is to have those source deductions increased. To do that, the employee needs to obtain a TD1A form for their province of residence for 2021. On the reverse side of that Form TD1, there is a section entitled “Additional tax to be deducted”, in which the employee can direct his or her employer to deduct additional amounts at source for income tax, and can specify the dollar amount which is to be deducted from each paycheque, on a going-forward basis.

A final note: while no one likes getting a tax bill, there are taxpayers who simply like getting a tax refund and overpay their taxes through the year to create that result. Some of them view that approach as a kind of “forced” savings plan, while others simply like the idea of getting money from the tax authorities. There is nothing inherently wrong with that approach, so long as the taxpayer understands that a tax refund is simply money which was always theirs and is simply being returned to them by the CRA (without interest). Those who would rather not loan money to the CRA interest-free and who don’t want to face a tax bill each spring can avoid both scenarios by investing a couple of hours of time and a little paperwork to ensure that this year’s tax payments are on track.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.