By mid to late June 2025, most taxpayers have filed their tax return for the 2024 tax year and a Notice of Assessment has been issued by the Canada Revenue Agency outlining the Agency’s conclusions with respect to the taxpayer’s income, tax deduction, and tax credit claims and the amount of tax payable for 2024. Most taxpayers hope for (and in fact do receive) a refund while others are disappointed to find out that they owe additional taxes for 2024 and therefore have a tax bill (on which interest may be accumulating) to pay.
A need to pay additional taxes at the time of filing always means that taxes for the prior year have been underpaid. While the only option open to the taxpayer on receiving a tax bill for the 2024 tax year is to pay it in full as soon as possible, a mid-year review of one’s tax situation for 2025 can ensure that a similar result does not arise when the return for 2025 is filed with the CRA next spring.
Many (if not most) taxpayers think of such tax reviews as a year-end exercise, one to be carried out in the last few weeks of the calendar year, in order to take the steps needed to minimize the tax bill for that year. And it’s true that almost all strategies needed to both minimize the tax hit for the current year and to ensure that there won’t be a big tax bill come next spring must be put in place by December 31 (the making of registered retirement savings plan (RRSP) contributions being the notable exception).
Nonetheless, there’s a lot to recommend carrying out a mid-year review of one’s tax situation for the current year, for several reasons, First, by this point in the year, most taxpayers have a good sense of how much income they will earn in 2025, the tax deductions and tax credit claims which they will be able to make, and, perhaps most important, the amount which they have already paid to the CRA for 2025 income taxes, whether through deductions from their paycheque or by instalment payments. As well, doing a mid-year review, instead of waiting until December, gives the taxpayer the chance to put into place any adjustments needed to help ensure that there are no unpleasant tax surprises when the return for 2025 is filed next spring. And, while the deadline for implementing most tax saving strategies may be December 31, it’s also the case that opportunities to make a significant difference to one’s current-year tax situation diminishes as the calendar year progresses.
The first step in doing that review is figuring out how much one’s tax bill for 2025 is likely to be. For most Canadians, income amounts and available deductions and credits don’t vary significantly from one year to the next. Where that’s the case, the amount of tax owed by the taxpayer for 2024 (a figure that can be found on Line 43500 of the Notice of Assessment) is likely to be very close to one’s tax liability for 2025.
Where income for 2025 is likely to be significantly different than that received in 2024, taxpayers can use the tax return preparation software used to prepare the 2024 return to get an idea of how much tax will be payable for 2025. Although the tax brackets and tax credit amounts used by tax return preparation software for 2024 will differ from those in effect for 2025, those differences won’t make a significant difference to the total tax bill. If anything, using 2024 tax return software to calculate the tax bill for 2025 will result in a slight overestimate of that tax bill, owing to the indexation of tax brackets and credit amounts.
After getting a sense of how much tax is likely to be payable for the 2025 tax year, the next step in doing a review is to determine how much income tax has already been paid to the CRA for 2025 (remembering that by this point in the year, approximately one-half of the tax bill for 2025 should already have been remitted to the CRA).
There are two ways of paying income taxes throughout the year. The majority of Canadians (including all employees) have income taxes deducted from their paycheques and remitted to the federal government on their behalf – a process known as source deductions. Taxpayers who do not have income tax deducted at source – which would include self-employed individuals and, frequently, retired taxpayers – make tax payments directly to the federal government (four times a year, in March, June, September, and December) through the tax instalment system.
Where the individual involved pays tax by instalments, the solution is simple. They can simply increase the amount of remaining instalment payments made in 2025 so that the total instalment payments made over the course of this year accurately reflect the total tax payable for the year.
The situation is a little more complex for employees, or anyone who has tax deducted at source. Where a taxpayer finds that source deductions being made will not be sufficient to cover their tax liability for the year (meaning a tax bill to be paid next spring) the solution is to have those source deductions increased. No one likes paying more taxes, but where taxes are owed the only choice involved is to pay them now or pay them later. Spreading out that payment over the rest of the tax year is much less painful than being hit with a large tax bill (as well as interest charges when that tax bill can’t be paid in full and on time) when the return for the year is filed next spring.
Take, for example, an employee who, after filing the return for 2024, received a bill indicating that an additional $1,000 in taxes was owed. Assuming that their income, and the amount of tax deducted from their paycheque don’t change, it’s likely that a similar amount will be owed when the return for 2025 is filed. If that taxpayer is paid biweekly, there will be about 13 paycheques between the end of June and the end of the year. Increasing the amount of tax deducted from those paycheques by about $75 per paycheque will mean that the $1,000 in taxes owing is paid to the Canada Revenue Agency by the end of the year – thereby avoiding that large tax bill when the return for 2025 is filed in the spring of 2026.
To increase the amount of tax deducted from their paycheque, the employee needs to obtain a TD1 form for 2025, which can be found on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/td1-personal-tax-credits-returns/td1-forms-pay-received-on-january-1-later.html. On the reverse side of that Form TD1, there is a section entitled “Additional tax to be deducted”, in which the employee can direct their employer to deduct additional amounts at source for income tax, and can specify the dollar amount which is to be deducted from each paycheque, on a go-forward basis.
No one particularly likes thinking about taxes at any time of year, but ignoring the issue definitely won’t make it go away. The investment of a few hours of time now, and putting in place any needed adjustments, can mean avoiding a nasty surprise in the form of a large tax bill which must be paid when the return for 2025 is completed and filed next spring.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.
