Refunds and reassessments
Around this time of the year, most taxpayers who filed a tax return in April will be receiving a Notice of Assessment, perhaps with a refund cheque, or what’s worse, a Notice of Reassessment, often with a demand for more tax payment. It’s important to deal with these issues, because each can have an impact on your tax planning for the year.
If you receive a Notice of Reassessment, check to see why the Canada Revenue Agency (CRA) says you owe more. If it’s a simple error you made in entering or calculating, then it’s best to pay up. But if you’re not sure what the problem is, call the CRA to find out. Make sure you have your tax return, the Notice of Assessment, and any other supporting documents handy.
If calling the CRA doesn’t help, and you (and your accountant or tax preparer) believe you still have a good case to make, you’ll have to file Form “T400A Objection – Income Tax Act” – the so-called Notice of Objection. Note that you have only 90 days from the date the CRA mailed the Notice of Reassessment to file a Notice of Objection. In the meantime, you still have to pay any assessed amounts owing. If you don’t, you’ll be charged interest and penalties on overdue amounts.
A tax refund might at first sound like a “gift” from the government. But it’s not. It just means you’ve been paying too much tax through the year. From a financial planning perspective, that money could have been earning a decent investment return instead of sitting in the government’s general revenue slush fund. For most taxpayers who are employed, a tax refund simply means that the tax-owing calculation on your General T1 Tax Return is less than the amount withheld at source by your employer.
Most employees will have filled out Form TD1 – Personal Tax Credits when they first joined a new employer. It includes such tax credits as the Basic Personal Amount, as well as such items as Child, Age, Tuition, Caregiver, Dependent amounts. If you’ve missed any of these (or added some since you joined your employer), increasing your tax refund as a result, you can make changes to these amounts by asking your employer for a new Form TD1 and adjusting the various credits and amounts accordingly. That should result in lower withholding from your paycheque.
Large refunds could also result from enhanced RRSP contributions, spousal support payments, childcare expenses, and interest on loans made for investment or business reasons. These typically wouldn’t be included in source withholding by your employer. If you incur these amounts regularly, consider filing CRA Form T1213 – Request to Reduce Tax Deductions at Source. If approved by the CRA, you’ll receive a “Letter of Authority,” which will allow your employer to further cut the tax withheld on your paycheque.
Then, with any luck, on next year’s tax return you’ll have a zero balance in the refund or the amount owing box.
Meanwhile, if you do have a large tax refund, consider reinvesting it in something that generates a return larger than the rate of inflation over the past year. This could include, for example, paying down high-interest consumer debt, adding to your mortgage prepayment amount, contributing to a Tax-Free Savings Account, or topping up your Registered Retirement Savings Plan contribution to increase your tax deduction for next year.
If your situation is more complex, consult with your financial advisor to discuss the best way to deal with these issues, especially if you intend to do battle with the CRA.