How to Request to Reduce Tax Deductions at Source?

There is a withholding tax applied to each paycheck of salaried employees in Canada. By law your employer or payer is required to withhold a portion of your pay and send it directly to the government. The idea is that you will be paying off your income tax liabilities throughout the year and that upon income tax filling time you would owe zero tax dollars to the government. 

There are situations however in which it might be the government the one owing you money. A very common example of this is when people contribute to their own RRSPs with after tax dollars. RRSP contributions are tax deductible which means they don’t count for the purpose of calculating your income tax liabilities. In a case like this you would have paid too much tax to the government and once your income tax return is assessed; you should receive a cheque paying you back the excess tax.
 
Most people are quite happy with this arrangement, but it is not financially wise. Why would you wait the whole year to get your money back? It is actually better not to have paid the excess tax at all. If you pay more tax than you should, you are actually giving the government an interest free loan. 

Why do you think the government withholds the tax to begin with? Well, because they can put that money to “work” immediately. You can do the same: you can choose not to overpay in taxes throughout out the year. By doing this your cash flow will increase as if you would have gotten a raise (really, your paycheck almost magically increases).

You might be wondering at this point how you can prevent your employer (payer) from withholding taxes from your income. Well, you cannot just “tell” your employer to stop sending Ottawa the tax, because the law requires this tax to be withheld.  

You can Request to Reduce Tax Deductions at Source. To do this, you need to fill form T1213 and mail it by postal mail to the Canada Revenue Agency (CRA). The CRA has the authority to tell your employer to withhold less tax from your salary. 

So, upon receiving your filled form T1213 (and other supporting documents), the CRA will issue a Letter of Authority that you can pass along to your employer effectively reducing the amount of income tax deducted from your remuneration.

The CRA can also decline to issue the Letter of Authority if it determines not enough tax will be withheld to cover your tax liabilities for the tax year or if there’s something wrong with the documentation mailed to them. In this case, you will still get a letter explaining your request was denied.

I went through this process myself and I got the Letter of Authority with no issues. The process of filling the form T1213 is different for everybody, but as an example I will quickly describe what I did in my case.

First some context:

 
I am a full time salaried employee and my employer withholds some tax from my pay. 

On top of that, I make some extra money from this blog. No tax is withheld from the income produced by the blog because it does not come from an employer. 

In addition to this, I set up a Pre authorized deposit (PAD) agreement with Questrade to fund my RRSP. The PAD was arranged in such a way that a fix amount of money is taken from my bank account on the same day I receive my paycheck and used to fund my RRSP at Questrade. 

Let’s make some numbers up to illustrate the above. Let’s imagine the PAD takes $300 biweekly from my bank account and contributes that amount to my Questrade RRSP.  The year has 52 weeks which means a total $7,800.00 (52 x $300 /2) will be contributed to my Questrade RRSP via the PAD. Finally let’s imagine I make $2,800.00 from my blog.

Start by filling the Identification section: provide your First Name, Last Name, Social Insurance Number, Address, City, Province or Territory, Postal Code, Residence and Business Telephone (Business Telephone if applicable).

Then proceed to the Employer/Payer section and type in your employer’s Name, Contact person and Telephone and fax numbers (I left the fax number empty since I don’t think my company has one). I think it is wise to provide a Contact person in the Payroll or HR department of the company. It is also wise to let this person know about your intention to use him/her as Contact person for this application.

Then move to the section Request to reduce tax on. In this section I just checked the Salary checkbox.  I am not familiar with the other option: Lump Sum, but I did not care since it does not apply to me. If the Lump Sum option applies to you and you want to share your insights about it, please drop us a line in the comments section below.

Next you move to the Deductions from income and non-refundable tax credits section. Using the numbers from our example, you will enter:
  • Registered retirement savings plan (RRSP) contributions (Line 1): $7,800.00
  • Total amounts to be deducted from income (Line 12): $7,800.00
  • Subtract income not under tax deductions at source (interest, net rental or self-employed income) (Line 13): $2,800.00
  • Net amount requested for tax waiver (Line 14): $5,000.00
There are other deductions and non-refundable tax credits that you can use to reduce your withholding tax at the source. Those are listed from line 2 to 11. Leave empty all the lines that do not apply to you. 

Line 12 is calculated by adding of all the numbers you have entered from line 1 to 11. In this particular example, I only filled Line 1; which is why the value of Line 12 matches the value of Line 1

Line 14 is calculated by subtracting the values in Lines 12 and 13.

Finally move to the Certification section and proceed to sign and date the form.

I mailed this application to the address specified at the end of the form T1213. Depending on where you live, the address will be different. Check the table at the end of the form T1213 to find out which address you need to send the application to.

My application included:
  1. My filled and signed form T121.
  2. My Pre authorized deposit (PAD) agreement with Questrade.
  3. A letter of my own explaining that the number I entered in Line 13 was just an “estimate”. (See the To Whom It May Concern letter at the end of the post). As you can imagine, I could not say exactly how much money I would make by blogging; so I just estimated the amount to enter in Line 13 to the best of my ability and I let the CRA know this was just an estimate.
I sent the whole application to the CRA on September 30th, 2017 and I got the Letter of Authority in the middle of November. You want to send the application well before the end of the year so that you give enough time to the CRA to assess you request and issue the Letter of Authority.

The Letter of Authority actually states that should you want to renew this application, a new form T1213 should be submitted each year by November 1st, thus giving enough time for the CRA to reply back.

If you have some questions drop me a line in the comments section and I’ll do my best to answer. You should not consider this to be legal advice of any kind. Should you use the information given in this post, you do so at your own risk.

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To Whom It May Concern:

September 30th, 2017

Dear Sir/Madam, 

I attached CRA Form T1213  (Request to reduce tax deductions at the source for year 2018). I also enclosed separate sheets containing further information about my employer’s contact person and a copy of the payment arrangement contract (RRSP pre-authorized deposit via Questrade).

Note that the value entered in row 13 ($2800.00CAD) of T1213 is an estimate done to the best of my ability. This portion of my income is variable (not fixed) and it is not subject to tax deductions at the source.

Sincerely,
--------------------------------
Yanniel Alvarez Alfonso

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