As another year draws to a close, we will soon be turning our attention to our clients’ tax returns. For many, the recurring annoyance of gathering documents and preparing a tax return is offset by the delight of receiving a sizeable tax refund. After all, who doesn’t like seeing that nice deposit arrive in the bank every spring? However, did you know that consistently receiving large tax refunds could actually be a sign of poor tax planning?

Why do I receive a tax refund?

Completing a tax return provides the CRA with a final accounting of the income you earned in a year. Various tax deductions and tax credits are then applied against your earnings to determine your taxable income and the total amount of tax you owe the federal and provincial governments. Rather than waiting a full year to receive payment from citizens, governments require employers to withhold certain amounts of income tax from employee paycheques throughout the year. The amount withheld is calculated by your employer based on an estimate of your total income for the year, but this estimate does not take into account many common tax deductions or credits. Many Canadians therefore end up having more tax withheld during the year than necessary. When your tax return is eventually completed the following spring, all deductions and tax credits are taken into account and the excess tax that was withheld throughout the year is refunded to you as a lump sum.

Common deductions and tax credits that are not taken into account when an employer calculates the amount of income tax to withhold from your paycheque include:

  • Contributions to RRSP accounts
  • Child care expenses
  • Medical expenses
  • Donations

Why are chronic tax refunds problematic?

As explained above, a tax refund occurs when you had more income tax withheld throughout the year than was necessary. You essentially overpay your taxes on each paycheque and receive the excess amounts back when you eventually file your tax return. This means that you’re providing CRA with a series of interest-free loans (up to 16 months for tax withheld in January of one year that is not refunded until April of the following year).

Ideally your employer would more accurately estimate your income taxes based on your circumstances and reduce the amounts withheld from your paycheques to account for tax deductions and credits that you qualify for. This would result in higher net pay throughout the year (i.e. more cash arriving in your bank account each pay period), which is beneficial because you can use the money sooner for things like investing, paying down debt, or spending. Assuming positive interest rates, money has time value and we should always prefer to receive it sooner (i.e. each paycheque throughout the year) rather than later (i.e. a lump sum tax refund the following spring). While waiting several months to receive a tax refund of a few thousand dollars may seem immaterial, the opportunity cost of this delay compounds year after year for your entire career and could ultimately leave you with a lot less down the road.

How can I avoid chronic tax refunds?

Thankfully, for most of us there is a way to proactively reduce our tax refunds, but there is both good and bad news when it comes to the work involved to make it happen. The good news: all that’s required is completion of the two-page CRA form T1213 (Request to Reduce Tax Deductions at Source). The bad news: this form needs to be completed every year, submitted to CRA via fax or mail, and an approval letter must be received before your employer can act on it.

You may be asking yourself if the hassle is worth it? First of all, keep in mind that your advisor will help you keep track of things and can remind you each year when the form should be completed. While we don’t provide specific tax or legal advice, we can help explain the fields on the form and provide you with data from prior tax returns to help fill it out. For many, there will only be one or two numbers to enter on the form. Whether completing the form is worth the effort to you is a personal decision, but the following example might help to highlight the potential benefits.


Donna works for a private company without a registered pension plan or group RRSP. In 2023, Donna expects to earn $130,000 in salary and will be contributing $2,000 per month to a personal RRSP account ($24,000 for the year). Donna receives paycheques once a month.

AEmployment income$130,000$130,000
BRRSP contributions factored
in to payroll deductions
CIncome tax deducted
(per paycheque)
Net pay relative to default
(per paycheque)
Tax return:
DTotal tax payable$23,616$23,616
ETotal income tax deducted
(C x 12)
Balance payable (refund due)

Default Strategy

Using the CRA payroll deduction calculator as a guide, Donna would normally have $2,663 deducted from each monthly paycheque for income taxes. When Donna’s tax return is prepared, it would indicate total taxes payable of $23,616, but since Donna already paid $31,956 ($2,663 x 12) via payroll deductions throughout the year, a tax refund of $8,340 would be issued.

Optimized Strategy Using Form T1213

Alternatively, if Donna completes form T1213 and indicates $24,000 of planned RRSP contributions, Donna would only have $1,952 deducted from each monthly paycheque for income taxes. When Donna’s tax return is prepared, it would still indicate total taxes payable of $23,616, which essentially matches the income taxes Donna already paid $23,424 ($1,952 x 12) via payroll deductions throughout the year.

By completing form T1213, Donna’s large tax refund is completely eliminated and Donna receives higher paycheques throughout the year – an extra $711 per month. This additional cash flow can be put towards investing (e.g. RRSP, TFSA, RESP contributions), paying down debt, or something fun like a trip or new smart phone.

This was a very simple example, but if Donna has additional tax deductions or credits that recur each year (e.g. charitable donations or medical expenses), they can also be reported on form T1213, further reducing the tax deductions made by Donna’s employer and further increasing net pay on each paycheque.

Are there any down sides?

As mentioned above, the biggest down side to this tax planning strategy is the time required to fill out form T1213 each year, submit it to CRA, wait for an approval letter, and provide the approval to your employer. While the annoyance factor may seem quite high, after completing the form once or twice it becomes fairly routine and your advisor can provide you with timely reminders to complete the annual task.

Another potential down side to this tax planning strategy is the higher onus it places on you to prudently manage your money. Getting larger paycheques throughout the year is a great benefit that can enable you to achieve your financial goals sooner, but there could also be temptation to spend the new windfall in less productive ways. If you have trouble budgeting or staying disciplined with your money, this tax planning strategy might actually work against you. For some, making larger than necessary payroll tax deductions throughout the year and receiving a lump sum tax refund the next spring can force good savings habits, assuming you ultimately do something productive with your tax refund when it is received. However, this method of forced saving comes at a considerable cost over time given the missed opportunities while waiting to receive your tax refund each year. If this is a concern for you, we recommend discussing your specific situation with your advisor and potentially setting up an automatic savings plan so that any increases to your paycheques are systematically transferred out of your bank account before you are tempted to spend them.

Final thoughts

If you are currently employed, there is a good chance that you qualify for one or more tax deductions or credits that are not being taken into account when your employer calculates the payroll deductions on your paycheque. By taking a bit of time each year to fill out form T1213 you can reduce these payroll deductions and receive significantly higher net pay throughout the year rather than waiting for an annual tax refund. It is a small incremental change that can make a material change to your financial outcomes over several decades. If you’re interested in this tax planning strategy, speak with your advisor for more information.

From a policy perspective, we think the CRA could dramatically improve the taxpayer experience related to payroll deductions and form T1213. At a minimum, the CRA should allow electronic submission of form T1213 through the CRA My Account website. This would make it easier for taxpayers to submit the form each year and provide tracking of the form’s approval progress. We also think there is a valid argument for doing away with form T1213 altogether, instead allowing taxpayers to make voluntary elections which their employer could act on without needing CRA pre-approval every year. Since tax returns are completed annually, a taxpayer’s total tax payable is frequently reconciled with their payroll tax deductions and the ability for a taxpayer to consistently abuse a voluntary election system is limited. Given that the CRA currently takes three to four months to approve form T1213, eliminating the form would make life considerably easier for taxpayers and at the same time free up CRA’s limited resources to focus on other important services.


There are many factors to consider before making a decision to complete CRA form T1213. The information in this article is intended to be general in nature and should not be interpreted as specific tax advice. You should consult with financial, tax, and legal advisors for help with making a decision that is appropriate and specific to your circumstances.