Reducing tax withholdings at source

Investment insight

Many people have large, tax-deductible payments that they make every year, such as registered retirement savings plan (RRSP) contributions, alimony payments, or interest payments on investment loans. Since these payments are made after receiving salary or other income, the deductions aren’t taken into account when calculating the amount of tax withheld from the source. This means that these individuals will usually have a large tax refund due to them when they file their personal income tax returns.

To assist with requesting authorization for reduced withholdings, Canada Revenue Agency (CRA) has form T1213, "Request to Reduce Tax Deductions at Source.”¹ You can complete the form and send in the appropriate supporting documentation to your tax services office. CRA will notify you within four to eight weeks whether the request has been approved

In accordance with paragraph 100(3)(c) of the Income Tax Regulations, withholding taxes can be avoided on RRSP transfers up to an employee’s RRSP contribution limit, provided the employer has reasonable grounds to believe that the RRSP contribution can be deducted by the employee for that year.

What are reasonable grounds? Generally, CRA considers an employer to have reasonable grounds to believe that an employee can deduct the RRSP contribution if the employer has written confirmation to that effect from the employee, or if the employee has provided a copy of the RRSP deduction limit statement from a notice of assessment.

This rule applies to RRSP contributions of any taxable pay to an employee, regardless of the amount of the payment, or whether it’s paid periodically or in a lump sum. For example, ordinary salary and wages, wages in lieu of termination notice, bonus pay, retroactive pay, vacation pay (including cashed-out vacation), sick-leave credits and death benefits, and the eligible and non-eligible portions of retiring allowances all qualify to avoid withholding tax.

Note that confirmation of an employee’s RRSP deduction limit isn’t needed for the eligible part of a retiring allowance because a special deduction under paragraph 60(j.1) of the Income Tax Act (Canada) applies to this amount so that it doesn’t affect the employee’s RRSP contribution room.

Keep in mind that employees can’t receive pay and then purchase an RRSP themselves. To avoid withholding, payments have to be transferred by the employer directly to the employee’s RRSP or to the employee’s spouse or common-law partner’s RRSP (except for the eligible part of a retiring allowance, which has to be transferred only to the employee’s RRSP).

For situations not described above, to reduce withholding tax, an employee needs to provide an employer with a letter of authority from a tax services office. For example, if an employee makes significant deductible RRSP contributions or deductible support payments, or lives in one province but works in another province and is subject to excessive tax deductions, the employee may be eligible to receive a letter of authority to reduce tax withholdings.

To obtain a letter of authority, an employee must send a completed form T1213 (TP-1016-V in Quebec) or written request, along with any documents supporting their request (i.e., a record of yearly RRSP contributions), to the client services division of any tax services office. Processing takes approximately four to eight weeks and letters of authority are usually issued for a specific tax year. Note that if an employee has a balance owing or hasn’t filed outstanding tax returns, CRA won’t normally issue a letter of authority.

1 Quebec residents must also complete and file form TP-1016-V, “Application for a Reduction in Source Deductions of Income Tax,” with the Quebec Ministere du Revenue to make sure they receive both federal and provincial source deduction relief.

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Tax, Retirement & Estate Planning Services Team

Tax, Retirement & Estate Planning Services Team

Manulife Investment Management

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