I only recently discovered the T1213 … it is a little gem, unknown to many.
With the T1213 form, you can obtain the CRA’s blessing for your employer to reduce the amount of tax skimmed off your pay.
This helps you immediately realize tax savings from your RRSP or First Home Savings Account (FHSA) contributions. You no longer need to wait until tax return season to realize your tax savings.
For example, I increased my take-home pay by $250/month in 2023 using the T1213. The alternative was to wait until tax time (March 2024) for a $3,000 tax return.
I’d rather have my money today instead of having it sit with the CRA at a 0% interest rate until tax return time…
This post is for the personal finance optimizers out there (that’s you) … a rare breed.
The Utility of The T1213
The T1213 is helpful whenever you plan to contribute to the FHSA or the RRSP.
Your employer may not know you’ve made RRSP or FHSA contributions. As a default, they will not reduce the tax removed from your pay.
Consider what happens when you contribute money to an RRSP or FHSA. You reduce your taxable income and owe less federal and provincial tax for the year.
For example, let’s assume you make $80,000/year. You contribute $8,000 to the FHSA and $5,000 to the RRSP. You reduced your taxable income by $13,000. Now you are only taxed as if you earn $67,000/year.
The T1213 is a way to say, “I contributed $13k to my FHSA/RRSP! You are taxing me as if I earn $80,000/year. Please tax me as if I earn $67,000/ year”.
Your employer can’t just reduce taxes just because you ask them. They need permission from the Canada Revenue Agency. That’s where the T1213 comes in.
T1213 Function: How Does it Work?
The T1213 form is a “request to reduce your tax deductions at the source”.
Usually, tax is removed by your employer. The “source” is your employer. Only the CRA can authorize your employer to reduce the tax skimmed off your pay.
By submitting the T1213 to the CRA (see how below), you communicate your expected change in your “taxable income” to the CRA for the upcoming year.
The CRA will then respond with an approval letter. This letter authorizes your employer to reduce the amount of tax removed from your pay.
How to Fill Out the T1213 Form for RRSP and FHSA Contributions
Step 1: Before the beginning of the next calendar year (October/November), plan out your total contributions to the FHSA and RRSP. Your contribution targets are rooted in your financial goals and your income/expense cashflows.
Step 2: Get the T1213 Form at this link.
Step 3: Check the box showing that you want to reduce the tax paid on your salary. Enter your expected RRSP contributions under line 1, as highlighted below.
Step 4: Input your expected FHSA contributions under line 11 (other). It does not look like the CRA has updated the form to reflect the FHSA at the time of writing (April 2023).
Step 5: Add the total deductions (RRSP + FHSA contributions). Input the total amount in line 12 under totals. Line 14 equals line 12 if you don’t earn income outside your primary employment. Your taxable income will be reduced by the amount in line 14.
Step 6: Travel back in time to the 1990s. You must fax the T1213 form to the CRA, or mail it to the address on the form.
Step 7: Wait a few months for the CRA’s response. They will mail you a letter authorizing your employer to reduce taxes on your pay.
Step 8: Give your CRA approval letter to your employer. My employer also wanted the original T1213 form. Your employer will do the math to figure out the new (lesser) amount of tax to remove from your pay.
Step 9: Watch your take-home pay increase as less tax is removed from your paycheck.
Step 10: Repeat for future years.
T1213 Pros and Cons
Here are a few technical and behavioural pros and cons I can think of regarding T1213 use. Let’s cover them.
T1213 Benefit: #1: Income Smoothing
Cash flow management is easier when your expenses are consistent. That’s why I love Sinking funds, to turn large future expenses into a smooth stream of cashflows. Likewise, a smooth income works wonders.
With the T1213, you can smooth your income. Instead of waiting for a hefty lump sum on your tax return, tax savings are spread evenly over 12 months of the year.
For me, a steady income stream is preferable to a lump sum payment at the end of the year.
T1213 Benefit #2: Reduced Opportunity Cost
Without the T1213, you pay extra tax. The extra funds paid sit with the CRA at a 0% interest rate until tax return time.
By holding money with the CRA, you lose the opportunity to invest in assets that pay interest. With central bank rates at 4.5% (considered the risk-free rate), anyone can get a 5% return with money market funds.
Let’s calculate the opportunity cost—math time. Let’s assume you overpay taxes by $300/month, or $3,600 annually.
By investing $300/month at a 5% return (close to the risk-free rate), you would have $3,684. So, you earn an extra $84. It is nothing earth-shattering, but it’s also not irrelevant.
The T1213 allows you to take advantage of the time value of money.
T1213 Downfall #1: Indebted to the CRA
What happens if the CRA approves tax deductions at the source, but you fail to make your target FHSA and RRSP contributions?
You will underpay taxes throughout the year. Come tax-return time; you may owe the CRA thousands of dollars.
The T1213 makes it easy to overspend and become indebted to the CRA. Without solid savings discipline, the T1213 may pose a threat.
T1213 Downfall #2: You Miss Out on Forced Savings
Paying excess money to the CRA is a form of Forced Savings. Money is automatically removed from your pay through the year, locked away (by the CRA), and returned at tax return time.
As discussed in my post on Forced Savings, automating savings reduces demands on your self-discipline. It is a form of protecting yourself from yourself … a critical personal finance concept.
Even though you eat the opportunity cost of the 0% interest rate on CRA-held funds, it can still be beneficial.
In addition, you can use the tax-return amount for a specific goal. For example, “I will use my $3,000 tax return to pay off a $3000 credit card debt”. Or, “My $2,500 tax return will fund a vacation”. Both are forms of mental accounting.
The T1213 gives up this benefit of a significant tax return. Although a hefty tax return is not numerically optimal, it can be behaviorally optimal.
T1213 Downfall #3: Administrative Time and Energy
The T1213 consumes administrative time and energy. As someone who works with the government, I’m aware administration is a real economic cost.
It takes time and energy to:
- Digest information in this post
- Fill out the T1213 form
- Mailing the T1213 Form
- Engaging HR to execute tax reduction
In my example above, you have to ask if these costs are worth the following benefits:
- Smoothing your income; and
- Saving ~$100 in opportunity costs (depends on your unique factors)
Based on the Pareto principle (80/20 rule), about 20% of your activities account for 80% of your success. In personal finance, the 20% solution is gaining the habit of consistently save and invest in index funds.
The T1213 is for the over-optimizers like me. The T1213 will not make or break your financial situation. But minor optimizations today can compound to produce significant impacts on your final wealth outcomes.
The T1213 Form can be used to get CRA approval for your employer to remove less tax from your pay based on your FHSA or RRSP contributions.
By using the T1213, you can realize tax-saving benefits today. It smooths your income and minimizes opportunity costs.
At the same time, there are downfalls to the T1213. It increases demands on self-discipline and requires administrative effort to execute.
For some, overpaying tax is a form of forced savings that can provide behavioural benefits, thanks to mental accounting.
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