Managing how much tax comes off your residency paycheque
As a resident, you likely love the idea of finally earning some money — just be prepared to share the love, via the taxes deducted from your first paycheque.
While you can’t avoid paying your fair share of income tax, there are ways to manage how much is withheld for tax at every paycheque.
- You can reduce the amount of tax your employer deducts, and have more in your pocket through the year, by applying for eligible tax credits upfront. (If you put the extra amount toward, say, a debt payment every month, this can reduce the total interest you pay on the loan.)
- You could also ask your employer to deduct an extra amount toward taxes so that you don’t get a big tax bill at the end of the year.
Here’s help to get your money numbers right.
Use TD1 forms to claim basic tax credits upfront
Every year, the residency office will provide you with the federal and provincial/territorial TD1 Personal Tax Credits Returns. These forms are used to determine how much tax should be deducted from your employment income. Your employer keeps them on file — you do not file them with the government.
See current versions of federal and provincial TD1 forms on the Canada Revenue Agency website; if you’re a Quebec resident, the provincial form is at the Revenu Québec website.
The forms are simple, and it’s easy to see which tax credits you could ask for. Every taxpayer gets a federal and provincial personal amount: for 2022, the federal amount, for example, is pre-filled as $14,398. If you don’t add any further claims, this is all that will be deducted.
Aside from the basic personal amount, the forms allow you to claim other basic credits that could lower your taxes deducted. These include credits for:
- tuition (current year only)
- caregiving
- eligible dependants
- a disability
If you don’t claim all the credits you’re entitled to, you may have more tax deducted from your pay than necessary. But you’ll get it back when you file your tax return. It’s up to you, and depends on your situation.
A second list of credits to reduce the tax withheld
In addition to the credits you can claim on the TD1 forms, there is another group of credits that can mean less tax is taken off your paycheque.
For example, if you contribute to RRSPs, pay for childcare, or want to claim medical school tuition held over from previous years, you can file a request to get further at-source tax reductions. You do this by sending Form T1213 Request to Reduce Tax Deductions at Source to the Canada Revenue Agency; if approved, it will authorize your employer to make the change.
You can also opt to increase the tax withheld
You’ll see a line near the bottom of the federal TD1 form where you can ask to have more tax deducted per paycheque by your employer. You specify the amount.
What, pay more taxes?
Well, yes: in some situations, it can make sense to have more tax deducted. For instance, later in residency you might have the opportunity to moonlight for extra income. By having more tax deducted from each residency paycheque, you could cover the tax you’ll owe on that extra self-employment income.
How to get your paycheque “just right”
While it may be nice to get a fat tax refund each April, it could just mean your employer is deducting more tax than necessary with every paycheque. Instead of handing over that extra tax, you could, say, pay down a bit of your debt with each month. Or invest a regular amount in a tax-free savings account or RRSP to build savings throughout the year.
Of course, too little tax off every paycheque could mean a hefty amount owing when you file your return.
Talk to your human resources or payroll administrator if you have any doubt: it’s easy enough to adjust your TD1 forms to get your numbers in balance.
From day one on the job, attention to tax and financial planning is the best way to take advantage of all the tax benefits available as you build your career.
At this early stage, we recommend a balanced approach: reduce your student debt, start to invest on a more regular basis, and get in good shape for your future plans.
For more information or for personalized financial planning advice, please speak with your MD Advisor*.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.