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Tax withheld from pay, and the April refund

Income tax is paid as the year goes, not at the end. An employer withholds tax, CPP and EI from each paycheque and sends it to CRA. After the year ends, the return works out the actual tax; if more was withheld than owed, CRA refunds the difference, and if less, the balance is owed by the end of April.

The rules

  • Withholding is an estimate by the employer, based on the pay alone. It does not know about an RRSP or FHSA contribution, rental income or investment income.
  • A deduction therefore does not lower the tax taken from each paycheque. It lowers the tax on the return, so the saving arrives as a refund the following April. See RRSP room and deduction and the FHSA.
  • A taxpayer who expects a large refund can ask CRA to reduce withholding with Form T1213. If approved, the employer withholds less in each pay.
  • Income with no withholding, such as business or rental income, is paid when the return is filed, or in instalments through the year.
  • Issuers withhold on lump-sum registered withdrawals at 10% up to $5,000, 20% from $5,000 to $15,000 and 30% above $15,000, the rate set by the payment size applying to the whole payment (outside Quebec). A RRIF payment is withheld on only above the year's minimum. This is a prepayment, not the final tax.

What the engine does

  • Takes one-twelfth of the year's income tax, CPP and EI on a person's salary alone out of each month's pay. It does not use CRA's payroll formulas; an employer that does lands close.
  • Leaves the deductions, rental income, investment income and similar items to the annual return, and books the refund or the balance owing the following April.
  • Offers the T1213 as an option, off by default. When on, withholding falls as RRSP and FHSA deductions are made through the year, and approval is assumed every year. December's deduction is left to the return.
  • Applies the lump-sum withholding bands above to taxable withdrawals when no amount is supplied, and settles any difference at assessment.
  • Settles tax not withheld at source in one April payment. The first April of a plan settles only what the plan is told about the year before, which is nothing by default.

What it deliberately does not

Quarterly instalments and instalment interest are not modelled, only the single April payment. The T1213 lines other than the RRSP and FHSA deductions (child care, support, donations, carrying charges) are not used. The size of a refund in the plan follows from the withholding estimate, so a real employer's withholding will differ. For what sits on a return, see income tax brackets.

Connected to

  • CPP and EI contributions · Canada Pension Plan and Employment Insurance contributions come out of each paycheque up to a yearly ceiling. The plan calculates both from salary, and treats the self-employed as paying both halves of CPP.
  • Income tax brackets and your marginal rate · Federal and Ontario tax are each charged in slices of income at rising rates, then reduced by credits, with an Ontario surtax and health premium on top. The marginal rate is what the next dollar costs; the average rate is total tax over income.
  • RRSP room, deduction and withdrawals · Room accrues at 18% of earned income up to the annual cap, contributions earn a deduction refunded the following April, and withdrawals are taxed as income. The plan assumes you start with no carried-forward room unless you say otherwise.
  • The First Home Savings Account · $8,000 a year with one year of carryforward and $40,000 for life, deducted from income and withdrawn tax-free for a first home. The refund is credited the following April, and the account winds up into an RRSP if it is never used.

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