Should I stop paying taxes? Canadian edition.

May 17, 2016 5:51 PM

Should I ask my HR department to stop auto-deducting federal & provincial tax from my paycheque, given the following conditions? Alternatively, can you recommend a good personal tax advisor in Vancouver, Canada?

I estimate I will be making about $66K gross this year. For context, this is about twice the amount I have ever made before. This income is spread over seven different roles with four different employers (four months part-time here, two months full time there, etc.)

I live in BC, so I calculate that my federal taxes should come to $13.1K and my provincial taxes $2.4K (= combined $15.5K). Call this X.

If I contribute $6K to my RRSP (with other savings in TFSAs), I believe I can bring my federal taxes down to $11.4K (= combined $13.8K). Call this Y.

I have about $47K in unused carry-over tuition from previous years. I believe this unused tuition reduces my tax burden by 15% (but maybe it's the lowest federal tax margin, 20.06% for 2016? Not sure). Assuming 15%, $47K tuition credit will shave just over $7K from my taxes. Subtracting this from Y, that leaves me with $6.8K owing to the federal and provincial governments. Call this Z.

I have already paid about $4.2K in federal and provincial taxes in 2016. When I hit that magic $6.8K, I want to ask my HR to stop deducting taxes from my paycheque.

My thought is that, if I stop paying taxes, I can put as much as another $6-7K in RRSPs, further reducing X, and allowing me to continue to carry forward some of my unused tuition into 2017.

My questions are:

1a. Am I crazy? Or crazy like a fox?
1b. Should I pay a tax advisor to go over this in more detail?
1c. If so, can you recommend a good personal tax advisor in Vancouver, BC?
1d. How much does a tax advisor cost?

2. None of the above accounts for CPP, EI, union fees, and very very small credits like transit and employment expenses. Do those things only reduce my taxes? So it's OK to leave them out of my magic number, Z?

3. I received an exceptionally small pension from one of my employers, around $550. I have no idea how to calculate that into my projected X--do you know? Does it matter?

4. I submit my taxes by mail and tend to throw in lots of extra documentation in that hopes that it will forestall anyone wanting to audit me. Anything you would recommend I throw in with my 2016 return, if I go through with this crazy plan?


Final notes: I have checked my TFSA and RRSP limits. This plan will not put me close to maxing out either.

posted by monkeymonkey to Work & Money (8 answers total)

What's the argument against continuing the deduction and getting a big refund? It seems a lot less risky. If the benefit you're hoping for is having more money to put in RRSPs, I think you're better off doing your taxes in January, figuring out how to maximize your RRSP contribution once you're actual doing your taxes, and then get an RRSP loan or pull money out of a credit line. You'll pay 2-4 weeks worth of interest until your refund comes but A) That should be hardly anything and B) Whatever interest you pay will be tax deductable next year anyway (interest paid for the purpose of investing).

I am not a tax professional, just a risk averse person who thinks that guessing in May what your taxes will be sounds risky.
posted by If only I had a penguin... at 6:03 PM on May 17, 2016 [1 favorite]

Response by poster: Not intending to threadsit, but the argument against waiting for a big deduction is the tuition carry-over. "Carried forward amounts must be claimed in the first year that tax is payable. Only the amounts required to reduce taxes to zero would be claimed, and any remainder would again be carried forward."

If I understand this correctly, if I pay the full X (or the full Y), that tuition carry-forward will keep carrying forward, losing out to inflation. I would prefer not to give the government an interest-free loan.
posted by monkeymonkey at 6:10 PM on May 17, 2016

OK, I think you misunderstand what is mean by required to reduce taxes to 0 means. The taxes in question (that must be reduced to 0) aren't the size of the cheque you send when you file your taxes, it's the X you refer to above (well, possibly only the federal portion of that X). Ending your tax withholding does nothing to change that X.
posted by If only I had a penguin... at 6:23 PM on May 17, 2016 [2 favorites]

Best answer: 1b. Should I pay a tax advisor to go over this in more detail?

Yes.
posted by feckless fecal fear mongering at 6:40 PM on May 17, 2016 [3 favorites]

No. 4: Do not try to annoy a tax agent who is in a position to make your life difficult.

The way in which you ask an employer to reduce your tax withholding is by filling out a TD1. If you fill out the TD1 accurately, you put yourself in the best position for proper tax withholding through the year. Just remember to update your TD1 in 2017.
posted by bkpiano at 6:47 PM on May 17, 2016

Best answer: Yes, the tax withholding doesn't change anything about your tuition credits. That's all calculated on your tax return in the new year and doesn't have anything to do with when you actually pay. Your tuition credit is claimed to reduce your taxes to zero for the entire year, not reduce the amount you owe to zero. In the case that you've already paid those taxes, you'd be entitled to a refund of the taxes paid.

So, with your plan to put $12K into an RRSP and your $47K tuition credits, it doesn't look like you'll be paying any tax this year. You are calculating it in terms of your tax owing, but it is much easier to calculate it in terms of income. You make $66K, you subtract $12K for RRSPs, $47k for tuition credits and you end up with a net income of $7k for taxes. This is less than the basic personal exemption, so you can save RRSP contribution credits or tuition credits for next year (or just contribute a little less to your RRSP in February once you've done your taxes).

In this case, all you'll be paying is EI and CPP. The annual maximum for those is just under $3.5k combined, so you've already paid that with your $4.2k paid to date. So yes, ask them to stop deducting anything at all for your pay cheque (other than the union dues, of course).

Don't worry about the $550 pension, it won't make much difference.

What I would consider is if you want to put money into your RRSP right now. Since you have the huge tuition tax credit, and won't be paying much tax even if you made no RRSP contributions, I would consider saving your RRSP contribution room for a later year when you'll be in a higher tax bracket (and thus the deduction is worth more to you). You can contribute now and claim it in a later year or just save the money and contribute it in a later year. Basically, if you are going to be earning around $66k for the foreseeable future, you are better off using those RRSP tax credits to reduce 20.5% plus provincial tax (for income over roughly $45,000) versus 15% plus provincial tax. This is something I'd strongly recommend.
posted by ssg at 6:54 PM on May 17, 2016

Best answer: ssg: " So yes, ask them to stop deducting anything at all for your pay cheque (other than the union dues, of course).
"

Note that you can't just ask your employer to stop witholding, you need to get an authority letter to give to your employer:

You can ask to have less tax deducted on your income tax return if you are eligible for deductions or non-refundable tax credits that are not listed on this form (for example, periodic contributions to a registered retirement savings plan (RRSP), child care or employment expenses, charitable donations, and tuition and education amounts carried forward from the previous year). To make this request, fill out Form T1213, Request to Reduce Tax Deductions at Source, to get a letter of authority from your tax services office. Give the letter of authority to your employer or payer. You do not need a letter of authority if your employer deducts RRSP contributions from your salary

posted by Mitheral at 7:34 PM on May 17, 2016

Response by poster: At this point, responses to Q. 1c would be especially appreciated. Thank you all.
posted by monkeymonkey at 8:24 PM on May 17, 2016