Is your pay cheque taking a big hit for income tax each pay period? Perhaps it's time to re-examine this or next year's tax deductions and credits. You may be eligible to reduce the amount withheld at source.

Taxpayers who have write-offs which are not considered when the taxes to be withheld at source are calculated, usually receive a tax refund the following year when they file their returns. But waiting until next year to get your refund means you're investing the money in the non-interest bearing Federal coffers. CCRA will reduce the amount of required source deductions if the excess amount causes undue hardship.

Changes That Affect Deductions

If your marital status changes or you pay tuition fees that will allow a non-refundable tax credit, request a new TD1 form from your employer to adjust your income tax deduction.

Other changes in your finances this year could also have an impact on your source deduction, such as:

• losses from other income-producing sources;
• RRSP contributions;
• spousal support payments; or
• interest for loans taken out for investment purposes.

In these instances, you will need to contact the district office of Revenue Canada to request the reduction of source deductions. You will have to provide the particulars of deductions and credits, estimated other income, and other pertinent details.

While CCRA considers all applications, a request is more likely to be granted for amounts that cause undue hardship, i.e., which have a significant impact on your income tax liability. However, if your account is in arrears or your return has not been filed for prior years, CCRA will not consider a request for a reduction of source deductions.

A Cash Flow Advantage

By applying for a reduction at source, the taxpayer will be able to use those funds throughout the year rather than wait for a tax refund. For example, a taxpayer in a 40% tax bracket has lagged in his RRSP contributions in past years and now has contribution room of $20,000. A catch-up contribution of the $20,000 this year could reduce the taxpayer's source deduction by as much as $650 per month. That's money that could be invested.

Think You Owe More Tax?

Tax planning works both ways. If you have other earned and/or investment income that will increase the amount of tax owing for this taxation year, you may wish to have your employer increase your source deduction. If you are self-employed and having a particularly good year, you should consider increasing your quarterly instalment amounts. However, if the increased tax is not required to be sent in as instalments, you are better off to invest the amount in an income-producing investment which will be available to pay the tax owing next April 30.

To avoid a tax surprise next April, talk to LOGAN KATZ LLP Chartered Accountants

The above provides general information only. It should not be regarded or relied upon as accounting or taxation advice or opinions. Logan Katz LLP Chartered Accountants would be pleased to provide more information or specific advice on matters of interest to you.

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